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 March 31, 1998 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 April 30, 1998: 307,487,640 shares.
<PAGE>
INTERNATIONAL PAPER COMPANY
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months Ended March 31, 1998 and 1997 3
Consolidated Balance Sheet -
March 31, 1998 and December 31, 1997 4-5
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1998 and 1997 6
Consolidated Statement of Common Shareholders'
Equity 7
Notes to Consolidated Financial
Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-14
Item 3. Other Financial Information 15-16
PART II. Other Information
Item 1. Legal Proceedings 17
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 18
Signatures 19
* 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)
Three Months Ended
March 31,
--------------------
1998 1997
--------- ---------
Net Sales $ 4,868 $ 4,862
--------- ---------
Costs and Expenses
Cost of products sold 3,654 3,636
Selling and administrative expenses 374 379
Depreciation and amortization 298 320
Distribution expenses 224 237
Taxes other than payroll and income taxes 50 52
--------- ---------
Total Costs and Expenses 4,600 4,624
--------- ---------
Earnings Before Interest, Income Taxes and
Minority Interest 268 238
Interest expense, net 127 130
--------- ---------
Earnings Before Income Taxes and Minority Interest 141 108
Income tax provision 46 40
Minority interest expense, net of taxes 20 34
--------- ---------
Net Earnings $ 75 $ 34
========= =========
Earnings Per Common Share $ 0.25 $ 0.11
========= =========
Earnings Per Common Share - Assuming Dilution $ 0.25 $ 0.11
========= =========
Average Shares of Common Stock Outstanding 302.3 300.6
========= =========
Cash Dividends Per Common Share $ 0.25 $ 0.25
========= =========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
March 31, December 31,
1998 1997
---------- ----------
Assets
Current Assets
Cash and temporary investments $ 534 $ 398
Accounts and notes receivable, net 2,373 2,404
Inventories 2,720 2,760
Other current assets 365 383
---------- ----------
Total Current Assets 5,992 5,945
---------- ----------
Plants, Properties and Equipment, Net 12,286 12,369
Forestlands 3,026 2,969
Investments 1,269 1,166
Goodwill 2,532 2,557
Deferred Charges and Other Assets 1,795 1,748
---------- ----------
Total Assets $ 26,900 $ 26,754
========== ==========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
March 31, December 31,
1998 1997
-------- ------------
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of
long-term debt $ 2,173 $ 2,212
Accounts payable 1,319 1,338
Accrued liabilities 1,337 1,330
-------- --------
Total Current Liabilities 4,829 4,880
-------- --------
Long-Term Debt 7,260 7,154
Deferred Income Taxes 2,709 2,681
Other Liabilities 1,203 1,236
Minority Interest 1,807 1,643
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
1998 - 302.9 shares, 1997 - 302.9 shares 303 303
Paid-in capital 3,647 3,654
Retained earnings 5,186 5,186
Accumulated other comprehensive income (loss) (475) (396)
-------- --------
8,661 8,747
Less: Common stock held in treasury,
at cost; 1998 - 0.4 shares,
1997 - 0.7 shares 19 37
-------- --------
Total Common Shareholders' Equity 8,642 8,710
-------- --------
Total Liabilities and Common Shareholders' Equity $ 26,900 $ 26,754
======== ========
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
Three Months Ended
March 31,
------------------
1998 1997
------- -------
Operating Activities
Net earnings $ 75 $ 34
Depreciation and amortization 298 320
Deferred income taxes 20 (26)
Payments related to restructuring and legal
reserves (18)
Other, net (7) 17
Changes in current assets and liabilities
Accounts and notes receivable (51) (57)
Inventories (15) (65)
Accounts payable and accrued liabilities (53) 40
Other (22) (22)
-------- --------
Cash Provided by Operations 227 241
-------- --------
Investment Activities
Invested in capital projects (206) (202)
Mergers and acquisitions, net of cash acquired (156)
Proceeds from divestitures 81
Other (31) 9
-------- --------
Cash Used for Investment Activities (312) (193)
-------- --------
Financing Activities
Issuance of common stock 37 14
Issuance of preferred securities by subsidiary 170
