<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1997 Commission file number 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York 13 0872805
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Two Manhattanville Road, Purchase, NY 10577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 914-397-1500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common stock outstanding on October 31, 1997: 302,290,361 shares.
<PAGE>
INTERNATIONAL PAPER COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months and Nine Months Ended September 30, 1997 and 1996 3
Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996 4-5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
Item 3. Other Financial Information 16-17
PART II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In millions, except per-share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Net Sales............................................................... $ 5,119 $ 5,108 $ 15,015 $ 14,999
--------- --------- --------- ---------
Costs and Expenses
Cost of products sold................................................. 3,791 3,760 11,213 11,087
Selling and administrative expenses................................... 404 387 1,174 1,113
Depreciation and amortization......................................... 311 307 949 872
Distribution expenses................................................. 233 240 703 678
Taxes other than payroll and income taxes............................. 52 51 157 148
Business improvement charge........................................... 535
Provision for legal reserve........................................... 150
Restructuring and asset impairment charge............................. 515
--------- --------- --------- ---------
Total Costs and Expenses................................................ 4,791 4,745 14,881 14,413
--------- --------- --------- ---------
Gain on sale of partnership interest.................................. 592
--------- --------- --------- ---------
Earnings Before Interest, Income Taxes and Minority Interest........... 328 363 134 1,178
Interest expense, net................................................. 120 136 375 398
--------- --------- --------- ---------
Earnings (Loss) Before Income Taxes and Minority Interest............... 208 227 (241) 780
Income tax provision (benefit)........................................ 71 86 (56) 329
Minority interest expense, net of taxes............................... 35 30 98 143
--------- --------- --------- ---------
Net Earnings (Loss)..................................................... $ 102 $ 111 $ (283) $ 308
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (Loss) Per Common Share........................................ $ 0.34 $ 0.37 $ (0.94) $ 1.06
--------- --------- --------- ---------
--------- --------- --------- ---------
Average Shares of Common Stock Outstanding.............................. 302.3 300.0 301.4 289.4
--------- --------- --------- ---------
--------- --------- --------- ---------
Cash Dividends Per Common Share......................................... $ 0.25 $ 0.25 $ 0.75 $ 0.75
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Assets
Current Assets
Cash and temporary investments.................................................... $ 469 $ 352
Accounts and notes receivable, net................................................ 2,618 2,553
Inventories....................................................................... 2,862 2,840
Other current assets.............................................................. 277 253
------------- -------------
Total Current Assets................................................................ 6,226 5,998
------------- -------------
Plants, Properties and Equipment, Net............................................... 12,387 13,217
Forestlands......................................................................... 3,152 3,342
Investments......................................................................... 1,227 1,178
Goodwill............................................................................ 2,609 2,748
Deferred Charges and Other Assets................................................... 1,793 1,769
------------- -------------
Total Assets........................................................................ $ 27,394 $ 28,252
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND COMMON SHAREHOLDER'S EQUITY 1997 1996
------------- ------------
<S> <C> <C>
Current Liabilities
Notes payable and current maturities of long-term debt............................ $ 3,079 $ 3,296
Accounts payable.................................................................. 1,405 1,426
Accrued liabilities............................................................... 1,463 1,172
------------- ------------
Total Current Liabilities........................................................... 5,947 5,894
------------- ------------
Long-Term Debt...................................................................... 6,656 6,691
Deferred Income Taxes............................................................... 2,590 2,768
Other Liabilities................................................................... 1,190 1,240
Minority Interest................................................................... 1,812 1,865
International Paper-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely International
Paper Subordinated Debentures..................................................... 450 450
Common Shareholders' Equity
Common stock, $1 par value, issued
1997 - 302.8 shares, 1996 - 300.8 shares........................................ 303 301
Paid-in capital................................................................... 3,342 3,426
Retained earnings................................................................. 5,130 5,639
------------- ------------
8,775 9,366
Less: Common stock held in treasury, at cost,
1997 - 0.5 shares, 1996 - 0.6 shares............................................ 26 22
------------- ------------
Total Common Shareholders' Equity................................................... 8,749 9,344
------------- ------------
Total Liabilities and Common Shareholders' Equity................................... $ 27,394 $ 28,252
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Operating Activities
Net earnings (loss).......................................................................... $ (283) $ 308
Depreciation and amortization................................................................ 949 872
Deferred income taxes........................................................................ (117) 133
Business improvement charge.................................................................. 535
Provision for legal reserve.................................................................. 150
Payments, net of proceeds, related to restructuring and legal reserves....................... (67)
Restructuring and asset impairment charge.................................................... 515
Gain on sale of partnership interest......................................................... (592)
Other, net................................................................................... 91 61
Changes in current assets and liabilities
Accounts and notes receivable.............................................................. (200) 128
Inventories................................................................................ (139) 157
Accounts payable and accrued liabilities................................................... (131) (331)
Other...................................................................................... (9) (2)
--------- ---------
Cash Provided by Operations.................................................................... 779 1,249
--------- ---------
Investment Activities
Invested in capital projects................................................................. (706) (944)
Mergers and acquisitions, net of cash acquired............................................... (37) (1,524)
Other........................................................................................ (24) 27
--------- ---------
Cash Used for Investment Activities............................................................ (767) (2,441)
--------- ---------
Financing Activities
Issuance of common stock..................................................................... 135 79
Issuance of debt............................................................................. 489 1,713
Reduction of debt............................................................................ (426) (252)
Change in bank overdrafts.................................................................... 95 (71)
Dividends paid............................................................................... (226) (215)
Other........................................................................................ 39 29
--------- ---------
Cash Provided by Financing Activities.......................................................... 106 1,283
--------- ---------
Effect of Exchange Rate Changes on Cash........................................................ (1) 2
--------- ---------
Change in Cash and Temporary Investments....................................................... 117 93
Cash and Temporary Investments
Beginning of the period...................................................................... 352 312
--------- ---------
End of the period............................................................................ $ 469 $ 405
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
INTERNATIONAL PAPER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, in the
opinion of Management, include all adjustments (consisting only of
normal recurring accruals) which are necessary for the fair
presentation of results for the interim periods. It is suggested that
these consolidated financial statements be read in conjunction with the
audited financial statements and the notes thereto incorporated by
reference in the Company's Form 10-K for the year ended December 31,
1996, which has previously been filed with the Commission.
