Exhibit 99
FINANCIAL REVIEW
Management's Discussion and Analysis
28 Corporate Overview
30 Printing Papers
32 Packaging
34 Distribution
36 Specialty Products
38 Forest Products
40 Liquidity and Capital Resources
43 Financial Information by Geographic Area
44 Financial Information by Industry Segment
45 Report of Management on Financial Statements
45 Report of Independent Public Accountants
46 Consolidated Statement of Earnings
47 Consolidated Balance Sheet
48 Consolidated Statement of Cash Flows
49 Consolidated Statement of Common Shareholders' Equity
50 Notes to Consolidated Financial Statements
58 Eleven-Year Financial Summary
60 Interim Financial Results
27
Corporate Overview
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Resourceful
SuperTree seedlings, developed to replant harvested areas in our forests, enable
the Company to produce more wood fiber on each managed acre.
[Illustration of SuperTree pine seedling.]
Technology
Our research organization uses state-of-the-art technology to optimize the
quality and performance of our products.
[Photograph--Appendix B No. 1]
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Results of Operations
International Paper achieved net sales of $15.0 billion during 1994, 9 percent
ahead of 1993 sales of $13.7 billion and 10 percent above 1992 sales of $13.6
billion.
Sales from operations outside the United States rose to $3.3 billion in
1994, up from $2.9 billion in 1993 and approaching the $3.4 billion achieved in
1992. U.S. export sales were $1.2 billion in 1994 compared with $1.1 billion in
1993 and $1.2 billion in 1992.
Net earnings were $357 million or $2.86 per share in 1994 ($422 million or
$3.38 per share before an accounting change) versus $289 million or $2.34 per
share in 1993 ($314 million or $2.54 per share before the revaluation of
deferred taxes) and $86 million or $.71 per share in 1992 ($405 million or $3.34
per share before the effects of an accounting change, an extraordinary item, and
charges for a profitability improvement program and for environmental costs).
Profits began to increase in the second half of 1994 as the pace of the
recovery in the U.S. economy accelerated and the European economy began to
recover.
The Packaging and Printing Papers segments led the Company's improving
performance. Our industrial packaging business
28
benefited from strong demand and higher prices for containerboard and corrugated
boxes. In Printing Papers, price increases, propelled by a stronger pulp market,
led to a resurgence in earnings in the latter part of the year. Results from
Specialty Products were mixed, but overall earnings improved slightly over 1993.
Forest Products earnings fell short of last year's record, while Distribution
posted increases in both sales and earnings.
Accounting Changes
Effective January 1, 1994, International Paper changed its
method of accounting for start-up costs to expense them as incurred. Our policy
had been to capitalize start-up costs on major projects and amortize them over a
five-year period. The accounting change resulted in a one-time after-tax charge
of $75 million or $.60 per share. However, it also increased earnings by $10
million or $.08 per share for a net reduction in 1994 earnings of
$65 million or $.52 per share.
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[Net Sales chart--Appendix A No.1]
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As of January 1, 1992, we adopted SFAS No. 109, "Accounting for
Income Taxes," which requires the liability method of determining
deferred income taxes. Net earnings in 1992 were reduced by $50 million
or $.41 per share for the cumulative effect of this change.
Restructuring and Other Charges
In 1992, International Paper recorded pre-tax charges of $370 million for a
productivity improvement reserve and $28 million for environmental remediation
and cleanup. These charges totaled $398 million ($263 million after taxes or
$2.17 per share).
The productivity improvement charge was primarily for asset write-downs and
related severance costs to shift production from older, less efficient
facilities to newer or modernized plants. The charge also included costs to
consolidate operations and write-downs of some facilities with marginal returns.
Asset write-downs were estimated at $250 million with accruals for one-time cash
costs of $120 million (mainly for employee severance, legal, warranty and
leases). Our projections called for annual savings approaching $75 million by
the end of 1994, primarily the result of lower personnel costs and depreciation
as well as the elimination of operating losses. As of year-end 1994, the Company
substantially completed the actions for which the reserve had been established
and realized the expected savings.
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15
billion in sales
1994 marked the beginning of a worldwide economic recovery that promises to
drive sales and earnings higher in 1995 and beyond.
[Photograph--Appendix B No. 2]
Worldwide
As international trade barriers fall, International Paper is ideally positioned
to enter new global markets for our products.
Standing Tall
Like the radiata pine raised by our New Zealand-based Carter Holt Harvey
affiliate, International Paper is growing rapidly in a highly competitive
environment.
[Illustration of a radiata pine tree.]
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29
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Premium
Zanders' Ikono and Chromolux lines of premium coated papers are used in
top-of-the-line brochures and annual reports...like this one.
[Photograph--Appendix B No. 3]
Selection
The wide choice of colors, textures and weights of our Hammermill, Springhill,
Strathmore and Beckett brands helps consumers match the medium to the message.
[Photograph--Appendix B No. 4]
Magazines
You read it here first: many widely circulated magazines and catalogs are
printed on Adirondack, Saratoga and Miraweb II recycled coated papers.
[Photograph--Appendix B No. 5]
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Printing Papers
Printing Papers produced net sales of $4.4 billion in 1994, up from $3.9 billion
in 1993 and $4.0 billion in 1992. 1994 operating profits totaled $20 million
compared with losses of $122 million in 1993 and $70 million (a profit of $19
million before unusual items) in 1992.
After several years of eroding prices and sluggish demand, improving economic
conditions in the United States and Europe sparked a recovery in all printing
papers businesses and the segment returned to profitability during the third
quarter of 1994. Prices continue to improve, mills are running full and cost
reduction efforts are under way, positioning International Paper to achieve
sharply higher earnings in 1995.
Uncoated Papers represented about 49 percent of segment sales. A stronger U.S.
economy led to higher demand when industry capacity was relatively tight. After
reaching their lows at the end of the second quarter, uncoated paper prices
began to increase rapidly. By the fourth quarter, our U.S. uncoated papers
business turned profitable, following two years of losses.
Our European operations improved dramatically, returning to profitability in
1994. Improving
30
economies in Western Europe supported stronger demand and higher prices for
Aussedat Rey's products. At Kwidzyn, productivity, quality and operating gains
also aided results.
We expect strong U.S.demand and high operating rates to lead to higher prices
in 1995. Our forecast calls for demand growth to exceed GDP growth, with very
modest industry capacity additions. The start-up of our new machine at
Riverdale, together with our 1994 shutdown of high-cost capacity, continuing
cost reductions and an enhanced product mix, should produce substantial
profitability gains in 1995 and beyond. The European economic recovery is
expected to continue. Operating results should improve as expanding demand
supports additional price increases and as cost reduction efforts are realized.
At Kwidzyn, capital improvements will provide greater operating efficiency and
higher product quality.
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[Net Sales and Operating Profit charts--Appendix A No. 2]
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Coated Papers represented about 28 percent of segment sales. In the United
States, price increases were implemented in the second half of the year and
order levels strengthened, substantially reducing operating losses. European
sales and results were also up from 1993 levels. However, the market for
Zanders' higher margin premium grades did not fully recover in 1994. Looking
forward, robust market growth is expected to keep operating rates high and
prices strong in the United States and Europe.
Bristols accounted for 8 percent of segment sales. Operating profits
increased 24 percent in 1994 after a two-year decline. Prices rose as markets
strengthened and product mix improved. Our outlook for 1995 is for continued
growth. New products and markets will help ensure that we maintain our
leadership position.
Pulp represented about 15 percent of segment sales. Operating results turned
sharply upward in 1994 after a loss in 1993. Late in 1993, pulp markets began
showing sustained improvement for the first time since 1989. Prices climbed more
than $300 per ton in 1994 as growing demand absorbed industry capacity. Supplies
remained tight through year end, and continued strong demand allowed further
price increases in the first quarter of 1995. We expect worldwide demand to
remain strong in 1995.
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114
Recycled Grades
International Paper is responding to an environmentally aware marketplace by
increasing the recycled grades that we offer.
[Photograph--Appendix B No. 6]
Specialty
Fibers such as Celebrate! accetate used in upscale apparel worn by Olympic gold
medalist Kristi Yamaguchi contain specialty pulp from International Paper.
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31
# One
Bleached Board Producer
Quality products amd customer service support our position as a global leader in
bleached board for folding cartons, liquid packaging and food service products.
[Photograph--Appendix B No. 7]
Long-lasting
Aseptic packaging keeps juice, milk and other perishable liquids fresh for our
customers ... and helps preserve our growth in fast-growing markets.
[Illustration and Photograph--Appendix B No. 8]
32
Packaging
Our Packaging segment generated net sales of $3.4 billion in 1994 compared with
$3.1 billion in 1993 and $3.2 billion in 1992. Operating profits rebounded to
$293 million in 1994 from $188 million in 1993 and were slightly lower than $308
million ($330 million before unusual items) in 1992. After reaching a low point
in the first quarter of 1994, segment earnings improved in the wake of higher
prices and volumes for industrial packaging.
Industrial Packaging represented about 52 percent of segment sales. Results
improved from 1993 as containerboard prices rose by more than $100 per ton
during the year. Higher prices were supported by accelerating demand, causing
the U.S. industry to operate at near-full capacity. Export demand for
containerboard was also strong.
In response to rising demand, the Oswego, N.Y., mill was converted in 1994
from high-cost uncoated papers to recycled containerboard. Construction of a new
400,000-ton-per-year containerboard machine at the Mansfield, La., mill also
began during 1994.
In 1995, U.S. containerboard capacity expansions will be limited and operating
rates should remain high. Containerboard prices continue to rise in early 1995
and box prices are increasing commensurately. While worldwide containerboard
supplies are expected to be tight in 1995, both our domestic and international
box businesses are expected to have an excellent year.
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[Net Sales and Operating Profit charts--Appendix A No. 3]
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We believe that earnings will improve signicantly in 1995 as we benefit from
our long-standing strength in the agricultural, poultry and industrial markets,
our ability to provide high-performance and visual-appeal grades, and our
expansion into the recycled markets.
Consumer Packaging accounted for about 36 percent of segment sales. Operating
profits were up slightly following a 30 percent decline in 1993. Market
conditions began to improve by mid-1994. Pricing rose during the second half but
did not fully recover to 1993 levels. Higher shipments and greater efficiency
offset the lower prices.
Capitalizing on our strengths in liquid packaging, we expect to expand in
offshore markets for both fresh and aseptic packaging in 1995, including
completion of an aseptic packaging facility near Lyons, France, as well as entry
into China and Brazil. New products, such as our Triton beverage packaging
system, will also contribute to the segment's growth. Strong market conditions
are expected to prevail in 1995 even as capacity is added to the U.S. market.
Kraft Packaging contributed about 12 percent of segment sales. Operating
profits increased 30 percent over 1993 as shipments and prices rose. We expect
further earnings improvement in 1995.
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Supremazia
We can say "leadership" in several languages--our international container
division is a top producer of corrugated boxes in Europe.
[Photograph--Appendix B No. 9]
Eye-catching
Everest bleached board enhances the merchandising appeal of our customers'
products, offering an exceptionally smooth surface for high quality printing.
[Photograph--Appendix B No. 10]
Refreshing
This SpoutPak carton keeps nature's bounty fresh-tasting, thanks to our
packaging technology, and makes it easy to pour, thanks to our cap.
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33
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280
Locations
Broad geographic coverage and coordinated operations enable us to serve
customers in every state of the union.
International
In addition to ResourceNet International in North America, Aussedat Rey in
France and Scaldia in the Netherlands deliver reliable service in Europe.
Moving
Expanding to new markets south of the border, ResourceNet International welcomed
Mexican paper distributors Ogi Papel and Papelera Kif to our growing family in
1994.
[Illustration of Mexican flag.]