Issuance of debt 97 217
Reduction of debt (101) (43)
Change in bank overdrafts 53 (52)
Dividends paid (75) (75)
Other 37 113
-------- --------
Cash Provided by Financing Activities 218 174
-------- --------
Effect of Exchange Rate Changes on Cash 3 (14)
-------- --------
Change in Cash and Temporary Investments 136 208
Cash and Temporary Investments
Beginning of the period 398 352
-------- --------
End of the period $ 534 $ 560
======== ========
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
Common Stock Issued Treasury Stock
------------------- --------------
Accumulated Total
Other Common
Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 302,910 $ 303 $ 3,654 $ 5,186 $ (396) 726 $ 37 $ 8,710
Issuance of stock for various plans 34 (7) (957) (46) 39
Repurchase of stock 610 28 (28)
Cash dividends - common stock
($.25 per share) (75) (75)
Comprehensive income
Net earnings 75 75
Realized foreign currency
translation adjustment
related to divestitures 11 11
Change in cumulative foreign
currency translation adjustment (90) (90)
--------
Total comprehensive income (loss) (4)
-------- ------- -------- -------- -------- ----- ------ --------
Balance, March 31, 1998 302,944 $ 303 $ 3,647 $ 5,186 $ (475) 379 $ 19 $ 8,642
======== ======= ======== ======== ======== ===== ====== ========
<CAPTION>
Three Months Ended March 31, 1997
Common Stock Issued Treasury Stock
------------------- --------------
Accumulated Total
Other Common
Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 300,824 $ 301 $ 3,599 $ 5,639 $ (173) 554 $ 22 $ 9,344
Issuance of stock for various plans 513 15 (620) (24) 39
Repurchase of stock 607 25 (25)
Cash dividends - common stock
($.25 per share) (75) (75)
Comprehensive income
Net earnings 34 34
Change in cumulative foreign
currency translation adjustment (4) (4)
--------
Total comprehensive income 30
-------- -------- -------- -------- -------- ------ ------ --------
Balance, March 31, 1997 301,337 $ 301 $ 3,614 $ 5,598 $ (177) 541 $ 23 $ 9,313
======== ======== ======== ======== ======== ====== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<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, 1997, which has
previously been filed with the Commission.
2. Earnings per common share were computed by dividing net earnings by the
weighted average number of common shares outstanding. Earnings per common
share-assuming dilution were computed assuming that all potentially
dilutive securities were converted into common shares at the beginning of
each period. A reconciliation of the amounts included in the computation
of earnings per common share and earnings per common share-assuming
dilution is as follows.
Three Months Ended
March 31,
In millions 1998 1997
-------- --------
Net earnings $ 75 $ 34
Effect of dilutive securities
Preferred securities of subsidiary trust
-------- --------
Net earnings - assuming dilution $ 75 $ 34
======== ========
Average common shares outstanding 302.3 300.6
Effect of dilutive securities
Long-term incentive plan deferred
compensation (0.9) (0.9)
Stock options 1.8 1.2
Preferred securities of subsidiary trust
-------- --------
Average common shares outstanding-assuming
dilution 303.2 300.9
======== ========
Earnings per common share $ .25 $ .11
======== ========
Earnings per common share - assuming
dilution $ .25 $ .11
======== ========
If an amount does not appear in the above table, the security was antidilutive
for the period presented.
3. In February 1998, the Company entered into a joint venture with Olmuksa in
Turkey for the manufacture of containerboard and corrugated boxes for
markets in Turkey and Europe. Also in February 1998, Carter Holt Harvey
and International Paper jointly acquired Australian-based Continental Cup.
This acquisition will allow Carter Holt Harvey and International Paper's
cup subsidiary, Imperial Bondware, to offer a full line of food service
products in the Australian and New Zealand markets.
In September 1997, the Company acquired Merbok Formtec, a company that has
pioneered the development of door facing products through postforming
medium-density fiberboard. In November 1997, the stock of Taussig Graphics
Supply, Inc. was acquired.
All of the above acquisitions were accounted for using the purchase
method.