2. In September 1997, the Company acquired Merbok Formtec.
In August 1996, the Company acquired Forchem, a tall oil and turpentine
processor in Finland. In September 1996, Carter Holt Harvey, a
consolidated subsidiary of the Company, acquired Forwood Products, the
timber processing business of the South Australian Government.
On March 12, 1996, the Company completed the merger with Federal Paper
Board (Federal), a diversified forest and paper products company. Under
the terms of the merger agreement, Federal shareholders received, at
their election and subject to certain limitations, either $55 in cash
or a combination of cash and International Paper common stock worth $55
for each share of Federal common stock. To complete the merger, Federal
shares were acquired for approximately $1.3 billion in cash and $1.4
billion in International Paper common stock, and approximately $800
million of debt was assumed. The results of Federal are included in the
consolidated statement of earnings from March 12, 1996.
All of the above acquisitions were accounted for using the purchase
method.
The consolidated balance sheet at December 31, 1996 includes preliminary
purchase price allocations for Forchem and Forwood Products.
3. The following unaudited pro forma financial information for the three
months and nine months ended September 30, 1996 presents the combined
results of the continuing operations of International Paper, Federal,
and the other acquisitions completed during 1996.
The 1997 amounts presented in the following table are actual results
for the third quarter and first nine months. These amounts include the
results of all of the 1996 acquisitions for the entire period and are
presented for comparative purposes only.
The pro forma information is presented as if the transactions occurred
as of the beginning of the three-month and nine-month periods ended
September 30, 1996. The pro forma adjustments are based on available
information, preliminary purchase price allocations and certain
assumptions that the Company believes are reasonable. There can be no
assurance that the assumptions and estimates would have been realized.
The pro forma information does not purport to represent the Company's
actual results of operations if the transactions described above would
have occurred at the beginning of the 1996 periods, nor is it indicative
of the actual results since acquisition. In addition, the information
may not be indicative of future results.
7
<PAGE>
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
(ACTUAL) (ACTUAL)
----------- --------- ----------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales....................................................... $ 5,119 $ 5,149 $ 15,015 $ 15,462
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Net Earnings (Loss)............................................. $ 102 $ 111 (283) $ 294
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Earnings (Loss) Per Common Share................................ $ 0.34 $ 0.37 $ (0.94) $ 0.98
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
4. In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities"
(the SOP), which was adopted by the Company in the first quarter of 1997.
The SOP provides guidance concerning the recognition, measurement and
disclosure of environmental remediation liabilities. The adoption of the
SOP did not have a material effect on the Company's financial position or
results of operations.
5. In February 1997, the Financial Accounting Standards Board (the FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", which specifies the computation, presentation and disclosure
requirements for earnings per share. This statement is effective for
fiscal years ending after December 15, 1997, and earlier adoption is not
permitted. Adoption of the provisions of this statement is not expected
to have a material effect on reported earnings per share. In June
1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", which establishes standards for
the reporting and display of comprehensive income and its components.
This statement is effective for fiscal years beginning after December 15,
1997.
6. On March 29, 1996, IP Timberlands, Ltd. (IPT), a consolidated subsidiary
of International Paper, completed the sale of a 98% general partnership
interest in a subsidiary partnership that owns approximately 300,000
acres of forestlands located in Oregon and Washington. Included in the
net assets of the partnership interest sold were forestlands, roads and
$750 million of long-term debt. As a result of this transaction,
International Paper recognized in its consolidated results for the first
quarter of 1996 a $592 million pre-tax gain ($336 million after taxes and
minority interest expense or $1.25 per share). IPT and International Paper
retained non-operating interests in the partnership.
