<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
March 10, 1994
Date of Report (Date of Earliest Event Reported)
INTERNATIONAL PAPER COMPANY
(Exact name of Registrant as specified in its charter)
New York 1-3157 13-0872805
(State of Commission (IRS Employer
Incorporation) File Identification
Number)
Two Manhattanville Road, Purchase, NY 10577
(Address of Principal executive offices)
914-397-1500
(Telephone No.)
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ITEM 1 CHANGES IN CONTROL OF REGISTRANT
N/A
ITEM 2 ACQUISITION OR DISPOSITION OF ASSETS
N/A
ITEM 3 BANKRUPTCY OR RECEIVERSHIP
N/A
ITEM 4 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
N/A
ITEM 5 OTHER EVENTS
N/A
ITEM 6 RESIGNATIONS OF REGISTRANT'S DIRECTORS
N/A
ITEM 7 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Audited Financial Statements, Selected Financial
Data and Management's Discussion and Analysis of
Financial Condition and Results of Operations for
the year ended December 31, 1993 are being filed
as Exhibit 99.
(b) Pro Forma Financial Information:
N/A
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(c) Exhibits:
(99) Audited Financial Statements, Selected
Financial Data and Management's Discussion
and Analysis of Financial Condition and
Results of Operations for the year ended
December 31, 1993.
ITEM 8 CHANGES IN FISCAL YEAR
N/A
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: March 10, 1994 /S/ SYVERT E. NERHEIM
Purchase, NY Syvert E. Nerheim
Assistant Secretary
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EXHIBIT INDEX
Exhibit Page
Number Number
______ ______
99 Audited Financial Statements, Selected
Financial Data and Management's Discussion
and Analysis of Financial Condition and
Results of Operations for the year ended
December 31, 1993.
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Financial Review Exhibit 99
PRINTING PAPERS
[BAR CHARTS-Appendix A No. 1]
Sales of Uncoated Papers, representing 51 percent of segment sales,
increased slightly in 1993 following a decline of 2 percent in 1992.
Although a loss was incurred, 1993 U.S. operating results showed
improvement over 1992 mainly due to price recovery. European results,
however, declined. Overall, 1993 results improved after a sharp
reduction in 1992.
U.S. prices moved up steadily until late in 1993 when
they weakened. However, prices at year-end were about $50 per ton higher
than at the end of 1992. In Europe, sharply lower volumes and prices
caused sales to decline by 13 percent. Operating margins were further
reduced when currencies of our export customers were devalued against
the French franc and German mark. Additionally, the devaluation of
Scandinavian currencies provided cost advantages to these producers,
causing price erosion in almost every market.
For 1994, we estimate that the increase in U.S. industry shipments of
uncoated papers will slightly exceed GDP growth, and operating rates
will sustain price increases. These factors, combined with cost
reduction efforts and the expansion of our line of recycled products,
should improve profitability. We expect 1994 operating results in Europe
to improve as local economies recover. Aussedat Rey implemented a price
increase in early 1994. Operating efficiency should also improve as
demand and sales volumes recover.
Sales of Coated Papers represented 26 percent of segment sales in 1993
compared with 30 percent in 1992 and 1991. Sales declined 12 percent in
1993 (although U.S. sales increased, European sales fell by 21 percent)
after a slight decline in 1992.
Continued low levels of magazine advertising and a surge of imports from
Europe limited our ability to raise prices in the United States. After a
midyear increase, prices retreated to levels slightly above those at
the beginning of the year. For the year, U.S. operating results improved
somewhat but were offset in Europe, where both volumes and prices
declined. Prices for Zanders premium coated products, however, were
relatively stable.
For 1994, we expect recovery in U.S. magazine advertising and growth in
catalogs and direct mail to increase demand for coated products. Price
recovery, however, will depend on the level of imports. In Europe, we
expect operating results to improve as volumes recover and aggressive
cost reduction efforts continue.
Bristols contributed about 8 percent to segment sales. Operating profits
declined 25 percent in 1993 versus a 37 percent decline in 1992. A 12
percent increase in volume was more than offset by lower average prices.
We expect profitability to improve in 1994 as our new product efforts
and marketing programs continue.
Pulp accounted for 15 percent of segment sales in 1993, up from 14
percent in 1992 and 1991.
Weak export markets, high industry inventories and a stronger U.S.
dollar led to weaker paper pulp prices. Additionally, the growing use of
thinner disposable diapers and increased industry capacity depressed
fluff pulp prices. These conditions resulted in an operating loss in
1993. Operating profit declined 5 percent in 1992.
We increased prices on paper pulps in early 1994 as wood shortages in
Scandinavia and increased paper output tightened supplies. However, we
expect pulp earnings to remain under pressure throughout the year.
Longer term improvement will depend on a stronger worldwide economy.
10
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Financial Review
PACKAGING
[BAR CHARTS-Appendix A No. 2]
Industrial Packaging accounts for just over 50 percent of segment sales.
Operating profits declined by 67 percent from 1992 due to depressed
U.S. and international economies, major shifts in exchange rates and
significant price erosion. In 1992, operating profits were slightly
ahead of 1991.
Despite 1993 growth of more than 5 percent in U.S. box shipments,
containerboard prices weakened until the final quarter of the year.
Increased U.S. consumption of containerboard was not sufficient to
offset a decline of 6 percent in exports. Containerboard inventories
declined, reaching a six-year low in October. These factors allowed
implementation of a $25 per-ton price increase in the United States in
the fourth quarter.
The U.S. container division benefited from increased demand for
high-performance linerboard for poultry and other food applications.
Competitive conditions, however, adversely affected prices. Despite
depressed economic conditions throughout Europe, our international
container division remained a strong contributor to earnings in 1993.
We are optimistic about 1994. U.S. containerboard capacity is expected
to grow at a rate of less than 2 percent in 1994, with operating rates
above 95 percent. Exports should recover as European economies improve
and China replenishes low inventories. Another price increase of $30 per
ton has been announced in the United States, as well as in European and
Asian markets.
Consumer Packaging accounted for 37 percent of segment sales in 1993
compared with 36 percent in 1992 and 39 percent in 1991. Operating
profits declined by 30 percent, after falling by 27 percent in 1992.
The principal source of pressure on bleached board industry profits over
the past few years has been a relatively rapid expansion in capacity,
forcing operating rates steadily downward. Over-supply, combined with
sharp devaluation of Scandinavian currencies in late 1992, has led to
aggressive pricing across world markets. Prices for major grades, which
began to decline in 1991, fell an additional 10 percent in 1993. Strong
customer acceptance of our high-quality Everest product line helped
limit the decline in operating profits. Prices for liquid packaging
products were also lower in 1993 and we incurred costs to realign
production facilities.
While we expect U.S. consumption of bleached folding carton board to
increase in 1994, we believe that industry operating rates will remain
static as the full impact of new capacity reaches the market and the
1993 buildup of inventory is consumed. Prices are trending downward,
with only limited recovery expected by late 1994. However, liquid
packaging results are expected to benefit from restructuring and
product development efforts.
Kraft Packaging contributed 13 percent of segment sales in 1993 and 12
percent in 1992. Operating profits declined 34 percent from 1992 due to
lower prices. We expect earnings to improve in 1994, as a result of
operating enhancements and modest price improvements.
16
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Financial Review
DISTRIBUTION
[BAR CHARTS-Appendix A No. 3]
Net sales for Distribution were $3.1 billion in 1993, up from $3.0
billion in 1992 and $2.6 billion in 1991. Operating profits for 1993
were $58 million compared with $52 million ($58 million before unusual
items) in 1992 and $53 million ($54 million before unusual items) in
1991. Acquisitions, aggressive marketing and cost control enabled us to
achieve solid results despite a sluggish printing market and a
competitive climate for reprographic papers.
Earnings of ResourceNet International, our U.S.-based distribution
business, increased 5 percent in 1993 after growing 10 percent in 1992.
Overall margins were down slightly in 1993, the result of a shift in the
sales mix toward direct sales. Margins on warehouse sales were
maintained and profits improved as we progressed in coordinating
nationwide operations. These changes began with the establishment of
geographic trading regions in early 1991 and included investments in
marketing, customer service and distribution logistics.
The benefits of these investments are being realized in the Greater
Boston market, where ResourceNet International is reconfiguring its
regional distribution system. Carter Rice, a fine paper merchant, and
The Dowd Company, an industrial products merchant, are joining to form a
single merchant organization that will capitalize on the strengths of
both businesses. The new Carter-Rice-Dowd organization will realize
additional efficiencies by consolidating sales, warehouse and
administrative functions. In other major markets, ResourceNet
International has identified similar opportunities and continues to
pursue them.
Significant resources have been committed to training sales and support
organizations and to the development of an integrated business and
customer information system.
In 1993, we broadened our North American group with two acquisitions:
Ingram Paper Company, expanding our West Coast market presence, and JB
Papers, Inc., serving printing papers markets in the New York
metropolitan area. Acquisitions in markets that will strengthen our
business will continue to be a part of our growth strategy. In 1991,
Dillard Paper Company, which serves Southeastern markets, and Leslie
Paper Company joined our system.