8
<PAGE>
4. In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information", which requires the presentation of
segment information on a basis consistent with that used by management for
operating decisions. The provisions of this statement will be adopted in
fiscal year 1998.
5. In March 1998, IP Timberlands, Ltd. completed the third 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 first-quarter 1998 transaction covered approximately 36,000 acres and
resulted in a gain of approximately $36 million before taxes.
6. In March 1998, IP Forest Resources Company, a subsidiary of International
Paper, in accordance with the IP Timberlands, Ltd. partnership agreement,
purchased all of the 7,299,500 publicly traded Class A Depositary Units of
IP Timberlands, Ltd. for a cash purchase price of $13.6325 per unit.
7. In March 1998, Timberlands Capital Corp. II, Inc., a subsidiary of
International Paper, issued $170 million of 7.005% preferred securities as
part of the financing to repurchase the outstanding units of IP
Timberlands, Ltd. These securities are classified in the consolidated
balance sheet as a minority interest liability and dividend payments will
be included in minority interest expense.
8. 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. It
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. In December 1997, an additional pre-tax charge of $125 million
($80 million after taxes or $.26 per share) was recorded for anticipated
losses on the sale of the remaining imaging businesses.
Through the end of the 1998 first quarter, most of the restructuring
actions have been completed or announced. We believe the reserves
established for these actions will be adequate.
9. 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 now final.
10. In December 1997, the Company recorded a $170 million pre-tax gain ($97
million after taxes and minority interest expense or $.32 per share) from
the redemption of certain retained west coast partnership interests and
the release of a related debt guaranty.
11. 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 $6 million were paid during each of the three months
ended March 31, 1998 and 1997.
9
<PAGE>
12. Inventories by major category include (in millions):
March 31, December 31,
1998 1997
--------- ------------
Raw materials $ 456 $ 478
Finished pulp, paper and packaging
products 1,482 1,466
Finished lumber and panel products 168 160
Operating supplies 387 387
Other 227 269
--------- ---------
Total $ 2,720 $ 2,760
========= =========
13. Interest payments made during the three month periods ended March 31, 1998
and 1997 were $149 million and $140 million, respectively. The Company
capitalized net interest costs of $12 million for the 1998 first quarter
and $14 million for the 1997 first quarter. Total interest expense was
$150 million for both the 1998 and 1997 first quarter. Income tax payments
made during the three months ended March 31, 1998 and 1997 were $38
million and $8 million, respectively.
14. Temporary investments with a maturity of three months or less are treated
as cash equivalents and are stated at cost. Temporary investments totaled
$231 million and $268 million at March 31, 1998 and December 31, 1997,
respectively.
15. Accumulated depreciation was $10.1 billion at March 31, 1998 and $10.0
billion at December 31, 1997. The allowance for doubtful accounts was $90
million at March 31, 1998 and $93 million at December 31, 1997.
16. 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.
10
<PAGE>
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.
17. Subsequent Events
In April 1998, International Paper completed the previously announced
merger with Weston Paper and Manufacturing Company by exchanging 4.7
million International Paper common shares valued at approximately $232
million for the outstanding Weston shares.
Also in April 1998, the remaining printing plates business of the imaging
division was sold and the Company announced that it had reached an
agreement to sell the Veratec nonwovens business for approximately $290
million.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
International Paper's first-quarter 1998 net sales of $4.9 billion were even
with the 1997 first quarter and below the $5.1 billion recorded in the 1997
fourth quarter.
First-quarter 1998 net earnings were $75 million or $.25 per share compared with
$34 million or $.11 per share in the 1997 first quarter and $115 million or $.38
per share before special items in the 1997 fourth quarter. Fourth-quarter 1997
earnings were $132 million or $.44 per share after special items that consisted
of a $125 million pretax charge ($80 million after taxes or $.26 per share) for
anticipated losses on the sale of the remaining imaging businesses and a $170
million pretax gain ($97 million after taxes and minority interest expense or
$.32 per share) from the redemption of certain west coast partnership interests
and the release of a related debt guaranty.
