================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________
---------------
Commission File Number 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York 13-0872805
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
400 Atlantic Street, Stamford, CT 06921
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 541-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the registrant's common stock as of July 31,
2001 was
483,150,673.
================================================================================
INTERNATIONAL PAPER COMPANY
INDEX
PART I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months and Six Months Ended June 30, 2001 and 2000 1
Consolidated Balance Sheet -
June 30, 2001 and December 31, 2000 2
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2001 and 2000 3
Consolidated Statement of Common Shareholders' Equity -
Six Months Ended June 30, 2001 and 2000 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Financial Information by Industry Segment 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 30
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2001 2000 2001 2000
------------- ------------ ------------ ------------
Net Sales $ 6,686 $ 6,780 $13,580 $13,151
------- ------- ------- -------
Costs and Expenses
Cost of products sold 4,914 4,735 10,052 9,256
Selling and administrative expenses 582 563 1,166 1,084
Depreciation and amortization 457 439 933 865
Distribution expenses 277 271 553 537
Taxes other than payroll and income taxes 71 61 146 124
Merger integration costs 32 4 42 12
Restructuring and other charges 465 71 465 71
Impairment losses on businesses held for sale 85 - 85 -
------- ------- ------- -------
Total Costs and Expenses 6,883 6,144 13,442 11,949
------- ------- ------- -------
Earnings (Loss) Before Interest, Income Taxes, Minority
Interest, Extraordinary Items and Cumulative
Effect of Accounting Change (197) 636 138 1,202
Interest expense, net 235 156 483 287
------- ------- ------- -------
Earnings (Loss) Before Income Taxes, Minority Interest,
Extraordinary Items and Cumulative Effect of
Accounting Change (432) 480 (345) 915
Income tax provision (benefit) (156) 142 (129) 278
Minority interest expense, net of taxes 37 68 79 123
------- ------- ------- -------
Earnings (Loss) Before Extraordinary Items
and Cumulative Effect of Accounting Change (313) 270 (295) 514
Gains (losses) on sales of investments and businesses,
net of taxes and minority interest - - (46) 134
Cumulative effect of change in accounting for derivatives
and hedging activities, net of taxes and minority interest - - (16) -
------- ------- ------- -------
Net Earnings (Loss) $ (313) $ 270 $ (357) $ 648
======= ======= ======= =======
Basic and Diluted Earnings Per Common Share
Income (loss) before extraordinary items and
accounting change $ (0.65) $ 0.64 $ (0.61) $ 1.23
Extraordinary items - - (0.10) 0.32
Cumulative effect of accounting change - - (0.03) -
------- ------- ------- -------
Net earnings (loss) $ (0.65) $ 0.64 $ (0.74) $ 1.55
======= ======= ======= =======
Average Shares of Common Stock Outstanding 483.1 421.0 482.9 417.3
======= ======= ======= =======
Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.50 $ 0.50
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
1
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
June 30, December 31,
2001 2000
------------------ ------------------
Assets
Current Assets
Cash and temporary investments $ 743 $ 1,198
Accounts and notes receivable, net 3,185 3,433
Inventories 2,925 3,182
Assets of businesses held for sale 1,618 1,890
Other current assets 995 752
-------- --------
Total Current Assets 9,466 10,455
-------- --------
Plants, Properties and Equipment, net 15,118 16,011
Forestlands 4,463 5,966
Investments 276 269
Goodwill 6,607 6,310
Deferred Charges and Other Assets 3,395 3,098
-------- --------
Total Assets $ 39,325 $ 42,109
======== ========
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 1,271 $ 2,115
Accounts payable 1,830 2,113
Accrued payroll and benefits 422 511
Liabilities of businesses held for sale 363 541
Other accrued liabilities 1,928 2,133
-------- --------
Total Current Liabilities 5,814 7,413
-------- --------
Long-Term Debt 12,787 12,648
Deferred Income Taxes 4,221 4,699
Other Liabilities 2,128 2,155
Minority Interest 1,341 1,355
International Paper - Obligated Mandatorily Redeemable Preferred
Securities of Subsidiaries Holding International Paper Debentures 1,805 1,805
Common Shareholders' Equity
Common stock, $1 par value, 484.2 shares in 2001 and 2000 484 484
Paid-in capital 6,443 6,501
Retained earnings 5,711 6,308
Accumulated other comprehensive income (loss) (1,358) (1,142)
-------- --------
11,280 12,151
Less: Common stock held in treasury, at cost, 2001 - 1.2 shares,
2000 - 2.7 shares 51 117
-------- --------
Total Common Shareholders' Equity 11,229 12,034
-------- --------
Total Liabilities and Common Shareholders' Equity $ 39,325 $ 42,109
======== ========
The accompanying notes are an integral part of these financial statements.
2
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
Six Months Ended
June 30,
----------------------------------------
2001 2000
------------ -----------
Operating Activities
Net earnings (loss) $ (357) $ 648
Cumulative effect of accounting change 16 -
Depreciation and amortization 933 865
Deferred income tax (benefit) provision (202) 107
Payments related to restructuring reserves, legal reserves and
merger integration costs (212) (121)
Merger integration costs 42 12
Restructuring and other charges 465 71
Impairment losses on businesses held for sale 85 -
Losses (gains) on sales of investments and businesses 72 (385)
Other, net (15) 64
Changes in current assets and liabilities
Accounts and notes receivable (85) (282)
Inventories 81 (69)
Accounts payable (147) (71)
Accrued liabilities (257) 120
Other (124) 9
------- -------
Cash Provided by Operations 295 968
------- -------
Investment Activities
Invested in capital projects (458) (488)
Mergers and acquisitions, net of cash acquired (150) (5,355)
Proceeds from divestitures 881 1,359
Other 11 (106)
------- -------
Cash Provided by (Used for) Investment Activities 284 (4,590)
------- -------
Financing Activities
Issuance of common stock 15 39
Issuance of debt 1,047 6,173
Reduction of debt (1,731) (1,487)
Change in bank overdrafts (79) (199)
Dividends paid (240) (207)
Other 4 39
------- -------
Cash (Used for) Provided by Financing Activities (984) 4,358
------- -------
Effect of Exchange Rate Changes on Cash (50) (44)
------- -------
Change in Cash and Temporary Investments (455) 692
Cash and Temporary Investments
Beginning of the period 1,198 453
------- -------
End of the period $ 743 $ 1,145
======= =======
The accompanying notes are an integral part of these financial statements.
3
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Six Months Ended June 30, 2001
Accumulated
Other
Common Stock Issued Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss)
---------- ---------- ----------- ---------- ----------------
Balance, December 31, 2000 484,160 $ 484 $ 6,501 $ 6,308 $ (1,142)
Issuance of stock for various
plans 25 - (58) - -
Cash dividends - Common
stock ($0.50 per share) - - - (240) -
Comprehensive income (loss):
Net loss - - - (357) -
Change in cumulative
foreign currency
translation adjustment - - - - (159)
Unrealized gain (loss) on cash
flow hedging derivatives - - - - (57)
Total comprehensive
income (loss) - - - - -
------- ----- ------- ------- --------
Balance, June 30, 2001 484,185 $ 484 $ 6,443 $ 5,711 $ (1,358)
======= ===== ======= ======= ========
Total
Common
Treasury Stock Shareholders'
Shares Amount Equity
--------- ---------- -------------
Balance, December 31, 2000 2,690 $ 117 $ 12,034
Issuance of stock for various
plans (1,485) (66) 8
Cash dividends - Common
stock ($0.50 per share) - - (240)
Comprehensive income (loss):
Net loss - - (357)
Change in cumulative
foreign currency
translation adjustment - - (159)
Unrealized gain (loss) on cas
flow hedging derivatives - - (57)
---------
Total comprehensive
income (loss) - - (573)
----- ---- --------
Balance, June 30, 2001 1,205 $ 51 $ 11,229
===== ==== ========
Six Months Ended June 30, 2000
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
---------- ---------- ----------- ---------- -------------------------- ---------- -------------
Balance, December 31, 1999 414,584 $ 415 $ 4,078 $ 6,613 $ (739) 1,216 $ 63 $ 10,304
Issuance of stock for
merger 68,706 69 2,360 - - - - 2,429
Issuance of stock for various
plans 160 - (1) - - (884) (42) 41
Repurchase of stock - - - - - 1,250 51 (51)
Cash dividends - Common
stock ($0.50 per share) - - - (207) - - - (207)
Comprehensive income (loss):
Net earnings - - - 648 - - - 648
Change in cumulative
foreign currency
translation adjustment - - - - (123) - - (123)
---------
Total comprehensive
income (loss) - - - - - - - 525
------- ----- ------- ------- ------ ----- ---- --------
Balance, June 30, 2000 483,450 $ 484 $ 6,437 $ 7,054 $ (862) 1,582 $ 72 $ 13,041
======= ===== ======= ======= ====== ===== ==== ========
The accompanying notes are an integral part of these financial statements.