7. In June 1997, a $535 million pre-tax business improvement reserve
($385 million after taxes or $1.28 per share) was established under a
plan to improve the Company's financial performance through closing or
divesting of operations that no longer meet financial or strategic
objectives. The second-quarter charge to establish the business
improvement reserve included approximately $230 million for asset
write-downs, $210 million for the estimated losses on sales of businesses
included in the reserve and $95 million for severance and other expenses.
The majority of the reserve relates to the restructuring of the printing
papers business in the United States and overseas and the sale of certain
specialty businesses. Annual improvement in earnings before interest and
income taxes of approximately $100 million is expected by the end of 1998.
8
<PAGE>
8. Also in June 1997, the Company recorded a $150 million pre-tax
charge ($93 million after taxes or $.31 per share) to add to its legal
reserves. On July 14, 1997, Masonite Corporation, a wholly-owned
subsidiary of the Company, announced that it had reached a proposed
settlement in a class action pending in Mobile County, Alabama. The
Company believes its legal reserves are adequate to cover any amounts to
be paid pursuant to the proposed settlement, which is subject to Court
approval.
9. During the first quarter of 1996, the Company's Board of Directors
authorized a series of management actions to restructure and strengthen
existing businesses which resulted in a pre-tax charge to earnings of
$515 million ($362 million after taxes or $1.35 per share). The charge
included $305 million for the write-off of certain assets, $100 million
for asset impairments, $80 million in associated severance costs and $30
million of other expenses, including the cancellation of leases. Accruals
for one-time cash costs, which include severance costs and other expenses,
totaled $110 million. Approximately $34 million of these costs were
incurred in 1996 and the remainder is being incurred in 1997.
10. In the third quarter of 1995, International Paper Capital Trust (the
Trust) issued $450 million of International Paper-obligated mandatorily
redeemable preferred securities. The Trust is a wholly owned consolidated
subsidiary of International Paper and its sole assets are International
Paper 5-1/4% convertible subordinated debentures. The obligations of the
Trust related to its preferred securities are fully and unconditionally
guaranteed by International Paper. These preferred securities are
convertible into International Paper common stock. Preferred securities
distributions of $18 million were paid during each of the nine months
ended September 30, 1997 and 1996.
11. Inventories by major category include (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------- -------------------
<S> <C> <C>
Raw materials......................................................... $ 533 $ 534
Finished pulp, paper and packaging products........................... 1,399 1,365
Finished lumber and panel products.................................... 181 215
Operating supplies.................................................... 396 397
Other................................................................. 353 329
------ ------
Total.............................................................. $ 2,862 $ 2,840
------ ------
------ ------
</TABLE>
12. Interest payments made during the nine month periods ended September 30,
1997 and 1996 were $493 million and $536 million, respectively. Interest
income for the nine months ended September 30, 1997 and 1996 was $67
million and $37 million, respectively, including income of $27 million
for the 1997 third quarter and $13 million for the 1996 third quarter.
The company capitalized net interest costs of $47 million and $43 million
for the nine month periods ended September 30, 1997 and 1996,
respectively. Income tax payments made during the nine months ended
September 30, 1997 and 1996 were $161 million and $209 million,
respectively.
13. Temporary investments with a maturity of three months or less are
treated as cash equivalents and are stated at cost. Temporary investments
totaled $253 million and $221 million at September 30, 1997 and
December 31, 1996, respectively.
14. Accumulated depreciation was $10.0 billion at September 30, 1997 and
$9.5 billion at December 31, 1996. The allowance for doubtful accounts
was $105 million at September 30, 1997 and $101 million at December 31,
1996.
9
<PAGE>
15. The Company uses financial instruments primarily to hedge its exposure
to currency and interest rate risk. To qualify as hedges, financial
instruments must reduce the currency or interest rate risk associated
with the related underlying items and be designated as hedges by
management. Gains or losses from the revaluation of financial instruments
which do not qualify for hedge accounting treatment are recognized in
earnings.
The Company has a policy of financing a portion of its investments in
overseas operations with borrowings denominated in the same currency as
the investment or by entering into foreign exchange contracts in tandem
with U.S. dollar borrowings. These contracts are effective in providing a
hedge against fluctuations in currency exchange rates. Gains or losses
from the revaluation of these contracts, which are fully offset by gains
or losses from the revaluation of the net assets being hedged, are
determined monthly based on published currency exchange rates and are
recorded as translation adjustments in common shareholders' equity. Upon
liquidation of the net assets being hedged or early termination of the
foreign exchange contracts, the gains or losses from the revaluation of
foreign exchange contracts are included in earnings. Amounts payable to or
due from the counterparties to the foreign exchange contracts are included
in accrued liabilities or accounts receivable as applicable.
The Company also utilizes foreign exchange contracts to hedge certain
transactions that are denominated in foreign currencies, primarily export
sales and equipment purchases from nonresident vendors. These contracts
serve to protect the Company from currency fluctuations between the
transaction and settlement dates. Gains or losses from the revaluation of
these contracts, based on published currency exchange rates, along with
offsetting gains or losses resulting from the revaluation of the
underlying transactions, are recognized in earnings or deferred and
recognized in the basis of the underlying transaction when completed.