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Distribution
Distribution produced net sales of $3.5 billion in 1994, up from $3.1 billion in
1993 and $3.0 billion in 1992. Operating profits were $74 million in 1994
compared with $58 million in 1993 and $52 million ($58 million before unusual
items) in 1992. While business conditions were sluggish during the first half of
1994, they improved dramatically later in the year. Sales and earnings grew
because of improving economic conditions, acquisitions, effective marketing and
gains in operating efficiency.
Sales and earnings of ResourceNet International, our North American
distribution business, rose in 1994. Earnings improved by 11 percent compared
with a 5 percent gain in 1993. Operating, selling and administrative expenses
improved as a percent of sales due to cost control and productivity efforts.
Overall, return on sales improved slightly in 1994 despite costs associated with
the integration of acquired companies.
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[Net Sales and Operating Profit charts--Appendix A No. 4]
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ResourceNet International is in transition from a group of successful regional
distributors to a premier national merchant. This change is designed to serve
customers more effectively and includes facility consolidations, implementation
of common information systems and a significant investment in employee training.
For example, in 1994 a large new facility was opened in New England,
consolidating several smaller, less efficient operations. Consolidation of
smaller facilities also took place in the Southeast and Midwest. In 1995,
additional facility coordination and redesign efforts are scheduled.
During 1994, ResourceNet International entered the Mexican market with two
small acquisitions. We also acquired California-based Kirk Paper Corporation in
December
34
1994. These acquisitions broaden our product offerings and marketing
opportunities across California, and enhance our westernmost distribution
capability from Canada to Mexico. Also in December, we announced our intent to
acquire Michigan-based Carpenter Paper Company and Seaman Patrick Paper Company.
Our European distribution business, based in France and the Netherlands,
generated 12 percent higher sales in 1994 than in 1993. Operating results
improved to a nearly break-even level following losses in 1993 and 1992. Sales
and earnings gains reflect improving economic conditions.
Demand and prices for our products and services began to improve in North
America and Europe during the third quarter of 1994, and we expect improvement
to continue in 1995. We are continuing to reduce costs, increase productivity
and responsiveness to customers, and improve working capital.
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Towering
We distribute printing papers, industrial packaging, maintenance supplies,
graphic arts supplies and other products used every day by businesses and
consumers.
[Photograph--Appendix B No. 11]
Service
ResourceNet International puts experienced, quality-driven professionals on our
team.
[Photograph--Appendix B No. 12]
Responsive
Just-in-time scheduling and the ability to deliver goods anywhere in the United
States drive our reputation for superior customer service.
[Photograph--Appendix B No. 13]
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35
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17%
Total Sales
Growing specialty products businesses build on the resources of our paper,
packaging and forest operations by sharing many of the same materials, processes
and customers.
[Photograph--Appendix B No. 14]
In Vogue
Our Polyrey subsidiary in France is a style leader in decorative surfaces such
as these high-pressure laminates.
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Specialty Products
Net sales of Specialty Products totaled $2.6 billion in 1994, up from $2.5
billion in 1993 and 1992. Operating profits improved to $268 million from $263
million in 1993 and $83 million ($238 million before unusual items) in 1992.
Improvement was led by Specialty Panels, Chemicals and Specialty Industrial
Papers. Earnings from Nonwovens, Petroleum and Imaging Products were lower in
1994 than in 1993.
Specialty Panels accounted for 29 percent of segment sales. Operating profit
improved 30 percent in 1994 following a 22 percent increase in 1993. As in
1993, the major contributor was CraftMaster molded interior door facings. Siding
sales increased 8 percent over the previous year with the greatest growth coming
from our specialty lines, OmniWood and Colorlok. The outlook for 1995 is for
continued growth in sales and earnings.
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[Net Sales and Operating Profit charts--Appendix A No. 5]
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Imaging Products sales represented about 28 percent of segment sales. Sales
increased in 1994 while earnings declined slightly after falling 64 percent in
1993. Earnings declines since 1992 are due to industry overcapacity and
technological changes in the photographic and graphic arts businesses. Our
offset plate and pressroom chemical activities are growing and continue to gain
market share. We expect 1995 results to improve as we reduce costs, introduce
new products and increase market share.
Specialty Industrial Papers, which produces release backing papers for
pressure-sensitive labels and other specialty papers, contributed about 18
percent of segment sales. After a 42 percent increase in 1993, 1994 earnings
improved by 8 percent on the strength of record shipments. Prices improved
toward the end of 1994, led by growth in the pressure-sensitive market. Our
outlook is for further improvement in 1995 as markets remain strong and prices
rise. Productivity enhancements will lower costs and a rebuilt machine at our
Kaukauna, Wis., facility will double our capacity to make release backing papers
for pressure-sensitive labels.
Nonwovens sales represented about 10 percent of segment sales. Operating
results declined significantly in 1994 as the con-
36
sumer disposables market continued to move from drylaid to spunbond products.
Sales volumes and earnings should begin to rebound in 1995 with the addition of
a spunbond line at our Toronto, Canada, facility and the start-up of a
proprietary fabric-enhancing process.
Chemicals accounted for 10 percent of segment sales. Earnings were 47 percent
above 1993. Commodity prices increased from cyclical lows. Demand was also
strong in specialty markets where we were able to raise prices and grow volume.
In 1995, we expect to continue to shift more of our sales to specialty products
and raise prices to maintain margins.
Petroleum accounted for about 5 percent of segment sales but a larger portion
of its earnings. However, earnings were down about 30 percent from 1993 and 1992
as prices and production declined. We expect 1995 production levels and results
to be comparable with 1994.
Overall, we expect higher sales and earnings for the Specialty Products
segment in 1995.
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Taking Off
Our specialty industrial papers business is reaching new heights as our
customers continue to find new uses for pressure-sensitive labels.
[Photograph--Appendix B No. 15]
Brilliant
Arizona Chemical significantly expanded its specialty product mix, including
resins used in brightly colored printing inks.
[Photograph--Appendix B No. 16]
Advanced
New products in our CraftMaster door facings line, such as this prestained
natural oak style, will open the door to higher sales in 1995.
[Photograph--Appendix B No. 17]
Veratec, a leading supplier of spunbond fabrics used in disposable diapers, is
using new technologies to improve comfort and hygiene for some of the world's
youngest consumers.
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37
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Stewardship
Southern pine represents our largest renewable source of fiber. On average, we
grow 25 percent more fiber than we harvest.
[Illustration of Southern pine trees.]
Preservation
We are proud to receive the National Wild Turkey Federation's first Land
Stewardship Award, recognizing our wildlife preservation programs.
[Illustration of a wild turkey.]
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Forest Products
Forest Products net sales were $1.7 billion in 1994, even with 1993 and up from
$1.4 billion in 1992. Operating profits totaled $378 million in 1994, down from
a record $445 million in 1993, but up substantially from $197 million ($261
million before unusual items) in 1992.
Forestland revenues and profits declined in 1994 in the wake of a planned
reduction in harvest volumes. A 10 percent decrease in the 1994 harvest was
partially offset by a 4 percent increase in average prices. Sales of
nonstrategic forest lands also declined.
In the South, revenues were about the same as in 1993 as higher prices for
pine sawlogs and pulpwood offset a lower harvest. High customer inventories and
favorable harvest conditions led to a softening of prices through midyear.
However, prices rebounded sharply in the fourth quarter when weather conditions
constrained harvest activity. Stumpage sales in the West were 18 percent lower
in 1994 than in 1993. Average prices on the West Coast were slightly above 1993
levels.
38
Export sales we re soft throughout the year. In the Northeast, revenues
were 18 percent above 1993 despite a lower harvest. Spruce-fir sawlog prices
rose steadily throughout the year to record highs at year end. Pulpwood prices
also increased as competition for fiber was brisk.
We project harvest volume to decrease an additional 10 percent in 1995 and to
remain near this level for the next several years. While early-1995 sawlog and
pulpwood prices are well above 1994 average prices in the South and Northeast,
and are at comparable levels in the West, lower harvests will likely have a
dampening effect on sales and earnings in 1995.
Wood Products operating results reached record levels in 1994 as sales
increased 9 percent over 1993 levels. Operating profits were up 12 percent,
benefiting from strong pricing and demand. Housing starts were robust through
midyear, but finished the year slightly below 1993 levels.
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[Net Sales and Operating Profit charts--Appendix A No. 6]
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Lumber prices were volatile during 1994, up significantly early in the year
but somewhat softer in the spring and late fall. The volatility resulted from
uncertainties in the construction industry as interest rates rose throughout the
year. Prices at year end were 11 percent below the record level reached in 1993.
Wood costs increased throughout the year.
Panel prices were less volatile and softened slightly during the spring before
strengthening at year end, finishing the year near record levels. Increased
productivity from recent capital improvements more than offset the increase in
wood costs.
Pricing levels for 1995 are uncertain and profit margins will face pressure
from higher wood costs as competition for fiber increases. However, programs are
under way to improve productivity and reduce costs.
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6,100,000
Acres
Our extensive forestlands, primarily in the southern United States, support the
economic vitality of our communities and the well-being of native plant and
animal life.
Conservation
In partnerhsip with the U.S. Fish and Wildlife Service, we are completing a
Habitat Conservation Plan in 1995 to protect the gopher tortoise, a threatened
species.
[Illustration of a gopher tortoise.]
Building
International Paper is one of the largest U.S. producers of southern pine lumber
and a leading provider of panels and other wood products.
[Photograph--Appendix B No. 18]
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39
Liquidity and Capital resouces
Cash Flow From Operations
Higher earnings helped International Paper generate substantial cash flow in
1994. Cash provided by operations in 1994 of $1.3 billion exceeded $1.0 billion
in 1993 and 1992.
Depreciation and amortization expense in 1994 was $885 million ($923 million
before the change in accounting for start-up costs), $898 million in 1993 and
$850 million in 1992.
Investment Activities
Capital spending of $1.1 billion in 1994 exceeded $954 million spent in 1993,
but was less than $1.4 billion spent in 1992. Spending in 1994 reflected the
start of several major projects and, as in recent years,also focused on further
reductions of production costs, plant upgrades and incremental capacity
expansions, quality and productivity improvements, and environmental
initiatives.
We expect capital spending for 1995 to exceed $1.3 billion. A discussion of
our capital spending program appears on page 12.
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Capital Expenditures by Industry Segment
In millions for the years ended December 31 1994 1993 1992
------ ------ ------
Printing Papers $ 447 $ 429 $ 740
Packaging 205 181 201
Distribution 16 13 14
Specialty Products 270 155 245
Forest Products 135 145 104
------ ------ ------
1,073 923 1,304
Corporate 41 31 64
------ ------ ------
Capital Expenditures $1,114 $ 954 $1,368
====== ====== ======
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In 1994, International Paper spent $299 million to acquire an additional 8
percent interest in Carter Holt Harvey Limited, bringing total ownership to 24
percent. In late December, the Company acquired additional stock of Zanders
Feinpapiere AG. Also in December, a merger was completed with Kirk Paper
Corporation, a California-based paper distribution company.
In 1993, the Company made several small acquisitions in its distribution and
specialty products businesses.
In 1992, the Company acquired Kwidzyn from the Polish government and an equity
interest in Scitex Corporation Ltd.
Financing Activities
In 1994, the Company issued long-term debt totaling $600 million: in May, $150
million due in 2004; in June, $150 million due in 2024; and in August, $300
million of which $150 million is due in each of 2004 and 2006. In 1993, the
Company issued $600 million of long-term debt: in March, $200 million due in
2023; in October, $200 million due in 2023; and in November, $200 million due in
2003.
The proceeds of all 1994 and 1993 debentures were used primarily to reduce
short-term borrowing and secure favorable long-term interest rates.
In 1992, taking advantage of low interest rates, the Company increased
short-term borrowing by $657 million, retiring $255 million of high-rate
long-term debt. Also, 9.2 million shares of common stock were sold in a public
offering yielding $650 million, and $200 million of 7.625 percent notes due in
2007 were issued. These proceeds were used principally to retire higher rate
debt. See Note 10 on page 54 for a discussion of financial instruments.