4
INTERNATIONAL PAPER COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, in the opinion of
Management, include all adjustments (consisting only of normal recurring
accruals) which are necessary for the fair presentation of results for the
interim periods. It is suggested that these consolidated financial statements be
read in conjunction with the audited financial statements and the notes thereto
incorporated by reference in International Paper's Annual Report on Form 10-K
for the year ended December 31, 2000, which has previously been filed with the
Securities and Exchange Commission.
On June 20, 2000, International Paper acquired Champion International
Corporation (Champion) in a transaction accounted for as a purchase. Champion's
results of operations are included in the consolidated statement of earnings
beginning on the date of acquisition.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings per common share before extraordinary items and cumulative effect of
accounting change were computed by dividing earnings before extraordinary items
and cumulative effect of accounting change by the weighted average number of
common shares outstanding. Earnings per common share before extraordinary items
and cumulative effect of accounting change, assuming dilution, were computed
assuming that all potentially dilutive securities were converted into common
shares at the beginning of each period. A reconciliation of the amounts included
in the computation of earnings per common share before extraordinary items and
cumulative effect of accounting change, and earnings per common share before
extraordinary items and cumulative effect of accounting change, assuming
dilution, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
In millions, except per share amounts 2001 2000 2001 2000
- ------------------------------------- ------------ ------------ ------------- ------------
Net earnings (loss) before extraordinary items
and cumulative effect of accounting change $ (313) $ 270 $ (295) $ 514
Effect of dilutive securities
Preferred securities of subsidiary trust - 5 - 9
------------ ------------ ------------- ------------
Net earnings (loss) before extraordinary items and
cumulative effect of accounting change - assuming dilution $ (313) $ 275 $ (295) $ 523
============ ============ ============= ============
Average common shares outstanding 483.1 421.0 482.9 417.3
Effect of dilutive securities
Preferred securities of subsidiary trust - 8.3 - 8.3
Stock Options - 0.3 - 0.5
------------ ------------ ------------- ------------
Average common shares outstanding - assuming dilution 483.1 429.6 482.9 426.1
============ ============ ============= ============
Earnings (loss) per common share before extraordinary
items and cumulative effect of accounting change $ (0.65) $ 0.64 $(0.61) $ 1.23
============ ============ ============= ============
Earnings (loss) per common share before extraordinary
items and cumulative effect of accounting $ (0.65) $ 0.64 $ (0.61) $ 1.23
change - assuming dilution ============ ============ ============= ============
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
5
NOTE 3 - MERGERS, ACQUISITIONS AND DIVESTITURES
Mergers and Acquisitions:
In April 2001, Carter Holt Harvey acquired Norske Skog's Tasman Kraft pulp
manufacturing business for $130 million in cash.
In June 2000, International Paper completed the acquisition of Champion, a
leading manufacturer of paper for business communications, commercial printing
and publications with significant market pulp, plywood and lumber manufacturing
operations. Champion shareholders received $50 in cash and $25 worth of
International Paper common stock for each Champion share. The acquisition was
completed for approximately $5 billion in cash and 68.7 million shares of
International Paper common stock having a market value of $2.4 billion.
Approximately $2.8 billion of Champion debt was assumed.
In April 2000, Carter Holt Harvey purchased CSR Limited's medium density
fiberboard and particleboard businesses and its Oberon sawmill for approximately
$200 million in cash.
In March 2000, International Paper acquired Shorewood Packaging Corporation, a
leader in the manufacture of premium retail packaging, for approximately $640
million in cash and the assumption of $280 million of debt.
All of these acquisitions were accounted for using the purchase method with the
related operating results included in the consolidated statement of earnings
from the dates of acquisition.
Divestitures:
In March 2001, International Paper received $500 million in proceeds from the
sale of approximately 265,000 acres of forestlands in the state of Washington to
Ranier Timber Company, LLC.
In January 2001, International Paper conveyed its oil and gas properties and fee
mineral and royalty interests to Pure Resources, Inc. and its affiliates in a
transaction valued at approximately $260 million, resulting in an extraordinary
loss of $8 million after taxes. International Paper also completed the sale of
its interest in Zanders Feinpapiere AG, a European coated paper business, to
Metsa Serla for approximately $120 million and the assumption of $80 million of
debt. This transaction resulted in an extraordinary loss of $245 million after
taxes and minority interest, which was recorded in the fourth quarter of 2000
when the decision was made to sell this business below book value.
In November 2000, International Paper sold its interest in Bush Boake Allen for
$640 million, resulting in an extraordinary gain of $183 million after taxes and
minority interest.
In January 2000, International Paper sold its equity interest in Scitex for $79
million, and Carter Holt Harvey sold its equity interest in Compania de
Petroleos de Chile for just over $1.2 billion. These sales resulted in a
combined extraordinary gain of $134 million after taxes and minority interest.
In 2000, International Paper announced a divestment program following the
Champion acquisition and the completion of a strategic analysis to focus on
International Paper's core businesses. Through June 30, 2001, approximately $1.7
billion of proceeds, including debt assumed by the buyers, have been realized
under the program.
6
NOTE 4 - SPECIAL AND EXTRAORDINARY ITEMS INCLUDING RESTRUCTURING AND BUSINESS
IMPROVEMENT ACTIONS
During the second quarter of 2001, special items amounting to a net pre-tax
charge of $582 million ($377 million after taxes and minority interest) were
recorded. These items included a $465 million charge before taxes and minority
interest ($300 million after taxes and minority interest) for asset shutdowns of
excess capacity and cost reduction actions, an $85 million pre-tax loss ($55
million after taxes) for impairment losses on businesses held for sale, and a
$32 million pre-tax charge ($22 million after taxes) for additional Champion
merger-related costs. The $465 million charge for asset shutdowns of excess
internal capacity and cost reduction actions included $240 million of asset
write-downs and $225 million of severance and other charges. The following table
presents additional detail related to the $465 million charge:
Asset Severance
Write- and
In millions Downs Other Total
- -------------- ----------------- ----------------- -----------------
Printing Papers (a) $ 9 $ 23 $ 32
Consumer Packaging (b) 151 69 220
Industrial Packaging (c) 62 20 82
Industrial Papers (d) 3 5 8
Forest Products (e) 1 12 13
Distribution (f) 4 21 25
Carter Holt Harvey (g) 10 - 10
Administrative Support Groups (h) - 75 75
----- ----- ----
$ 240 $ 225 $465
===== ===== ====
(a) The Printing Papers business indefinitely shut down the Hudson River
mill No. 3 paper machine located in Corinth, New York due to excess
internal capacity. The machine was written down by $9 million to its
estimated fair value of zero. A severance charge of $10 million was
recorded to cover the termination of 208 employees. Also, the Printing
Papers business implemented a plan to streamline and realign
administrative functions at several of its locations. Charges
associated with this plan included $6 million of severance costs
covering the termination of 82 employees, and other cash costs of $7
million.
(b) In June 2001, the Consumer Packaging business shut down the Moss Point,
Mississippi mill and announced the shut down of its Clinton, Iowa
facility due to excess internal capacity. Charges associated with the
Moss Point shutdown included $138 million to write the assets down to
their estimated salvage value, $21 million of severance costs covering
the termination of 363 employees, and other exit costs of $20 million.
Charges associated with the Clinton shutdown included $7 million to
write the assets down to their estimated salvage value, $7 million of
severance costs covering the termination of 327 employees, and other
exit costs of $3 million. Additionally, the Consumer Packaging business
implemented a plan to reduce excess internal capacity and streamline
administrative functions at several of its locations. Charges
associated with this plan included $6 million of asset write-downs, $15
million of severance costs covering the termination of 402 employees,
and other cash costs of $3 million.
(c) The Industrial Packaging business indefinitely shut down the Savannah,
Georgia mill No. 2, No. 4 and No. 6 paper machines due to excess
internal capacity. The machines were written down by $62 million to
their estimated fair value of zero, with severance charges of $11
million also recorded to cover the termination of 290 employees. Also,
Industrial Packaging implemented a plan to streamline and realign
administrative functions at several of its locations, resulting in a
severance charge of $9 million covering the termination of 146
employees.
7
(d) Industrial Papers implemented a plan to reduce excess capacity and
streamline administrative functions at several of its locations.
