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, 1999 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, 1999: 414,078,621 shares.
<PAGE>
INTERNATIONAL PAPER COMPANY
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months and Nine Months Ended September 30,
1999 and 1998 1
Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 3
Consolidated Statement of Common Shareholders' Equity -
Three Months and Nine Months Ended September 30, 1999
and 1998 4 - 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Other Financial Information 27
PART II. Other Information
Item 1. Legal Proceedings 29
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 31
Signatures 31
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
<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,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 6,251 $ 6,032 $ 18,279 $ 17,871
-------- -------- -------- --------
Costs and Expenses
Cost of products sold 4,593 4,568 13,589 13,340
Selling and administrative expenses 495 482 1,548 1,476
Depreciation and amortization 383 378 1,140 1,118
Distribution expenses 268 273 821 808
Taxes other than payroll and income taxes 58 57 172 180
Restructuring and other charges 155 113 155
Write-off of in-process research and
development costs acquired by an investee company 6
Merger integration costs 68 225
Environmental remediation charge 10 10
Oil and gas impairment charge 55 55
Equity earnings from investment in Scitex (1) (3) (2)
-------- -------- -------- --------
Total Costs and Expenses 5,875 5,967 17,615 17,136
-------- -------- -------- --------
Reversal of reserves no longer required 45 36 45
Gain on sale of business 20 20
-------- -------- -------- --------
Earnings Before Interest, Income Taxes, Minority
Interest and Extraordinary Item 376 130 700 800
Interest expense, net 134 147 400 461
-------- -------- -------- --------
Earnings (Loss) Before Income Taxes, Minority
Interest and Extraordinary Item 242 (17) 300 339
Income tax provision (benefit) 54 (23) 64 89
Minority interest expense, net of taxes 43 8 117 49
-------- -------- -------- --------
Earnings (Loss) Before Extraordinary Item 145 (2) 119 201
Loss on extinguishment of debt, net of taxes (3) (16)
-------- -------- -------- --------
Net Earnings (Loss) $ 142 $ (2) $ 103 $ 201
======== ======== ======== ========
Earnings (Loss) Per Common Share Before Extraordinary
Item $ 0.35 $ (0.01) $ 0.29 $ 0.49
Earnings (Loss) Per Common Share - Extraordinary Item (0.01) (0.04)
-------- -------- -------- --------
Earnings (Loss) Per Common Share $ 0.34 $ (0.01) $ 0.25 $ 0.49
======== ======== ======== ========
Earnings (Loss) Per Common Share - Assuming
Dilution $ 0.34 $ (0.01) $ 0.25 $ 0.49
======== ======== ======== ========
Average Shares of Common Stock Outstanding 413.5 412.2 412.9 410.5
======== ======== ======== ========
Cash Dividends Per Common Share $ 0.25 $ 0.26 $ 0.76 $ 0.78
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Assets
Current Assets
Cash and temporary investments $ 353 $ 533
Accounts and notes receivable, net 3,294 3,018
Inventories 3,188 3,211
Other current assets 367 378
-------- --------
Total Current Assets 7,202 7,140
Plants, Properties and Equipment, Net 14,593 15,328
Forestlands 3,031 3,093
Investments 1,106 1,147
Goodwill 2,637 2,699
Deferred Charges and Other Assets 1,918 1,932
-------- --------
Total Assets $ 30,487 $ 31,339
======== ========
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 1,126 $ 1,418
Accounts payable 1,611 1,808
Accrued payroll and benefits 371 370
Other accrued liabilities 1,287 841
-------- --------
Total Current Liabilities 4,395 4,437
-------- --------
Long-Term Debt 7,584 7,697
Deferred Income Taxes 3,325 3,601
Other Liabilities 1,289 1,321
Minority Interest 1,675 1,720
International Paper - Obligated Mandatorily Redeemable Preferred
Securities of Subsidiaries Holding International Paper Debentures 1,805 1,805
Common Shareholders' Equity
Common stock, $1 par value, 1999 - 414.0 shares, 1998 - 413.2 shares 414 413
Paid-in capital 3,987 3,896
Retained earnings 6,657 6,868