First-quarter 1998 operating profit from businesses totaled $290 million
compared with $250 million in the first quarter of 1997 and $360 million in the
1997 fourth quarter before special items. Fourth-quarter 1997 operating profit
was $405 million after special items which added $45 million before taxes and
minority interest expense.
First-quarter 1998 earnings were well ahead of the 1997 first quarter reflecting
improved pricing for coated and uncoated papers in the United States and Europe.
Earnings for the first quarter of 1998 were down from the 1997 fourth quarter as
the economic situation in Asia continues to affect some businesses, particularly
the domestic pulp business and Carter Holt Harvey's log exports and pulp prices.
Weather conditions in the southern United States resulted in higher than
expected wood costs that were partially offset by the continued progress of
cost-reduction efforts. Compared with the 1997 fourth quarter, timber harvest
volumes on the Company's U.S. forestlands declined about 30% which negatively
impacted earnings.
Printing Papers 1998 first-quarter net sales of $1.4 billion were about even
with the 1997 first quarter and the 1997 fourth quarter. Operating profit for
the 1998 first quarter was $70 million compared with break-even results for the
1997 first quarter reflecting higher prices for major coated and uncoated paper
grades. Compared with 1997 fourth-quarter operating profit of $85 million,
segment profit for the 1998 first quarter declined moderately due to poor pulp
markets and lower sales volumes for uncoated grades. Sales for coated grades
were up over the previous quarter and demand for coated groundwood remained
strong throughout the quarter.
Packaging 1998 first-quarter net sales of $1.2 billion were even with the 1997
first quarter and declined from the 1997 fourth quarter. First-quarter 1998
operating profit of $60 million was about even with the 1997 first quarter and
improved over 1997 fourth-quarter profit of $45 million. Domestic containerboard
results were ahead of the 1997 first quarter and the previous quarter. Earnings
for Carter Holt Harvey were behind the 1997 first and fourth quarters. While
corrugated box pricing continued to improve over the previous quarter, bleached
board markets weakened somewhat and production was reduced to control
inventories.
Distribution net sales of $1.2 billion for the 1998 first quarter were ahead of
the 1997 first quarter and about even with the 1997 fourth quarter.
First-quarter 1998 operating profit declined to $20 million from $25 million in
the 1997 first and fourth quarters. First-quarter 1998 operating profit for
xpedx was behind the 1997 first and fourth quarters primarily due to lower
margins. The current quarter also included the results of Taussig Graphic Supply
that was acquired in November of 1997.
12
<PAGE>
Specialty Products 1998 first-quarter net sales declined to $750 million, down
from $860 million in the 1997 first quarter and $840 million in the 1997 fourth
quarter, primarily due to the divestiture of the imaging products businesses.
Despite a good quarter for the chemicals business, operating profit for the
specialty products segment declined to $50 million from $65 million in the
previous quarter before special items and $80 million in the 1997 first quarter
due to weak pricing in the oil and gas businesses and losses from the imaging
businesses that operated during the quarter. 1997 fourth-quarter results for the
specialty products segment were a loss of $60 million after a $125 million
pretax charge for anticipated losses on the sale of the remaining imaging
businesses.
Forest Products 1998 first-quarter net sales were $590 million compared with
$605 million for the 1997 first quarter and $710 million for the 1997 fourth
quarter. Operating profit of $90 million for the 1998 first quarter was even
with the 1997 first quarter and down substantially from the $140 million
recorded in the previous quarter before special items as timber harvest levels
declined from last year's record highs. Results for Carter Holt Harvey's forest
products business declined from the previous quarter primarily due to recent
economic events in Asian markets. The 1998 first quarter benefited from a $36
million gain before taxes from the sale of a partnership interest in about
36,000 acres of the Company's Allegheny forestlands. This sale was the third in
a series of transactions announced in the 1997 second quarter. 1997
fourth-quarter operating profit of $310 million after special items included a
$170 million pretax gain from the redemption of certain west coast partnership
interests and the release of a related debt guaranty.