Charges associated with this plan included asset write-downs of $3
million and severance costs of $5 million covering the termination of
123 employees.
(e) The Forest Products business charge of $13 million reflects the
reorganization of its regional operating structure and streamlining of
administrative functions. The charge included $1 million of asset
write-downs, $9 million of severance costs covering the termination of
100 employees, and other cash costs of $3 million.
(f) xpedx implemented a plan to consolidate duplicate facilities and
eliminate excess internal capacity. Charges associated with this plan
included $4 million of asset write-downs, $14 million of severance
costs covering the termination of 394 employees, and other cash costs
of $7 million.
(g) The Carter Holt Harvey charge of $10 million was recorded to write down
the assets of its Mataura mill to their estimated fair value of zero as
a result of the decision to permanently shutdown this facility which
had previously been idled temporarily.
(h) During the second quarter of 2001, International Paper implemented a
cost reduction program to realign its administrative functions across
all business and staff support groups. As a result, a $75 million
severance charge was recorded covering the termination of 985
employees.
The $85 million charge for impairment losses on businesses held for sale
reflects the reduction of the carrying value of these assets to their expected
realizable value based on offers received. These businesses are currently being
offered for sale as part of International Paper's divestment program.
The merger-related expenses of $32 million consisted primarily of systems
integration, product line rationalization, employee retention, travel and other
cash costs related to the Champion merger.
During the first quarter of 2001, special and extraordinary items amounting to a
net pre-tax charge of $108 million ($68 million after taxes and minority
interest) were recorded. These items included a $25 million charge before taxes
and minority interest ($16 million after taxes and minority interest) for the
cumulative impact of adopting the provisions of Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS Nos. 137 and 138, an extraordinary
charge of $73 million before taxes ($46 million after taxes) for impairment
losses on businesses held for sale, and a special charge of $10 million before
taxes ($6 million after taxes) for additional Champion merger-related costs.
During the second quarter of 2000, International Paper recorded special items
amounting to a net charge before taxes and minority interest of $75 million ($45
million after taxes and minority interest). The special items included a $71
million pre-tax charge ($42 million after taxes and minority interest) for asset
shutdowns of excess internal capacity and cost reduction actions and a $4
million pre-tax charge ($3 million after taxes) for merger-integration costs.
During the first quarter of 2000, a pre-tax charge of $8 million ($5 million
after taxes) was recorded for merger-related expenses, primarily consisting of
systems integration, employee retention, travel and other cash costs related to
the Union Camp merger.
8
During the last two quarters of 2000, additional charges totaling $749 million
before taxes and minority interest ($464 million after taxes and minority
interest) for asset shutdowns of excess internal capacity and cost reduction
actions were recorded. The following table presents a roll forward of the
cumulative severance and other costs included in these charges:
Severance
Dollars in millions and Other
- ---------------------- -------------------
Opening balance - second quarter 2000 (1,056 employees) $ 31
Additions - fourth quarter 2000 (3,187 employees) 217
Cash charges - 2000 (991 employees) (19)
-----
Balance, December 31, 2000 (3,252 employees) 229
Cash charges - first quarter 2001 (1,744 employees) (86)
Cash charges - second quarter 2001 (655 employees) (37)
-----
Balance, June 30, 2001 (853 employees) $ 106
=====
In addition, $13 million of 1999 reserves, primarily relating to severance,
which remained at the end of 2000 was paid during the first quarter of 2001.
International Paper continually evaluates its operations for improvement. When
any such plans are finalized, costs or charges may be incurred in future periods
related to the implementation of these plans.
NOTE 5 - INVENTORIES
Inventories by major category were:
June 30, December 31,
In millions 2001 2000
- -------------- ----------------- -----------------
Raw materials $ 360 $ 431
Finished pulp, paper and packaging products 1,752 1,912
Finished lumber and panel products 225 261
Operating supplies 472 473
Other 116 105
------- -------
Total $ 2,925 $ 3,182
======= =======
NOTE 6 - BUSINESSES HELD FOR SALE
During 2000, International Paper announced a divestment program to sell certain
assets that are not strategic to its core businesses. The decision to sell these
businesses and certain other assets resulted from International Paper's
acquisition of Champion and the completion of its strategic analysis to focus on
its core businesses of Paper, Packaging and Forest Products.
9
Businesses being marketed at June 30, 2001, including those with sales pending
under sales agreements, were Arizona Chemical, Chemical Cellulose, Masonite,
Decorative Products, Flexible Packaging, and other smaller businesses. Sales and
operating earnings for each of the six-month periods ended June 30, 2001 and
2000 for these businesses were:
For the Six Months Ended
June 30,
---------------------------------
In millions 2001 2000
- -------------- ----------------- ------------
Sales $ 1,125 $ 1,276
Operating earnings 17 80
The sales and operating earnings shown above for these businesses, plus the
results of businesses sold during the first half of 2001, are shown in "Other
Businesses" in Management's Discussion and Analysis. The assets of these
businesses, totaling $1.6 billion at June 30, 2001 and $1.9 billion at December
31, 2000, are included in "assets of businesses held for sale" in current assets
in the accompanying consolidated balance sheet. The liabilities of these
businesses, totaling $363 million at June 30, 2001 and $541 million at December
31, 2000, are included in "liabilities of businesses held for sale" in current
liabilities in the accompanying consolidated balance sheet.
During the second quarter of 2001, a decision was made to continue to operate
the Fine Papers business that was previously held for sale. Accordingly,
industry segment information for prior periods has been restated to include this
business in the printing papers segment.
An agreement to sell Masonite to Premdor Inc. of Toronto, Canada was entered
into in September 2000 and subsequently amended in July 2001. In August 2001,
the Flexible Packaging business was sold to Exo-Tech Packaging LLC, a company
sponsored by the Sterling Group L.P.
NOTE 7 - TEMPORARY INVESTMENTS
Temporary investments with a maturity of three months or less are treated as
cash equivalents and are stated at cost. Temporary investments totaled $162
million and $581 million at June 30, 2001 and December 31, 2000, respectively.
NOTE 8 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Interest payments made during the six-month periods ended June 30, 2001 and 2000
were $549 million and $309 million, respectively. Capitalized net interest costs
were $7 million for the six months ended June 30, 2001 and $13 million for the
six months ended June 30, 2000. Total interest expense was $547 million for the
six months ended June 30, 2001 and $326 million for the six months ended June
30, 2000. The increase reflects debt incurred in the acquisition of Champion.
Income tax payments of $322 million were made during the first half of 2001 and
$161 million during the first half of 2000. Distributions paid under all of
International Paper's preferred securities of subsidiaries were $74 million and
$76 million for the six months ended June 30, 2001 and 2000, respectively and
are included in minority interest expense.
Accumulated depreciation was $16.6 billion at June 30, 2001 and $16.1 billion at
December 31, 2000. The allowance for doubtful accounts was $124 million at June
30, 2001 and $128 million at December 31, 2000.
10
NOTE 9 - CONVERTIBLE DEBENTURES
In June 2001, International Paper completed a private placement offering of $2.1
billion principal amount at maturity zero-coupon convertible senior debentures
due June 20, 2021, which yielded net proceeds of approximately $1.0 billion. The
debt accretes to face value at maturity at a rate of 3.75% per annum, subject to
upward adjustment if International Paper's stock price falls below a certain
level for a specified period. Also, the securities are convertible into shares
of International Paper common stock at the option of debenture holders upon an
upward change in International Paper's stock price in relation to the accreted
value of the debentures, or if the bond rating agencies downgrade International
Paper's debt below investment grade, or upon the debentures being called for
redemption by International Paper, or upon the occurrence of certain other
corporate events as defined in the debt agreement. International Paper may be
required to repurchase the securities on June 20th in each of the years 2004,
2006, 2011, and 2016 at a repurchase price equal to the accreted principal
amount to the repurchase date. International Paper also has the option to redeem
the securities on or after June 20, 2006 under certain circumstances. The net
proceeds of this issuance were used to retire higher interest rate commercial
paper borrowings.
NOTE 10 - RECENT ACCOUNTING DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method, thus eliminating the
use of pooling-of-interests accounting for business combinations. SFAS No. 142
changes the accounting for goodwill, eliminating the periodic charge to earnings
for goodwill amortization for fiscal years beginning after December 15, 2001.
Instead, the statement will require an annual assessment of goodwill for
impairment, or more frequent assessments if circumstances indicate a possible
impairment. Additionally, SFAS No.142 prescribes the accounting for identifiable
intangible assets acquired in a business combination. Whereas, SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001, SFAS No.
142 requires companies to continue to amortize goodwill existing at June 30,
2001 through the end of the current fiscal year, with periodic amortization
ceasing effective January 1, 2002.