Accumulated other comprehensive income (loss) (614) (395)
-------- --------
10,444 10,782
Less: Common stock held in treasury, at cost, 1999 - 0.6 shares,
1998 - 0.6 shares 30 24
-------- --------
Total Common Shareholders' Equity 10,414 10,758
-------- --------
Total Liabilities and Common Shareholders' Equity $ 30,487 $ 31,339
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended
September 30,
------------------
1999 1998
------- -------
Operating Activities
Net earnings $ 103 $ 201
Depreciation and amortization 1,140 1,118
Deferred income tax (benefit) provision (209) 29
Payments related to restructuring and legal reserves (117) (66)
Payments related to Union Camp merger (124)
Oil and gas impairment charges 55
Restructuring and other charges 113 155
Merger integration costs 225
Environmental remediation charge 10
Reversals of reserves no longer required (36) (45)
Gain on sale of business (20)
Loss on extinguishment of debt, before taxes 26
Other, net 22 48
Changes in current assets and liabilities
Accounts and notes receivable (331) 85
Inventories (57) (38)
Accounts payable and accrued liabilities 381 (181)
Other 11 (20)
------- -------
Cash Provided by Operations 1,157 1,321
------- -------
Investment Activities
Invested in capital projects (706) (873)
Mergers and acquisitions, net of cash acquired (54) (464)
Proceeds from divestitures 119 517
Other (84) (187)
------- -------
Cash Used for Investment Activities (725) (1,007)
------- -------
Financing Activities
Issuance of common stock 192 64
Issuance of preferred securities by subsidiaries 1,525
Issuance of debt 787 209
Reduction of debt (1,159) (1,287)
Penalties paid on early retirement of debt (23)
Change in bank overdrafts (68) (57)
Dividends paid (314) (324)
Other (12) 31
------- -------
Cash (Used for) Provided by Financing Activities (597) 161
------- -------
Effect of Exchange Rate Changes on Cash (15) (13)
------- -------
Change in Cash and Temporary Investments (180) 462
Cash and Temporary Investments
Beginning of the period 533 433
------- -------
End of the period $ 353 $ 895
======= =======
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Three Months Ended September 30, 1999
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------- -------- -------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1999 413,228 $ 413 $ 3,997 $ 6,617 $ (620) 139 $ 9 $ 10,398
Issuance of stock for various
plans 799 1 (10) (207) (12) 3
Repurchase of stock 640 33 (33)
Cash dividends - Common
stock ($0.25 per share) (102) (102)
Comprehensive income
Net earnings 142 142
Change in cumulative
foreign currency
translation adjustment 6 6
--------
Total comprehensive
income 148
------- -------- -------- -------- ------- -------- -------- --------
Balance, September 30, 1999 414,027 $ 414 $ 3,987 $ 6,657 $ (614) 572 $ 30 $ 10,414
======= ======== ======== ======== ======= ======== ======== ========
</TABLE>
Three Months Ended September 30, 1998
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------- -------- -------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 413,009 $ 413 $ 3,880 $ 7,041 $ (371) 260 $ 12 $ 10,951
Issuance of stock for various
plans 3 (4) (126) (6) 2
Repurchase of stock (150) (6) 610 26 (32)
Cash dividends - Common
stock ($0.26 per share) (109) (109)
Comprehensive income (loss)
Net earnings (loss) (2) (2)
Realized foreign currency
translation adjustment
related to divestitures (4) (4)
Change in cumulative
foreign currency
translation adjustment 45 45
--------
Total comprehensive
income (loss) 39
------- -------- -------- -------- ------- -------- -------- --------
Balance, September 30, 1998 412,862 $ 413 $ 3,870 $ 6,930 $ (330) 744 $ 32 $ 10,851
======= ======== ======== ======== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------- -------- ------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 413,185 $ 413 $ 3,896 $ 6,868 $ (395) 552 $ 24 $ 10,758
Issuance of stock for various
plans 842 1 91 (1,870) (87) 179
Repurchase of stock 1,890 93 (93)
Cash dividends - Common
stock ($0.76 per share) (314) (314)
Comprehensive income (loss)
Net earnings 103 103
Change in cumulative