Carter Holt Harvey reported net sales of $415 million in the 1998 first quarter,
down from $470 million in the 1997 first quarter. First-quarter 1998 operating
profit for Carter Holt Harvey declined to $10 million from $60 million in the
1997 first quarter largely due to the Asian economic slowdown which particularly
affected log exports and pulp prices. About $10 million of the earnings decline
is due to unfavorable currency exchange rate changes. COPEC, the Chilean forest
products company owned 30% by Carter Holt Harvey, also reported lower earnings
due to adverse currency exchange rate fluctuations and weak demand resulting
from the Asian economic situation.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $227 million for the 1998 first quarter
compared with $241 million in the 1997 first quarter. Improved earnings were
offset by higher working capital requirements for the 1998 first quarter and
payments related to the prior-year restructuring charges. The $141 million
increase in working capital included a $51 million increase in receivables and a
$53 million decrease in current liability balances from December 1997. Working
capital on a cash flow basis increased $104 million during the first quarter of
1997.
Investments in capital projects totaled $206 million for the 1998 first quarter,
about even with the $202 million spent in the 1997 first quarter. Mergers and
acquisitions included the investment in a joint venture with Olmuksa in Turkey
for the manufacture of containerboard and corrugated boxes, the acquisition of
Australian-based Continental Cup and the repurchase of the publicly traded units
of IP Timberlands, Ltd. for approximately $100 million. Proceeds from
divestitures totaled $81 million from the sale of certain imaging businesses.
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 lowered to approximately $1.1 billion for 1998,
below expected 1998 depreciation expense. Capital spending will continue to be
focused on the Company's stronger, more competitive businesses.
Financing activities for the 1998 first quarter include a $4 million net
reduction in primarily short-term debt. Net borrowings of $174 million for the
1997 first quarter consisted primarily of short-term debt. During the 1998 first
13
<PAGE>
quarter, $170 million of 7.005% preferred securities were issued by a subsidiary
of the Company as part of the financing to repurchase the outstanding units of
IP Timberlands, Ltd. These securities are classified in the consolidated balance
sheet as a minority interest liability and dividend payments will be included in
minority interest expense.
Common stock dividend payments were $75 million or $.25 per common share for the
1998 first quarter, even with the prior-year period on a per share basis.
MERGERS AND ACQUISITIONS
In February 1998, the Company entered into a joint venture with Olmuksa in
Turkey for the manufacture of containerboard and corrugated boxes for markets in
Turkey and Europe.
In February 1998, Carter Holt Harvey and International Paper jointly acquired
Australian-based Continental Cup. This acquisition will allow Carter Holt Harvey
and International Paper's cup subsidiary, Imperial Bondware, to offer a full
line of food service products in the Australian and New Zealand markets.
In March 1998, IP Forest Resources Company, a subsidiary of International Paper,
purchased all of the 7,299,500 publicly traded Class A Depositary Units of IP
Timberlands, Ltd. for a cash purchase price of $13.6325 per unit.
In April 1998, the Company completed the merger with Weston Paper, a corrugated
manufacturer serving markets in the United States, by exchanging International
Paper common stock worth approximately $232 million for all of the outstanding
Weston Paper shares.
RESTRUCTURING ACTIONS
Certain of the imaging products printing and graphic arts businesses were sold
in late February 1998 and the remaining imaging businesses were sold early in
the 1998 second quarter. The sales of the Veratec nonwovens business and the
Company's label business have been announced.
OTHER
Minority interest expense for the 1998 first quarter declined primarily due to
lower earnings for Carter Holt Harvey, which is owned approximately 50% by
International Paper.
The effective income tax rate for the 1998 first quarter declined to 33% from
37% in the 1997 first quarter primarily due to changes in the mix of estimated
annual earnings.
YEAR-2000 COSTS
Many of our systems and related computer technology are year-2000 compliant.
However, we have a program in place to bring the remaining software and systems
into year-2000 compliance by mid-1999. We estimate that this will cost $65
million, exclusive of software and systems that are being replaced or upgraded
in the normal course of business. Under the program as we continue to review
existing systems and related computer technology and alternatives for bringing
them into year-2000 compliance, this cost estimate may be revised. Information
system maintenance or modification costs are expensed as incurred, while the
cost of new software and equipment is capitalized and amortized over the assets'
useful lives.