Goodwill amortization charges for the six-month period ended June 30, 2001 were
$91 million with a similar charge expected for the last half of 2001. This
amortization charge will be discontinued on January 1, 2002. International Paper
is currently evaluating other possible impacts of adopting the provisions of
SFAS No. 142, including potential impairment of existing goodwill balances, but
has not yet quantified the impact on its consolidated financial position.
In July 2001, the Financial Accounting Standards Board announced that it will
issue SFAS No. 143, "Accounting for Obligations Associated with the Retirement
of Long-Lived Assets". SFAS No. 143 will require the accrual, at fair value, of
the estimated retirement obligation for tangible long-lived assets if the
company is legally obligated to perform retirement activities at the end of the
related asset's life and is effective for fiscal years beginning after June 15,
2002. International Paper has not yet evaluated the impact of adopting SFAS No.
143 on its consolidated financial position.
On January 1, 2001, International Paper adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and
138. These statements require that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured by its fair value. These
statements also establish new accounting rules for hedge transactions, which
depend on the nature of the hedge relationship.
11
The cumulative effect of adopting SFAS No. 133 was a $25 million charge to net
earnings before taxes and minority interest ($16 million after taxes and
minority interest), and a net decrease of $9 million after taxes to Other
Comprehensive Income (OCI). The charge to net earnings primarily resulted from
recording the fair value of certain interest rate swaps which do not qualify
under the new rules for hedge accounting treatment. The decrease to OCI
primarily resulted from adjusting the foreign currency contracts used as hedges
of net investments in foreign operations to fair value.
International Paper periodically uses derivatives and other financial
instruments to hedge exposures to interest rate, commodity and currency risks.
For hedges which meet the SFAS No. 133 criteria, International Paper, at
inception, formally designates and documents the instrument as a hedge of a
specific underlying exposure, as well as the risk management objective and
strategy for undertaking each hedge transaction. Because of the high degree of
effectiveness between the hedging instrument and the underlying exposure being
hedged, fluctuations in the value of the derivative instruments are generally
offset by changes in the value or cash flows of the underlying exposures being
hedged. Derivatives are recorded in the consolidated balance sheet at fair value
in other current or noncurrent assets or liabilities. The earnings impact
resulting from the change in fair value of the derivative instruments is
recorded in the same line item in the consolidated statement of earnings as the
underlying exposure being hedged. The financial instruments that are used in
hedging transactions are assessed both at inception and quarterly thereafter to
ensure they are effective in offsetting changes in either the fair value or cash
flows of the related underlying exposures. The ineffective portion of a
financial instrument's change in fair value, if any, would be recognized
currently in earnings together with the changes in fair value of derivatives not
designated as hedges.
The counterparties to International Paper's contracts consist of a number of
major international financial institutions. International Paper monitors its
positions with, and the credit quality of, these financial institutions and does
not expect nonperformance by the counterparties.
Interest Rate Risk
Cross-currency and interest rate swaps may be used to manage the composition of
portions of International Paper's fixed and floating rate debt portfolio. Carter
Holt Harvey uses these instruments to hedge the interest rate exposure of its
U.S. dollar fixed rate debt and has designated the instruments as fair value
hedges with net gains and losses reported currently in interest expense.
In the U.S., International Paper has entered into interest rate swap agreements
with a total notional amount of approximately $1 billion with maturities ranging
from 1 to 23 years. These swaps do not qualify as hedges under SFAS No. 133 and,
consequently, were recorded at fair value on the transition date by a charge to
net earnings. For the quarter ended June 30, 2001, the change in fair value of
the swaps was immaterial. Future changes in fair value of these swaps are not
expected to have a material impact on earnings, although some volatility in a
quarter is possible due to unforeseen market conditions.
At June 30, 2001, International Paper had $2.9 billion of floating rate debt
with interest rates that fluctuate based on market conditions and credit
returns.
Commodity Risk
To manage risks associated with future variability in cash flows attributable to
certain commodity purchases, International Paper currently uses swap contracts
with maturities of 12 months or less. Such cash flow hedges are accounted for by
deferring the quarterly change in fair value of the outstanding contracts in
accumulated OCI. On the date a contract matures, the deferred gain or loss is
reclassified into cost of goods sold concurrently with the recognition of the
commodity purchased. During the quarter ended June 30, 2001, International Paper
entered into a number of contracts to hedge a portion of its U.S. forecasted
purchases of natural gas through March 31, 2002, effectively fixing the price of
these purchases at a weighted average price of $5.30 per MMBTU.
12
Contracts for a notional amount of 33.8 MMBTU's were outstanding at June 30,
2001. Approximately $48 million after taxes, representing the quarterly change
in the fair market value of these contracts, was charged to accumulated OCI, and
$5 million after taxes, reflecting the realized loss on maturing contracts
during the period, was charged to expense.
Foreign Currency Risk
International Paper's policy has been to hedge certain investments in foreign
operations with borrowings denominated in the same currency as the operation's
functional currency or by entering into foreign exchange contracts. These
financial instruments are effective as a hedge against fluctuations in currency
exchange rates. Gains or losses from changes in the fair value of these
instruments, which are offset in whole or in part by translation gains and
losses on the net assets hedged, are recorded as translation adjustments in
accumulated OCI. Upon liquidation or sale of the net assets hedged, the
accumulated gains or losses from the revaluation of the hedging instruments
would be included in earnings.
Currency swaps are used to mitigate the risk associated with changes in foreign
exchange rates, which will affect the fair value of debt denominated in a
foreign currency. Some of these hedges have been designated as fair value hedges
and others have not.
Foreign exchange contracts (including forward, swap and purchase option
contracts) are also used to hedge certain transactions, primarily trade receipts
and payments denominated in foreign currencies, to manage volatility associated
with these transactions and to protect International Paper from currency
fluctuations between the contract date and ultimate settlement. These contracts,
most of which have been designated as cash flow hedges, had maturities of five
years or less as of June 30, 2001. For the three months ended June 30, 2001, a
net charge of $9 million after taxes, was recorded in accumulated OCI, net of
reclassifications to earnings of $1 million after taxes, related to net losses
on these contracts. An estimated $5 million after taxes is expected to be
reclassified to earnings by the end of 2001. Additionally, the change in the
time value associated with currency options recognized immediately in earnings
for the quarter was immaterial. Other contracts are used to offset the earnings
impact relating to the variability in exchange rates on certain monetary assets
and liabilities denominated in non-functional currencies and are not designated
as hedges. Changes in the fair value of these instruments are recognized
currently in earnings to offset the remeasurement of the related assets and
liabilities.
NOTE 11 - SUBSEQUENT EVENTS
In July 2001, International Paper completed the sale of its Curtis/Palmer
hydroelectric generating project in Corinth, New York to TransCanada Pipelines
Limited.
In August 2001, International Paper completed the sale of its Flexible Packaging
business to Exo-Tech Packaging, LLC, a company sponsored by the Sterling Group,
L.P.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
International Paper's consolidated results of operations include Champion
International Corporation (Champion) from the date of acquisition, June 20,
2000.
Second quarter 2001 earnings were $64 million, or $.13 per share, before special
items. Earnings for the same period a year earlier were $315 million, or $.75
per share, before special items. First quarter 2001 earnings were $24 million,
or $.05 per share, before special and extraordinary items and the cumulative
effect of an accounting change. The earnings increase in the second quarter of
2001 compared with the first quarter was due mainly to declining costs,
including lower energy costs, and improved operating efficiencies. However, weak
pulp, paper, and packaging markets and a soft U.S. economy continue to
negatively impact results. Export revenues continue to come under pressure due
to the strengthening U.S. dollar. We took approximately 430,000 tons of
market-related downtime throughout our mill system as we continue to balance
production with demand. During the second quarter of 2001, we announced the
elimination of approximately 4,000 positions related to capacity shutdowns,
internal reorganizations, and streamlining of salaried staff functions. These
announcements included plans to shut down production of 610,000 tons of U.S.
containerboard capacity and 60,000 tons of U.S. coated freesheet capacity.
In the second quarter of 2001, International Paper reported a net loss of $313
million, or $.65 per share, after special items. This compared with net earnings
of $270 million, or $.64 per share, in the second quarter of 2000 after special
items. International Paper reported a net loss of $44 million, or $.09 per
share, in the first quarter of 2001, after special and extraordinary items and
the cumulative effect of an accounting change.
Special items in the second quarter of 2001 included charges of $300 million
after taxes and minority interest, or $.62 per share, for facility closures,
administrative realignment and related severance and $55 million after taxes, or
$.11 per share, for impairment losses on businesses held for sale.