foreign currency
translation adjustment (219) (219)
--------
Total comprehensive
income (loss) (116)
------- -------- -------- -------- ------- -------- -------- --------
Balance, September 30, 1999 414,027 $ 414 $ 3,987 $ 6,657 $ (614) 572 $ 30 $ 10,414
======= ======== ======== ======== ======= ======== ======== ========
</TABLE>
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------- -------- ------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 408,174 $ 408 $ 3,659 $ 7,053 $ (415) 726 $ 37 $ 10,668
Issuance of stock for merger 4,683 5 227 232
Issuance of stock for various
plans 279 (13) (1,832) (90) 77
Repurchase of stock (274) (3) 1,850 85 (88)
Cash dividends - Common
stock ($0.78 per share) (324) (324)
Comprehensive income
Net earnings 201 201
Realized foreign currency
translation adjustment
related to divestitures 7 7
Change in cumulative
foreign currency
translation adjustment 78 78
--------
Total comprehensive
income 286
------- -------- -------- -------- ------- -------- -------- --------
Balance, September 30, 1998 412,862 $ 413 $ 3,870 $ 6,930 $ (330) 744 $ 32 $ 10,851
======= ======== ======== ======== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<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
International Paper and Union Camp Corporation Form 10-Ks for the year
ended December 31, 1998, which have previously been filed with the
Commission.
On April 30, 1999, the Company completed its previously announced merger
with Union Camp Corporation in a transaction accounted for as a
pooling-of-interests. The accompanying financial statements have been
restated to include the financial position and results of operations for
both International Paper and Union Camp for all periods presented.
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
In millions 1999 1998 1999 1998
- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 142 $ (2) $ 103 $ 201
Effect of dilutive securities
Preferred securities of subsidiary trust
------- ------- ------- -------
Net earnings (loss) - assuming dilution $ 142 $ (2) $ 103 $ 201
======= ======= ======= =======
Average common shares outstanding 413.5 412.2 412.9 410.5
Effect of dilutive securities
Long-term incentive plan deferred
compensation (0.8) (0.8)
Stock options 3.3 0.9 3.3 2.7
Preferred securities of subsidiary trust
------- ------- ------- -------
Average common shares outstanding -
assuming dilution 416.8 412.3 416.2 412.4
======= ======= ======= =======
Earnings (loss) per common share $ 0.34 $ (0.01) $ 0.25 $ 0.49
======= ======= ======= =======
Earnings (loss) per common share -
assuming dilution $ 0.34 $ (0.01) $ 0.25 $ 0.49
======= ======= ======= =======
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
6
<PAGE>
3. On November 24, 1998, the Company announced that it had reached an
agreement to merge with Union Camp Corporation (Union Camp), a diversified
paper and forest products company. The transaction was
approved by Union Camp and International Paper shareholders on April 30,
1999. Union Camp shareholders received 1.4852 International Paper common
shares for each Union Camp share held. The exchange ratio was calculated
based on an average closing price of International Paper common shares of
$47.80625 per share. The average closing price of International Paper
common shares was determined from ten randomly selected days during the 20
trading day period from March 26 through April 23. Based on this exchange
ratio and International Paper's closing price on April 28, 1999 of $57.375
per share, the equity value of the transaction was approximately $6.3
billion, or $85.21 per Union Camp share. The total value of the
transaction, including the assumption of debt, was approximately $7.9
billion.
International Paper issued approximately 110 million shares for
approximately 74 million Union Camp shares, including options. Assuming
dilution, approximately 417 million shares of International Paper are
outstanding. Former Union Camp shareowners owned 26.3 percent of
International Paper on the merger date. The merger was accounted for as a
pooling of interests.