In Europe, poor demand and lower prices led to 1993 sales that were 15
percent lower than 1992 and to a larger operating loss. Most European
operations are in France, where the recession deepened in 1993.
Consolidating operations and reducing costs partially offset the lower
prices. We expect European business conditions to improve in 1994.
As International Paper expands its worldwide distribution business, we
will continue to improve productivity and customer response time and
reduce operating costs and working capital. Market position and earnings
should improve in 1994, although both demand in the printing market and
pricing will influence the extent and timing of improvement in results.
20
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Financial Review
SPECIALTY PRODUCTS
[BAR CHARTS-Appendix A No. 4]
Imaging Products sales represented 28 percent of segment sales in 1993
compared with 31 percent in 1992 and 34 percent in 1991. Continuing weak
economic conditions, as well as technological changes, depressed margins
in the graphic arts and film businesses. Currency translation effects
also contributed to lower margins, particularly in Europe, the
division's largest market. These factors led to declines of 9 percent in
sales and 64 percent in operating profit in 1993. Market share gains in
the offset plate and professional photography markets were a positive
factor. Also, extensive restructuring in the graphic arts business has
reduced manufacturing costs. Introduction of improved imagesetting films
and cooperative programs with Scitex are strengthening our position in
the expanding electronic imaging market. Emphasis on electronic imaging,
new products and reduced operating costs position the business to grow
in commercial printing markets, and should lead to improved earnings.
Specialty Panels accounted for 28 percent of segment sales in 1993
versus 25 percent in 1992 and 21 percent in 1991. Operating profit
improved 22 percent in 1993. The major contributor, CraftMaster molded
interior door facings, had volume increases in all markets . In
addition, siding products experienced strong demand. The outlook for
1994 is for even higher sales and earnings, led by door facings sales.
The December 1993 acquisition of Fome-Cor, a manufacturer of paper-faced
polystyrene foam boards that complements our graphic arts and signage
panels businesses, will also contribute to 1994 earnings.
Specialty Industrial Papers contributed 17 percent to segment sales.
Earnings improved 42 percent in 1993 after declining 25 percent in 1992.
Strong demand for release backing papers led to record shipments.
Successful cost reduction programs more than offset weak demand for
other products. Despite some downward pressure on prices, earnings
should remain strong in 1994 as shipments improve and further
productivity actions take effect.
Nonwovens contributed 12 percent to segment sales. Sales fell modestly
in 1993 as a result of technological changes in the consumer disposables
market, whereby major diaper manufacturers shifted from use of our
drylaid diaper coverstock to spunbond products. Growth in specialty
applications partially offset the sales decline. The start-up of a new
spunbond line in Toronto, Canada, in late 1994 and growth in new
products should strengthen sales and earnings.
Chemicals and Petroleum contributed 15 percent to segment sales in 1993.
Petroleum achieved record sales and earnings as the Sugg Ranch, a major
field in West Texas, increased production. Chemicals earnings increased
over 1992, most markedly in Europe. Contributing factors were lower raw
material costs, price increases and growth in specialty resins. In the
United States, specialty resin sales grew, offset by a decline in
commodity product volume and price. For 1994, we expect Petroleum will
experience a decline in earnings due to lower oil prices. However,
Chemicals sales and earnings should improve as commodity prices rise and
sales of specialty chemicals grow.
26
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Financial Review
FOREST PRODUCTS
[BAR CHARTS-Appendix A No. 5]
Forestland revenues reached record levels in 1993, increasing 15 percent
compared with an 11 percent increase in 1992. A surge in U.S. housing
starts combined with ongoing logging restrictions on federal lands in
the West led to 1993 stumpage prices that exceeded high prices set in
1992.
In the South, record lumber and panel prices spurred a significant
increase in demand for sawlogs as mills sought to increase production.
As a result, pine sawlog prices reached record levels by year-end.
Further, pulpwood prices advanced as greater use of small logs by wood
products plants, an increase in exports of hardwood chips and poor
weather conditions early in 1993 forced paper mills to compete for
available fiber. In the Northeast, strong demand for spruce-fir logs
from Canadian and U.S. lumber mills caused prices to increase. In the
West, domestic and export log prices also reached record levels in 1993
before softening slightly as the year ended.
Taking advantage of strong demand and record prices, IPT increased
harvest volumes 8 percent in 1993. The 1992 harvest was slightly below
1991 levels. The strong prices also supported an increase in sales of
nonstrategic forestlands in 1993. Together with stringent control over
operating expenses, the higher volumes and prices led to a 56 percent
increase in IPT's operating profits in 1993 after a 37 percent increase
in 1992.
Operating results in 1994 should continue to be strong as both prices
and demand were favorable as the year began. Expected further growth in
housing starts, resumption of exports to Japan, and continued strength
in repair and remodeling markets should cause prices to remain strong.
However, a short-term decline in the inventory of mature trees is
expected to lead to lower IPT harvests over the next several years.
Future harvests may be supplemented through forestland purchases where
economically advantageous.
Wood Products benefited from an increase in U.S. housing starts, which
were up 7 percent in 1993 after a 19 percent increase in 1992, reaching
the highest level since 1989. Combined with an improving U.S. economy,
this led to steadily increasing demand for lumber and panels as the year
progressed. In general, prices increased sharply in the first quarter
and, after easing during the summer months, trended steadily higher to
finish the year at record levels. Sales for the year were up 24 percent
after a 23 percent increase in 1992. Despite higher fiber costs due to
increased competition for tight stumpage supplies, operating earnings
for wood products were about double those of 1992.
Current favorable prices and continued strength in housing starts and
the repair and remodeling markets present an optimistic outlook for wood
products operations as 1994 begins.
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Financial Review
Management's Discussion and Analysis 36
Financial Information by Geographic Area 40
Financial Information by Industry Segment 41
Report of Management on Financial Statements 42
Report of Independent Public Accountants 42
Consolidated Statement of Earnings 43
Consolidated Balance Sheet 44
Consolidated Statement of Cash Flows 45
Consolidated Statement of Common Shareholders' Equity 46
Notes to Consolidated Financial Statements 47
Eleven-Year Financial Summary 54
Interim Financial Results 56
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
International Paper's 1993 consolidated net sales were $13.7 billion,
slightly higher than 1992 sales of $13.6 billion and 8% above 1991 sales
of $12.7 billion. Full-year contributions of companies acquired in 1991
were a major factor in the 1992 increase.
Sales from operations outside the United States decreased to $2.9
billion in 1993 from $3.4 billion in 1992 and $3.2 billion in 1991. Poor
European economic conditions resulted in lower prices and shipments.
U.S. export sales were $1.1 billion in 1993 compared with $1.2 billion
in 1992 and $1.1 billion in 1991.
Net earnings were $289 million or $2.34 per share in 1993 ($314 million
or $2.54 per share before the revaluation of deferred taxes to reflect
the increase in the U.S. federal income tax rate) versus $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) and
$184 million or $1.66 per share in 1991 ($452 million or $4.09 per share
before an accounting change and a charge for severance costs).
Profits continued to decrease in 1993 as the U.S. economy recovered
slowly and European economic conditions worsened. A continuing focus on
cost reduction helped minimize the decrease in profits. However,
generally weak prices led to reductions in Printing Papers and Packaging
results, offsetting a record-breaking year by our Forest Products
operations. Although Printing Papers prices in the United States
generally improved as the year progressed, European prices continued to
fall, with the segment losing $122 million in 1993. Price increases in
containerboard and some Printing Papers grades were announced in early
1994.
[BAR CHARTS-Appendix A No. 6]
Accounting Changes
As of January 1, 1992, International Paper adopted SFAS No. 109,
"Accounting for Income Taxes," which requires the liability method of
determining deferred income taxes. Net earnings were reduced by $50
million or $.41 per share for the cumulative effect of this change.
Also, in adopting SFAS No. 109, we revised our accounting for prior
acquisitions. As a result, 1992 depreciation expense increased by $41
million. However, there was no impact on net earnings because of an
offsetting deferred tax benefit.
The 1991 adoption of SFAS No. 106, requiring accrual accounting for
postretirement benefits, reduced 1991 earnings by $231 million or $2.10
per share. Of this, $215 million or $1.95 per share related to the
cumulative effect of the accounting change as of the beginning of the
year.
Restructuring and Other Charges
In 1992, International Paper recorded pre-tax charges of $370 million to
establish a productivity improvement reserve and $28 million for
environmental remediation and clean-up. 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, 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 (for employee severance, legal,
warranty, leases and miscellaneous items). Approximately 40% of the cash
costs were incurred in 1993 and, except for legal costs, we expect the
remainder to be spent equally in 1994 and 1995. We had projected that
annual savings-composed of lower personnel costs and depreciation and
the elimination of operating losses-would approach $75 million by the
end of 1994. We have realized 45% of the annual savings in 1993, and we
expect to reach 85% by the end of 1994 and to exceed $75 million in 1995
when actions are completed. No overall adjustment to the reserve balance
is anticipated at this time.