Common stock dividends per share were $.42 per quarter ($1.68 on an annual
basis) in 1994, 1993 and 1992. Payments were $210 million in 1994, $208 million
in 1993 and $206 million in 1992.
Capital Resource Outlook for 1995
Cash flow from operations is expected to exceed capital
40
expenditures, working capital and dividend requirements.
The Company maintained a strong balance sheet, with a debt to capital ratio of
41 percent in 1994, up from 39 percent in 1993 and 38 percent in 1992. These
ratios support an investment-grade debt rating, allowing ready access to
financial markets. As a result, we are able to take advantage of external
investment and financing opportunities.
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[Cash Flow From Operations chart--Appendix A No. 7]
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Other Financial Statement Items
Net interest expense increased to $349 million in 1994, up from $310 million in
1993 and $247 million in 1992. The 1994 increase resulted primarily from the
shift to longer term debt and higher short-term rates.
Net interest in 1992 benefited from tax-related interest income as well as
higher capitalized interest related to major capital projects.
The effective tax rate for 1994 was 35 percent of pre-tax income compared with
42 percent in 1993 (37 percent before the revaluation of deferred tax balances)
and 31 percent in 1992. The adoption of SFAS No. 109 and the tax benefit at
statutory rates of the productivity improvement charge in 1992 contributed to
the lower rate. The increase in the 1993 rate arose from the increase in the
U.S. statutory federal income tax rate of 1 percent, which also increased
deferred taxes by $25 million. We expect the effective tax rate for 1995 to
increase slightly as a result of changes in the geographic mix of our
earnings.
During 1994 and 1993, the Company recognized tax benefits of $33 million and
$55 million, respectively, related to losses at certain non-U.S. locations. We
believe that it is likely that these tax benefits will be realized.
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[Total Debt to Capital Ratio chart--Appendix A No. 8]
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Environmental Issues
Environmental capital expenditures totaled $95 million in 1994, $100 million in
1993 and $126 million in 1992. Capital spending to increase recycling capacity
totaled $280 million, $102 million and $35 million in 1994, 1993 and 1992,
respectively. During 1994, International Paper successfully converted four of
its 11 U.S. bleached mills to elemental chlorine-free technology.
In 1993, the EPA released its "Cluster Rule" proposal to coordinate and
integrate by 1998 the requirements for air emissions and water discharge for the
pulp and paper industry. Also in 1993, the EPA issued the "Great Lakes
Initiative," proposed regulations covering minimum water quality and
implementation procedures. The content of the Cluster Rule and GLI and their
impact on the industry was widely debated during 1994. The financial impact of
these regulations will depend on various factors, including changes in the
proposed regulations, new developments in technology, and timing of the
implementation period. Last year, the Company estimated future capital spending
to comply with the Cluster Rule and GLI to be between $700 million and $1.5
billion, depending upon the methods allowed by the final regulations to meet
requirements. While there are ongoing discussions with the EPA and Congress
concerning these rules, there have been no announced changes to the proposals
and thus these estimates remain valid at this time. As a result of these
discussions, there is some basis to expect that the EPA will make moderating
adjustments to these rules and, if so, the range of estimated capital
41
spending would be adjusted downward. Last year, we estimated that annual
operating costs, excluding depreciation and the cost of capital, would increase
between $60 million and $120 million when these rules are fully implemented in
1998 or 1999. This estimate will also be adjusted to the extent the EPA makes
moderating changes.
The Company paid fines and penalties related to environmental issues of
$960,000, $400,000 and $1.6 million for the years 1994, 1993 and 1992,
respectively. Reviews are in progress by federal and state environmental
agencies at certain facilities to determine if the Company is in
compliance with environmental laws and regulations. Any fines arising
from these reviews should not have a material effect on the Company's
future financial condition or results of operations.
In 1992, agreement was reached with the State of New York to conclude an
investigation of the Company's Anitec facility in Binghamton, N.Y. Estimated
costs of remediation were accrued in 1992.
Beginning in late 1990, several lawsuits were filed against paper producers
alleging property damage, business loss or risk of personal injury resulting
from the presence of dioxin in mill discharges. International Paper was named in
a number of these lawsuits. One case involving the Company's Texarkana, Texas,
facility was settled in late 1993 without any admission or finding of liability.
All but one of the remaining cases are in federal or state court in southern
Mississippi and involve the Company's Moss Point, Miss., mill. During 1994, the
Company tried to bring several cases to trial but uniformly the plaintiffs have
dismissed the actions prior to commencement of proceedings. The Company expects
to bring at least one lawsuit to trial during 1995. Due to aggressive
solicitations by plaintiffs' attorneys, cumulative damage claims totaled more
than $9.4 billion by the end of 1994, some $8 billion of which is in punitive
damages. Management believes these suits are without merit and expects to
prevail upon final resolution.
International Paper is also a party to a number of other environmental
remediation actions under various federal and state laws, including the
Comprehensive Environmental Response, Compensation and Liability Act. Related
costs are recorded in the financial statements when probable and reasonably
estimable. These costs have increased in recent years and stabilized in 1994.
Completion of these actions is not expected to have a material adverse effect on
the Company's future financial condition or results of operations.
Further details with respect to these cases can be found in the
Company's quarterly reports on Form 10-Q and annual report on Form 10-K
filed with the Securities and Exchange Commission. Copies can be
obtained as indicated on the inside back cover of this report.
Effects of Inflation
General inflation has had minimal impact on International Paper's operating
results in the last three years. Sales prices and volumes are more strongly
influenced by supply and demand factors in specific markets and by exchange rate
fluctuations than by inflationary factors.
42
Financial Information by Geographic Area
- --------------------------------------------------------------------------------
Net Sales
In millions 1994 1993 1992
------- ------- -------
United States 1 $11,965 $11,085 $10,524
Europe 2,958 2,586 3,030
Other 354 340 347
Less: Intergeographic Sales (311) (326) (303)
------- ------- -------
Net Sales $14,966 $13,685 $13,598
======= ======= =======
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Assets
In millions 1994 1993 1992
------- ------- -------
United States $11,237 $10,999 $10,680
Europe 3,818 3,512 3,832
Other 1,241 820 812
Corporate 1,540 1,300 1,192
------- ------- -------
Assets $17,836 $16,631 $16,516
======= ======= =======
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
European Sales by Business Segment
In millions 1994 1993 1992
------- ------- -------
Printing Papers $1,231 $1,016 $1,172
Packaging 559 513 675
Distribution 318 284 335
Specialty Products 771 710 791
Forest Products 79 63 57
------- ------- -------
European Sales $2,958 $2,586 $3,030
======= ======= =======
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Operating Profit
In millions 1994 1993 1992
------- ------- -------
United States $915 $833 $511
Europe 2,3 97 (23) 41
Other 21 22 18
------- ------- -------
Operating Profit $1,033 $832 $570 4
======= ======= =======
- --------------------------------------------------------------------------------
1 Export sales to unaffiliated customers (in millions) were $1,200 in 1994,
$1,100 in 1993 and $1,200 in 1992.
2 Includes amounts, net of goodwill amortization, for Aussedat Rey, Ilford,
Zanders, the Horsell graphic arts businesses, the Rhone Valley Packaging
business, Scaldia Papier BV and Kwidzyn from the dates of acquisition.
3 While net sales includes 100% of Zanders' sales, operating profit is
adjusted for minority interests.
4 Includes restructuring and other charges totaling $336 million.
European sales staged a strong recovery in 1994, increasing 14% to $3.0 billion
after decreasing 15% in 1993 and increasing 7% in 1992. Profitability of the
European units of our Packaging and Specialty Products segments improved
compared with 1993 and operations within the Printing Papers segment returned to
profitability during 1994. As a result, European operations as a whole reported
profits of $97 million in 1994 compared with a loss of $23 million in 1993 and a
$41 million profit in 1992.
Improved economic conditions in 1994 resulted in increased prices and
shipments, particularly in the last quarter. Prices for pulp and
uncoated papers led the upturn. The capital improvements at Aussedat
Rey's Saillat mill in France and the Kwidzyn mill in Poland contributed
to increased earnings as a result of reduced costs and increased pulp
production.
In Europe, prices reached their cyclical lows in 1994 and began recovering in
the second half. We expect higher profits in 1995 as the economy continues to
recover and the price increases implemented in the latter part of 1994 are
realized in 1995.
International Paper owns a 12% interest in Scitex Corporation Ltd., a world
leader in digital visual information communication for the graphic design,
printing, publishing and video markets. Scitex, with annual 1994 revenues of
$704 million, is headquartered in Israel, with most of its sales to European,
North American and Japanese customers. For the year ended December 31, 1994,
Scitex reported net income of $72 million before a nonrecurring charge of $8
million. The 1994 results before the special charge declined 23% after a similar
decline in 1993.
In March 1994, the Company increased its investment in Carter Holt Harvey
Limited, a New Zealand-based forest and paper products company with substantial
assets in Chile, from 16% to 24%. CHH has annual sales of approximately $1.5
billion. For the fiscal year ended March 31, 1994, CHH reported net earnings of
about $180 million for a 34% increase over the period ended March 31, 1993. The
growth in profit for the period is attributable to higher sawlog export prices
and solid gains in productivity and operational efficiencies. For the six months
ended September 30, 1994, CHH had earnings of about $120 million, which
represented a 23% increase in profits over the prior-year six-month period.
Results were driven by higher average pulp and paper prices, stronger wood
products demand and operating cost reductions.
43
Financial Information by Industry Segment
- --------------------------------------------------------------------------------
Net Sales
In millions 1994 1993 1992
------- ------- -------
Printing Papers $ 4,400 $ 3,905 $ 4,040
Packaging 3,375 3,095 3,245
Distribution 3,470 3,140 2,980
Specialty Products 2,590 2,460 2,460
Forest Products 1,715 1,700 1,410
Less: Intersegment Sales (584) (615) (537)
------- ------- -------
Net Sales $14,966 $13,685 $13,598
======= ======= =======
- --------------------------------------------------------------------------------
Operating Profit
In millions 1994 1993 1992
------- ------- -------
Printing Papers $ 20 $ (122) $ (70)
Packaging 293 188 308
Distribution 74 58 52
Specialty Products 268 263 83
Forest Products 378 445 197
------- ------- -------
Operating Profit 1,033 832 570
Interest Expense, net (349) (310) (247)
Corporate Items, net (20) (22) (117)
------- ------- -------
Earnings Before Income Taxes,
Extraordinary Item and
Cumulative Effect of
Accounting Changes $664 $500 $206
======= ======= =======
- --------------------------------------------------------------------------------
Assets
In millions 1994 1993 1992
------- ------- -------
Printing Papers $ 6,706 $ 6,466 $ 6,566
Packaging 3,098 3,011 3,090
Distribution 1,210 1,085 1,062
Specialty Products 2,782 2,607 2,585
Forest Products 1,533 1,603 1,522
Investment in:
Carter Holt Harvey 735 331 285
Scitex 232 228 214
Corporate 1 1,540 1,300 1,192
------- ------- -------
Assets $17,836 $16,631 $16,516
======= ======= =======
- --------------------------------------------------------------------------------
Depreciation, Depletion and Amortization
In millions 1994 1993 1992
------- ------- -------
Printing Papers $ 443 $ 414 $ 392
Packaging 192 213 211
Distribution 29 28 30
Specialty Products 161 180 152
Forest Products 96 93 84
Corporate 5 10 14
------- ------- -------
Depreciation, Depletion
and Amortization 926 938 883
Less: Depletion 2 (41) (40) (33)
------- ------- -------
Depreciation and
Amortization $885 $898 $850
======= ======= =======
- --------------------------------------------------------------------------------
1 Corporate assets are principally cash and temporary investments, investments,
deferred taxes and other assets that are not identifiable with industry
segments.