The accompanying financial statements have been restated to combine the
historical financial position and results of operations for both
International Paper and Union Camp for all periods presented. The results
of operations for the separate companies for the periods prior to the
merger and the combined amounts included in the Company's consolidated
financial statements are as follows:
Nine Months
Three Months Ended
Ended September 30,
In millions March 31, 1999 1998
- ----------- -------------- -------------
Net sales:
International Paper $ 4,962 $ 14,514
Union Camp 1,137 3,386
Intercompany eliminations (67) (29)
-------------- -------------
$ 6,032 $ 17,871
============== =============
Net earnings (loss)
International Paper $ 44 $ 182
Union Camp (10) 24
Other (2) (5)
-------------- -------------
$ 32 $ 201
============== =============
Note: Other includes the elimination of intercompany transactions and
adjustments to conform the accounting practices of the two companies.
In August 1999, the Company acquired Bolsaflex, S.A., a diversified
manufacturer of high graphics plastic packaging for consumer products
located in Buenos Aires, Argentina. This acquisition broadens our product
offering in the region.
On April 30, 1999, Carter Holt Harvey, a subsidiary of International
Paper, announced the acquisition of the corrugated packaging business of
Stone Australia, a subsidiary of Smurfit-Stone Container Corporation. The
business was acquired for approximately $25 million and consists of two
sites in Melbourne and Sydney which serve industrial and primary produce
customers.
In December 1998, the Company completed the previously announced
acquisition of OAO Svetogorsk, a Russia-based pulp and paper business,
which should enhance the Company's ability to serve growing market demand
in Eastern Europe. Also in December 1998, Carter Holt Harvey and
International Paper jointly
7
<PAGE>
acquired Marinetti S.A.'s paper cup division based in Chile. This
acquisition enables the foodservice business to serve markets in South
America.
In July 1998, International Paper acquired the Zellerbach distribution
business from the Mead Corporation for approximately $261 million in cash.
Zellerbach has been integrated into xpedx, the Company's distribution
business.
In April 1998, Weston Paper and Manufacturing Company (Weston) was
acquired by exchanging about 4.7 million International Paper common shares
valued at approximately $232 million for all of the outstanding Weston
shares in a noncash transaction.
In 1998, Carter Holt Harvey acquired Riverwood International, an
Australia-based folding carton business for approximately $46 million in
cash. The results of this acquisition are included in the consolidated
financial statements beginning in April 1998.
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 surrounding countries. Also in February 1998, Carter
Holt Harvey and International Paper jointly acquired Australia-based
Continental Cup. This acquisition has allowed Carter Holt Harvey and
International Paper's Foodservice Division to offer a full line of
foodservice products in the Australian and New Zealand markets.
All of the acquisitions completed in 1998 and the Bolsaflex and
Stone-Australia acquisitions in 1999, were accounted for using the
purchase method. The operating results of the mergers and acquisitions
accounted for under the purchase method have been included in the
consolidated statement of earnings from the dates of acquisition.
4. In March 1998, IP Forest Resources Company, a wholly-owned 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.
5. In September 1998, the Company completed the last in a series of five
transactions relating to the sale of a subsidiary partnership interest in
approximately 175,000 acres of forestlands in Pennsylvania and New York.
The third quarter 1998 transaction resulted in a gain of approximately $37
million before taxes. A similar transaction was completed in each of the
previous four quarters.
6. On August 11, 1999 the Company issued Euro 250 million notes in bearer
form, with a coupon of 5 3/8%. The notes were issued at 99.516% of the par
amount and mature on August 11, 2006. These notes are subject to
redemption in whole, but not in part, at any time, at the option of the
Company. International Paper may also call the notes in the event of
certain changes affecting taxation in the United States.
7. In September 1998, International Paper Capital Trust III issued $805
million of International Paper-obligated mandatorily redeemable preferred
securities. International Paper Capital Trust III is a wholly-owned
consolidated subsidiary of International Paper and its sole assets are
International Paper 7 7/8% debentures. The obligations of International
Paper Capital Trust III related to its preferred securities are fully and
unconditionally guaranteed by International Paper. These preferred
securities are mandatorily redeemable on December 1, 2038.
In June 1998, IP Finance (Barbados) Limited, a non-U.S. wholly-owned
consolidated subsidiary of International Paper, issued $550 million of
preferred securities with a dividend payment based on LIBOR. These
preferred securities are mandatorily redeemable on June 30, 2008.