Any gains or losses arising from the cancellation of the underlying
transactions or early termination of the foreign currency contracts are
included in earnings.
The Company uses cross-currency and interest rate swap agreements to
manage the composition of its fixed and floating rate debt portfolio.
Amounts to be paid or received as interest under these agreements are
recognized over the life of the swap agreements as adjustments to
interest expense. Gains or losses from the revaluation of cross-currency
swap agreements that qualify as hedges of investments are recorded as
translation adjustments in common shareholders' equity. Gains or losses
from the revaluation of cross-currency swap agreements that do not
qualify as hedges of investments are included in earnings. The related
amounts payable to or receivable from the counterparties to the agreements
are included in accrued liabilities or accounts receivable. If swap
agreements are terminated early, the resulting gain or loss is deferred
and amortized over the remaining life of the related debt.
The Company does not hold or issue financial instruments for trading
purposes.
16. Through a public tender offer from July 23, 1997 through August 6, 1997,
the Company's wholly owned subsidiary, Federal Paper Board, repurchased
$164 million of its 10% debentures due April 15, 2011. The earnings
impact of the debt retirement was not material.
17. Certain reclassifications have been made to prior-year amounts to conform
with the current-year presentation.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
International Paper's third-quarter 1997 net sales of $ 5.1 billion were even
with the 1996 third quarter and slightly ahead of the $5.0 billion recorded
in the 1997 second quarter.
Third-quarter 1997 net earnings were $102 million or $0.34 per share compared
with $111 million or $0.37 per share in the 1996 third quarter and 1997
second-quarter earnings before special charges of $59 million or $0.20 per
share. Second quarter 1997 results were a net loss of $419 million or $1.39
per share after a $535 million pretax charge ($385 million after taxes or
$1.28 per share) to establish a business improvement reserve and a $150
million pretax charge ($93 million after taxes or $0.31 per share) to add to
the Company's legal reserves.
Results for the 1997 nine months were a net loss of $283 million or $0.94 per
share after the special charges. Before these charges, 1997 nine-month
earnings were $195 million or $0.65 per share compared with 1996 nine month
net earnings of $334 million or $1.16 per share before a $515 million pretax
restructuring and asset impairment charge ($362 million after taxes or $1.35
per share) and a $592 million pretax gain ($336 million after taxes and
minority interest expense or $1.25 per share) on the sale of a partnership
interest.
Third-quarter 1997 net earnings were ahead of the 1997 second quarter before
special charges reflecting markets that are continuing to improve. Demand for
most product lines is high, pricing continues to improve in many categories
and industry inventories are lower in general due to good economic growth in
the United States and overseas. Third-quarter 1997 earnings declined from the
1996 third quarter primarily due to lower prices for major paper and packaging
products.
The components of consolidated earnings before and after special charges are
presented in the following tables.
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------
SECOND QUARTER NINE MONTHS
-------------------------- -------------------------
BEFORE AFTER BEFORE AFTER
FIRST SPECIAL SPECIAL SPECIAL THIRD SPECIAL SPECIAL SPECIAL
QUARTER CHARGES CHARGES CHARGES QUARTER CHARGES CHARGES CHARGES
--------- --------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings Before Interest,
Income Taxes and Minority
Interest........................... $ 238 $ 253 $ (685) $ (432) $ 328 $ 819 $ (685) $ 134
Interest expense, net................ (130) (125) (125) (120) (375) (375)
Income tax (provision) benefit....... (40) (40) 207 167 (71) (151) 207 56
Minority interest expense,
net of taxes....................... (34) (29) (29) (35) (98) (98)
----- ----- ----- ----- ----- ----- ----- -----
Net Earnings (Loss).................. $ 34 $ 59 $ (478) $ (419) $ 102 $ 195 $ (478) $(283)
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
<CAPTION>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST QUARTER NINE MONTHS
------------------------- ---------------------------
<CAPTION>
BEFORE AFTER BEFORE AFTER
SPECIAL SPECIAL SPECIAL SECOND THIRD SPECIAL SPECIAL SPECIAL
CHARGES CHARGES CHARGES QUARTER QUARTER CHARGES CHARGES CHARGES
--------- -------- ------- -------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings Before Interest,
Income Taxes and Minority
Interest.......................... $ 384 $ 77 $ 461 $ 354 $ 363 $ 1,101 $ 77 $ 1,178
Interest expense, net............... (125) (125) (137) (136) (398) (398)
Income tax provision................ (92) (71) (163) (80) (86) (258) (71) (329)
Minority interest expense,
net of taxes...................... (43) (32) (75) (38) (30) (111) (32) (143)
----- --- ----- ----- ----- -------- ------ ------
Net Earnings (Loss)................. $ 124 $ (26) $ 98 $ 99 $ 111 $ 334 $ (26) $ 308
----- --- ----- ----- ----- -------- ------ ------
----- --- ----- ----- ----- -------- ------ ------
</TABLE>
The consolidated results of operations include Federal Paper Board (Federal)
since March 12, 1996. Federal contributed about 8% of consolidated net sales for
the 1997 nine-month period. Operating results for Carter Holt Harvey, adjusted
as necessary to conform with International Paper's classifications, are also
included in each segment as applicable.