Also, a special charge of $22 million after taxes, or $.05 per share,
represented additional Champion merger integration costs. Special charges in the
second quarter of 2000 included charges of $42 million after taxes and minority
interest, or $.10 per share, for asset shutdowns of excess internal capacity and
cost reduction actions, and $3 million after taxes, or $.01 per share, for
merger-integration costs.
International Paper posted net sales in the second quarter of 2001 of $6.7
billion, compared with $6.8 billion in the second quarter of 2000 and $6.9
billion in the first quarter of 2001. The decline was due mainly to lower
volumes and price erosion in our pulp and paper and packaging businesses.
The following segment discussions for the second quarter of 2001 are based on
results before special items.
Printing Papers net sales of $1.9 billion for the second quarter of 2001 were
down slightly from the $2.1 billion recorded in the first quarter of 2001. Net
sales for the second quarter of 2000 were $1.4 billion. The segment reported
operating profit of $119 million for the second quarter of 2001 compared with
$154 million for the first quarter of 2001 and $204 million for the second
quarter of 2000. The lower operating profits and sales continue to reflect the
slow general economy. The 2001 first quarter slowdown in advertising spending
accelerated in the second quarter impacting demand from publishers and
commercial printers. Paper pricing declined slightly during the second quarter
of 2001. European and North American pulp markets continued to weaken in the
second quarter with very low demand and sharply lower pulp prices. During the
quarter, International Paper took market-related downtime of 45,000 tons for
bristols and pulp and 70,000 tons for coated and supercalendered papers which
reduced inventory levels and helped balance supply to demand. In July 2001, we
indefinitely shut down a coated freesheet machine, further reducing capacity by
60,000 tons. We intend to continue to take
14
market-related downtime as necessary in the third quarter of 2001 to keep
internal supply aligned with customer demand. The segment is aggressively
pursuing improvement initiatives and expects significant cost savings as a
result of reorganization efforts in the business.
Printing Papers
2001 2000
------------------------------------------------ ------------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
------------------------------------------------ ------------------------------------------------
Sales $ 2,085 $ 1,945 $ 4,030 $ 1,470 $ 1,440 $ 2,910
Operating Profit 154 119 273 172 204 376
Industrial and Consumer Packaging net sales of $1.7 billion for the second
quarter of 2001 were flat compared with net sales in the first quarter of 2001.
Net sales for the second quarter of 2000 were $1.9 billion. The segment reported
operating profit of $143 million for the 2001 second quarter compared with $116
million in the first quarter of 2001 and $236 million for the second quarter of
2000. While energy costs continued to moderate during the second quarter, the
strong U.S. dollar and soft domestic market conditions caused operating results
to decline versus the same period a year ago. Industrial Packaging continued to
take extensive market-related downtime, which totaled 265,000 tons in the second
quarter of 2001. In July 2001, we announced the indefinite shutdown of 610,000
tons of capacity to match production with customer orders. Internal initiatives
centered on cost and efficiency improvements and external customer-focused
programs favorably impacted both Consumer Packaging and Industrial Packaging
earnings during the quarter, partly offsetting the impact of soft market
conditions. The strong U.S. dollar continued to adversely affect both bleached
board sales and containerboard exports.
Industrial and Consumer Packaging
2001 2000
--------------------------------------------- -----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
--------------------------------------------- -----------------------------------------------
Sales $ 1,710 $ 1,695 $ 3,405 $ 1,665 $ 1,865 $ 3,530
Operating Profit 116 143 259 192 236 428
Distribution net sales of $1.7 billion for the 2001 second quarter were slightly
lower than the $1.8 billion of net sales for the 2001 first quarter and even
with net sales in the second quarter of 2000. Operating profit of $12 million
for the second quarter of 2001 was slightly down from $14 million in the first
quarter of 2001. Operating profit for the second quarter of 2000 was $35
million. The year-over-year sales increase attributable to the addition of
Champion's Nationwide facilities was essentially offset by lower overall market
demand across the United States. The segment continues to make progress on its
internal profit improvement program but was affected by weak printing markets as
well as slowing sales in packaging and industrial supplies in the second quarter
of 2001.
Distribution
2001 2000
----------------------------------------------- -----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
----------------------------------------------- -----------------------------------------------
Sales $ 1,800 $ 1,710 $ 3,510 $ 1,750 $ 1,700 $ 3,450
Operating Profit 14 12 26 30 35 65
Forest Products 2001 second quarter net sales of $720 million were up from the
$685 million reported in the first quarter of 2001 and the $460 million reported
in the second quarter of 2000. Current quarter operating profit of $182 million
was up from the $136 million reported in the first quarter of 2001 and the $151
million reported in the second quarter of 2000. Earnings for Forest Products
increased in the second quarter compared with the first quarter of 2001 as sales
of lumber and panels benefited from strong housing starts. Prices for oriented
strand board, plywood, and lumber improved during the quarter. Stumpage prices
for the second quarter of 2001, for both pulpwood and sawtimber, continued their
decline from 2000 levels. International Paper monetizes its forest
15
assets in various ways including sales of short and long-term harvest rights on
a pay-as-cut or lump-sum bulk sales basis, and sales of timberland. Accordingly,
earnings from quarter to quarter may vary depending upon prices and volumes of
such sales. Overall, timber sales volumes and prices dropped in the second
quarter resulting in lower earnings compared with the first quarter. Earnings
for the Wood Products businesses improved in the second quarter compared with
the first quarter. In July 2001, Forest Resources announced an internal
reorganization designed to increase flexibility and reduce its administrative
costs. This reorganization will result in lower operating costs in future
quarters.
Forest Products
2001 2000
----------------------------------------------- -----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
----------------------------------------------- -----------------------------------------------
Sales $ 685 $ 720 $ 1,405 $ 500 $ 460 $ 960
Operating Profit 136 182 318 132 151 283
Carter Holt Harvey reported 2001 second quarter net sales of $400 million
compared with $395 million in the first quarter of 2001 and $460 million in the
second quarter of 2000. Operating profit in the 2001 second quarter of $5
million was up from the $1 million recorded in the first quarter of 2001, but
down from the $23 million recorded in the second quarter of 2000. The decline in
U.S. dollar sales compared with 2000 reflects the translation effect of a 16%
stronger U.S. dollar in 2001. Although second quarter 2001 results improved over
the first quarter, pricing in Asian export log markets was at cyclical lows,
while weak regional construction markets in Australia and New Zealand in
combination with weak housing starts continued to adversely impact Carter Holt
Harvey's earnings. Earnings for Carter Holt Harvey's Wood Products business in
the second quarter showed improvement over first quarter of 2001 due to stronger
volumes. The operating results of the Tissue business continue to be adversely
affected by a weak Australian dollar.
Carter Holt Harvey
2001 2000
----------------------------------------------- -----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
----------------------------------------------- -----------------------------------------------
Sales $ 395 $ 400 $ 795 $ 410 $ 460 $ 870
Operating Profit 1 5 6 17 23 40
International Paper's results for this segment differ from those reported by
Carter Holt Harvey in New Zealand due to (1) Carter Holt Harvey's fiscal year
ends at March 31 versus our calendar year-end, (2) our segment earnings include
only our share of Carter Holt Harvey's operating earnings while 100% of sales
are included in segment results, (3) our results are in U.S. dollars while
Carter Holt Harvey reports in New Zealand dollars, and (4) Carter Holt Harvey
reports under New Zealand accounting standards while our segment results comply
with U.S. generally accepted accounting principles. The major accounting
differences relate to cost of timber harvested and start-up costs.
Other Businesses include the operating results for those businesses identified
in International Paper's divestiture program. Businesses either under agreement
for sale or being marketed at the end of the second quarter of 2001 include
Arizona Chemical, Masonite, the Chemical Cellulose pulp business, Decorative
Products, Flexible Packaging, and certain other small businesses. In addition,
operating results for Bush Boake Allen, Zanders and International Paper's
Petroleum and Minerals business are included in this segment for periods prior
to their sale. Net sales for other businesses for the second quarter of 2001
were $565 million compared with $595 million in the 2001 first quarter and $955
million in the 2000 second quarter. Operating profit was $21 million compared
with $5 million for the first quarter of 2001 and $65 million in the second
quarter of 2000. The declines in 2001 second quarter net sales and earnings from
the second quarter of 2000 reflect a weaker U.S. economy as well as the sale of
certain businesses in late 2000 and the first quarter of 2001.