8
<PAGE>
In March 1998, Timberlands Capital Corp. II, Inc., a wholly-owned
consolidated 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 not
mandatorily redeemable and are classified in the consolidated balance
sheet as a minority interest liability.
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.
Distributions paid under all of the Company's subsidiary preferred
securities were $31 million and $16 million for the third quarter of 1999
and 1998, respectively, and $103 million and $28 million for the nine
months ended September 30, 1999 and 1998.
8. During the third quarter of 1999 the Company recorded special items
amounting to a net pre-tax charge of $78 million ($47 million after
taxes). The charge consisted of $50 million ($30 million after taxes) for
Union Camp merger-related termination benefits, $18 million ($11 million
after taxes) for one-time merger expenses and $10 million ($6 million
after taxes) to increase existing environmental remediation reserves
related to certain former Union Camp facilities.
Also during the 1999 third quarter, the Company recorded an extraordinary
$5 million pre-tax charge ($3 million after taxes) related to the
continuation of a refinancing of high interest Union Camp debt, which the
Company assumed under the merger agreement.
During the second quarter of 1999 the Company recorded special items
amounting to a net pre-tax charge of $234 million ($158 million after
taxes). The special items included a $98 million pre-tax charge ($67
million after taxes) for Union Camp merger-related termination benefits, a
$59 million pre-tax charge ($49 million after taxes) for one-time merger
expenses, a $113 million charge ($69 million after taxes) for asset
shutdowns of excess internal capacity and cost reduction actions, and a
$36 million pre-tax credit ($27 million after taxes) for the reversal of
reserves that were no longer required.
The Company also recorded an extraordinary $21 million pre-tax charge ($13
million after taxes) during the second quarter related to the refinancing
of high interest Union Camp debt, which the Company assumed under the
merger agreement.
The following table shows the impact of special items on 1999 pre-tax
earnings by quarter:
<TABLE>
<CAPTION>
Quarter
------------------------------
Year to
In millions First Second Third Date
- ----------- ----- ------ ----- -------
<S> <C> <C> <C> <C>
Earnings before special items, income taxes,
minority interest and extraordinary item $ 94 $ 198 $ 320 $ 612
Merger-related termination benefits (98) (50) (148)
One-time merger expenses (59) (18) (77)
Restructuring and other charges (113) (113)
Reversal of reserves no longer required 36 36
Environmental reserve (10) (10)
----- ----- ----- -----
Earnings (loss) before income taxes, minority
interest and extraordinary item $ 94 $ (36) $ 242 $ 300
====== ====== ====== ======
</TABLE>
9
<PAGE>
The one-time merger expenses of $77 million consist of $49 million of
merger costs and $28 million of post-merger expenses. The merger costs are
primarily investment banker, consulting, legal and accounting fees.
Post-merger expenses include costs related to employee retention, such as
stay bonuses and relocation. Other post-merger expenses include consulting
fees and the costs related to integrating Union Camp systems.
The Union Camp merger-related termination benefit charges result from the
integration of the previously separate International Paper and Union Camp
organizations. Under an integration benefits program 1,218 employees of
the combined company were identified for termination during the second and
third quarters at a total cost of $148 million. Benefits for certain
senior executives and managers are payable from the general assets of the
Company. Benefits for remaining employees are payable from plan assets of
the Company's qualified pension plan. Terminated employees may elect to
receive termination benefits in a one-time upfront payment or over a
period of time. Through September 30, 1999, 567 employees have been
terminated at a cost of $83 million. Substantially all of the 1,218
positions are expected to be eliminated by May 31, 2000. No further
adjustments are anticipated to be made to the merger-related termination
benefit charges.
The following table is a roll forward of the Union Camp merger-related
termination benefit charges and costs incurred by quarter. The amounts
identified below as incurred include all payments made or to be made to
employees that have been terminated. The payments are made from the
general assets of the Company or from the assets of the Company's
qualified pension plan.
Termination
In millions Benefits
- ----------- -----------
Special charge (572 employees) $ 98
Incurred costs - second quarter 1999 (83 employees) (30)
Special charge (646 employees) 50
Incurred costs - third quarter 1999 (484 employees) (53)
-----------
Balance, September 30, 1999 (651 employees) $ 65
===========
Note: Benefit costs are treated as incurred on termination date of employee.