2 Included in Forest Products.
Industry Segment Contributions
Earnings before income taxes, extraordinary item and cumulative effect of
accounting changes were $664 million in 1994, $500 million in 1993 and $206
million ($604 million before the $370 million productivity improvement charge
and $28 million of environmental charges) in 1992. The table to the right
portrays the impact of the unusual items on operating profit for each of the
industry segments for 1992:
- --------------------------------------------------------------------------------
1992 Operating Profit
-----------------------------------------
Before Unusual After
Unusual Items Items Unusual Items
------------- ------- -------------
In millions
Printing Papers $ 19 $ 89 $ (70)
Packaging 330 22 308
Distribution 58 6 52
Specialty Products 238 155 83
Forest Products 261 64 197
----- ----- -----
Operating Profit 906 336 570
Interest Expense, net (247) (247)
Corporate Items, net (55) 62 (117)
----- ----- -----
Earnings Before Income Taxes,
Extraordinary Item and Cumulative
Effect of Accounting Changes $ 604 $ 398 $ 206
===== ===== =====
- --------------------------------------------------------------------------------
44
REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS
The management of International Paper Company is responsible for the fair
presentation of the information contained in the financial statements in this
annual report. The statements are prepared in accordance with generally accepted
accounting principles and reflect management's best judgment as to the Company's
financial position, results of operations and cash flows.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that transactions are properly recorded and
summarized so that reliable financial records and reports can be prepared and
assets safeguarded.
An important part of the internal controls system is the Company's Policy on
Ethical Business Conduct, which requires employees to maintain the highest
ethical and legal standards in their conduct of Company business. The internal
controls system further includes careful selection and training of supervisory
and management personnel, appropriate delegation of authority and division of
responsibility, dissemination of accounting and business policies throughout
the Company, and an extensive program of internal audits with management
follow-up. During 1993, the Company instituted a toll-free telephone "compliance
line" whereby any employee may report suspected violations of law or company
policy.
The independent public accountants provide an objective, independent review of
management's discharge of its responsibility for the fairness of the Company's
financial statements. They review the Company's internal accounting controls and
conduct tests of procedures and accounting records to enable them to form the
opinion set forth in their report.
The Board of Directors monitors management's administration of the Company's
financial and accounting policies and practices, and the preparation of these
financial statements. The Audit Committee, which consists of five nonemployee
directors, meets regularly with representatives of management, the independent
public accountants and the internal Auditor to review their activities. At the
annual meeting, the Audit Committee presents a summary of its findings to the
shareholders and recommends that the shareholders approve the appointment of the
independent public accountants to conduct the annual audit.
The independent public accountants and the internal Auditor both have free
access to the Audit Committee and meet regularly with the Audit Committee, with
and without management representatives in attendance.
Robert C. Butler
Senior Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of International Paper Company:
We have audited the accompanying consolidated balance sheets of International
Paper Company (a New York corporation) and subsidiaries as of December 31, 1994
and 1993, and the related consolidated statements of earnings, common
shareholders' equity and cash flows for each of the three years ended December
31, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Paper Company and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years ended December 31,
1994 in conformity with generally accepted accounting principles.
As explained in Notes 3 and 6 to the financial statements, effective January
1, 1994, the Company changed its method of accounting for start-up costs, and
effective January 1, 1992, changed its method of accounting for income taxes.
New York, N.Y.
February 9, 1995
45
CONSOLIDATED STATEMENT OF EARNINGS
In millions, except per share amounts, for
the years ended December 31 1994 1993 1992
------- ------- -------
Net Sales $14,966 $13,685 $13,598
------- ------- -------
Costs and Expenses
Cost of products sold 11,143 10,191 10,137
Depreciation and amortization 885 898 850
Distribution expenses 692 634 629
Selling and administrative expenses 1,082 999 981
Taxes other than payroll and income taxes 151 153 150
Restructuring charges 370
Other 28
------- ------- -------
Total Costs and Expenses 13,953 12,875 13,145
------- ------- -------
Earnings Before Interest, Income Taxes,
Extraordinary Item and Cumulative Effect
of Accounting Changes 1,013 810 453
Interest expense, net 349 310 247
------- ------- -------
Earnings Before Income Taxes,
Extraordinary Item and Cumulative
Effect of Accounting Changes 664 500 206
Provision for income taxes 232 211 64
------- ------- -------
Earnings Before Extraordinary Item and
Cumulative Effect of Accounting Changes 432 289 142
Extraordinary item-loss on extinguishment
of debt (less tax benefit of $3)-Note 9 (6)
Cumulative effect of change in
accounting for:
Start-up costs (less tax benefit of $50)
-Note 3 (75)
Income taxes-Note 6 (50)
------- ------- -------
Net Earnings $ 357 $ 289 $ 86
======= ======= =======
Earnings per Common Share
Earnings before extraordinary item
and cumulative effect of accounting
changes $ 3.46 $ 2.34 $ 1.17
Extraordinary item-loss on extinguishment
of debt-Note 9 (.05)
Cumulative effect of change in
accounting for:
Start-up costs-Note 3 (.60)
Income taxes-Note 6 (.41)
------- ------- -------
Earnings per Common Share $ 2.86 $ 2.34 $ .71
======= ======= =======
The accompanying notes are an integral part of these financial statements.
46
CONSOLIDATED BALANCE SHEET
In millions at December 31 1994 1993
------- -------
Assets
Current Assets
Cash and temporary investments, at cost,
which approximates market $ 270 $ 242
Accounts and notes receivable, less
allowances of $97 in 1994 and $104 in
1993 2,241 1,856
Inventories 2,075 2,024
Other current assets 244 279
------- -------
Total Current Assets 4,830 4,401
------- -------
Plants, Properties and Equipment, Net 9,139 8,872
Forestlands 802 786
Investments 1,032 631
Goodwill 763 754
Deferred Charges and Other Assets 1,270 1,187
------- -------
Total Assets $17,836 $16,631
======= =======
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of
long-term debt $ 2,083 $ 2,089
Accounts payable 1,204 1,089
Accrued liabilities 747 751
------- -------
Total Current Liabilities 4,034 3,929
------- -------
Long-Term Debt 4,464 3,601
Deferred Income Taxes 1,612 1,614
Minority Interest and Other Liabilities 1,212 1,262
Commitments and Contingent Liabilities-Note 7
Common Shareholders' Equity
Common stock, $1 par value; issued 1994
128.2 shares, 1993 127.3 shares 128 127
Paid-in capital 1,786 1,704
Retained earnings 4,711 4,553
------- -------
6,625 6,384
Less: Common stock held in treasury,
at cost; 1994 2.3 shares, 1993 3.4 shares 111 159
------- -------
Total Common Shareholders' Equity 6,514 6,225
------- -------
Total Liabilities and Common Shareholders' Equity $17,836 $16,631
======= =======
The accompanying notes are an integral part of these financial statements.
47
CONSOLIDATED STATEMENT OF CASH FLOWS
In millions for the years ended December 31 1994 1993 1992
------- ------- -------
Operating Activities
Net earnings $ 357 $ 289 $ 86
Cumulative effect of accounting changes 75 50
Noncash items
Depreciation and amortization 885 898 850
Deferred income taxes 42 54 (99)
Restructuring and other charges 398
Other, net (2) (22) (95)
Changes in current assets and liabilities
Accounts and notes receivable (339) 78 2
Inventories 8 (93) (127)
Accounts payable and accrued liabilities 252 (220) (71)
Other (3) (3) 15
------- ------- -------
Cash Provided by Operations 1,275 981 1,009
------- ------- -------
Investment Activities
Invested in capital
projects (1,114) (954) (1,368)
Acquisitions
Plants, properties and equipment (17) (163)
Goodwill (9) (13)
Other assets and liabilities, net (58) (9) 23
Investments in affiliated companies (299) (9) (247)
Other (71) (124) (104)
------- ------- -------
Cash Used for Investment Activities (1,542) (1,122) (1,872)
------- ------- -------
Financing Activities
Issuance of common stock 67 60 703
Sale of limited partnership interests 165
Issuance of debt 1,059 727 869
Reduction of debt (275) (467) (475)
Change in bank overdrafts (115) (52) 69
Dividends paid (210) (208) (206)
Other (235) (62) (102)
------- ------- -------
Cash Provided by Financing Activities 291 163 858
------- ------- -------
Effect of Exchange Rate Changes on Cash 4 (5) (8)
------- ------- -------
Change in Cash and Temporary Investments 28 17 (13)
Cash and Temporary Investments
Beginning of the year 242 225 238
------- ------- -------
End of the year $ 270 $ 242 $ 225
======= ======= =======
The accompanying notes are an integral part of these financial statements.
48
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Common
Stock Issued Treasury Stock Total
--------------- -------------- Common
Paid-In Retained Shareholders'
In millions, except share amounts in thousands Shares Amount Capital 1 Earnings Shares Amount Equity
------- ------ --------- -------- ------ ------ -------------
Balance, January 1, 1992 117,578 $118 $1,264 $4,592 5,124 $235 $5,739
Issuance of stock in a public offering 9,200 9 641 650
Issuance of stock for various plans 215 27 (793) (33) 60
Cash dividends--Common stock ($1.68 per share) (206) (206)
Foreign currency translation
(less tax benefit of $58) (140) (140)
Net earnings 86 86
------- ------ --------- -------- ------ ------ -------------
Balance, December 31, 1992 126,993 127 1,792 4,472 4,331 202 6,189
Issuance of stock for acquisition 2 (117) (5) 7
Issuance of stock for various plans 294 38 (815) (38) 76
Cash dividends--Common stock ($1.68 per share) (208) (208)
Foreign currency translation (less tax benefit of $14) (128) (128)
Net earnings 289 289
------- ------ --------- -------- ------ ------ -------------
Balance, December 31, 1993 127,287 127 1,704 4,553 3,399 159 6,225
Issuance of stock for merger 819 1 15 11 27
Issuance of stock for various plans 138 30 (1,050) (48) 78
Cash dividends--Common stock ($1.68 per share) (210) (210)
Foreign currency translation (less tax benefit of $70) 37 37
Net earnings 357 357
------- ------ --------- -------- ------ ------ -------------
Balance, December 31, 1994 128,244 $128 $1,786 $4,711 2,349 $111 $6,514
======= ====== ========= ======== ====== ====== =============
1 The cumulative foreign currency translation adjustment was $(243) million,
$(280) million and $(152) million at December 31, 1994, 1993 and 1992,
respectively.
The accompanying notes are an integral part of these financial statements.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of International
Paper Company and its subsidiaries (the Company). Minority interest represents
minority shareholders' proportionate share of the equity in several of the
Company's consolidated subsidiaries, primarily IP Timberlands, Ltd. (IPT),
Zanders Feinpapiere AG, Georgetown Equipment Leasing Associates, L.P. and Trout
Creek Equipment Leasing, L.P. All significant intercompany balances and
transactions are eliminated. Investments in affiliated companies owned 20% to
50%, and the Company's investment in Scitex Corporation Ltd. where the Company
has the ability to exercise significant influence, are accounted for by the
equity method. The Company's share of affiliates' earnings is included in the
consolidated statement of earnings.
Temporary Investments
Temporary investments with an original maturity of three months or less are
treated as cash equivalents and are stated at cost.
Inventories
Inventory values include all costs directly associated with manufacturing
products: materials, labor and manufacturing overhead. These values are
presented at cost or market if it is lower. Costs of raw materials and finished
pulp and paper products are generally determined on the last-in, first-out
method. Other inventories are primarily stated using the first-in, first-out or
average cost method.
Plants, Properties and Equipment
Plants, properties and equipment are stated at cost, less accumulated
depreciation. For financial reporting purposes, the Company uses the
units-of-production method for depreciating its major pulp and paper mills and
certain wood products facilities and the straight-line method for other plants
and equipment. Annual straight-line depreciation rates are buildings, 2 1/2% to
8 1/2%, and machinery and equipment, 5% to 33%. For tax purposes, depreciation
is computed utilizing accelerated methods.