In 1991, a $60 million pre-tax charge ($37 million after taxes or $.33
per share) was recorded for personnel reductions of more than 1,000
positions worldwide. These reductions have now been implemented with
annual savings of over $30 million.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Cash Flow From Operations
International Paper continued to generate substantial cash flow in 1993
despite lower operating earnings. However, cash provided by operations
of $929 million in 1993 was below the $1.1 billion in 1992 and $1.2
billion in 1991. During 1993, working capital increased $290 million,
most of which was from lower accounts payable and accrued liabilities.
An increase in depreciation and amortization charges in 1993 to $898
million from $850 million in 1992 and $725 million in 1991 mitigated the
effect of lower net earnings on cash flow.
Capital Expenditures by Industry Segment
In millions for the years ended December 31 1993 1992 1991
- ------------------------------------------- ---- ------ ------
Printing Papers $429 $ 740 $ 604
Packaging 181 201 246
Distribution 13 14 14
Specialty Products 155 245 209
Forest Products 145 104 79
---- ------ ------
923 1,304 1,152
Corporate 31 64 45
---- ------ ------
Consolidated Total $954 $1,368 $1,197
---- ------ ------
---- ------ ------
Investment Activities
Capital spending of $954 million in 1993 was well below the $1.4 billion
and $1.2 billion spent in 1992 and 1991. This reduced spending reflects
completion of several major projects in late 1992 including Zanders' new
paper machine for the production of high-quality base papers and
expansion of Aussedat Rey's Saillat pulp mill.
As in recent years, 1993 capital spending largely focused on further
reduction of production costs, plant upgrades and incremental capacity
expansions, quality and productivity improvements, and environmental and
safety programs. During 1993, the project at Lock Haven, Pa., to produce
100% recycled-paper grades from postconsumer newspapers and magazines
was completed and started production late in the year. Also, one paper
machine at Kwidzyn, in Poland, was upgraded to improve productivity.
Capital spending for 1994 is expected to exceed $1.1 billion. Major
projects will focus on printing papers and packaging facilities. In the
United States, the design for a new, low-cost uncoated paper machine at
the Riverdale mill near Selma, Ala., was completed and the majority of
spending for this project will occur during 1994. In Europe, the $175
million capital investment program for Kwidzyn will continue.
Spending for acquisitions decreased substantially in 1993. In 1993, $35
million was spent and $22 million of debt was assumed to acquire certain
assets of Los Angeles-based Ingram Paper Company, a distributor of
industrial and fine writing papers, and the assets of Monsanto Company's
Fome-Cor division, a manufacturer of polystyrene foam boards. The
Company also acquired the assets of JB Papers, Inc., a paper
distribution company located in Union, N.J., by issuing 117,000 shares
of Company common stock.
In 1992, $153 million was spent and $30 million accrued, principally for
the acquisitions of Kwidzyn in Poland and Western Pacific in Oregon. The
Company also spent $209 million to acquire an equity interest in Scitex,
a world leader in color electronic prepress systems.
In 1991, $457 million was spent and $50 million of debt assumed to
acquire the Rhone Valley Packaging business, Evergreen Packaging
Equipment, Dillard Paper Company and Scaldia Papier BV. A merger with
Leslie Paper Company and the formation of a joint venture to control 32%
of Carter Holt Harvey Limited were also completed in 1991.
[BAR CHARTS-Appendix A Nos. 7 and 8]
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Financing Activities
In 1993, the Company issued $600 million of long-term debt as follows:
in March, $200 million of debentures due in 2023; in October, $200
million of debentures due in 2023; and in November, $200 million of
debentures due in 2003. The proceeds of all debentures were used mainly
to reduce short-term borrowings and secure favorable long-term interest
rates. Interest rate swaps were utilized to obtain the equivalent of
short-term rates during the first year of the October and November
financings.
In 1992, taking advantage of low interest rates, the Company increased
short-term borrowings by $657 million to, in part, retire $255 million
of high-rate long-term debt. Also, in January, 9.2 million shares of
common stock were sold in a public offering yielding $650 million, and
$200 million of 7 5/8% notes due in 2007 were issued. These proceeds were
principally used to retire higher rate debt outstanding at that time.
Net borrowings were $994 million in 1991, principally used to finance
acquisitions and large capital projects.
Common stock dividends per share were $.42 per quarter ($1.68 on an
annual basis) in 1993, 1992 and 1991. Payments were $208 million in
1993, $206 million in 1992 and $186 million in 1991.
Capital Resource Outlook for 1994
Cash flow from operations is expected to be adequate to meet internal
capital expenditures, working capital and dividend requirements. A
strong balance sheet (debt to capital ratio of 39% in 1993, up from 38%
in 1992 and comparable with 39% in 1991) supporting an investment-grade
debt rating allows ready access to financial markets to take advantage
of external investment and favorable financing opportunities.
[BAR CHART-Appendix A No. 9]
Other Financial Statement Items
Net interest expense increased to $310 million in 1993 from $247 million
in 1992 and down from $315 million in 1991. 1992's net interest
benefited from tax-related interest income and higher capitalized
interest related to two major European capital projects that are now
completed.
The effective tax rate for 1993 increased to 42% (37% before the
revaluation of deferred tax balances) of pre-tax income compared with
31% in 1992 and 37% in 1991. The adoption of SFAS No. 109 and the tax
benefit at statutory rates of the productivity improvement and other
charges in 1992 contributed to 1992's lower rate. The increase in the
rate for 1993 results from the increase in the U. S. statutory federal
income tax rate of 1%, which also increased deferred taxes by $25
million.
During 1993, the Company recognized tax benefits amounting to $55
million related to losses at certain of its non-U.S. operations,
increasing noncurrent deferred tax assets to $115 million at December
31, 1993. The Company believes that it is more likely than not that
these assets will be realized.
Environmental Issues
Given the nature of its businesses, International Paper is closely
linked to the environment. Increasingly demanding environmental laws and
regulations have resulted in significant capital spending to meet or
exceed air, water and solid waste disposal standards. Environmental
capital expenditures totaled $100 million in 1993, $126 million in 1992
and $107 million in 1991. Capital spending to increase recycling
capacity totaled $102 million, $35 million and $5 million in 1993, 1992
and 1991, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
International Paper has made good progress protecting the environment.
For example, the Company has reduced by 72% the release of certain
chemicals targeted by the Environmental Protection Agency (EPA) under a
voluntary program and met its 1995 goal ahead of schedule. Further, the
Company reached agreement with the U.S. Fish and Wildlife Service to
protect the habitats of threatened species, and initiated a program to
recover and recycle milk and juice cartons.
In 1993, the EPA released its proposal, known as "Cluster Rulemaking,"
to coordinate and integrate the requirements for air emissions and water
discharge for the pulp and paper industry to meet in 1998. Further in
1993, the EPA issued proposed regulations implementing the "Great Lakes
Initiative" (GLI), which covers minimum water quality and implementation
procedures. Spending to meet the GLI regulations, which still need to be
finalized and then adopted by the participating states, is not likely to
occur until 1998. Future spending will be heavily influenced by the
final standards included within each of the sets of proposed
regulations. However, we estimate the Company's future capital spending
to comply with the Cluster Rulemaking and GLI requirements to be between
$700 million and $1.5 billion, depending upon the methods allowed by the
regulations to meet overall requirements. In addition, annual operating
costs, excluding depreciation, are expected to increase between $60
million and $120 million when these changes are fully implemented in
1998.
The Company paid fines and penalties related to environmental issues of
$400,000, $1.6 million and $3.6 million for the years 1993, 1992 and
1991, respectively. Reviews have been completed by federal and state
environmental agencies at certain Company facilities to determine if all
permits required under law have been obtained. Any fines arising from
these reviews should not have a material effect on the Company's future
financial condition or results of operations.
In the fourth quarter of 1992, agreement was reached with the State of
New York concluding an investigation of the Company's Anitec facility in
Binghamton, N.Y. Under the agreement, the Company agreed to pay a civil
penalty, reimburse state expenses, fund a community emergency planning
program, and implement a remediation plan to clean up soil and
groundwater contamination. Estimated costs of remediation were accrued
in 1992.
In May 1992, the EPA issued an order alleging that Masonite failed to
obtain a permit required for operation of a production line added in
1989 to its Ukiah, Calif., facility. Two additional lawsuits related to
the facility were filed by state and county officials alleging
noncompliance with certain aspects of state law and late filing of a
required emissions plan. The state and county lawsuits were settled
during 1993 and settlement of the EPA action is expected in 1994. None
of the settlements had or will have a material effect on the Company's
future financial condition or results of operations.
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. Although no
International Paper case has yet gone to trial, one case involving the
Company's Texarkana, Texas, facility was settled in late 1993 without
any admission or finding of liability. Due to aggressive solicitations
by plaintiffs' attorneys, cumulative damage claims totaled more than
$9.4 billion by the end of 1993, principally 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 reasonably
estimable. Although these costs have increased in recent years,
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 page 60 of this annual 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.
Financial Review by Segment
Management's Discussion and Analysis of results of operations by
industry segment is set forth on pages 10 (Printing Papers), 16
(Packaging), 20 (Distribution), 26 (Specialty Products) and 30 (Forest
Products), and is incorporated herein by reference.