Printing Papers 1997 third-quarter net sales of $1.4 billion were about even
with the 1996 third quarter and ahead of the 1997 second quarter. Net sales of
$4.1 billion for the 1997 nine months were down slightly from the $4.2 billion
reported in the comparable 1996 period. Operating profits for the 1997 third
quarter were ahead of the 1997 second quarter and the 1996 third quarter
reflecting higher prices for coated and uncoated paper. Also adding to earnings
during the quarter were strong demand in Europe and higher pulp prices.
Packaging 1997 third-quarter net sales of $1.2 billion declined slightly
from the 1997 second quarter and the 1996 third-quarter. Nine-month 1997 net
sales of $3.7 billion were even with the comparable 1996 period. Third-quarter
1997 operating profits declined from the 1997 second quarter and the 1996 third
quarter due to lower prices. Compared with the 1997 second quarter, results were
off at Carter Holt Harvey because of weaker markets in New Zealand. Linerboard
exports from the United States, are continuing at record levels. Overall,
linerboard pricing has improved and we believe it should continue to do so
reflecting lower inventory levels and strong demand. Corrugated box shipments
approached record levels and pricing has begun to move upward, reflecting
increased containerboard costs. Bleached board results were comparable to the
previous quarter but were down from the 1996 third quarter.
Distribution net sales of $1.2 billion for the 1997 third quarter were about
even with the 1996 third quarter and the 1997 second quarter. Nine-month net
sales were $3.5 billion in 1997 and 1996. Operating profits for the 1997 third
quarter were relatively stable compared with the 1997 second quarter and were
down slightly from the 1996 third quarter.
Specialty Products 1997 third-quarter net sales were $860 million, ahead of
1996 third-quarter net sales of $845 million but below 1997 second-quarter
net sales of $890 million. Net sales for the 1997 nine months were $2.6
billion, even with the 1996 nine month period. Third-quarter 1997 operating
profits were down slightly from the 1997 second quarter as improvements in
the Masonite, Decorative Products and Veratec businesses were offset by
traditionally slower European sales for the Chemicals business. Operating
profits for the 1997 third quarter were about even with the 1996 third
quarter.
12
<PAGE>
Forest Products 1997 third-quarter net sales were $720 million compared with
$695 million for the 1996 third quarter and $680 million for the 1997 second
quarter. Net sales were $2.0 billion for the 1997 and 1996 nine months.
Operating profits increased significantly from the 1997 second quarter as a
result of both higher harvest volumes and the completion of the first in a
series of transactions relating to the sale of a subsidiary partnership
interest in approximately 175,000 acres of forestlands in Pennsylvania and
New York. This initial transaction, covering approximately 25,000 acres,
resulted in earnings before interest and taxes of $37 million. Also prices
in the 1997 third quarter were higher than in the 1996 third quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $779 million for the 1997 nine months
compared with $1.2 billion in 1996. Lower earnings and higher working capital
levels for the 1997 nine-month period were primarily responsible for the decline
in cash provided by operations. Working capital increased $479 million in the
1997 nine-month period compared with an increase of $48 million in 1996.
Receivables increased due to higher pricing and sales volumes for some product
lines. The increase in inventories reflects seasonally higher purchased timber
inventories and higher inventory balances at certain packaging and specialty
businesses. The net decrease in accounts payable and accrued liabilities
included payments of income tax liabilities. Noncash operating items for the
1997 nine months included a business improvement charge and a provision to add
to the Company's legal reserves. Prior-year noncash operating items included
the $77 million net impact of special items recorded in the 1996 first quarter.
Investments in capital projects totaled $706 million for the 1997 nine
months compared with $944 million for the 1996 nine month period. Cash flow
generated by operations, supplemented as necessary by short- or long-term
borrowings, are anticipated to be adequate to fund expected capital
expenditures, which have been reduced to approximately $1.2 billion for 1997,
about equal to expected 1997 depreciation expense.
Financing activities for the 1997 nine months included $63 million of net
borrowing activities primarily consisting of issuances of short-term debt and
repayments of long-term debt including the Federal Paper Board 10% debentures.
Approximately $1.3 billion of short-term debt was issued and $1.4 billion of
International Paper common stock was exchanged (35.4 million shares) to
acquire the outstanding shares of Federal during the first quarter of 1996.
Dividend payments totaled $226 million or $.75 per common share for the 1997
nine-month period compared with $215 million for the 1996 nine months. This
change primarily reflects the increase in common shares outstanding due to the
Federal merger in March of 1996.