Interest costs for the construction of certain long-term assets are capitalized
and amortized over the related assets' estimated useful lives. The Company
capitalized net interest costs of $18 million in 1994, $12 million in 1993 and
$42 million in 1992. Interest payments made during 1994, 1993 and 1992 were $369
million, $372 million and $363 million, respectively.
Forestlands
The Company, which currently owns 84% and 100% of IPT's Class A and Class B
Units, respectively, controlled approximately 6.1 million acres of forestlands
in the United States at December 31, 1994. Forestlands are stated at cost, less
accumulated depletion representing the cost of timber harvested. Forestlands
include owned property as well as certain timber harvesting rights with terms of
one or more years. Costs attributable to timber are charged against income as
trees are cut. The depletion rate charged is determined annually based on the
relationship of remaining costs to estimated recoverable volume.
Translation of Financial Statements
Balance sheets of the Company's international operations are translated into
U.S. dollars at year-end exchange rates, while statements of earnings are
translated at average rates. Adjustments resulting from financial statement
translations are included as cumulative translation adjustments in paid-in
capital. Gains and losses resulting from foreign currency transactions are
included in earnings.
Amortization of Intangible Assets
Goodwill, the cost in excess of assigned value of businesses acquired, is
amortized over 40 years. Accumulated amortization was $148 million and $101
million at December 31, 1994 and 1993, respectively.
Revenue Recognition
The Company generally recognizes revenues when goods are shipped.
Earnings per Common Share
Earnings per common share were computed on the basis of the following average
number of shares outstanding (in millions): 1994--124.9, 1993--123.2 and
1992--121.4. The effect of all dilutive securities is immaterial.
Reclassifications
Certain reclassifications have been made to prior-year amounts to conform with
the current-year presentation.
Note 2. Industry Segment Information
Financial information by industry segment and geographic area for 1994, 1993 and
1992 is presented on pages 40, 43 and 44.
50
Note 3. Start-up Costs
Effective January 1, 1994, the Company changed its method of accounting for
start-up costs on major projects to expense these costs as incurred. Prior to
1994, the Company capitalized these costs and amortized them over a five-year
period. This change was made to increase the focus on controlling costs
associated with facility start-ups.
The Company restated 1994 first-quarter results to record a pre-tax charge of
$125 million ($75 million after taxes or $.60 per share) as the cumulative
effect of this accounting change. This change also decreased 1994 total costs
and expenses by $17 million ($10 million after taxes or $.08 per share). On a
pro forma basis, this change would have increased 1992 total costs and expenses
by $33 million ($20 million after taxes or $.17 per share) and would have had no
impact on 1993.
Note 4. Mergers and Acquisitions
In March 1994, the Company acquired from Brierley Investments Limited an
additional 8% interest in Carter Holt Harvey Limited, a major New Zealand forest
and paper products company with substantial assets in Chile. The purchase
increased the Company's ownership of Carter Holt to 24%. The investment in
Carter Holt is accounted for using the equity method. In December, the Company
acquired additional stock of Zanders Feinpapiere AG. Also in December, a merger
was completed with Kirk Paper Corporation, a California-based paper distribution
company. The December 31, 1994 consolidated balance sheet reflects a preliminary
allocation of the purchase price for these acquisitions, to be finalized in
1995.
In 1993, the Company made several small acquisitions in its distribution and
specialty products businesses.
During 1992, the Company acquired an equity interest in Scitex Corporation Ltd.,
an Israel-based world leader in digital visual information communication for the
graphic design, printing, publishing and video industries. Also in 1992, Zaklady
Celulozowa-Papierniecze S.A. w Kwidzynie (Kwidzyn) was acquired from the
Government of the Republic of Poland. Kwidzyn is Poland's largest white papers
manufacturer and only integrated bleached pulp and paper company.
With the exception of Kirk Paper Corporation, which was accounted for as a
pooling-of-interests, all of the 1994, 1993 and 1992 acquisitions were accounted
for using the purchase method. The operating results of these mergers and
acquisitions have been included in the consolidated statement of earnings from
the dates of acquisition. The effects of these mergers and acquisitions, both
individually and in the aggregate, were not significant to the Company's
consolidated financial statements.
During 1993, the Company contributed assets with a fair market value of
approximately $900 million to two newly formed limited partnerships, Georgetown
Equipment Leasing Associates, L.P. and Trout Creek Equipment Leasing, L.P. These
partnerships are separate and distinct legal entities from the Company and have
separate assets, liabilities, business functions and operations. However, for
accounting purposes, the Company continues to consolidate these assets, and the
minority shareholders' interest is reflected as minority interest in the
accompanying financial statements. The purpose of the partnerships is to invest
in and manage a portfolio of assets including pulp and paper equipment used at
the Georgetown, S.C., and Ticonderoga, N.Y., mills. This equipment is leased to
the Company under long-term leases. Partnership assets also include floating
rate notes and cash. During 1993, outside investors purchased a portion of the
Company's limited-partner interests for $132 million and also contributed an
additional $33 million to one of these partnerships.
At December 31, 1994, the Company held aggregate general and limited-partner
interests totaling 83.5% in Georgetown Equipment Leasing Associates, L.P. and
81.2% in Trout Creek Equipment Leasing, L.P. The Company also held $273 million
and $197 million of borrowings at December 31, 1994 and 1993, respectively, from
these partnerships. These funds are being used for general corporate purposes.
Note 5. Unusual Items
In November 1992, the Company recorded pre-tax charges of $370 million to
establish a productivity improvement reserve and $28 million for environmental
remediation and cleanup. The productivity improvement reserve included charges
for plant shutdowns ($126 million), consolidations and other write-offs ($138
million) and severance and employee relocation ($64 million). Other costs
included in the productivity charge concerned legal, warranty and miscellaneous
items amounting to $42 million.
51
Note 6. Income Taxes
The Company uses the liability method required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109),
whereby deferred income taxes are recorded based upon differences between the
financial statement and tax bases of assets and liabilities. Deferred tax assets
and liabilities must be revalued to reflect new tax rates in the periods rate
changes are enacted. Accordingly, the 1993 provision for income taxes included a
charge of $25 million ($.20 per share) for deferred tax expense resulting from
the enactment of the Omnibus Budget Reconciliation Act of 1993, which raised the
federal income tax rate by 1% effective January 1, 1993.
The Company adopted the provisions of SFAS No. 109 in the fourth quarter of
1992. First-quarter operations were restated to record an after-tax charge of
$50 million ($.41 per share) as the cumulative effect of the accounting change
as of January 1, 1992. The components of earnings before income taxes,
extraordinary item and cumulative effect of accounting changes, and the
provision for income taxes by taxing jurisdiction were:
- --------------------------------------------------------------------------------
In millions 1994 1993 1992
----- ----- -----
Earnings (losses)
U.S. $ 595 $ 577 $ 134
Non-U.S. 69 (77) 72
----- ----- -----
Earnings before income taxes,
extraordinary item and cumulative
effect of accounting changes $ 664 $ 500 $ 206
===== ===== =====
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In millions 1994 1993 1992
----- ----- -----
Current tax provision
U.S. federal $ 148 $ 114 $ 120
U.S. state and local 10 12 14
Non-U.S. 32 31 29
----- ----- -----
190 157 163
----- ----- -----
Deferred tax provision
U.S. federal 23 64 (79)
U.S. state and local 24 20 (17)
Non-U.S. (5) (55) (3)
U.S. federal rate change 25
----- ----- -----
42 54 (99)
----- ----- -----
Provision for income taxes $ 232 $ 211 $ 64
===== ===== =====
- --------------------------------------------------------------------------------
The Company made income tax payments of $75 million, $156 million and $130
million in 1994, 1993 and 1992, respectively.
A reconciliation of income tax expense using the statutory U.S. income tax rate
compared with the Company's actual income tax expense follows:
- --------------------------------------------------------------------------------
In millions 1994 1993 1992
----- ----- -----
Earnings before income taxes,
extraoridinary item and cumulative
effect of accounting changes $ 664 $ 500 $ 206
Statutory U.S. income tax rate 35% 35% 34%
----- ----- -----
Tax expense using statutory
U.S. income tax rate 232 175 70
State and local taxes 22 21 (2)
Goodwill amortization 8 7 18
Foreign sales corporation benefit (12) (6) (6)
U.S. federal rate change 25
Tax credits (6) (9) (6)
Other, net (12) (2) (10)
----- ----- -----
Provision for income taxes $ 232 $ 211 $ 64
----- ----- -----
Effective income tax rate 35% 42% 31%
===== ===== =====
- --------------------------------------------------------------------------------
The net deferred income tax liability as of December 31, 1994 and 1993 includes
the following components:
- --------------------------------------------------------------------------------
In millions 1994 1993
------- -------
Current deferred tax asset $ 138 $ 176
Noncurrent deferred tax liability 1 (1,462) (1,499)
------- -------
Total $(1,324) $(1,323)
======= =======
- --------------------------------------------------------------------------------
1 Net of $150 million and $115 million at December 31, 1994 and 1993,
respectively, of noncurrent deferred tax assets.
The tax effects of significant temporary differences representing deferred tax
assets and liabilities at December 31, 1994 and 1993 were as follows:
- --------------------------------------------------------------------------------
In millions 1994 1993
------- -------
Plants, properties and equipment $(1,634) $(1,644)
Prepaid pension costs (233) (204)
Postretirement benefit accruals 167 150
Alternative minimum tax credit
carryforwards 145 92
Non-U.S. net operating losses 148 115
Other 83 168
------- -------
Total $(1,324) $(1,323)
======= =======
- --------------------------------------------------------------------------------
The Company's alternative minimum tax credit carryforwards can be carried
forward indefinitely. The Company had net operating loss carryforwards
applicable to non-U.S. subsidiaries of which $176 million expire in years 1997
through 2004 and $240 million can be carried forward indefinitely.
52
Deferred taxes are not provided for temporary differences of approximately $297
million and $385 million as of December 31, 1994 and 1993, respectively,
representing earnings of non-U.S. subsidiaries that are intended to be
permanently reinvested. If these earnings were remitted, the Company believes
that U.S. foreign tax credits would eliminate any significant impact on future
income tax provisions.
Note 7. Commitments and Contingent Liabilities
The Company leases certain property, machinery and equipment under cancelable
and noncancelable lease agreements. At December 31, 1994, total future minimum
rental commitments under noncancelable leases were $348 million, due as
follows: 1995-$81 million, 1996-$68 million, 1997-$57 million, 1998-$46
million, 1999-$41 million, and thereafter-$55 million. Rent expense was
$124 million, $92 million and $86 million for 1994, 1993 and 1992, respectively.
The Company is involved in various inquiries, administrative proceedings and
litigation relating to contracts, sales of property, environmental protection,
tax, antitrust and other matters, some of which allege substantial monetary
damages. While any proceeding or litigation has the element of uncertainty, the
Company believes that the outcome of any lawsuit or claim that is pending or
threatened, or all of them combined, will not have a material adverse effect on
its consolidated financial position or results of operations.
Note 8. Supplementary Balance Sheet Information
Inventories by major category were:
- --------------------------------------------------------------------------------
In millions at December 31 1994 1993
------- -------
Raw materials $ 365 $ 380
Finished pulp, paper and packaging
products 1,067 1,017
Finished imaging products 152 164
Finished lumber and panel products 77 79
Operating supplies 335 324
Other 79 60
------- -------
Inventories $ 2,075 $ 2,024
======= =======
- --------------------------------------------------------------------------------
Approximately 70% of the Company's total raw materials and finished products
inventories were valued using the last-in, first-out method. If the first-in,
first-out method had been used, it would have increased total inventory balances
by approximately $194 million, $160 million and $168 million at December 31,
1994, 1993 and 1992, respectively.