The $113 million second quarter charge for the asset shutdowns of excess
internal capacity and cost reduction actions includes $57 million of asset
write-downs and $56 million of severance and other charges. The following
table and discussion present additional detail related to the $113 million
charge.
<TABLE>
<CAPTION>
Asset Severance
In millions Write-downs and Other Total
- ----------- ----------- --------- ---------
<S> <C> <C> <C>
Printing and Communication Papers (a) $ 6 $ 27 $ 33
European Papers (b) 3 7 10
Consumer Packaging (c) 19 12 31
Industrial Packaging (d) 12 12
Chemicals and Petroleum (e) 10 3 13
Industrial Papers (f) 7 7 14
----------- --------- ---------
$ 57 $ 56 $113
=========== ========= =========
</TABLE>
(a) The Company recorded a charge of $24 million for severance related to the
second phase of the Printing and Communication Papers business plan to
improve the cost position of its mills. The charge, pursuant to the
Company's ongoing severance program, covers a reduction of approximately
289 employees at 14 mills in the U.S. At September 30, 1999, 146 employees
had been terminated.
10
<PAGE>
Also, management approved a decision to permanently shut down the Hudson
River mill No. 4 paper machine located in Corinth N.Y. and the No. 2 paper
machine at the Franklin V.A. mill. The Franklin machine was shut down in
September 1999 and the Hudson River machine was previously shut down. The
Hudson River machine had been temporarily shut down in October 1998
because of lack of orders. The machines were written down by $6 million to
their estimated fair value of zero. Severance costs of $3 million cover
the termination of 147 employees. At September 30, 1999, 79 employees had
been terminated.
(b) The charge for European Papers, which covers the shutdown of two mills,
consists of $3 million in asset write downs, $6 million in severance costs
and $1 million of other exit costs. The Company decided to shut down the
Lana mill in Docelles, France due to excess capacity. The Lana mill
produces approximately 5,000 metric tons of high-end uncoated specialty
paper per year. The Company plans to shift this production to the La
Robertsau mill in Strasbourg, France. The mill shutdown will be completed
by June 2000. The Lana mill fixed assets were written down $3 million to
their estimated fair value of zero. Costs related to the site closure are
expected to be $1 million and severance related to the termination of 42
employees will be approximately $4 million. The Lana mill had revenues of
$9 million and an operating loss of $1 million for the nine months ended
September 30, 1999. At September 30, 1999, 2 employees had been
terminated.
The Corimex coating plant was shut down in April 1999. The market for
thermal fax paper, which was produced at the plant, has been shrinking
since the mid-1990's. The assets at this plant were considered to be
impaired in 1997 and were written down accordingly at that time. A $2
million severance charge was recorded during the second quarter of 1999 to
cover the costs of terminating 81 employees. Corimex had revenues of $6
million and an operating loss of $3 million for the nine months ended
September 30, 1999. At September 30, 1999, 81 employees had been
terminated.
(c) The Company's Consumer Packaging business is implementing a plan to
improve the overall performance of the Moss Point, Miss., mill. Included
in this plan is the shutdown of the No. 3 paper machine which produces
labels. This production is being transferred to the Hudson River mill. The
machine was written down $6 million to its estimated fair value of zero.
Severance costs including, but not limited to, employees associated with
the No. 3 machine total $10 million and cover the elimination of 360
positions. At September 30, 1999, 272 employees had been terminated.
Consumer Packaging shut down a facility in Brazil in an effort to reduce
excess capacity. Customers are being supplied by other International Paper
facilities in Latin America. The assets were written down $13 million to
their estimated fair value of zero and a severance charge of $1 million
covers the elimination of 29 positions. Other exit costs total $1 million.
At September 30, 1999, 16 employees had been terminated.
(d) As a result of the merger with Union Camp, the Company entered into
negotiations with Union Camp's joint venture partner in an Industrial
Packaging business in Turkey to resolve a non-compete clause in the joint
venture agreement. As a result of these negotiations and evaluation of
this entity, it was determined that the investment was impaired. A $12
million charge was recorded to reflect this impairment and the related
costs of resolving the non-compete agreement.