39
<PAGE>
FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Net Sales
In millions 1993 1992 1991
- ----------- ------- ------- -------
United States 1 $11,085 $10,524 $ 9,811
Europe 2,586 3,030 2,833
Other 340 347 318
Less: Intergeographic Sales (326) (303) (259)
------- ------- -------
Net Sales $13,685 $13,598 $12,703
------- ------- -------
------- ------- -------
1 Export sales to unafliated customers (in millions) were $1,100 in
1993, $1,200 in 1992 and $1,100 in 1991.
Assets
In millions 1993 1992 1991
- ----------- ------- ------- -------
United States $10,999 $10,680 $10,207
Europe 3,512 3,832 3,153
Other 2 820 812 518
Corporate 1,300 1,192 1,063
------- ------- -------
Assets $16,631 $16,516 $14,941
------- ------- -------
------- ------- -------
2 Includes investments in Scitex Corporation Ltd. (1993 and 1992).
Operating Profit
In millions 1993 1992 1991
- ----------- ------- ------- -------
United States 3 $833 $511 $871
Europe 3,4,5 (23) 41 143
Other 22 18 24
------- ------- -------
Operating Profit $832 $570 6 $1,038 7
------- ------- -------
------- ------- -------
3 Includes additional depreciation related to SFAS No. 109 of $22
million in the United States and $19 million in Europe in 1993 and 1992.
4 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. See Note 3 on page 48.
5 While net sales includes 100% of Zanders' sales, operating profit is
adjusted for minority interests.
6 Includes restructuring and other charges totaling $336 million.
7 Includes a $50 million restructuring charge.
Sales in the United States increased in 1993 to $11.1 billion, up 5%
from 1992, after a 7% increase in 1992. However, European sales declined
15% in 1993 to $2.6 billion after a 7% increase in 1992 to $3.0 billion.
While the European units within our Packaging and Specialty Products
segments remained profitable, European operations as a whole produced an
operating loss of $23 million in 1993 compared with a $41 million profit
in 1992 ($74 million before the productivity improvement charge) and
$143 million in 1991.
France and Germany, the predominant European economies, were in a
recession in 1993 with real GDP falling by .8% and 1.9%, respectively.
These weak economic conditions, combined with strong currencies in these
countries where much of our European paper production is sited,
resulted in sharply lower prices and shipments, particularly for coated
and uncoated papers. While cost reductions helped limit the impact of
the downturn, our European Printing Papers operations realized a loss in
1993.
We believe that prices have now reached their cyclical lows and results
should improve in the latter part of 1994 as European economies resume
growth. An indicator of this improvement is the price increases
implemented by Aussedat Rey early in 1994.
European Sales by Business Segment
In millions 1993 1992 1991
- ----------- ------ ------ ------
Printing Papers $1,016 $1,172 $1,150
Packaging 513 675 580
Distribution 284 335 282
Specialty Products 710 791 794
Forest Products 63 57 27
------ ------ ------
European Sales $2,586 $3,030 $2,833
------ ------ ------
------ ------ ------
Equity Investments (unaudited)
International Paper owns a 12% interest in Scitex Corporation Ltd., a
world leader in color electronic prepress systems for the graphic
design, printing and publishing industries. Scitex, with annual 1993
revenues of $623 million, is headquartered in Israel, with most of its
sales to European, North American and Japanese customers. For the year
ended December 31, 1993, Scitex reported net income of $94 million,
which was 23% below 1992 and about equal to 1991. The 1993 results were
adversely impacted by a decline in revenues in Europe and lower gross
margins related to product mix. Focused research and development,
aggressive marketing and strong cost control point to continued
long-term growth.
The Company is a partner in a 50:50 joint venture that holds 32% of Cart
er Holt Harvey Limited (CHH), a New Zealand-based forest products
company with substantial assets in Chile. CHH has annual sales of about
$1.3 billion. For the six months ended September 30, 1993, CHH reported
a 47% increase in profits to about $90 million. Results were led by
forest and wood products operations with record-high prices for export
logs to Asia.
40
<PAGE>
FINANCIAL INFORMATION BY INDUSTRY SEGMENT
Net Sales
In millions 1993 1992 1991
- ----------- ------- ------- -------
Printing Papers $ 3,905 $ 4,040 $ 4,075
Packaging 3,095 3,245 3,030
Distribution 3,140 2,980 2,590
Specialty Products 2,460 2,460 2,335
Forest Products 1,700 1,410 1,190
Less: Intersegment Sales (615) (537) (517)
------- ------- -------
Net Sales $13,685 $13,598 $12,703
------- ------- -------
------- ------- -------
Operating Profit
In millions 1993 1992 1991
- ----------- ----- ----- ------
Printing Papers $(122) $(70) $ 298
Packaging 188 308 334
Distribution 58 52 53
Specialty Products 263 83 227
Forest Products 445 197 126
----- ----- ------
Operating Profit 832 570 1,038
Interest Expense, net (310) (247) (315)
Corporate Items, net (22) (117) (85)
----- ----- ------
Earnings Before Income
Taxes, Extraordinary
Item and Cumulative
Effect of Accounting
Changes $ 500 $ 206 $ 638
----- ----- ------
----- ----- ------
Assets
In millions 1993 1992 1991
- ----------- ------- ------- -------
Printing Papers $ 6,466 $ 6,566 $ 5,448
Packaging 3,011 3,090 3,118
Distribution 1,085 1,062 1,008
Specialty Products 2,607 2,585 2,427
Forest Products 1,603 1,522 1,619
Investment in:
Carter Holt Harvey 331 285 258
Scitex 228 214
Corporate 1 1,300 1,192 1,063
------- ------- -------
Assets $16,631 $16,516 $14,941
------- ------- -------
------- ------- -------
1 Corporate assets are principally cash and temporary investments,
investments and other assets that are not identifiable with industry
segments.
Depreciation, Depletion and Amortization
In millions 1993 1992 1991
- ----------- ---- ---- ----
Printing Papers $414 $392 $328
Packaging 213 211 191
Distribution 28 30 20
Specialty Products 180 152 129
Forest Products 93 84 76
Corporate 10 14 11
---- ---- ----
Depreciation, Depletion
and Amortization $938 2 $883 2 $755
---- ---- ----
---- ---- ----
2 Increased by $41 million in both 1993 and 1992 for additional
depreciation related to the adoption of SFAS No. 109.
Industry Segment Contributions
Earnings before income taxes were $500 million in 1993, $206 million
($604 million before the $370 million productivity improvement charge
and $28 million of environmental charges) in 1992 and $638 million ($698
million before the reduction in force charge) in 1991. Discussions of
operating results by business segment are set forth on pages 10
(Printing Papers), 16 (Packaging), 20 (Distribution), 26 (Specialty
Products) and 30 (Forest Products). The following table portrays 1993,
1992 and 1991 industry segment contributions:
<TABLE>
<CAPTION>
Restruct-
Operating Profit turing
Before and
Restructuring and Other Operating
Other Charges Charges Profit
-------------------- ---------- --------------------
In millions 1993 1992 1991 1992 1991 1993 1992 1991
- ----------- ----- ----- ------ ---- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Printing Papers $(122) $ 19 $ 318 $ 89 $20 $(122) $ (70) $ 298
Packaging 188 330 346 22 12 188 308 334
Distribution 58 58 54 6 1 58 52 53
Specialty Products 263 238 244 155 17 263 83 227
Forest Products 445 261 126 64 445 197 126
----- ----- ------ ---- --- ----- ----- ------
Operating Profit 832 906 1,088 336 50 832 570 1,038
Interest Expense, net (310) (247) (315) (310) (247) (315)
Corporate Items, net (22) (55) (75) 62 10 (22) (117) (85)
----- ----- ------ ---- --- ----- ----- ------
Earnings Before Income Taxes,
Extraordinary Item and Cumulative
Effect of Accounting Changes $ 500 $ 604 $ 698 $398 $60 $ 500 $ 206 $ 638
----- ----- ------ ---- --- ----- ----- ------
----- ----- ------ ---- --- ----- ----- ------
</TABLE>
Industry segment data for 1992 and 1991 has been restated to reclassify
certain operations from Packaging and Forest Products to Specialty
Products to conform with the current-year presentation.
41
<PAGE>
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
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, 1993 and 1992, and the related consolidated statements
of earnings, common shareholders' equity and cash flows for each of the
three years ended December 31, 1993. 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, 1993 and
1992, and the results of their operations and their cash flows for each
of the three years ended December 31, 1993, in conformity with generally
accepted accounting principles.
As explained in Notes 5 and 11 to the financial statements, effective
January 1, 1992, the Company changed its method of accounting for income
taxes, and effective January 1, 1991, changed its method of accounting
for postretirement benefits.
Arthur Anderson & Co.
New York, N.Y.