SPECIAL CHARGES
In June 1997, a $535 million pretax business improvement reserve ($385
million after taxes or $1.28 per share) was established under a plan to
improve the Company's financial performance through closing or divesting of
operations that no longer meet financial or strategic objectives. The
majority of the reserve related to the restructuring of the printing papers
business in the United States and overseas and the sale of certain specialty
businesses. Included in the reserve were costs to shut down or close the
Woronoco, Mass. mill; three production lines at the Erie, Pa. mill (two lines
shutdown to date); the de-inking pulp operation at the Lock Haven, Pa. mill;
(shutdown complete) a higher-cost paper machine at the Moss Point, Miss. mill
(shutdown complete); and two container plants in California. Also included
were estimated losses on dispositions of the Imaging Products business
(including the Anchor pressroom chemicals business); Papeteries de Lancey, a
coated papers mill in France (sale completed); three multiwall kraft bag
plants (sale completed); Veratec's InterSpun business; four low pressure
laminates plants; two particleboard facilities; two medium density fiberboard
facilities; and six Pluswood distribution centers.
The second-quarter business improvement charge included approximately $230
million for asset write-downs, $210 million for the estimated losses on the
sales of businesses included in the reserve and $95 million for severance and
other expenses. Annual improvement in earnings before interest and income taxes
of approximately $100 million is expected by the end of 1998.
13
<PAGE>
Also in June 1997, the Company recorded a $150 million pretax charge ($93
million after taxes or $0.31 per share) to add to its legal reserves. On July
14, 1997, Masonite Corporation, a wholly-owned subsidiary of the Company,
announced that it had reached a proposed settlement in a class action pending in
Mobile County, Alabama. The Company believes its legal reserves are adequate to
cover any amounts to be paid pursuant to the proposed settlement, which is
subject to Court approval.
During the first quarter of 1996, the Company's Board of Directors
authorized a series of management actions to restructure and strengthen
existing businesses, which resulted in a pre-tax charge to earnings of $515
million ($362 million after taxes or $1.35 per share). The charge included
$305 million for the write-off of certain assets, $100 million for asset
impairments, $80 million in associated severance costs and $30 million of
other expenses, including the cancellation of leases. Accruals for one-time
cash costs, which include severance costs and other expenses, totaled $110
million. Approximately $34 million of these costs were incurred in 1996 and
the remainder is being incurred in 1997.
MERGERS AND ACQUISITIONS
In September 1997, the Company acquired Merbok Formtec.
On March 12, 1996, International Paper completed the merger with Federal
Paper Board, a diversified forest and paper products company. Under the terms of
the merger agreement, Federal shareholders received, at their election and
subject to certain limitations, either $55 in cash or a combination of cash and
International Paper common stock worth $55 for each share of Federal common
stock. To complete the merger, Federal shares were acquired for approximately
$1.3 billion in cash and $1.4 billion in International Paper common stock, and
approximately $800 million of debt was assumed.
The results of Federal are included in the consolidated statement of
earnings from March 12, 1996. As a result of the merger, Federal contributed
about 8% of consolidated net sales for the 1997 nine months and between 2% and
13% for each of the components of consolidated costs and expenses. The
consolidated balance sheets at September 30, 1997 and December 31, 1996 include
the balances of Federal.
In August 1996, the Company acquired Forchem, a tall oil and turpentine
processor in Finland, for approximately $100 million. In September 1996, Carter
Holt Harvey acquired Forwood Products, the timber processing business of the
South Australian Government, for approximately $100 million.
GAIN ON SALE OF PARTNERSHIP INTEREST
On March 29, 1996, IP Timberlands Ltd. (IPT), a consolidated subsidiary of
International Paper, completed the sale of a 98% general partnership interest in
a subsidiary partnership that owns approximately 300,000 acres of forestlands
located in Oregon and Washington. Included in the net assets of the partnership
interest sold were forestlands, roads and $750 million of long-term debt. As a
result of this transaction, International Paper recognized in its 1996
first-quarter consolidated results a $592 million pre-tax gain ($336 million
after taxes and minority interest expense or $1.25 per share).
OTHER
Minority interest expense for the 1997 nine months decreased significantly
from the comparable 1996 period due to the minority interestholders' share of
the gain on the sale of a partnership interest that was recorded in the 1996
first quarter.
14
<PAGE>
The effective income tax rate for the 1997 nine-month period was a 23%
benefit compared with a 42% expense for the 1996 nine month period because of
the impact of the special charges. The following table presents the components
of pretax earnings and losses and the related income tax expense and benefit for
each period.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- ------------------------------------
PRETAX TAX PRETAX TAX
EARNINGS EXPENSE EFFECTIVE EARNINGS EXPENSE EFFECTIVE
(LOSS) (BENEFIT) TAX RATE (LOSS) (BENEFIT) TAX RATE
----------- ----------- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Before Special Charges.............. $ 444 $ 151 34% $ 703 $ 258 37%
Business Improvement Charge......... (535) (150) 28%
Provision for Legal Reserve......... (150) (57) 38%
Restructuring and Asset
Impairment Charge................. (515) (153) 30%
Gain on Sale of Partnership
Interest.......................... 592 224 38%
--------- --------- --------- ---------
Total............................... $ (241) $ (56) 23% $ 780 $ 329 42%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Both the business improvement charge and the restructuring and asset
impairment charge included expenses that were not deductible for tax purposes.
The effective tax rate on earnings before special charges for the 1997 nine
months was 34% compared with 37% for the 1996 nine months. This decline was the
result of changes in the mix of estimated earnings.