16
Other Businesses
2001 2000
----------------------------------------------- -----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
----------------------------------------------- -----------------------------------------------
Sales $ 595 $ 565 $ 1,160 $ 945 $ 955 $ 1,900
Operating Profit 5 21 26 60 65 125
Liquidity and Capital Resources
Cash provided by operations totaled $295 million for the first half of 2001
compared with $968 million for the comparable 2000 six-month period, due
principally to the decline in net earnings. Working capital requirements reduced
operating cash flow by $532 million and $293 million for the 2001 and 2000
six-month periods, respectively, due to an increase in seasonal estimated tax
payments.
Investments in capital projects totaled $458 million and $488 million for the
2001 and 2000 six-month periods, respectively.
Financing activities for the 2001 six-month period included a $684 million net
reduction in debt compared to a $4.7 billion net increase in debt in the
comparable 2000 six-month period when borrowings were made in connection with
the acquisition of Champion. During the second quarter, certain cash balances in
Europe and South American were repatriated to the U.S. to reduce debt balances.
Additionally, zero-coupon convertible senior debentures were issued yielding net
proceeds of approximately $1.0 billion which was used to retire commercial paper
borrowings. Common stock dividend payments totaled $240 million, or $.50 per
share, for the 2001 first half compared to $207 million, or $.50 per share, for
the 2000 first half.
At June 30, 2001, cash and temporary investments totaled $743 million compared
with $1.2 billion at December 31, 2000.
Mergers, Acquisitions and Divestitures
Mergers and Acquisitions:
In April 2001, Carter Holt Harvey acquired Norske Skog's Tasman Kraft pulp
manufacturing business for $130 million in cash.
In June 2000, International Paper completed the acquisition of Champion, a
leading manufacturer of paper for business communications, commercial printing
and publications with significant market pulp, plywood and lumber manufacturing
operations. Champion shareholders received $50 in cash and $25 worth of
International Paper common stock for each Champion share. The acquisition was
completed for approximately $5 billion in cash and 68.7 million shares of
International Paper common stock having a market value of $2.4 billion.
Approximately $2.8 billion of Champion debt was assumed.
In April 2000, Carter Holt Harvey purchased CSR Limited's medium density
fiberboard and particleboard businesses and its Oberon sawmill for approximately
$200 million in cash.
In March 2000, International Paper acquired Shorewood Packaging Corporation, a
leader in the manufacture of premium retail packaging, for approximately $640
million in cash and the assumption of $280 million of debt.
All of these acquisitions were accounted for using the purchase method with the
related operating results included in the consolidated statement of earnings
from the dates of acquisition.
17
Divestitures:
In March 2001, International Paper received $500 million in proceeds from the
sale of approximately 265,000 acres of forestlands in the state of Washington to
Ranier Timber Company, LLC.
In January 2001, International Paper conveyed its oil and gas properties and fee
mineral and royalty interests to Pure Resources, Inc. and its affiliates in a
transaction valued at approximately $260 million, resulting in an extraordinary
loss of $8 million after taxes. International Paper also completed the sale of
its interest in Zanders Feinpapiere AG, a European coated paper business, to
Metsa Serla for approximately $120 million and the assumption of $80 million of
debt. This transaction resulted in an extraordinary loss of $245 million after
taxes and minority interest, which was recorded in the fourth quarter of 2000
when the decision was made to sell this business below book value.
In November 2000, International Paper sold its interest in Bush Boake Allen for
$640 million, resulting in an extraordinary gain of $183 million after taxes and
minority interest.
In January 2000, International Paper sold its equity interest in Scitex for $79
million, and Carter Holt Harvey sold its equity interest in Compania de
Petroleos de Chile for just over $1.2 billion. These sales resulted in a
combined extraordinary gain of $134 million after taxes and minority interest.
In 2000, International Paper announced a divestment program following the
Champion acquisition and the completion of a strategic analysis to focus on
International Paper's core businesses. Through June 30, 2001, approximately $1.7
billion of proceeds, including debt assumed by the buyers, have been realized
under the program.
Restructuring, Special and Extraordinary Items
During the second quarter of 2001, special items amounting to a net pre-tax
charge of $582 million ($377 million after taxes and minority interest) were
recorded. These items included a $465 million charge before taxes and minority
interest ($300 million after taxes and minority interest) for asset shutdowns of
excess capacity and cost reduction actions, an $85 million pre-tax loss ($55
million after taxes) for impairment losses on businesses held for sale, and a
$32 million pre-tax charge ($22 million after taxes) for additional Champion
merger-related costs. The $465 million charge for asset shutdowns of excess
internal capacity and cost reduction actions included $240 million of asset
write-downs and $225 million of severance and other charges. The following table
presents additional detail related to the $465 million charge:
Asset Severance
Write- and
In millions Downs Other Total
- -------------- ------- ----------- -------
Printing Papers (a) $ 9 $ 23 $ 32
Consumer Packaging (b) 151 69 220
Industrial Packaging (c) 62 20 82
Industrial Papers (d) 3 5 8
Forest Products (e) 1 12 13
Distribution (f) 4 21 25
Carter Holt Harvey (g) 10 - 10
Administrative Support Groups (h) - 75 75
------ ------ ------
$ 240 $ 225 $ 465
====== ====== ======
(a) The Printing Papers business indefinitely shut down the Hudson River
mill No. 3 paper machine located in Corinth, New York due to excess
internal capacity. The machine was written down by $9 million to
18
its estimated fair value of zero. A severance charge of $10 million was
recorded to cover the termination of 208 employees. Also, the Printing
Papers business implemented a plan to streamline and realign
administrative functions at several of its locations. Charges
associated with this plan included $6 million of severance costs
covering the termination of 82 employees, and other cash costs of $7
million.
(b) In June 2001, the Consumer Packaging business shut down the Moss Point,
Mississippi mill and announced the shut down of its Clinton, Iowa
facility due to excess internal capacity. Charges associated with the
Moss Point shutdown included $138 million to write the assets down to
their estimated salvage value, $21 million of severance costs covering
the termination of 363 employees, and other exit costs of $20 million.
Charges associated with the Clinton shutdown included $7 million to
write the assets down to their estimated salvage value, $7 million of
severance costs covering the termination of 327 employees, and other
exit costs of $3 million. Additionally, the Consumer Packaging business
implemented a plan to reduce excess internal capacity and streamline
administrative functions at several of its locations. Charges
associated with this plan included $6 million of asset write-downs, $15
million of severance costs covering the termination of 402 employees,
and other cash costs of $3 million.
(c) The Industrial Packaging business indefinitely shut down the Savannah,
Georgia mill No. 2, No. 4 and No. 6 paper machines due to excess
internal capacity. The machines were written down by $62 million to
their estimated fair value of zero, with severance charges of $11
million also recorded to cover the termination of 290 employees. Also,
Industrial Packaging implemented a plan to streamline and realign
administrative functions at several of its locations, resulting in a
severance charge of $9 million covering the termination of 146
employees.
(d) Industrial Papers implemented a plan to reduce excess capacity and
streamline administrative functions at several of its locations.
Charges associated with this plan included asset write-downs of $3
million and severance costs of $5 million covering the termination of
123 employees.
(e) The Forest Products business charge of $13 million reflects the
reorganization of its regional operating structure and streamlining of
administrative functions. The charge included $1 million of asset
write-downs, $9 million of severance costs covering the termination of
100 employees, and other cash costs of $3 million.
(f) xpedx implemented a plan to consolidate duplicate facilities and
eliminate excess internal capacity. Charges associated with this plan
included $4 million of asset write-downs, $14 million of severance
costs covering the termination of 394 employees, and other cash costs
of $7 million.
(g) The Carter Holt Harvey charge of $10 million was recorded to write down
the assets of its Mataura mill to their estimated fair value of zero as
a result of the decision to permanently shutdown this facility which
had previously been idled temporarily.
(h) During the second quarter of 2001, International Paper implemented a
cost reduction program to realign its administrative functions across
all business and staff support groups. As a result, a $75 million
severance charge was recorded covering the termination of 985
employees.
The $85 million charge for impairment losses on businesses held for sale
reflects the reduction of the carrying value of these assets to their expected
realizable value based on offers received. These businesses are currently being
offered for sale as part of International Paper's divestment program.
The merger-related expenses of $32 million consisted primarily of systems
integration, product line rationalization, employee retention, travel and other
cash costs related to the Champion merger.
19
During the first quarter of 2001, special and extraordinary items amounting to a
net pre-tax charge of $108 million ($68 million after taxes and minority
interest) were recorded. These items included a $25 million charge before taxes
and minority interest ($16 million after taxes and minority interest) for the
cumulative impact of adopting the provisions of Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS Nos. 137 and 138, an extraordinary
charge of $73 million before taxes ($46 million after taxes) for impairment
losses on businesses held for sale, and a special charge of $10 million before
taxes ($6 million after taxes) for additional Champion merger-related costs.