Plants, properties and equipment by major classification were:
- --------------------------------------------------------------------------------
In millions at December 31 1994 1993
------- -------
Pulp, paper and packaging facilities
Mills $11,672 $10,996
Packaging plants 1,180 1,138
Wood products facilities 1,296 1,178
Other plants, properties and equipment 2,042 1,865
------- -------
Gross cost 16,190 15,177
Less: Accumulated depreciation 7,051 6,305
------- -------
Plants, properties and equipment, net $ 9,139 $ 8,872
======= =======
- --------------------------------------------------------------------------------
Note 9. Debt and Lines of Credit
A summary of long-term debt follows:
- --------------------------------------------------------------------------------
In millions at December 31 1994 1993
------- -------
9.4% to 9.7% notes--due 1995-2002 $ 400 $ 400
8 1/8% notes--due 2024 149
7 1/2% to 7 7/8% notes--due 2004-2007 648 199
7 5/8% notes--due 2003 199 199
6 7/8% notes--due 2023 197 197
6 1/8% notes--due 2003 199 199
5 3/4% convertible subordinated
debentures--due 2002 1 199 199
5 1/8% debentures--due 2012 81 78
Medium-term notes--due 1995-2009 2 594 549
Environmental and industrial
development bonds--due 1995-2017 3,4 848 747
Commercial paper and bank notes 5 677 516
Other 6 585 496
------- -------
Total 7 4,776 3,779
Less: Current maturities 312 178
------- -------
Long-term debt $ 4,464 $ 3,601
======= =======
- --------------------------------------------------------------------------------
1 The 5 3/4% convertible subordinated debentures are convertible into Company
common stock at a conversion price of $68.50 per share. These debentures are
redeemable at par.
2 The weighted average interest rate on these notes was 8.5% in 1994 and 8.7% in
1993.
3 The weighted average interest rate on these bonds was 5.7% in 1994 and 5.3% in
1993.
4 Includes $323 million and $279 million of bonds at December 31, 1994 and 1993,
respectively, which may be tendered at various dates and/or under certain
circumstances.
5 The weighted average interest rate was 5.7% in 1994 and 3.5% in 1993.
6 Includes $96 million in 1994 and $95 million in 1993 of French franc
borrowings with a weighted average interest rate of 4.7% in 1994 and 5.6% in
1993, and $227 million in 1994 and $214 million in 1993 of German mark
borrowings with a weighted average interest rate of 6.7% in 1994 and 6.6% in
1993.
7 The fair market value was approximately $4.7 billion and $4.0 billion at
December 31, 1994 and 1993, respectively.
53
At December 31, 1994 and 1993, the Company classified $1.0 billion and $795
million, respectively, of tenderable bonds, commercial paper and bank notes as
long-term debt. The Company has the intent and ability to renew or convert these
obligations through 1995 and into future periods.
Total maturities of long-term debt over the next five years are: 1995-$312
million, 1996-$228 million, 1997-$190 million, 1998-$171 million and 1999-$120
million.
At December 31, 1994, the Company had unused bank lines of credit of
approximately $1.2 billion. The lines generally provide for interest at market
rates plus a margin based on the Company's current bond rating. The principal
line provides for $1.0 billion of credit through January 2000, cancelable only
if the Company's bond rating drops below investment grade. A facility fee of
.10% of the line is payable annually.
At December 31, 1994, notes payable classified as current liabilities included
$1.7 billion of non-U.S. dollar-denominated debt with a weighted average
interest rate of 5.9%.
In 1992, an extraordinary loss of $6 million after taxes ($.05 per share) was
recorded for the extinguishment of high-interest-rate debt.
Note 10. Financial Instruments
The Company has a policy of financing a portion of its investments in overseas
operations with borrowings denominated in the same currency as the investment or
by entering into foreign exchange contracts in tandem with U.S. borrowings. The
purpose of this activity is to provide a hedge against fluctuations in exchange
rates.
Non-U.S. dollar-denominated debt totaling $2.2 billion was outstanding at
December 31, 1994. Also outstanding were foreign exchange contracts totaling
$319 million, all having maturities of less than 360 days, as follows: Belgian
francs, $126 million; Spanish pesetas, $58 million; British pounds, $52 million;
and contracts totaling $83 million in four other currencies. The average amount
of outstanding contracts during 1994 and 1993 was $2.1 billion. Gains and losses
from these contracts (including an immaterial gain related to contracts
outstanding at December 31, 1994), which are fully offset by gains and losses
from the revaluation of the net assets being hedged, are determined monthly
based on published currency exchange rates and are recorded as translation
adjustments in common shareholders' equity.
The Company also utilizes foreign exchange contracts to hedge certain
transactions denominated in foreign currencies, primarily export sales
and equipment purchased from non-U.S. vendors. These contracts serve to
protect the Company from currency fluctuations between the transaction
date and settlement. Gains and losses on these contracts, along with
offsetting gains and losses resulting from the revaluations of the
underlying transactions, are recognized in earnings based on published
currency exchange rates. At December 31, 1994, foreign exchange
contracts totaling $189 million in 18 different currencies, all having
maturities of less than six months, were outstanding. The average amount
of outstanding contracts during 1994 and 1993 was $170 million and $87
million, respectively. Net gains and losses related to contracts
outstanding at December 31, 1994 and 1993, and amounts of outstanding
contracts in any single currency were not significant.
The Company used interest rate swap agreements to manage the composition of its
fixed and floating rate debt portfolio in 1994 and 1993. The agreements involve
the exchange of fixed or floating rate interest payments without changing the
underlying principal amounts related to $600 million and $400 million of
long-term debt having maturities ranging from 10 to 30 years issued in 1994 and
1993, respectively. The interest payments made or received pursuant to the swap
agreements are included in interest expense. The impact on earnings and the
Company's net liability under these agreements were not significant.
The Company does not hold or issue financial instruments for trading purposes.
The counterparties to the Company's interest rate swap agreements and foreign
exchange contracts consist of a number of major international financial
institutions. The Company continually monitors its positions with and the credit
quality of these financial institutions and does not expect nonperformance by
the counterparties.
54
Note 11. Capital Stock
The authorized capital stock of the Company at December 31, 1994 and 1993
consisted of 400,000,000 shares of common stock, $1 par value; 400,000 shares of
cumulative $4 nonredeemable preferred stock, without par value (stated value of
$100 per share); and 8,750,000 shares of serial preferred stock, $1 par value.
The serial preferred stock is issuable in one or more series by the Board of
Directors without further shareholder action.
In January 1992, 9.2 million shares of common stock were sold in a public
offering. Proceeds of $650 million were used to repay long-term and short-term
borrowings.
The Company has stock rights under a Shareholder Rights Plan whereby each share
of common stock has one right. Each right entitles shareholders to purchase one
common stock share at an exercise price of $155. The rights will become
exercisable 10 days after anyone acquires or tenders for 20% or more of the
Company's common stock. If, thereafter, anyone acquires 30% or more of the
common stock, or a 20% or more owner combines with the Company in a reverse
merger in which the Company survives and its common stock is not changed, each
right will entitle its holder to purchase Company common stock with a value of
twice the $155 exercise price. If, following an acquisition of 20% or more of
the common stock, the Company is acquired in a merger or sells 50% of its assets
or earnings power, each right will entitle its holder to purchase stock of the
acquiring company with a value of twice the $155 exercise price.
Note 12. Retirement Plans
The Company maintains pension plans that provide retirement benefits to
substantially all employees. Employees generally are eligible to participate in
the plans upon commencement of employment.
The plans provide defined benefits based on years of credited service and either
final average earnings (salaried employees), hourly job rates or specified
benefit rates (hourly and union employees).
U.S. Defined Benefit Plans
The Company makes contributions that are sufficient to fully fund its
actuarially determined costs, generally equal to the minimum amounts required by
ERISA. Net periodic pension income for the Company's qualified and nonqualified
defined benefit plans comprised the following:
- --------------------------------------------------------------------------------
In millions 1994 1993 1992
------- ------- -------
Service cost-benefits earned
during the period $ (54) $ (43) $ (43)
Interest cost on projected benefit
obligation (151) (143) (136)
Actual return on plan assets 7 291 135
Net amortization and deferrals 275 (18) 125
------- ------- -------
Net periodic pension income $ 77 $ 87 $ 81
======= ======= =======
- --------------------------------------------------------------------------------
The actuarial assumptions used in determining net periodic pension costs for the
years presented were:
- --------------------------------------------------------------------------------
1994 1993 1992
------- ------- -------
Discount rate 7.25% 8.0% 8.0%
Expected long-term return on
plan assets 10.0% 10.0% 10.0%
Weighted average rate of increase
in compensation levels 4.0% 5.0% 5.0%
- --------------------------------------------------------------------------------
The discount rates and the rates of increase in future compensation levels used
to determine the projected benefit obligations at December 31, 1994 were 8.75%
and 4.75%, respectively, and at December 31, 1993 were 7.25% and 4.0%,
respectively.
The following table presents the funded status of the Company's U.S. pension
plans and the amounts reflected in the accompanying consolidated balance
sheet:
- --------------------------------------------------------------------------------
In millions at December 31 1994 1993
------- -------
Actuarial present value of benefit
obligations
Vested benefits $ 1,649 $ 1,835
------- -------
Accumulated benefit obligation $ 1,777 $ 1,986
------- -------
Projected benefit obligation $ 1,909 $ 2,145
Plan assets at fair value 2,557 2,671
------- -------
Plan assets in excess of projected
benefit obligation 648 526
Unrecognized net (gain) loss (6) 58
Balance of unrecorded transition
asset (109) (136)
Other 53 59
------- -------
Prepaid pension cost $ 586 $ 507
======= =======
- --------------------------------------------------------------------------------
Plan assets are held primarily in master trust accounts and comprised the
following:
- --------------------------------------------------------------------------------
In millions at December 31 1994 1993
------- -------
Cash reserve $ 134 $ 163
Fixed income securities 843 744
Diversified equities 943 1,174
International Paper common stock 392 351
Real estate 117 130
Other 128 109
------- -------
Total plan assets $ 2,557 $ 2,671
======= =======
- --------------------------------------------------------------------------------
55
Non-U.S. Defined Benefit Plans
Generally, the Company's non-U.S. pension plans are funded using the projected
benefit as a target, except in certain countries where funding of benefit plans
is not required.
The following table presents the funded status of the Company's non-U.S. pension
plans and the amounts reflected in the accompanying consolidated balance sheet.
Plan assets are comprised principally of common stocks and fixed income
securities.
- --------------------------------------------------------------------------------
In millions at December 31 1994 1993
------- -------
Actuarial present value of benefit
obligations
Vested benefits $ 276 $ 251
------- -------
Accumulated benefit obligation $ 29 $ 266
------- -------
Projected benefit obligation 1 $ 347 $ 307
Plan assets at fair value 338 304
------- -------
Projected benefit obligation
in excess of plan assets (9) (3)
Unrecognized net (gain) (16) (19)
Balance of unrecorded transition
asset (40) (41)
Other 3 3
------- -------
Pension liability 2 $ (62) $ (60)
======= =======
- --------------------------------------------------------------------------------
1 The weighted average discount rate and the weighted average rate of increase
in compensation levels used to measure the projected benefit obligation were
7.01% (6.82% in 1993) and 4.61% (4.41% in 1993), respectively.
2 Pension liability is the result of unfunded plans in Germany and France as is
the general practice in those countries.
Other Plans
The Company sponsors several defined contribution plans to provide substantially
all U.S. salaried and certain hourly employees of the Company an opportunity to
accumulate personal funds for their retirement. Contributions may be made on a
before-tax basis to substantially all of these plans.