February 4, 1994
42
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS
In millions, except per share amounts,
for the years ended December 31 1993 1992 1991
- -------------------------------------- ------- ------- -------
Net Sales $13,685 $13,598 $12,703
------- ------- -------
Costs and Expenses
Cost of products sold 10,191 10,137 9,316
Depreciation and amortization 898 850 725
Distribution expenses 634 629 569
Selling and administrative expenses 999 981 945
Taxes other than payroll and income taxes 153 150 135
Restructuring charges 370 60
Other 28
------- ------- -------
Total Costs and Expenses 12,875 13,145 11,750
------- ------- -------
Earnings Before Interest, Income Taxes,
Extraordinary Item and Cumulative Effect of
Accounting Changes 810 453 953
Interest expense, net 310 247 315
------- ------- -------
Earnings Before Income Taxes, Extraordinary Item
and Cumulative Effect of Accounting Changes 500 206 638
Provision for income taxes (includes $25 in
1993 related to the increase in the U.S.
statutory federal income tax rate) 211 64 239
------- ------- -------
Earnings Before Extraordinary Item and Cumulative
Effect of Accounting Changes 289 142 399
Extraordinary item--loss on extinguishment of
debt (less tax benefit of $3)--Note 8 (6)
Cumulative effect of change in accounting for
income taxes--Note 5 (50)
Cumulative effect of change in accounting for
postretirement benefits (less deferred tax
benefit of $135)--Note 11 (215)
------- ------- -------
Net Earnings $ 289 $ 86 $ 184
------- ------- -------
------- ------- -------
Earnings per Common Share
Earnings before extraordinary item and
cumulative effect of accounting changes $ 2.34 $ 1.17 $ 3.61
Extraordinary item--loss on extinguishment
of debt--Note 8 (.05)
Cumulative effect of change in accounting for
income taxes--Note 5 (.41)
Cumulative effect of change in accounting for
postretirement benefits--Note 11 (1.95)
------- ------- -------
Earnings per Common Share $ 2.34 $ .71 $ 1.66
------- ------- -------
------- ------- -------
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
CONSOLIDATED BALANCE SHEET
In millions at December 31 1993 1992
- -------------------------- ------- -------
Assets
Current Assets
Cash and temporary investments, at cost,
which approximates market $ 242 $ 225
Accounts and notes receivable, less allowances of
$104 in 1993 and $91 in 1992 1,856 1,861
Inventories 2,024 1,938
Other current assets 279 342
------- -------
Total Current Assets 4,401 4,366
------- -------
Plants, Properties and Equipment, Net 8,872 8,884
Forestlands 786 759
Investments 631 599
Goodwill 754 772
Deferred Charges and Other Assets 1,187 1,136
------- -------
Total Assets $16,631 $16,516
------- -------
------- -------
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 2,089 $ 2,356
Accounts payable 1,089 1,259
Accrued payroll and benefits 181 173
Accrued income taxes 97 104
Other accrued liabilities 553 639
------- -------
Total Current Liabilities 4,009 4,531
------- -------
Long-Term Debt 3,601 3,096
Deferred Income Taxes 1,614 1,474
Minority Interest and Other Liabilities 1,182 1,226
Commitments and Contingent Liabilities--Note 6
Common Shareholders' Equity
Common stock, $1 par value; issued 1993--127.3 shares,
1992--127.0 shares 127 127
Paid-in capital 1,704 1,792
Retained earnings 4,553 4,472
------- -------
6,384 6,391
Less: Common stock held in treasury, at cost;
1993--3.4 shares, 1992--4.3 shares 159 202
------- -------
Total Common Shareholders' Equity 6,225 6,189
------- -------
Total Liabilities and Common Shareholders' Equity $16,631 $16,516
------- -------
------- -------
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
In millions for the years ended December 31 1993 1992 1991
- ------------------------------------------- ------- ------- -------
Operating Activities
Net earnings $ 289 $ 86 $ 184
Cumulative effect of accounting changes 50 215
Noncash items
Depreciation and amortization 898 850 725
Deferred income taxes 54 (99) 30
Restructuring and other charges 398 60
Other, net (22) (95) 45
Changes in current assets and liabilities
Accounts and notes receivable 78 2 79
Inventories (93) (127) (74)
Accounts payable and accrued liabilities (272) (2) (122)
Other (3) 15 35
------- ------- -------
Cash Provided by Operations 929 1,078 1,177
------- ------- -------
Investment Activities
Invested in capital projects (954) (1,368) (1,197)
Mergers and acquisitions
Plants, properties and equipment (17) (163) (131)
Goodwill (9) (13) (211)
Other assets and liabilities, net (9) 23 (115)
Investments in affiliated companies (9) (247) (258)
Other (124) (104) (56)
------- ------- -------
Cash Used for Investment Activities (1,122) (1,872) (1,968)
------- ------- -------
Financing Activities
Issuance of common stock 60 703 45
Sale of limited partnership interests 165
Issuance of debt 1,276 1,852 1,583
Reduction of debt (1,016) (1,458) (589)
Dividends paid (208) (206) (186)
Other (62) (102) (76)
------- ------- -------
Cash Provided by Financing Activities 215 789 777
------- ------- -------
Effect of Exchange Rate Changes on Cash (5) (8) (4)
------- ------- -------
Change in Cash and Temporary Investments 17 (13) (18)
Cash and Temporary Investments
Beginning of the year 225 238 256
------- ------- -------
End of the year $ 242 $ 225 $ 238
------- ------- -------
------- ------- -------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Stock Common
Issued Treasury Stock Share-
---------------- Paid-In Retained --------------- holders'
In millions, except share amounts in thousands Shares Amount Capital 1 Earnings Shares Amount Equity
- ---------------------------------------------- ------- ------ --------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1991 117,303 $117 $1,243 $4,581 7,594 $309 $5,632
Conversion of subordinated debentures 33 (1,244) (43) 76
Issuance of stock for merger (7) 13 (512) (13) 19
Issuance of stock for various plans 275 1 39 (714) (18) 58
Cash dividends--Common stock ($1.68 per
share) (186) (186)
Foreign currency translation (less tax
benefit of $10) (44) (44)
Net earnings 184 184
------- ---- ------ ------ ------ ---- ------
Balance, December 31, 1991 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
------- ---- ------ ------ ------ ---- ------
------- ---- ------ ------ ------ ---- ------
</TABLE>
1 The cumulative foreign currency translation adjustment was $(280)
million, $(152) million and $(12) million at December 31, 1993, 1992
and 1991, respectively.
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
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% or more, and the Company's
investments in Carter Holt Harvey Limited and 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%, and machinery and equipment, 5% to 33%.
For tax purposes, depreciation is computed utilizing accelerated
methods.
Start-up costs on major projects are capitalized and amortized over a
five-year period. Unamortized start-up costs were $125 million, $126
million and $93 million at December 31, 1993, 1992 and 1991,
respectively.
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 $12 million in
1993, $42 million in 1992 and $36 million in 1991. Interest payments
during 1993, 1992 and 1991 were $372 million, $363 million and $385
million, respectively.
Forestlands
The Company, which currently owns 84% and 100% of IPT's Class A and
Class B Units, respectively, controlled approximately 6.2 million acres
of forestlands in the United States at December 31, 1993. 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 International Currencies
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.
The Company enters into foreign exchange contracts to hedge a portion of
its investment in overseas operations. Gains and losses resulting from
these contracts are determined monthly based on published currency
exchange rates and are recorded as translation adjustments in paid-in
capital. At December 31, 1993, contracts in various currencies totaling
$2.6 billion were outstanding based on year-end exchange rates. Gains of
$68 million related to these outstanding contracts have been included in
paid-in capital. These gains are offset by losses from the revaluation
of the net assets being hedged.
Amortization of Intangible Assets
Goodwill, the cost in excess of assigned value of businesses acquired,
is amortized over 40 years. Accumulated amortization was $101 million
and $77 million at December 31, 1993 and 1992, 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): 1993--123.2;
1992--121.4; 1991--110.5. 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.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Industry Segment Information
Financial information by industry segment and geographic area for 1993,
1992 and 1991 is presented on pages 37, 40 and 41.
Note 3. Mergers and Acquisitions
In April 1993, the Company acquired certain assets of the Los
Angeles-based Ingram Paper Company (Ingram), a distributor of industrial
and fine printing papers. In December, JB Papers, Inc. (JB Papers), a
paper distribution company located in Union, N.J., was purchased. Also
in December, the assets of Monsanto Company's Kentucky-based Fome-Cor
division, a manufacturer of polystyrene foam boards, were acquired. The
consolidated balance sheet as of December 31, 1993 includes a
preliminary allocation of the purchase prices for Ingram, JB Papers and
Fome-Cor, which will be finalized in 1994.
During the first quarter of 1992, the operating assets of Western Paper
Company (Western Pacific), a printing and industrial distribution
business based in Portland, Ore., were purchased. In the second quarter,
the Company acquired an equity interest in Scitex Corporation Ltd.
(Scitex), an Israeli-based world leader in color electronic prepress
systems for the graphic design, printing and publishing industries. In
the third quarter, 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. In the fourth quarter,
certain assets of the chemical division of M. Peterson & Son AS
(Peterson) were acquired.
During the first quarter of 1991, the Company purchased certain
packaging and sheeting facilities located in France previously owned by
Georgia-Pacific Corporation (the Rhone Valley Packaging business). In
April, the packaging equipment division of United Dominion Industries
Ltd. (Evergreen Packaging Equipment) was purchased. Also in April, the
Company acquired the common stock of Dillard Paper Company, a domestic
wholesale distributor of printing and industrial papers, packaging
equipment and supplies. In August, the Company completed a merger with
Leslie Paper Company, a paper distribution firm headquartered in
Minneapolis, Minn. In November, the Company entered into an agreement
with Brierley Investments Limited to control 32% of Carter Holt Harvey
Limited, a major New Zealand forest products and paper company. In
December, the common stock of Scaldia Papier BV, a paper distribution
company based in Nijmegen, Netherlands, was purchased.