14
<PAGE>
ITEM 3. OTHER FINANCIAL INFORMATION
Financial Information by Industry Segment
(Unaudited)
(In millions)
Net Sales by Industry Segment
Three Months Ended
March 31,
-------------------------
1998 1997
--------- ---------
Printing Papers $ 1,380 $ 1,380
Packaging 1,200 1,190
Distribution 1,225 1,090
Specialty Products 750 860
Forest Products 590 605
Less: Intersegment Sales (277) (263)
--------- ---------
Net Sales $ 4,868 $ 4,862
========= =========
The above amounts include Carter Holt Harvey net sales of $415 million in the
first quarter of 1998 and $470 million in the first quarter of 1997.
Operating Profit by Industry Segment
Three Months Ended
March 31,
------------------------
1998 1997
--------- ---------
Printing Papers $ 70 $ 0
Packaging 60 55
Distribution 20 25
Specialty Products 50 80
Forest Products 90 90
--------- ---------
Operating Profit 290 250
Interest expense, net (127) (130)
Corporate items, net (22) (12)
--------- ---------
Earnings Before Income
Taxes and Minority Interest $ 141 $ 108
========= =========
The above amounts include Carter Holt Harvey operating profit of $10 million in
the first quarter of 1998 and $60 million in the first quarter of 1997.
15
<PAGE>
Production by Products
Three Months Ended
March 31,
--------------------
1998 1997 (D)
-------- --------
Printing Papers (In thousands
of tons)
White Papers and Bristols 990 1,027
Coated Papers 332 310
Market Pulp (A) 512 575
Newsprint 24 21
Packaging (In thousands of
tons)
Containerboard 709 699
Bleached Packaging Board 521 549
Industrial Papers 161 172
Industrial and Consumer
Packaging (B) 782 807
Specialty Products (In
thousands of tons)
Tissue 35 32
Forest Products (In millions)
Panels (sq. ft. 3/8"
basis) (C) 360 301
Lumber (board feet) 529 481
MDF (sq. ft. 3/4" basis) 48 52
Particleboard (sq. ft.
3/4" basis) 47 45
(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) Certain reclassifications and adjustments have been made to prior-period
amounts.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The litigation referred to in the Company's Form 10-K for 1997 under "Other
Litigation" relating to Los Andes, in Chile, is updated as follows:
The Company's majority-owned subsidiary, Carter Holt Harvey, has an indirect
shareholding of 30.05% in Chile's largest industrial company, COPEC. This
shareholding is held through Carter Holt Harvey's 50% interest in Inversiones y
Desarrollo Los Andes S.A. ("Los Andes") which holds 60.1% of the shares of
COPEC. The other 50% of Los Andes is owned by Inversiones Socoroma S.A.
("Socoroma"), a Chilean investment company. In late 1993, Carter Holt Harvey
commenced several actions in Chilean courts challenging certain corporate
governance documents of Los Andes, as well as agreements between Carter Holt
Harvey's subsidiary and Socoroma. All of those actions have now been terminated.
In December 1994, Socoroma commenced an arbitration action seeking to expel
Carter Holt Harvey from Los Andes at a price which is less than the carrying
value. In April 1998, the arbitrator dismissed Socoroma's request, but granted
it the right to claim monetary damages for Carter Holt Harvey's breach of
certain of its obligations as a participant in the Los Andes joint venture.
While any proceeding or litigation has an element of uncertainty, the Company
believes that the resolution of this issue will not have a material adverse
effect on its consolidated financial position or results of operations.
17
<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
A report on Form 8-K was filed on April 14, 1998.