As determined by the provisions of each plan, the Company matches the
employees' basic voluntary contributions. Company matching contributions to
the plans were approximately $36 million, $38 million and $30 million for the
plan years ending in 1994, 1993 and 1992, respectively. The net assets of
these plans approximated $1.4 billion as of the 1994 plan year ends.
Note 13. Postretirement Benefits
The Company provides certain retiree health care and life insurance benefits
covering substantially all U.S. salaried and certain hourly employees. Employees
are generally eligible for benefits upon retirement and completion of a
specified number of years of creditable service. A plan amendment in 1992 limits
the maximum annual Company contribution for health care benefits for retirees
after January 1, 1992 based on age at retirement and years of service after age
50. The Company does not pre-fund these benefits and has the right to modify or
terminate certain of these plans in the future.
The components of postretirement benefit expense in 1994, 1993 and 1992 were as
follows:
- --------------------------------------------------------------------------------
In millions 1994 1993 1992
------- ------- -------
Service cost-benefits earned
during the period $ 8 $ 8 $ 7
Interest cost on accumulated
postretirement benefit obligation 23 25 23
Net amortization of plan amendments (16) (15) (18)
------- ------- -------
Net postretirement benefit cost $ 15 $ 18 $ 12
======= ======= =======
- --------------------------------------------------------------------------------
The accumulated postretirement benefit obligation, included in minority
interest and other liabilities in the accompanying consolidated balance sheet,
comprised the following components:
- --------------------------------------------------------------------------------
In millions at December 31 1994 1993
------- -------
Retirees $ 223 $ 235
Fully eligible active plan
participants 15 16
Other active plan participants 63 83
------- -------
Total accumulated postretirement
benefit obligation 301 334
Unrecognized net loss (26) (58)
Unrecognized effect of plan
amendments 96 104
------- -------
Accrued postretirement benefit
obligation $ 371 $ 380
======= =======
- --------------------------------------------------------------------------------
Future benefit costs were estimated assuming medical costs would increase at a
15% annual rate starting in 1991, decreasing to a 6% annual growth rate ratably
over the next 13 years and then remaining at a 6% annual growth rate thereafter.
A 1% increase in this annual trend rate would have increased the accumulated
postretirement benefit obligation at December 31, 1994 by $20 million, with an
immaterial effect on 1994 postretirement benefit expense. The weighted average
discount rate used to estimate the accumulated postretirement benefit obligation
at December 31, 1994 was 8.75%, up from 7.25% at December 31, 1993.
In 1992, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits." The
impact of this change was not significant.
56
Note 14. Incentive Plans
The Company has a Long-Term Incentive Compensation Plan that includes a
Restricted Performance Share Plan, a Stock Option Plan and an Executive
Continuity Award Plan, administered by a committee of nonemployee members of the
Board of Directors who are not eligible for awards. The plan allows stock
appreciation rights to be awarded either separately or in combination with other
awards, although none were awarded in 1994, 1993 or 1992.
Under the Restricted Performance Share Plan, contingent awards of Company common
stock are granted by the committee. Awards are earned if the Company's financial
performance over a five-year period meets or exceeds that of other forest
products companies using standards determined by the committee. In 1993 and
1992, 152,000 shares and 163,000 shares, respectively, were earned. The awards
for 1994 have not yet been determined.
The Stock Option Plan provides for the granting of incentive stock options and
nonqualified stock options to key employees. The committee determines the option
price, the number of shares for which an option is granted and the term (which
cannot exceed 10 years). The option price is the market price of the stock at
the date of grant. Upon exercise of an option, a replacement option may be
granted with the exercise price equal to the current market price and with a
term extending to the expiration date of the original option.
The following summarizes stock option transactions under stock option plans
for the three years ended December 31, 1994:
- --------------------------------------------------------------------------------
Shares Option Price
--------- --------------
Balance at 1/1/92 1 2,694,074 $13.930-76.750
Granted 1,091,369 60.750-78.000
Exercised (561,634) 13.930-70.625
--------- --------------
Balance at 12/31/92 1 3,223,809 13.930-78.000
Granted 941,900 59.375-69.250
Exercised (425,196) 13.930-64.000
--------- --------------
Balance at 12/31/93 1 3,740,513 13.930-78.000
Granted 1,353,270 64.625-79.625
Exercised (895,349) 13.930-74.000
--------- --------------
Balance at 12/31/94 1 4,198,434 $13.930-79.625
========= ==============
- --------------------------------------------------------------------------------
1 All options are exercisable under the plan upon grant; however, the underlying
shares cannot be sold or are otherwise restricted for various periods.
The Executive Continuity Award Plan provides for the granting of tandem awards
of restricted stock and/or nonqualified stock options to key executives. Grants
are restricted and awards conditioned on attainment of specified age and years
of service requirements. Exercise of the options results in the cancellation of
the related restricted shares.
In 1994, 1993 and 1992, restricted shares of 32,000, 32,000 and 20,000,
respectively, were awarded under this plan. In 1992, grants for 20,000 shares
were forfeited. At December 31, 1994, 1,060,000 options at exercise prices
ranging from $48.250 to $73.875 were outstanding under the Executive Continuity
Award Plan. The options expire at various dates through 2008.
At December 31, 1994 and 1993, a total of 7.1 million shares and 3.7 million
shares, respectively, were available for grant under incentive plans.
Provisions for awards under the Long-Term Incentive Compensation Plan and all
other incentive plans amounted to $37 million, $31 million and $29 million in
1994, 1993 and 1992, respectively. The provisions include charges for recently
acquired companies, and adjustments of prior-year awards due to changes in the
market price of Company stock and final determination of Restricted Performance
Share Plan awards.
57
ELEVEN-YEAR FINANCIAL SUMMARY
Dollar amounts in millions, except
per share amounts and stock prices 1994 1993 1992 1991 1990 1989
------- ------- ------- -------- -------- --------
Results of Operations
Net sales $14,966 $13,685 $13,598 $ 12,703 $ 12,960 $ 11,378
Costs and expenses, excluding interest 13,953 12,875 13,145 3 11,750 4 11,737 5 9,768
Earnings before income taxes,
extraordinary item and cumulative
effect of accounting changes 664 1 500 206 3 638 4 946 5 1,405
Extraordinary item (6)
Cumulative effect of accounting
changes (75) (50) (215)
Net earnings 357 1 289 2 86 3 184 4 569 5 864
Earnings applicable to common shares 357 1 289 2 86 3 184 4 569 5 845
------- ------- ------- -------- -------- --------
Financial Position
Working capital $ 796 $ 472 $ (165)6 $ 404 $ 784 $ 366
Plants, properties and equipment, net 9,139 8,872 8,884 7,848 7,287 6,238
Forestlands 802 786 759 743 751 764
Total assets 17,836 16,631 16,516 14,941 13,669 11,582
Long-term debt 4,464 3,601 3,096 3,351 3,096 2,324
Common shareholders' equity 6,514 6,225 6,189 5,739 5,632 5,147
------- ------- ------- -------- -------- --------
Per Share of Common Stock 7
Earnings before extraordinary
item and cumulative effect of
accounting changes $ 3.46 1 $ 2.34 2 $ 1.17 3 $ 3.61 4 $ 5.21 5 $ 7.72
Extraordinary item (.05)
Cumulative effect of accounting
changes (.60) (.41) (1.95)
Earnings 2.86 1 2.34 2 .71 3 1.66 4 5.21 5 7.72
Cash dividends 1.68 1.68 1.68 1.68 1.68 1.53
Common shareholders' equity 51.74 50.25 50.46 51.03 51.34 47.35
------- ------- ------- -------- -------- --------
Common Stock Prices 7
High 80 1/2 69 7/8 78 1/2 78 1/4 59 3/4 58 3/4
Low 60 5/8 56 5/8 58 1/2 50 1/2 42 3/4 45 1/8
Year-end 75 3/8 67 3/4 66 5/8 70 3/4 53 1/2 56 1/2
------- ------- ------- -------- -------- --------
Financial Ratios
Current ratio 1.2 1.1 .96 6 1.1 1.2 1.1
Total debt to capital ratio 41.2 38.5 38.0 39.1 36.1 33.9
Return on equity 5.6 1,8 4.7 2,8 1.4 3,8 3.2 4 10.5 5 17.8
Return on capital employed 3.9 1,8 3.8 2,8 1.2 3,8 3.5 4 8.0 5 13.4
------- ------- ------- -------- -------- --------
Capital Expenditures $ 1,114 $ 954 $ 1,368 $ 1,197 $ 1,267 $ 887
------- ------- ------- -------- -------- --------
Number of Employees 70,000 72,500 73,000 70,500 69,000 63,500
======= ======= ======= ======== ======== ========
Financial Glossary
Current ratio--
current assets divided by current liabilities
Total debt to capital ratio--
long-term debt plus notes payable and current maturities of long-term debt
divided by long-term debt, notes payable and current maturities of long-term
debt, deferred income taxes, minority interest and other liabilities, preferred
stock and total common shareholders' equity
Return on equity--
net earnings divided by average common shareholders' equity (computed monthly)
Return on capital employed--
net earnings plus after-tax interest expense and provision for deferred income
taxes divided by total assets minus accounts payable and accrued liabilities at
the beginning of the year
Dollar amounts in millions, except
per share amounts and stock prices 1988 1987 1986 1985 1984
------- ------- ------- ------- -------
Results of Operations
Net sales $ 9,587 $ 7,800 $ 5,540 $ 4,530 $ 4,750
Costs and expenses, excluding interest 8,224 6,952 5,030 4,379 4,590
Earnings before income taxes,
extraordinary item and cumulative
effect of accounting changes 1,198 681 454 159 144
Extraordinary item
Cumulative effect of accounting
changes
Net earnings 754 407 305 133 120
Earnings applicable to common shares 733 387 284 107 94
------- ------- ------- ------- -------
Financial Position
Working capital $ 781 $ 657 $ 296 $ 350 $ 574
Plants, properties and equipment, net 5,456 5,125 4,788 3,725 3,276
Forestlands 772 780 783 741 780
Total assets 9,462 8,710 7,848 6,039 5,795
Long-term debt 1,853 1,937 1,764 1,191 1,015
Common shareholders' equity 4,557 4,052 3,664 3,195 3,298
------- ------- ------- ------- -------
Per Share of Common Stock 7
Earnings before extraordinary
item and cumulative effect of
accounting changes $ 6.57 $ 3.68 $ 2.89 $ 1.08 $ .94
Extraordinary item
Cumulative effect of accounting
changes
Earnings 6.57 3.68 2.89 1.08 .94
Cash dividends 1.28 1.20 1.20 1.20 1.20
Common shareholders' equity 41.14 36.35 35.04 33.34 33.02
------- ------- ------- ------- -------
Common Stock Prices 7
High 49 3/8 57 3/4 40 28 7/8 29 7/8
Low 36 1/2 27 24 1/4 22 1/8 23
Year-end 46 3/8 42 1/4 37 1/2 25 3/8 26 7/8
------- ------- ------- ------- -------
Financial Ratios
Current ratio 1.5 1.4 1.2 1.5 1.9
Total debt to capital ratio 25.8 31.6 31.2 24.1 20.7
Return on equity 17.0 10.0 8.3 3.3 2.8
Return on capital employed 13.8 10.2 8.4 2.5 2.2
------- ------- ------- ------- -------
Capital Expenditures $ 645 $ 603 $ 576 $ 794 $ 628
------- ------- ------- ------- -------
Number of Employees 55,500 45,500 44,000 32,000 33,500
======= ======= ======= ======= =======
1 Includes $17 million ($10 million after taxes or $.08 per share) of additional
earnings related to the change in accounting for start-up costs.
2 Includes $25 million ($.20 per share) of additional income tax expense to
revalue deferred tax balances to reflect the increase in the U.S. statutory
federal income tax rate.
3 Includes restructuring and other charges totaling $398 million ($263 million
after taxes or $2.17 per share).