All of the 1993, 1992 and 1991 acquisitions, except the merger with
Leslie Paper Company, 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, individually or 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, 1993, 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 $197 million of borrowings from these partnerships.
These funds are being used for general corporate purposes.
Note 4. Restructuring and Other Charges
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 clean-up. Of the total productivity
improvement charge, $328 million was 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.
In December 1991, the Company recorded a $60 million ($37 million after
taxes or $.33 per share) reduction in force charge to cover severance
costs associated with the elimination of more than 1,000 positions from
its worldwide work force.
48
<PAGE>
Notes to Consolidated Financial Statements
Note 5. 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 includes a charge of $25 million ($.20 per
share) for deferred tax expense resulting from the August enactment of
the Omnibus Budget Reconciliation Act of 1993, which raised the federal
income tax rate by 1% retroactive to 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. For 1992 this change also
increased depreciation and amortization expense and decreased the
provision for income taxes by approximately $41 million. In addition,
plants, properties and equipment and deferred income taxes each
increased by approximately $500 million 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 1993 1992 1991
- ----------- ---- ---- ----
Earnings (losses)
U.S. $577 $134 $505
Non-U.S. (77) 72 133
---- ---- ----
Earnings before income taxes,
extraordinary item and cumulative
effect of accounting changes $500 $206 $638
---- ---- ----
---- ---- ----
In millions 1993 1992 1991
- ----------- ---- ---- ----
Current tax provision
U.S. federal $114 $120 $151
U.S. state and local 12 14 9
Non-U.S. 31 29 49
---- ---- ----
157 163 209
---- ---- ----
Deferred tax provision
U.S. federal 64 (79) 15
U.S. state and local 20 (17) 5
Non-U.S. (55) (3) 10
U.S. federal rate change 25
---- ---- ----
54 (99) 30
---- ---- ----
Provision for income taxes $211 $ 64 $239
---- ---- ----
---- ---- ----
Major components of deferred income taxes relate to alternative minimum
tax credits, non-U.S. net operating losses, accelerated depreciation,
restructuring accruals, pension cost funding, adoption of SFAS No. 109
and the U.S. statutory federal income tax rate change.
The Company made income tax payments of $156 million, $130 million and
$247 million in 1993, 1992 and 1991, respectively.
A reconciliation of income tax expense using the statutory U.S. income
tax rate compared to the Company's actual income tax expense follows:
In millions 1993 1992 1991
- ----------- ---- ---- ----
Earnings before income taxes,
extraordinary item and cumulative
effect of accounting changes $500 $206 $638
Statutory U.S. income tax rate 35% 34% 34%
---- ---- ----
Tax expense using statutory U.S.
income tax rate 175 70 217
State and local taxes 21 (2) 9
Goodwill 7 18 4
Foreign sales corporation benefit (6) (6) (9)
U.S. federal rate change 25
Tax credits (9) (6) (1)
Other, net (2) (10) 19
---- ---- ----
Provision for income taxes $211 $ 64 $239
---- ---- ----
Effective income tax rate 42% 31% 37%
---- ---- ----
---- ---- ----
The net deferred income tax liability as of December 31, 1993 and 1992
includes the following components:
In millions 1993 1992
- ----------- ------- -------
Current deferred tax asset $ 176 $ 213
Noncurrent deferred tax asset 115 57
Noncurrent deferred tax liability (1,614) (1,474)
------- -------
Total $(1,323) $(1,204)
------- -------
------- -------
The tax effects of significant temporary differences representing
deferred tax assets and liabilities at December 31, 1993 and 1992 were
as follows:
In millions 1993 1992
- ----------- ------- -------
Plants, properties and equipment $(1,644) $(1,460)
Prepaid pension costs (204) (156)
Postretirement benefit accruals 150 163
Alternative minimum tax credit
carryforwards 92 70
Non-U.S. net operating losses 115 57
Other 168 122
------- -------
Total $(1,323) $(1,204)
------- -------
------- -------
At December 31, 1993, the Company had alternative minimum tax credit
carryforwards of approximately $92 million that can be carried forward
indefinitely. The Company had net operating loss carryforwards
applicable to non-U.S. subsidiaries of which $137 million expires in
years 1997 through 2003 and $206 million can be carried forward
indefinitely.
Deferred taxes are not provided for temporary differences of
approximately $385 million and $440 million as of December 31, 1993 and
1992, 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.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Commitments and Contingent Liabilities
The Company leases certain property, machinery and equipment under
cancelable and noncancelable lease agreements. At December 31, 1993,
total future minimum rental commitments under noncancelable leases were
$305 million, due as follows: 1994--$68 million, 1995--$55 million,
1996--$46 million, 1997--$39 million, 1998--$35 million and
thereafter--$62 million.
The Company is involved in various inquiries, administrative proceedings
and litigation relating to contracts, sales of property, environmental
protection, tax, anti-trust 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 7. Supplementary Balance Sheet Information
Inventories by major category were:
In millions at December 31 1993 1992
- -------------------------- ------ ------
Raw materials $ 380 $ 354
Finished pulp, paper and packaging
products 1,017 964
Finished imaging products 164 192
Finished lumber and panel products 79 70
Operating supplies 324 310
Other 60 48
------ ------
Inventories $2,024 $1,938
------ ------
------ ------
Total inventories at December 31, 1991 were approximately $1.8 billion.
Approximately 72% 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 $160 million, $168 million
and $183 million at December 31, 1993, 1992 and 1991, respectively.
Plants, properties and equipment by major classification were:
In millions at December 31 1993 1992
- -------------------------- ------- -------
Pulp, paper and packaging facilities
Mills $10,996 $10,588
Packaging plants 1,138 1,067
Wood products facilities 1,178 1,082
Other plants, properties and equipment 1,865 1,801
------- -------
Gross cost 15,177 14,538
Less: Accumulated depreciation 6,305 5,654
------- -------
Plants, properties and equipment, net $ 8,872 $ 8,884
------- -------
------- -------
Note 8. Debt and Lines of Credit
A summary of long-term debt follows:
In millions at December 31 1993 1992
- -------------------------- ------ ------
9.4% to 9.7% notes--due 1995-2002 $ 400 $ 400
7 5/8% notes--due 2007 199 199
7 5/8% notes--due 2023 199
6 1/8% notes--due 2003 199
6 7/8% notes--due 2023 197
Medium-term notes--due 1994-2006 1 549 589
9 3/8% French franc note--due 1994 95 94
5 1/8% debentures--due 2012 78 77
5 3/4% convertible subordinated debentures--
due 2002 2 199 199
Environmental and industrial development bonds 3,4 747 750
Commercial paper 5 516 473
Other 6 401 414
------ ------
Total 3,779 7 3,195
Less: Current maturities 178 99
------ ------
Long-term debt $3,601 $3,096
------ ------
------ ------
1 The weighted average interest rate on these notes was 8.7% in both
1993 and 1992.
2 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.
3 The weighted average interest rate on these bonds was 5.3% in 1993 and
6.4% in 1992.
4 Includes $279 million and $284 million of bonds at December 31,1993
and 1992, respectively, which may be tendered at various dates and/or
under certain circumstances.
5 The average interest rate based on a weighted average of stated
month-end rates was 3.5% in 1993 and 4.2% in 1992.
6 Includes $95 million in 1993 and $104 million in 1992 of French franc
borrowings with a weighted average interest rate of 5.6% in 1993
and 6.6% in 1992, and $214 million in 1993 and $190 million in
1992 of German mark borrowings with a weighted average interest rate of
6.6% in 1993 and 5.1% in 1992.
7 The fair market value is approximately $4.0 billion.
At December 31, 1993 and 1992, the Company classified $795 and $760
million, respectively, of tenderable bonds and commercial paper as
long-term debt. The Company has the intent and ability to renew or
convert these obligations through 1994 and into future periods.
Total maturities of long-term debt over the next five years are:
1994--$178 million, 1995--$1,104 million, 1996--$234 million, 1997--$152
million and 1998--$123 million. The 1995 amount includes $795 million
under a revolving credit agreement that will be rolled over before
maturity.
At December 31, 1993, the Company had unused bank lines of credit of
approximately $1.5 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 $795 million of credit through November
1995, cancelable only if the Company's bond rating drops below
investment grade. A facility fee of .125% to .25% of the line is payable
annually.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes payable at December 31, 1993 included $245 million of French
franc-denominated borrowings with a weighted average interest rate of
7.6%.
The Company has entered into certain cross-currency and interest rate
swap agreements. In November 1993, the Company entered into interest
rate swap agreements that effectively converted $400 million of
fixed-rate 10- and 30-year notes with interest rates of 6 1/8% to 6 7/8%
to adjustable-rate debt. During the first year, interest rates are
adjustable at six-month intervals based on LIBOR. After the first year,
interest is payable at fixed rates slightly above the stated coupon
rates. Additionally, a cross-currency swap agreement provides that in
April 1994, the Company will pay 14 million British pounds plus interest
at an 11.34% average rate and will receive about $21 million plus
interest based on commercial paper rates. The risk of loss to the
Company for nonperformance by any party to these agreements is not
significant.