(e) As a result of an overall reduction in market demand for dissolving pulp,
the decision was made to downsize the Company's Natchez mill. Charges
associated with capacity reduction total $10 million and include the
shutdown of several pieces of equipment. A severance charge of $3 million
includes the elimination of 89 positions. At September 30, 1999, 88
employees had been terminated.
11
<PAGE>
(f) The Company's Industrial Papers business is implementing a plan to reduce
excess capacity at several of its locations. Certain equipment at the
Kaukauna, De Pere, and Menasha, Wis., plants is scheduled to be shut down
and the Toronto, Canada plant has been closed. The total amount related to
the write-down of these assets is $7 million. Severance costs related to
these shutdowns are $5 million and are based on a personnel reduction of
123 employees. Other exit costs total $2 million. At September 30, 1999,
26 employees had been terminated.
The following table is a roll forward of the severance costs included in
the 1999 restructuring plan:
In millions Severance
----------- -------------
Opening balance - second quarter $ 49
Cash charges - third quarter 1999 (13)
-------------
Balance, September 30, 1999 $ 36
=============
The $36 million pre-tax credit for the reversal of reserves that were no
longer required consists of $30 million related to a retained exposure at
the Lancey mill in France and $6 million of excess reserves previously
established by Union Camp. The Lancey mill was sold to an employee group
in October of 1997. In April 1999, the Company's remaining exposure to
potential obligations under this sale were resolved, and the reserve was
returned to income in the second quarter.
The following table shows the impact of special items on 1998 pre-tax
earnings by quarter:
<TABLE>
<CAPTION>
Quarter
-----------------------------------------
In millions First Second Third Fourth Year
- ----------- ----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Earnings before special items, income
taxes and minority interest $ 185 $ 177 $ 128 $ 110 $ 600
Reversal of reserves no longer required 45 38 83
Gain on sale of Veratec business 20 20
Oil and gas impairment charges (55) (56) (111)
Restructuring charges and write-off of
acquired in-process research and
development costs by Scitex (6) (10) (16)
Restructuring and other charges (145) (145)
----- ------ ------ ------ ------
Earnings (loss) before income taxes
and minority interest $ 185 $ 171 $ (17) $ 92 $ 431
===== ====== ====== ====== ======
</TABLE>
In June 1998, a $6 million pre-tax charge ($4 million after taxes) was
recorded to write off in-process research and development costs related to
an acquisition by Scitex, an investee company owned approximately 13% by
International Paper.
During the 1998 third quarter the Company recorded special items resulting
in a pre-tax charge of $145 million ($82 million after taxes and minority
interest). These items included a $45 million pre-tax gain ($27 million
after taxes) for the reversal of previously established reserves that were
no longer required and a $20 million pre-tax gain ($12 million after
taxes) from the sale of the Veratec nonwovens business. The Company also
recorded a $55 million pre-tax charge ($33 million after taxes) to write
down the value of its oil and gas
12
<PAGE>
assets. This write-down was made in accordance with the Securities and
Exchange Commission's regulation that companies that use the full-cost
method of accounting for oil and gas activities perform a ceiling test on
a quarterly basis. Also during the third quarter, the Company recorded
restructuring and other charges of $145 million ($82 million after taxes
and minority interest) consisting of $64 million of asset write-downs and
$81 million of severance costs and a $10 million charge ($6 million after
taxes) which represents International Paper's share of a restructuring
reserve taken by Scitex to exit its digital video business.
In December 1998, the Company recorded a pre-tax charge of $56 million
($35 million after taxes) for the further impairment of its oil and gas
assets due to declining prices. After further analysis of previously
established reserves, an additional $38 million ($23 million after taxes)
was returned to earnings in the fourth quarter of 1998.
A full discussion of these charges is included in the Company's 1998
Annual Report filed on Form 10-K.