18
<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: May 15, 1998 By /s/ MARIANNE M. PARRS
----------------------------
Marianne M. Parrs
Senior Vice President
and Chief Financial Officer
Date: May 15, 1998 By /s/ ANDREW R. LESSIN
----------------------------
Andrew R. Lessin
Vice President, Controller and
Chief Accounting Officer
19
INTERNATIONAL PAPER COMPANY
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
(In millions, except per-share amounts)
Three Months
Ended
March 31,
--------------------
1998 1997
-------- --------
Net earnings $ 75 $ 34
Reduction in minority interest expense,
net of taxes, assuming conversion of
preferred securities of subsidiary
trust
-------- --------
Net earnings - assuming dilution $ 75 $ 34
======== ========
Average common shares outstanding 302.3 300.6
Shares assumed to be repurchased using
long-term incentive plan deferred
compensation at average
market price (0.9) (0.9)
Shares assumed to be issued upon exercise
of stock options, net of treasury
buyback at average market price 1.8 1.2
Shares assumed to be issued upon
conversion of preferred securities
of subsidiary trust
-------- --------
Average common shares outstanding -
assuming dilution 303.2 300.9
======== ========
Earnings per common share $ .25 $ .11
======== ========
Earnings per common share - assuming
dilution $ .25 $ .11
======== ========
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
INTERNATIONAL PAPER COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
(Unaudited)
<TABLE>
<CAPTION>
For the Years Ended December 31, Three Months Ended
March 31,
TITLE 1993 1994 1995 1996 1997 1997 1998
- ---------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
A) Earnings before income
taxes, minority
interest, extraordinary
item and
accounting changes $ 538.0 $ 715.0 $ 2,028.0 $ 802.0 $ 16.0 $ 108.0 $ 141.0
B) Less: Minority interest
expense, net of taxes (36.0) (47.0) (156.0) (169.0) (129.0) (34.0) (20.0)
C) Add: Fixed charges
excluding capitalized
interest 365.3 412.3 605.9 672.4 686.6 170.4 171.3
D) Add: Amortization of
previously capitalized
interest 12.2 12.8 13.0 17.8 20.0 4.8 5.4
E) Less: Equity in
undistributed earnings
of affiliates (25.9) (49.1) (94.5) 6.2 (40.4) (5.8) 2.7
--------- --------- --------- --------- --------- --------- ---------
F) Earnings before income
taxes, minority interest,
extraordinary item,
accounting changes and
fixed charges $ 853.6 $ 1,044.0 $ 2,396.4 $ 1,329.4 $ 553.2 $ 243.4 $ 300.4
========= ========= ========= ========= ========= ========= =========
Fixed Charges
G) Interest and
amortization of debt expense $ 334.5 $ 371.0 $ 542.3 $ 582.8 $ 593.0 $ 149.6 $ 150.5
H) Interest factor
attributable to rentals 30.8 41.3 53.0 66.0 70.0 14.9 14.9
I) Preferred dividends of
subsidiary 10.6 23.6 23.6 5.9 5.9
J) Capitalized interest 12.2 18.0 58.0 66.7 61.9 13.8 11.7
--------- --------- --------- --------- --------- --------- ---------
K) Total fixed charges $ 377.5 $ 430.3 $ 663.9 $ 739.1 $ 748.5 $ 184.2 $ 183.0
========= ========= ========= ========= ========= ========= =========
L) Ratio of earnings to
fixed charges 2.26 2.43 3.61 1.80 1.32 1.64
========= ========= ========= ========= ========= =========
M) Deficiency in earnings
necessary to cover fixed
charges $ 195.3
=========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 534
<SECURITIES> 0
<RECEIVABLES> 2,463
<ALLOWANCES> 90
<INVENTORY> 2,720
<CURRENT-ASSETS> 5,992
<PP&E> 22,417
<DEPRECIATION> 10,131
<TOTAL-ASSETS> 26,900
<CURRENT-LIABILITIES> 4,829
<BONDS> 7,260
0
0
<COMMON> 303
<OTHER-SE> 8,339
<TOTAL-LIABILITY-AND-EQUITY> 26,900
<SALES> 4,868
<TOTAL-REVENUES> 4,868
<CGS> 3,654
<TOTAL-COSTS> 4,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 127
<INCOME-PRETAX> 141
<INCOME-TAX> 46
<INCOME-CONTINUING> 75
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