In 1992, an extraordinary loss of $6 million after taxes ($.05 per
share) was recorded for the extinguishment of high-interest-rate debt.
Note 9. Capital Stock
The authorized capital stock of the Company at December 31, 1993 and
1992 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 10. Retirement Plans
The Company maintains numerous noncontributory pension plans that
provide retirement benefits to substantially all employees. Employees
generally are eligible to participate in the plans upon commencement of
employment and become fully vested after five years of service.
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). 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 1993 1992 1991
- ----------- ----- ----- -----
Service cost--benefits earned during the period $ (43) $ (43) $ (40)
Interest cost on projected benefit obligation (143) (136) (129)
Actual return on plan assets 291 135 565
Net amortization and deferrals (18) 125 (331)
----- ----- -----
Net periodic pension income $ 87 $ 81 $ 65
----- ----- -----
----- ----- -----
The actuarial assumptions used in determining net periodic pension costs
for the years presented were:
1993 1992 1991
----- ----- ----
Discount rate 8.0% 8.0% 8.5%
Expected long-term return on plan assets 10.0% 10.0% 9.5%
Weighted average rate of increase in
compensation levels 5.0% 5.0% 5.5%
----- ----- -----
----- ----- -----
The discount rates and the rates of increase in future compensation
levels used to determine the projected benefit obligations at December
31, 1993 were 7.25% and 4.0%, respectively, and at December 31, 1992
were 8.0% and 5.0%, respectively.
The following table presents the funded status of the Company's pension
plans and the amounts reflected in the accompanying consolidated balance
sheet:
In millions at December 31 1993 1992
- -------------------------- ------ ------
Actuarial present value of benefit obligations
Vested benefits $1,835 $1,575
------ ------
Accumulated benefit obligation $1,986 $1,682
------ ------
Projected benefit obligation $2,145 $1,828
Plan assets at fair value 2,671 2,523
------ ------
Projected benefit obligation less than plan assets 526 695
Unrecognized net loss/(gain) 58 (131)
Balance of unrecorded transition asset (136) (164)
Other 59 21
------ ------
Prepaid pension cost $ 507 $ 421
------ ------
------ ------
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan assets are held primarily in master trust accounts and comprised
the following:
In millions at December 31 1993 1992
- -------------------------- ------ ------
Temporary investments $ 101 $ 108
Fixed income securities 774 628
Corporate stocks 1,290 1,305
International Paper common stock 351 347
Income-producing real estate 155 135
------ ------
Total plan assets $2,671 $2,523
------ ------
------ ------
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' voluntary contributions. Company matching contributions to
the plans were approximately $38 million, $30 million and $28 million
for the plan years ending in 1993, 1992 and 1991, respectively. The net
assets of these plans approximated $1.3 billion as of the 1993 plan
year-ends.
Note 11. 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.
In the fourth quarter of 1991, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," changing to
the accrual method of accounting for these benefits effective January 1,
1991. Prior to 1991, postretirement benefit expense was recognized when
claims were paid. The Company restated 1991 first-quarter operations to
record a pre-tax charge of $350 million ($215 million after taxes or
$1.95 per share) as the cumulative effect of an accounting change at
that date. This change also increased 1991 pre-tax postretirement
benefit expense by $25 million.
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.
Postretirement benefit expense was $18 million, $12 million and $42
million in 1993, 1992 and 1991, respectively. Plan amendments in 1992
decreased expense by approximately $33 million. The components of
expense in 1993 and 1992 were as follows:
In millions 1993 1992
- ----------- ---- ----
Service cost--benefits earned during the period $ 8 $ 7
Interest cost on accumulated postretirement
benefit obligation 25 23
Net amortization of plan amendments (15) (18)
---- ----
Net postretirement benefit cost $ 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 1993 1992
- -------------------------- ---- ----
Retirees $249 $209
Fully eligible active plan participants 16 44
Other active plan participants 83 58
---- ----
Total accumulated postretirement benefit
obligation 348 311
Unrecognized net loss (58) (28)
Unrecognized effect of plan amendments 104 115
---- ----
Accrued postretirement benefit obligation $394 $398
---- ----
---- ----
Future benefit costs were estimated assuming medical costs would
increase at a 15% annual rate starting in 1991, decreasing to a 5%
annual growth rate ratably over the next 13 years and then remaining at
a 5% annual growth rate thereafter. A 1% increase in this annual trend
rate would have increased the accumulated postretirement benefit
obligation at December 31, 1993 by $24 million, with an immaterial
effect on 1993 postretirement benefit expense. The weighted average
discount rate used to estimate the accumulated postretirement benefit
obligation at December 31, 1993 was 7.25%, down from 8.0% at December
31, 1992.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. 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 1993,
1992 or 1991.
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 1992 and 1991, 163,000 shares and
141,000 shares, respectively, were earned. The awards for 1993 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. Options awarded under the plan
are restricted for a period of four years after the date of grant.
The following summarizes stock option transactions under stock option
plans for the three years ended December 31, 1993:
Shares Option Price
--------- -------------
Balance at 1/1/91 1 2,274,364 13.930-58.750
Granted 1,077,392 52.875-76.750
Exercised (657,682) 13.930-63.625
--------- -------------
Balance at 12/31/91 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
--------- -------------
--------- -------------
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 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
1993, 1992 and 1991, restricted shares of 32,000, 20,000 and 8,000,
respectively, were awarded under this plan. In each of the years 1992
and 1991, grants for 20,000 shares were forfeited.
At December 31, 1993 and 1992, a total of 3.7 million shares and 4.7
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 $31 million, $29 million and
$32 million in 1993, 1992 and 1991, 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.
53
<PAGE>
ELEVEN-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Dollar amounts in millions, except
per share amounts and stock prices 1993 1992 1991
- ---------------------------------- ------- ------- -------
<S> <C> <C> <C>
Results of Operations
Net sales $13,685 $13,598 $12,703
Costs and expenses, excluding
interest 12,875 13,145 2 11,750 3
Earnings before income taxes,
extraordinary item and
cumulative effect of
accounting changes 500 206 2 638 3
Extraordinary item (6)
Cumulative effect of accounting
changes (50) (215)
Net earnings 289 1 86 2 184 3
Earnings applicable to common
shares 289 1 86 2 184 3
Financial Position
Working capital $ 392 $ (165) 5 $ 404
Plants, properties and
equipment, net 8,872 8,884 7,848
Forestlands 786 759 743
Total assets 16,631 16,516 14,941
Long-term debt 3,601 3,096 3,351
Common shareholders' equity 6,225 6,189 5,739
Per Share of Common Stock 6
Earnings before extraordinary
item and cumulative effect of
accounting changes $ 2.34 1 $ 1.17 2 $ 3.61 3
Extraordinary item (.05)
Cumulative effect of accounting
changes (.41) (1.95)
Net earnings 2.34 1 .71 2 1.66 3
Cash dividends 1.68 1.68 1.68
Common shareholders' equity 50.25 50.46 51.03
Common Stock Prices 6
High 69 7/8 78 1/2 78 1/4
Low 56 5/8 58 1/2 50 1/2
Year-end 67 3/4 66 5/8 70 3/4
Financial Ratios
Current ratio 1.1 .96 5 1.1
Total debt to capital ratio 38.7 38.0 39.1
Return on equity 4.7 1,7 1.4 2,7 3.2 3,7
Return on capital employed 3.8 1,7 1.2 2,7 3.5 3,7
Capital Expenditures $ 954 $ 1,368 $ 1,197
Number of Employees 72,500 73,000 70,500
</TABLE>
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
54
<PAGE>
ELEVEN-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Dollar amounts in millions, except
per share amounts and stock prices 1990 1989 1988 1987 1986 1985 1984 1983
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $12,960 $11,378 $9,587 $7,800 $5,540 $4,530 $4,750 $4,423
Costs and expenses, excluding
interest 11,737 4 9,768 8,224 6,952 5,030 4,379 4,590 4,190
Earnings before income taxes,
extraordinary item and
cumulative effect of
accounting changes 946 4 1,405 1,198 681 454 159 144 253
Extraordinary item
Cumulative effect of accounting
changes
Net earnings 569 4 864 754 407 305 133 120 255
Earnings applicable to common
shares 569 4 845 733 387 284 107 94 229
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Working capital $ 784 $ 366 $ 781 $ 657 $ 296 $ 350 $ 574 $ 652
Plants, properties and
equipment, net 7,287 6,238 5,456 5,125 4,788 3,725 3,276 3,129
Forestlands 751 764 772 780 783 741 780 780
Total assets 13,669 11,582 9,462 8,710 7,848 6,039 5,795 5,617
Long-term debt 3,096 2,324 1,853 1,937 1,764 1,191 1,015 940
Common shareholders' equity 5,632 5,147 4,557 4,052 3,664 3,195 3,298 3,321
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK 6
Earnings before extraordinary
item and cumulative effect of
accounting changes $ 5.21 4 $ 7.72 $ 6.57 $ 3.68 $ 2.89 $ 1.08 $ .94 $ 2.31
Extraordinary item
Cumulative effect of accounting
changes
Net earnings 5.21 4 7.72 6.57 3.68 2.89 1.08 .94 2.31
Cash dividends 1.68 1.53 1.28 1.20 1.20 1.20 1.20 1.20
Common shareholders' equity 51.34 47.35 41.14 36.35 35.04 33.34 33.02 33.39
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCK PRICES 6
High 59 3/4 58 3/4 49 3/8 57 3/4 40 28 7/8 29 7/8 30
Low 42 3/4 45 1/8 36 1/2 27 24 1/4 22 1/8 23 23
Year-end 53 1/2 56 1/2 46 3/8 42 1/4 37 1/2 25 3/8 26 7/8 29 1/2
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Current ratio 1.2 1.1 1.5 1.4 1.2 1.5 1.9 2.2
Total debt to capital ratio 36.1 33.9 25.8 31.6 31.2 24.1 20.7 19.4
Return on equity 10.5 4 17.8 17.0 10.0 8.3 3.3 2.8 7.0
Return on capital employed 8.0 4 13.4 13.8 10.2 8.4 2.5 2.2 6.6
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES $ 1,267 $ 887 $ 645 $ 603 $ 576 $ 79 $ 628 $ 738
NUMBER OF EMPLOYEES 69,000 63,500 55,500 45,500 44,000 32,000 33,500 33,600
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
1 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.