During the second quarter of 2000, International Paper recorded special items
amounting to a net charge before taxes and minority interest of $75 million ($45
million after taxes and minority interest). The special items included a $71
million pre-tax charge ($42 million after taxes and minority interest) for asset
shutdowns of excess internal capacity and cost reduction actions and a $4
million pre-tax charge ($3 million after taxes) for merger-integration costs.
During the first quarter of 2000, a pre-tax charge of $8 million ($5 million
after taxes) was recorded for merger-related expenses, primarily consisting of
systems integration, employee retention, travel and other cash costs related to
the Union Camp merger.
During the last two quarters of 2000, additional charges totaling $749 million
before taxes and minority interest ($464 million after taxes and minority
interest) for asset shutdowns of excess internal capacity and cost reduction
actions were recorded. The following table presents a roll forward of the
cumulative severance and other costs included in these charges:
Severance
Dollars in millions and Other
- ---------------------- -----------------
Opening balance - second quarter 2000 (1,056 employees) $ 31
Additions - fourth quarter 2000 (3,187 employees) 217
Cash charges - 2000 (991 employees) (19)
------
Balance, December 31, 2000 (3,252 employees) 229
Cash charges - first quarter 2001 (1,744 employees) (86)
Cash charges - second quarter 2001 (655 employees) (37)
------
Balance, June 30, 2001 (853 employees) $ 106
======
In addition, $13 million of 1999 reserves, primarily relating to severance,
which remained at the end of 2000 was paid during the first quarter of 2001.
International Paper continually evaluates its operations for improvement. When
any such plans are finalized, costs or charges may be incurred in future periods
related to the implementation of these plans.
Other
The effective income tax rate for both the 2001 and 2000 second quarters was
31%. The effective income tax rate after special items, but before extraordinary
items and the cumulative effect of an accounting change, was 37% and 30% for the
2001 and 2000 six-month periods, respectively. The following table presents the
components of pre-tax earnings and losses and the related income tax expense or
benefit for each of the six-month periods ended June 30, 2001 and 2000.
20
2001 2000
------------------------------------------- -------------------------------------------
Earnings Earnings
(Loss) Before (Loss) Before
Income Taxes Income Tax Income Taxes Income Tax
and Minority Provision Effective and Minority Provision Effective
In millions Interest (Benefit) Tax Rate Interest (Benefit) Tax Rate
- -------------- --------------- ------------- ----------- --------------- ------------- -----------
Before special and
extraordinary items
and cumulative effect
of accounting change $ 247 $ 76 31% $ 998 $ 309 31%
Merger integration costs (42) (14) 33% (12) (4) 33%
Restructuring and other charges (550) (191) 35% (71) (27) 38%
------ ------ ----- -----
After special items $ (345) $ (129) 37% $ 915 $ 278 30%
====== ====== ===== =====
During the quarter ended June 30, 2001, International Paper entered into a
number of contracts to hedge a portion of its U.S. forecasted purchases of
natural gas through March 31, 2002, effectively fixing the price of these
purchases at a weighted average price of $5.30 per MMBTU. Contracts for a
notional amount of 33.8 MMBTU's were outstanding at June 30, 2001.
Forward-Looking Statements
The statements under "Management's Discussion and Analysis" and other statements
contained herein that are not historical facts are forward-looking statements
(as such term is defined under the Private Securities Litigation Reform Act of
1995). Forward-looking statements reflect our expectations or forecasts of
future events. These include statements relating to future actions, future
performance or the outcome of contingencies, such as legal proceedings and
financial results. Any or all of the forward-looking statements that we make in
this report may turn out to be wrong. They can be influenced by inaccurate
assumptions we might make or by known or unknown risks and uncertainties. No
forward-looking statements can be guaranteed and actual results may vary
materially. Factors which could cause actual results to differ include, among
other things, whether our efforts relating to capacity rationalization, internal
reorganizations, and realignment initiatives will have the results anticipated,
whether expected merger savings will be realized, whether our divestiture
program will achieve anticipated proceeds, the relative strength of the U.S.
dollar compared with other foreign currencies, especially the Euro, and changes
in overall demand, changes in domestic competition, changes in the cost or
availability of raw materials, and the cost of compliance with environmental
laws and regulations. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
21
Financial Information by Industry Segment
(Unaudited)
(In millions)
Net Sales by Industry Segment (1)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
2001 2000 2001 2000
------------- ------------- ------------ ------------
Printing Papers $ 1,945 $ 1,440 $ 4,030 $ 2,910
Industrial and Consumer Packaging 1,695 1,865 3,405 3,530
Distribution 1,710 1,700 3,510 3,450
Forest Products 720 460 1,405 960
Carter Holt Harvey 400 460 795 870
Other Businesses (2) 565 955 1,160 1,900
Corporate and Intersegment Sales (349) (100)(3) (725) (469)(3)
------- ------- -------- --------
Net Sales $ 6,686 $ 6,780 $ 13,580 $ 13,151
======= ======= ======== ========
Operating Profit by Industry Segment (1)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Printing Papers $ 119 $ 204 $ 273 $ 376
Industrial and Consumer Packaging 143 236 259 428
Distribution 12 35 26 65
Forest Products 182 151 318 283
Carter Holt Harvey (4) 5 23 6 40
Other Businesses (2) 21 65 26 125
Corporate - 26 (3) - 26 (3)
------ ----- ------ ------
Operating Profit 482 740 908 1,343
Interest expense, net (235) (156) (483) (287)
Minority interest adjustment (4) 10 38 13 62
Corporate items, net (107) (67) (191) (120)
Merger integration costs (32) (4) (42) (12)
Restructuring and other charges (465) (71) (465) (71)
Impairment losses on businesses
held for sale (85) - (85) -
------ ----- ------ ------
Earnings (loss) before income taxes,
minority interest, extraordinary items and
cumulative effect of accounting change $ (432) $ 480 $ (345) $ 915
====== ===== ====== ======
(1) Certain reclassifications and adjustments have been made to current year
and prior year amounts.
(2) Includes businesses identified in International Paper's divestiture
program.
(3) Includes results of operations from Champion, which was acquired on June
20, 2000, for the ten days ended June 30, 2000.
(4) Includes equity earnings (in millions) of $1 and $5 for the three months
ended June 30, 2001 and 2000, respectively, and $2 and $9 for the six
months ended June 30, 2001 and 2000, respectively (half in the Carter Holt
Harvey segment and half in the minority interest adjustment).
22
Production by Product
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- --------------------------
2001 2000 2001 2000
-------------- --------------- ------------ ------------
Printing Papers (In thousands of tons)
White Papers and Bristols (1) 1,578 1,355 3,219 2,735
Coated Papers 658 317 1,356 642
Market Pulp (2) 655 516 1,331 1,037
Newsprint 27 28 55 55
Packaging (In thousands of tons)
Containerboard 1,061 1,190 2,108 2,394
Bleached Packaging Board 556 542 1,048 1,074
Industrial Papers 193 230 415 471
Industrial and Consumer Packaging (1) (3) 936 1,375 1,888 2,726
Specialty Products (In thousands of tons)
Tissue 40 42 81 83
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) (4) 771 510 1,420 1,003
Lumber (board feet) 1,001 713 1,949 1,428
MDF (sq. ft. 3/4" - basis) 90 84 184 143
Particleboard (sq. ft. 3/4" - basis) 111 95 212 143
(1) Certain reclassifications and adjustments have been made to current and
prior-year amounts.
(2) Excludes market pulp purchases.
(3) A significant portion of this tonnage was fabricated from paperboard and
paper produced at International Paper's own mills and included in the
containerboard, bleached packaging board and industrial papers amounts in
this table.
(4) Panels include plywood and oriented strand board.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosures about market
risk are shown in Footnotes 9 and 10 of this Form 10-Q, and on pages 27 - 29 of
International Paper's Annual Report to Shareholders for the year ended December
31, 2000 as previously filed on Form 10-K, which information is incorporated
herein by reference.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following matters discussed in previous filings under the Securities
Exchange Act are updated as follows:
Masonite Litigation
Three nationwide class action lawsuits filed against the Company have been
settled in recent years.
The first suit alleged that hardboard siding manufactured by Masonite fails
prematurely, allowing moisture intrusion that in turn causes damage to the
structure underneath the siding (Naef Lawsuit). The class consisted of all U.S.
property owners having Masonite hardboard siding installed on and incorporated
into buildings between 1980 and January 15, 1998. The Court granted final
approval of the settlement on January 15, 1998. The settlement provides for
monetary compensation to class members meeting the settlement requirements on a
claims-made basis. It also provides for the payment of attorneys' fees equaling
15% of the settlement amounts paid to class members, with a non-refundable
advance of $47.5 million plus $2.5 million in costs.