15
<PAGE>
ITEM 3. OTHER FINANCIAL INFORMATION
Financial Information by Industry Segment
(Unaudited)
(In millions)
NET SALES BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Printing Papers......................................................... $ 1,415 $ 1,435 $ 4,135 $ 4,220
Packaging............................................................... 1,235 1,265 3,680 3,685
Distribution............................................................ 1,205 1,175 3,485 3,515
Specialty Products...................................................... 860 845 2,610 2,590
Forest Products......................................................... 720 695 2,005 1,965
Less: Intersegment Sales................................................ (316) (307) (900) (976)
--------- --------- --------- ---------
Net Sales............................................................... $ 5,119 $ 5,108 $ 15,015 $ 14,999
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
16
<PAGE>
PRODUCTION BY PRODUCTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
<S> <C> <C> <C> <C>
1997 (D) 1996 (D) (F) 1997 (D) 1996 (E)(F)
----------- --------------- ----------- -------------
Printing Papers (In thousands of tons)
White Papers and Bristols........................................ 999 1038 3,004 2,850
Coated Papers.................................................... 316 292 960 792
Market Pulp (A).................................................. 558 537 1,659 1,437
Newsprint........................................................ 23 27 63 73
Packaging (In thousands of tons)
Containerboard................................................... 773 724 2,170 2,033
Bleached Packaging Board......................................... 543 507 1,634 1,381
Industrial Papers................................................ 175 181 514 496
Industrial and Consumer Packaging (B)............................ 850 839 2,554 2,470
Specialty Products (In thousands of tons)
Tissue........................................................... 39 29 110 82
Forest Products (In millions)
Panels (sq. ft. 3/8" basis) (C).................................. 387 322 1,057 886
Lumber (board feet).............................................. 572 509 1,598 1,307
MDF (sq. ft. 3/4" basis)......................................... 48 71 154 209
Particleboard (sq. ft. 3/4" basis)............................... 46 49 138 143
</TABLE>
- ------------------------
(A) This excludes market pulp purchases.
(B) A significant portion of this tonnage was fabricated from paperboard and
paper produced at the Company's own mills and included in the
containerboard, bleached packaging board, and industrial papers amounts in
this table.
(C) Panels include plywood and oriented strand board.
(D) Includes Federal for the full period.
(E) Includes Federal from March 12, 1996.
(F) Certain reclassifications and adjustments have been made to
prior-period amounts.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MASONITE
As previously reported on Forms 10-K and 10-Q, a lawsuit which had been
certified as a nationwide class action was filed against the Company and its
wholly owned subsidiary, Masonite Corporation, on December 27, 1994, in Mobile
County Circuit Court, Mobile, Alabama. The lawsuit alleged that hardboard
siding, which is used as exterior cladding for residential dwellings and is
manufactured by Masonite, fails prematurely, allowing moisture intrusion. It
further alleged that the presence of moisture in turn causes the failure of the
structure underneath. In August 1996, the single issue of product defect was
tried to a jury and they returned a split decision, finding partly for the
plaintiffs and partly for Masonite. The jury was not asked to determine any
other liability issues, causation or damages. In July 1997, the Company and
Masonite entered into an agreement with counsel for the class providing for
settlement of the case. On November 2, 1997, the parties commenced the process
of notifying class members of the settlement of the case, the terms of the
proposed settlement and their rights. Pursuant to a Settlement Notice Plan
approved by the Court, notice in various forms has and will be provided in the
media and directly to known class members. The Court approved notice period
will continue until December 31, 1997. A hearing to determine the fairness of
the settlement is scheduled for January 14, 1998. The settlement permits class
members to make claims concerning damage associated with their siding, after
which their homes will be inspected to determine whether, pursuant to the terms
of the settlement, they are entitled to compensation. The settlement agreement
also provides for payment by the defendants of certain costs of administering
the settlement and attorneys fees of the plaintiffs. The costs of the proposed
settlement are not expected to have a material adverse effect on the Company's
consolidated financial position or results of operations.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Statement of Computation of Per Share Earnings
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
No current reports on Form 8-K have been filed during
the quarter for which this report is filed, except those
previously reported in the second-quarter report on
Form 10-Q for the quarter ended June 30, 1997.