2 Includes restructuring and other charges totaling $398 million ($263
million after taxes or $2.17 per share).
3 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).
4 Includes a $212 million pre-tax restructuring charge ($137 million
after taxes or $1.26 per share).
5 Reflects increase in short-term versus long-term borrowings due to
favorable interest rates.
6 Appropriate per share amounts and common stock prices have been
adjusted to reflect the 2-for-1 stock split in May 1987.
7 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. Return
on equity was 7.8% and return on capital employed was 5.9% in 1991
before the accounting change, restructuring charge and additional
expenses related to the adoption of SFAS No. 106.
55
<PAGE>
INTERIM FINANCIAL RESULTS (unaudited)
<TABLE>
<CAPTION>
Quarter
In millions, except per share amounts ---------------------------------------------------------------------------
and stock prices First Second Third Fourth Year
- ----------------------------------------------------------------------------------------------------------------------
1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 2 100 289 2
Per Common Share
Earnings $ .52 $ .62 $ .39 2 $ .81 $ 2.34 2
Dividends .42 .42 .42 .42 1.68
Stock Price
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
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
1992
- ----------------------------------------------------------------------------------------------------------------------
Net Sales $ 3,356 $ 3,386 $ 3,478 $ 3,378 $13,598
Gross Margin 1 860 873 866 862 3,461
Earnings (Loss) Before Income Taxes,
Extraordinary Item and Cumulative
Effect of Accounting Change 157 174 152 (277) 3 206 3
Earnings (Loss) Before Extraordinary Item and
Cumulative Effect of Accounting Change 104 114 100 (176) 3 142 3
Extraordinary Item (2) (2) (2) (6)
Cumulative Effect of Accounting Change (50) (50)
Net Earnings (Loss) 52 112 98 (176) 3 86 3
Per Common Share
Earnings (Loss) Before Extraordinary Item and
Cumulative Effect of Accounting Change $ .87 $ .94 $ .82 $ (1.46) 3 $ 1.17 3
Extraordinary Item (.02) (.02) (.01) (.05)
Cumulative Effect of Accounting Change (.41) (.41)
Earnings (Loss) .44 .92 .81 (1.46) 3 .71 3
Dividends .42 .42 .42 .42 1.68
Stock Price
High 78 1/2 77 70 3/8 67 3/8 78 1/2
Low 68 1/8 64 1/2 61 58 1/2 58 1/2
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Gross margin represents net sales less cost of products sold.
2 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.
3 Restructuring and other charges totaling $398 million ($263 million
after taxes or $2.17 per share) were recorded in the 1992 fourth
quarter.
56
<PAGE>
APPENDIX A
1--PRINTING PAPERS--NET SALES AND OPERATING PROFIT (PAGE 10)
Bar charts of NET SALES and OPERATING PROFIT for the segment for the
years 1991 through 1993, 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 1991 and
1992.
Data points for NET SALES as follows:
1991 1992 1993
----- ----- -----
U.S. 2,818 2,747 2,746
Non-U.S. 1,257 1,293 1,159
----- ----- -----
NET SALES 4,075 4,040 3,905
Data points for OPERATING PROFIT as follows:
1991 1992 1993
----- ----- -----
Operating profit before restructuring charge 318 19 (122)
Restructuring charge (20) (89)
----- ----- -----
OPERATING PROFIT 298 (70) (122)
2--PACKAGING--NET SALES AND OPERATING PROFIT (PAGE 16)
Bar charts of NET SALES and OPERATING PROFIT for the segment for the
years 1991 through 1993, 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 keys to highlight restructuring charge in 1991 and
1992.
Data points for NET SALES as follows:
1991 1992 1993
----- ----- -----
U.S. 2,252 2,381 2,366
Non-U.S. 778 864 729
----- ----- -----
NET SALES 3,030 3,245 3,095
Data points for OPERATING PROFIT as follows:
1991 1992 1993
----- ----- -----
Operating profit before restructuring charge 346 330 188
Restructuring charge (12) (22)
----- ----- -----
OPERATING PROFIT 334 308 188
3--DISTRIBUTION--NET SALES AND OPERATING PROFIT (PAGE 20)
Bar charts of NET SALES and OPERATING PROFIT for the segment for the
years 1991 through 1993, 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 1991 and
1992.
Data points for NET SALES as follows:
1991 1992 1993
----- ----- -----
U.S. 2,275 2,617 2,853
Non-U.S. 315 363 287
----- ----- -----
NET SALES 2,590 2,980 3,140
Data points for OPERATING PROFIT as follows:
1991 1992 1993
----- ----- -----
Operating profit before restructuring charge 54 58 58
Restructuring charge (1) (6)
----- ----- -----
OPERATING PROFIT 53 52 58
4--SPECIALTY PRODUCTS--NET SALES AND OPERATING PROFIT (PAGE 26)
Bar charts of NET SALES and OPERATING PROFIT for the segment for the
years 1991 through 1993, 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 1991 and 1992.
Data points for NET SALES as follows:
1991 1992 1993
----- ----- -----
U.S. 1,540 1,656 1,749
Non-U.S. 795 804 711
----- ----- -----
NET SALES 2,335 2,460 2,460
Data points for OPERATING PROFIT as follows:
1991 1992 1993
----- ----- -----
Operating profit before restructuring and
other charges 244 238 263
Restructuring and other charges (17) (155)
----- ----- -----
OPERATING PROFIT 227 83 263
5--FOREST PRODUCTS--NET SALES AND OPERATING PROFIT (PAGE 30)
Bar charts of NET SALES and OPERATING PROFIT for the segment for the
years 1991 through 1993, 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 1991 and 1992.
Data points for NET SALES as follows:
1991 1992 1993
----- ----- -----
U.S. 1,121 1,313 1,597
Non-U.S. 69 97 103
----- ----- -----
NET SALES 1,190 1,410 1,700
Data points for OPERATING PROFIT as follows:
1991 1992 1993
----- ----- -----
Operating profit before restructuring and
other charges 126 261 445
Restructuring and other charges (64)
----- ----- -----
OPERATING PROFIT 126 197 445
6--NET SALES (PAGE 36)
Bar charts of NET SALES for the years 1991 through 1993, in billions of
dollars. Data points as follows:
1991 1992 1993
----- ----- -----
12.7 13.6 13.7
7--CASH FLOW FROM OPERATIONS (PAGE 37)
Bar chart of CASH FLOW FROM OPERATIONS for the years 1991 through 1993,
in millions of dollars. Data points as follows:
1991 1992 1993
----- ----- -----
1,177 1,078 929
8--RETURN ON EQUITY (PAGE 37)
Bar chart of RETURN ON EQUITY for the years 1991 through 1993, expressed as a
percent. Chart contains color keys for the years 1991 through 1993 to highlight
the following unusual or nonrecurring items: In 1991, accrual effect of SFAS No.
106, restructuring charge, and accounting change; in 1992. Restructuring and
other charges, extraordinary item and accounting change; in 1993. Adjustment of
deferred tax balances to reflect the federal tax rate change. Data points as
follows:
1991 1992 1993
----- ----- -----
RETURN ON EQUITY BEFORE UNUSUAL ITEMS 7.8 6.3 5.1
Adjustment of deferred tax balances .4
Restructuring and other charges 4.1
Restructing charge .6
Accounting change-SFAS No. 109 .7
Extraordinary item .1
Accounting change-SFAS No. 106 3.7
Accrual effect of SFAS No. 106 .3
----- ----- -----
RETURN ON EQUITY 3.2 1.4 4.7
9--TOTAL DEBT TO CAPITAL RATIO (PAGE 38)
Bar chart of TOTAL DEBT TO CAPITAL RATIO for the years 1991 through 1993,
expressed as a percent. Data points as follows:
1991 1992 1993
----- ----- -----
39.1 38.0 38.7