The second suit made similar allegations with regard to Omniwood siding
manufactured by Masonite (Omniwood Lawsuit). The class consisted of all U.S.
property owners having Omniwood siding installed on and incorporated into
buildings from January 1, 1992 to January 6, 1999.
The third suit alleged that Woodruf roofing manufactured by Masonite is
defective and causes damage to the structure underneath the roofing (Woodruf
Lawsuit). The class consisted of all U.S. property owners who had incorporated
and installed Masonite Woodruf roofing from January 1, 1980 to January 6, 1999.
The Court granted final approval of the settlements of the Omniwood and Woodruf
lawsuits on January 6, 1999. The settlements provide for monetary compensation
to class members meeting the settlement requirements on a claims-made basis, and
provide for payment of attorneys' fees equaling 13% of the settlement amounts
paid to class members with a non-refundable advance of $1.7 million plus $75,000
in costs for each of the two cases.
International Paper believes that the large majority of the settlement relating
to the Naef Lawsuit is covered by insurance and that it will prevail in the
insurance coverage litigation that it was forced to file against certain of its
insurers because of their refusal to cover that settlement. Nevertheless, due to
the inherent uncertainties involved in litigation, International Paper has
estimated total insurance recoveries of approximately $70 million, for purposes
of establishing the reserve for Masonite claims.
Reserves for these matters total $61 million at June 30, 2001, net of expected
future insurance recoveries. This amount includes $25 million added to the
reserve for hardboard siding claims in the fourth quarter of 1999 (some of which
has now been paid to claimants) and an additional $125 million added to the
reserve in the fourth quarter of 2000, resulting primarily from a higher number
of hardboard siding claims than anticipated. It is reasonably possible that the
higher number of hardboard siding claims might be indicative of the need for one
or more future additions to this reserve. However, whether or not any future
additions to this reserve become necessary, we believe that these settlements
will not have a material adverse effect on our consolidated financial position
or results of operations.
Through June 30, 2001, net settlement payments of $324 million, including
approximately $51 million of non-refundable advances of attorneys' fees
discussed above, have been made. Payments of $5 million, including the $3.4
million of non-refundable advances referred to above, have been made to the
attorneys for the plaintiffs in the Omniwood and Woodruf Lawsuits through June
30, 2001. Also, we have received $27 million from our insurance carriers through
June 30, 2001. International Paper and Masonite have the right to terminate each
of
25
the settlements after seven years from the dates of final approval. The
liability for these matters will be retained after the planned sale of Masonite
is completed.
Other Litigation
Purchasers of high-pressure laminates have filed a number of purported class
actions under the federal antitrust laws in various federal district courts in
different states, alleging that International Paper's Nevamar division
participated in a price-fixing conspiracy with competitors. These cases have
been consolidated in federal district court in New York. Indirect and direct
purchasers of high-pressure laminates have also filed similar purported class
action cases under various state antitrust and consumer protection statutes in
California, Florida, Maine, Michigan, Minnesota, New Mexico, New York, North
Dakota, South Dakota, Tennessee and the District of Columbia. We filed a motion
to dismiss one of the cases in federal court, which was denied by the court
without prejudice. The federal plaintiffs filed a consolidated amended complaint
on February 22, 2001. On February 26, 2001, International Paper filed a motion
to dismiss the case pending in New York State court and has filed answers in
California, New Mexico, South Dakota and one of two complaints filed in
Michigan. On May 2, 2001, our motion to dismiss in the case pending in New York
State court was granted.
Environmental
On December 30, 1999, Champion entered into a Consent Order with the Florida
Department of Environmental Protection relating to alleged violations of the
wastewater discharge permit at the Pensacola, Florida mill. The Consent Order
required Champion to take additional steps to control the discharge of suspended
solids, nutrients and oxygen-consuming material in the mill's wastewater and to
pay a civil penalty of $137,730. The Consent Order became effective in April
2001, when an administrative challenge of the Consent Order was resolved.
In April 1999, the Franklin, Virginia mill received a Notice of Violation (NOV)
from the EPA, Region 3 in Philadelphia, and an NOV from the Commonwealth of
Virginia alleging that the mill violated the Prevention of Significant
Deterioration (PSD) regulations. The Franklin mill was owned by Union Camp at
the time of the alleged violations and was one of seven paper mills in Region 3
owned by different companies that received similar NOVs. On May 11, 2001, the
Commonwealth of Virginia informed International Paper that it does not intend to
pursue the allegations identified in the NOV, and we do not anticipate further
enforcement action from the EPA.
International Paper is involved in other contractual disputes, administrative
and legal proceedings and investigations of various types. While any litigation,
proceeding or investigation has an element of uncertainty, we believe that the
outcome of any proceeding, lawsuit or claim that is pending or threatened, or
all of them combined, will not have a material adverse effect on our
consolidated financial position or results of operations.
26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) In June 2001, International Paper completed a private placement offering of
$2.1 billion principal amount at maturity zero-coupon convertible senior
debentures due June 20, 2021, for aggregate net proceeds of approximately
$1.0 billion. Each $1,000 principal amount at maturity debenture was issued
at a price of $475.66 and accretes at a rate of 3.75% per annum, subject to
upward adjustment under certain circumstances. The securities are
convertible into shares of International Paper common stock if certain
conditions are met. The debenture holders option to convert can be
triggered by an upward change in International Paper's stock price in
relation to the accreted value of the debentures, or if the bond rating
agencies downgrade International Paper's debt below investment grade, or
upon the debentures being called for redemption by International Paper, or
upon the occurrence of certain other corporate events as defined in the
debt agreement. International Paper may be required to repurchase the
securities on June 20th in each of the years 2004, 2006, 2011, and 2016 at
a repurchase price equal to the accreted principal amount plus any accrued
and unpaid cash interest to the repurchase date. International Paper also
has the option to redeem the securities on or after June 20, 2006 under
certain circumstances. The net proceeds of this issuance were used to
retire higher interest rate commercial paper borrowings. The transaction
was completed without registration in reliance upon Section 4(2) of the
Securities Act. The securities were initially sold to Credit Suisse First
Boston and Goldman Sachs & Co. for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act.
27
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on May 8, 2001.
(b) Shareholders elected four directors to Class I for three-year terms
expiring at the annual meeting in 2004. The vote tabulation for individual
directors were:
For Withheld
--- --------
John T. Dillon 414,443,891 4,876,569
James A. Henderson 414,791,640 4,528,820
Robert A. Kennedy 414,745,389 4,575,071
W. Craig McClelland 414,509,347 4,811,113
Other directors whose terms of office continued after the meeting were
Samir G. Gibara, Robert J. Eaton, John R. Kennedy, Donald F. McHenry,
Patrick F. Noonan, Jane C. Pfeiffer, Jeremiah J. Sheehan, Charles R.
Shoemate and C. Wesley Smith.
(c) The shareholders approved the appointment of Arthur Andersen LLP as
International Paper's independent auditor for 2001. There were 407,221,998
votes cast in favor of the ratification, 9,167,883 votes cast against the
ratification, and 2,931,579 votes in abstention.
(d) N/A
28
ITEM 5. OTHER INFORMATION
On June 12, 2001, Standard & Poor's lowered International Paper's long-term
credit and senior long-term debt ratings from BBB+ negative to BBB stable and
affirmed our short-term and corporate credit and commercial paper ratings of
A-2.
On August 3, 2001, Moody's announced that it had placed International Paper's
senior unsecured debt and preferred stock under review for a possible downgrade.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment of the Certificate of
Incorporation of International Paper
4.1 In accordance with Item 601 (b) (4) (iii) (A) of
Regulation S-K, certain instruments respecting long-term
debt of the Company have been omitted but will be
furnished to the Commission upon request.
11 Statement of Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
Reports on Form 8-K were filed on April 18, 2001 and July 17,
2001 under Item 5 reporting earnings for the quarters ended
March 31, 2001, and June 30, 2001, respectively, and on June
13, 2001 under Item 5 containing the press release of
International Paper announcing the private offering of zero-
coupon convertible debentures.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(Registrant)
Date: August 13, 2001 By /s/JOHN V. FARACI
-----------------
John V. Faraci
Executive Vice President and Chief
Financial Officer
Date: August 13, 2001 By /s/ ANDREW R. LESSIN
--------------------
Andrew R. Lessin
Vice President-Finance and
Chief Accounting Officer
30