4 Includes a $60 million pre-tax restructuring charge ($37 million after taxes
or $.33 per share) and additional expenses related to the adoption of SFAS No.
106 of $25 million ($16 million after taxes or $.15 per share).
5 Includes a $212 million pre-tax restructuring charge ($137 million after taxes
or $1.26 per share).
6 Reflects increase in short-term versus long-term borrowings due to favorable
interest rates.
7 Appropriate per share data and common stock prices have been adjusted to
reflect the 2-for-1 stock split in May 1987.
8 Return on equity was 6.7% and return on capital employed was 4.7% in 1994
before the accounting change. Return on equity was 5.1% and return on capital
employed was 3.8% in 1993 before the additional income tax expense. Return on
equity was 6.3% and return on capital employed was 3.7% in 1992 before the
accounting change, extraordinary item, and restructuring and other charges.
58-59
INTERIM FINANCIAL RESULTS (UNAUDITED)
Quarter
--------------------------------------
In millions, except per share amounts and stock prices First Second Third Fourth Year
------ ------ ------ ------ -------
1994
Net Sales $3,414 $3,633 $3,792 $4,127 $14,966
Gross Margin 1 847 2 918 2 971 2 1,087 3,823
Earnings Before Income Taxes and
Cumulative Effect of Accounting Change 118 2 140 2 171 2 235 664
Earnings Before Cumulative Effect of
Accounting Change 76 2 91 2 111 2 154 432
Cumulative Effect of Accounting Change (75) (75)
Net Earnings 1 2 91 2 111 2 154 357
Per Share of Common Stock
Earnings Before Cumulative Effect
of Accounting Change $ .61 2 $ .73 2 $ .89 2 $ 1.23 $ 3.46
Cumulative Effect of Accounting Change (.60) (.60)
Earnings .01 2 .73 2 .89 2 1.23 2.86
Dividends .42 .42 .42 .42 1.68
Common Stock Prices
High 77 7/8 72 7/8 80 3/8 80 1/2 80 1/2
Low 67 1/8 60 5/8 66 3/8 67 7/8 60 5/8
1993
Net Sales $3,362 $3,506 $3,405 $3,412 $13,685
Gross Margin 1 819 887 862 926 3,494
Earnings Before Income Taxes 101 122 119 158 500
Net Earnings 64 77 48 3 100 289 3
Per Share of Common Stock
Earnings $ .52 $ .62 $ .39 3 $ .81 $ 2.34 3
Dividends .42 .42 .42 .42 1.68
Common Stock Prices
High 69 7/8 68 68 3/8 68 5/8 69 7/8
Low 60 3/4 61 3/4 58 56 5/8 56 5/8
1 Gross margin represents net sales less cost of products sold.
2 Amounts have been restated to reflect the change in accounting for start-up
costs. The additional earnings in each quarter is as follows: first quarter,
$7 million ($4 million after taxes or $.03 per share); second quarter, $6
million ($4 million after taxes or $.03 per share); and third quarter, $4
million ($2 million after taxes or $.02 per share).
3 A charge of $25 million ($.20 per share) was recorded in the 1993 third
quarter to revalue deferred tax balances to reflect the increase in the U.S.
statutory federal income tax rate.
60
[Incorporated from page 40 on discussion of capital spending.]
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The new world-class paper machine at our Riverdale mill strengthens our position
as a low-cost producer of uncoated papers, a market we expect will grow 3 to 4
percent annually.
[Photograph--Appendix B No. 19]
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We expect to devote $1.3 billion to capital projects in 1995, following $1.1
billion in 1994. Our strong financial position has given International Paper the
ability to invest in our future even during periods of economic weakness.
Projects completed in 1994 and 1995 will add almost one million tons of paper
and packaging capacity throughout our mill system. These improvements will
expand revenues and keep us a low-cost producer of high-quality paper,
packaging, forest and specialty products. For example, a new 400,000-ton-per-
year recycled containerboard machine in Mansfield, La., expected to start up
in late 1995, will give our customers the widest selection of grades in the
industry. Production there will focus on higher value products such as mottled
white, white-top and lightweight grades.
Our uncoated papers business is growing at a time when little capacity is
being added by our competitors. New facilities at our Riverdale mill in Alabama
will increase our ability to provide recycled reprographic papers. Additions at
Riverdale include a 360,000-ton-per-year uncoated papers machine, a deinking
plant, two sheeters and a gas turbine, representing an investment of more than
$300 million. We are expanding our capacity to serve the global aseptic
packaging market. Improvements at our Raleigh, N.C., plant support our expansion
into Latin America, where aseptic packaging plays a key role in delivering
nutrition to regions with limited refrigeration. Similarly, a new plant near
Lyons, France, will support growth of our Evergreen and other aseptic filling
systems in Europe and the Middle East. In response to our customers' need for
additional panel products, we are building a new oriented strand board mill in
Jefferson, Texas. When completed in late 1995, the 350-million-square-foot mill
will more than double International Paper's OSB capacity and will have a cost
structure that compares favorably with any mill in the industry.
We are also investing in the growth of our specialty businesses. Nicolet added
new capacity in 1994 to meet rising demand. Veratec established a second
spunbond line in Toronto, Canada, to increase capacity and reduce costs.
Masonite is increasing its CraftMaster door facings capacity. And Arizona
Chemical is enhancing its production of ink and adhesive resins.
12
APPENDIX A
(Exhibit 99)
GRAPHS AND CHARTS
INTERNATIONAL PAPER APPENDIX A
CHARTS
1. NET SALES (PAGE 29)
Bar chart of NET SALES for the years 1992 through 1994, in billions of dollars.
Data points as follows:
1992 1993 1994
---- ---- ----
13.6 13.7 15.0
2. PRINTING PAPERS-NET SALES AND OPERATING PROFIT (PAGE 31)
Bar charts of NET SALES and OPERATING PROFIT for the segment for the years 1992
through 1994, in millions of dollars. NET SALES chart contains color keys to
show breakdown of U.S. and non-U.S. sales. OPERATING PROFIT chart contains color
key to highlight restructuring charge in 1992.
Data points for NET SALES as follows:
1992 1993 1994
----- ----- -----
U.S. 2,747 2,746 3,028
Non-U.S. 1,293 1,159 1,372
----- ----- -----
NET SALES 4,040 3,905 4,400
Data points for OPERATING PROFIT as follows:
1992 1993 1994
---- ---- ----
Operating profit before restructuring charge 19 (122) 20
Restructuring charge (89)
---- ---- ----
OPERATING PROFIT (70) (122) 20
3. PACKAGING-NET SALES AND OPERATING PROFIT (PAGE 33)
Bar charts of NET SALES and OPERATING PROFIT for the segment for the years 1992
through 1994, in millions of dollars. NET SALES chart contains color keys to
show breakdown of U.S. and non-U.S. sales. OPERATING PROFIT chart contains color
key to highlight restructuring charge in 1992.
Data points for NET SALES as follows:
1992 1993 1994
----- ----- -----
U.S. 2,381 2,366 2,579
Non-U.S. 864 729 796
----- ----- -----
NET SALES 3,245 3,095 3,375
Data points for OPERATING PROFIT as follows:
1992 1993 1994
---- ---- ----
Operating profit before restructuring charge 330 188 293
Restructuring charge (22)
---- ---- ----
OPERATING PROFIT 308 188 293
4. DISTRIBUTION-NET SALES AND OPERATING PROFIT (PAGE 34)
Bar charts of NET SALES and OPERATING PROFIT for the segment for the years 1992
through 1994, in millions of dollars. NET SALES chart contains color keys to
show breakdown of U.S. and non-U.S. sales. OPERATING PROFIT chart contains color
key to highlight restructuring charge in 1992.
Data points for NET SALES as follows:
1992 1993 1994
----- ----- -----
U.S. 2,617 2,853 3,145
Non-U.S. 363 287 325
----- ----- -----
NET SALES 2,980 3,140 3,470
Data points for OPERATING PROFIT as follows:
1992 1993 1994
---- ---- ----
Operating profit before restructuring charge 58 58 74
Restructuring charge (6)
---- ---- ----
OPERATING PROFIT 52 58 74
5. SPECIALTY PRODUCTS-NET SALES AND OPERATING PROFIT (PAGE 36)
Bar charts of NET SALES and OPERATING PROFIT for the segment for the years 1992
through 1994, in millions of dollars. NET SALES chart contains color keys to
show breakdown of U.S. and non-U.S. sales. OPERATING PROFIT chart contains color
key to highlight restructuring and other charges in 1992.
Data points for NET SALES as follows:
1992 1993 1994
----- ----- -----
U.S. 1,656 1,749 1,840
Non-U.S. 804 711 750
----- ----- -----
NET SALES 2,460 2,460 2,590
Data points for OPERATING PROFIT as follows:
1992 1993 1994
---- ---- ----
Operating profit before restructuring and
other charges 238 263 268
Restructuring and other charges (155)
---- ---- ----
OPERATING PROFIT 83 263 268
6. FOREST PRODUCTS-NET SALES AND OPERATING PROFIT (PAGE 39)
Bar charts of NET SALES and OPERATING PROFIT for the segment for the years 1992
through 1994, in millions of dollars. NET SALES chart contains color keys to
show breakdown of U.S. and non-U.S. sales. OPERATING PROFIT chart contains color
key to highlight restructuring and other charges in 1992.
Data points for NET SALES as follows:
1992 1993 1994
----- ----- -----
U.S. 1,313 1,597 1,595
Non-U.S. 97 103 120
----- ----- -----
NET SALES 1,410 1,700 1,715
Data points for OPERATING PROFIT as follows:
1992 1993 1994
---- ---- ----
Operating profit before restructuring
and other charges 261 445 378
Restructuring and other charges (64)
---- ---- ----
OPERATING PROFIT 197 445 378
7. CASH FLOW FROM OPERATIONS (PAGE 41)
Bar chart of CASH FLOW FROM OPERATIONS for the years 1992 through 1994, in
millions of dollars. Data points as follows:
1992 1993 1994
----- ---- -----
1,009 981 1,275
8. TOTAL DEBT TO CAPITAL RATIO (PAGE 41)
Bar chart of TOTAL DEBT TO CAPITAL RATIO for the years 1992 through 1994,
expressed as a percent. Data points as follows:
1992 1993 1994
---- ---- ----
38.0 38.5 41.2
APPENDIX B
(Exhbit 99)
PHOTOGRAPHS AND ILLUSTRATIONS
INTERNATIONAL PAPER APPENDIX B
PHOTOGRAPHS AND ILLUSTRATIONS
1. Pages 28: A photograph of laser technology being used in our research
activities.
2. Page 29: A photograph of a globe of the world.
3. Pages 30: A photograph of Zanders' promotional brochures.
4. Pages 30: A photograph of several grades of International Papers uncoated
cutsize papers.
5. Pages 30: A photograph of Natural History magazine, which is printed on
International Paper's coated paper.
6. Page 31: A photograph of Olympic gold medalist Kristi Yamaguchi, wearing
apparel made from fiber containing International Paper specialty pulp.
7. Pages 32: A photograph of a Tropicana juice carton.
8. Pages 32: An illustration of an aseptic filling machine and a photograph of
an aseptic carton.
9. Page 33: A photograph of a corrugated box made by one of our European
container plants.
10. Page 33: A photograph of a folding carton made from Everest bleached board.
11. Page 35: A photograph of many of the products we distribute.
12. Page 35: A photograph of a ResourceNet International truck.
13. Page 35: A photograph of a delivery person.
14. Pages 36: A photograph of Polyrey high pressure laminates.
15. Page 37: A photograph of a door made from CraftMaster prestained door
facings.
16. Page 37: A photograph of a baby in diapers.
17. Page 37: A photograph of a piece of luggage containing an airline routing
tag and a name tag, both representing uses for pressure-sensitive labels.
18. Page 39: A photograph of various wood products.
19. Page 12: A photograph of a paper machine.