19
<PAGE>
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: November 14, 1997 By /s/ MARIANNE M. PARRS
---------------------
Marianne M. Parrs
Senior Vice President
and Chief Financial Officer
Date: November 14, 1997 By /s/ ANDREW R. LESSIN
---------------------
Andrew R.Lessin
Vice President, Controller and
Chief Accounting Officer
20
<PAGE>
(Exhibit 11)
INTERNATIONAL PAPER COMPANY
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings (loss)................... $ 102 111 $ (283) 308
Reduction in minority interest
expense, net of taxes, assuming
conversion of preferred securities
of subsidiary....................... * * * *
-------- -------- -------- --------
Primary and fully diluted net
earnings (loss)..................... $ 102 111 $ (283) $ 308
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per common share...... $ 0.34 $ 0.37 $ (0.94) $ 1.06
-------- -------- -------- --------
-------- -------- -------- --------
Primary earnings (loss) per share..... $ 0.33 $ 0.37 $ (0.94) $ 1.06
-------- -------- -------- --------
-------- -------- -------- --------
Fully diluted earnings (loss)
per share............................ $ 0.33 $ 0.37 $(0.94) $ 1.06
-------- -------- -------- --------
-------- -------- -------- --------
PRIMARY SHARES
Average shares outstanding............ 302.3 300.0 301.4 289.4
Shares assumed to be repurchased
using long-term incentive plan
deferred compensation at average
market price........................ (0.8) (0.6) (0.9) (0.6)
Shares assumed to be issued upon
exercise of stock options, net of
treasury buyback at average market
price............................... 3.1 1.5 * 1.6
-------- -------- -------- --------
Primary shares........................ 304.6 300.9 300.5 290.4
-------- -------- -------- --------
-------- -------- -------- --------
FULLY DILUTED SHARES
Average shares outstanding............ 302.3 300.0 301.4 289.4
Shares assumed to be repurchased
using long-term incentive plan
deferred compensation at period-end
market price (if higher than
average market price)............... (0.8) (0.6) (0.8) (0.6)
Shares assumed to be issued upon
exercise of stock options, net of
treasury buyback at period-end
market price (if higher than
average market price)............... 3.1 1.9 * 2.1
Shares assumed to be issued upon
conversion of preferred
securities of subsidiary............ * * * *
-------- -------- -------- --------
Fully diluted shares.................. 304.6 301.3 300.6 290.9
-------- -------- -------- --------
-------- -------- -------- --------
- ------------------------
<FN>
Note: The Company reports earnings per common share as the effect of dilutive
securities is less than 3%.
* This item was anti-dilutive for this period.
</TABLE>
<PAGE>
EXHIBIT 12
INTERNATIONAL PAPER COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TITLE 1992 1993 1994 1995 1996 1996 1997
- ----- ------ ------ ------- -------- ------- -------- -------
A) Earnings (loss) before income taxes, minority
interest, extraordinary
item and accounting changes.................... $ 226 $538.0 $ 715.0 $2,028.0 $ 802.0 $ 780.0 $(241.0)
B) Less: Minority interest expense, net of taxes... (15.0) (36.0) (47.0) (156.0) (169.0) (143.0) (98.0)
C) Add: Fixed charges excluding capitalized
interest....................................... 325.3 365.3 412.3 605.9 672.4 493.8 503.4
D) Add: Amortization of previously capitalized
interest....................................... 9.9 12.2 12.8 13.0 17.8 14.0 14.9
E) Less: Equity in undistributed earnings of
affiliates..................................... (19.1) (25.9) (49.1) (94.5) 6.2 (3.4) (28.3)
------- ------- ------- -------- ------- -------- --------
F) Earnings (loss) before income taxes, minority
interest, extraordinary item, accounting
changes and fixed charges...................... $527.1 $ 853.6 $1,044.0 $2,396.4 $1,329.4 $1,141.4 $ 151.0
------ ------- -------- ------- ------- -------- -------
------ ------- -------- ------- ------- -------- -------
Fixed Charges
G) Interest and amortization of debt expense....... $297.1 $334.5 $ 371.0 $ 542.3 $ 582.8 $ 435.7 $ 441.1
H) Interest factor attributable to rentals......... 28.2 30.8 41.3 53.0 66.0 40.4 44.6
I) Preferred dividends of subsidiary............... 10.6 23.6 17.7 17.7
J) Capitalized interest............................ 42.0 12.2 18.0 58.0 66.7 43.4 47.0
------ ------- -------- ------- ------- ------- -------
K) Total fixed charges............................. $367.3 $377.5 $ 430.3 $ 663.9 $ 739.1 $ 537.2 $ 550.4
------ ------- -------- ------- ------- ------- -------
------ ------- -------- ------- ------- ------- -------
L) Ratio of earnings to fixed charges.............. 1.44 2.26 2.43 3.61 1.80 2.12
M) Deficiency in earnings necessary to cover
fixed charges................................... -- -- -- -- -- -- $399.4
------ ------- -------- ------- ------- ------- -------
------ ------- -------- ------- ------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 469
<SECURITIES> 0
<RECEIVABLES> 2,723
<ALLOWANCES> 105
<INVENTORY> 2,862
<CURRENT-ASSETS> 6,226
<PP&E> 22,411
<DEPRECIATION> 10,024
<TOTAL-ASSETS> 27,394
<CURRENT-LIABILITIES> 5,947
<BONDS> 6,656
0
0
<COMMON> 303
<OTHER-SE> 8,446
<TOTAL-LIABILITY-AND-EQUITY> 27,394
<SALES> 15,015
<TOTAL-REVENUES> 15,015
<CGS> 11,213
<TOTAL-COSTS> 14,881
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 375
<INCOME-PRETAX> (241)
<INCOME-TAX> (56)
<INCOME-CONTINUING> (283)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (283)
<EPS-PRIMARY> (0.94)
<EPS-DILUTED> (0.94)
</TABLE>