The following table is a roll forward of the severance costs included in
the 1998 restructuring plan:
In millions Severance
----------- --------------
Opening balance - third quarter 1998 $ 81
Cash charges - fourth quarter 1998 (19)
--------------
Balance, December 31, 1998 62
Cash charges - first quarter 1999 (36)
Cash charges - second quarter 1999 (14)
Cash charges - third quarter 1999 0
Reserve reversal (6)
--------------
Balance, September 30, 1999 $ 6
==============
The severance reserve recorded in the 1998 third quarter is related to
2,508 employees. At December 31, 1998, 1,080 employees had been
terminated. At September 30, 1999, 2,274 employees had been terminated. We
anticipate that substantially all of the remaining reserve will be
utilized by December 31, 1999.
9. Inventories by major category include:
September 30, December 31,
In millions 1999 1998
- ----------- ------------- ------------
Raw materials $ 410 $ 555
Finished pulp, paper and packaging products 1,925 1,800
Finished lumber and panel products 175 183
Operating supplies 487 510
Other 191 163
------------- ------------
Total $3,188 $3,211
============= ============
10. Interest payments made during the nine month periods ended September 30,
1999 and 1998 were $450 million and $583 million, respectively.
Capitalized net interest costs were $27 million for the nine months ended
September 30, 1999. The Company capitalized net interest costs of $34
million for the nine months ended September 30, 1998. Total interest
expense was $457 million for the nine months ended September 30, 1999 and
$532 million for the nine months ended September 30,
13
<PAGE>
1998. Income tax payments made during the nine months ended September 30,
1999 and 1998 were $31 million and $150 million respectively.
11. Temporary investments with a maturity of three months or less are treated
as cash equivalents and are stated at cost. Temporary investments totaled
$176 million and $316 million at September 30, 1999 and December 31, 1998,
respectively.
12. Accumulated depreciation was $14.9 billion at September 30, 1999 and $14.2
billion at December 31, 1998. The allowance for doubtful accounts was $119
million at September 30, 1999 and $115 million at December 31, 1998.
13. The Company's equity investments consist primarily of Scitex and Carter
Holt Harvey's 30% ownership in COPEC, which it holds through a joint
venture. Both Scitex and COPEC are publicly traded companies. At September
30, 1999, the carrying amounts of these investments and their market
values based on the closing per share amounts were as follows:
In millions Scitex COPEC
----------- ------ ---------
Carrying amount $ 33 $ 833
Market value $ 62 $ 1,343
For various reasons, the market values on the closing per share amount may
be higher or lower than the amount that could be realized if these
investments were sold. On November 9, 1999 International Paper entered
into an agreement to sell its shares in Scitex for nearly $80 million. The
agreement is scheduled to close in January 2000. Disposition of this
investment has been pursued since 1997.
14. 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.
14
<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. The counterparties to the Company's interest rate swap
agreements and foreign exchange contracts consist of a number of major
international financial institutions. The Company continually monitors its
positions with and the credit quality of these financial institutions and
does not expect nonperformance by the counterparties.
15. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured by
its fair value. The Statement requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
The Statement is effective for fiscal years beginning after June 15, 2000.
A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance. The Statement cannot be applied
retroactively. The Statement must be applied to (a) derivative instruments
and (b) certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December 31, 1997
(and, at the company's election, before January 1, 1998).
The Company has not yet quantified the impact of adopting the Statement on
its consolidated financial statements and has not determined the timing of
or method of the adoption. However, adoption of the provisions of the
Statement could increase volatility in earnings and other comprehensive
income.
16. Certain reclassifications have been made to prior-year amounts to conform
with the current-year presentation.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
International Paper's third-quarter 1999 net sales were $6,251 million, ahead of
the $5,996 million in the 1999 second-quarter and $6,032 in the 1998
third-quarter. All previous periods have been restated to include Union Camp
Corporation.
Third-quarter 1999 earnings were $192 million, or $.46 per share, before special
and extraordinary items. This is an increase of $92 million ($.22 per share)
over second-quarter 1999 earnings of $100 million ($.24 per share) before
special and extraordinary items. Third quarter 1998 earnings were $80 million
before special charges or $.20 per share.
International Paper reported net earnings of $142 million or $.34 per share
after special and extraordinary items in the third-quarter of 1999. Special
items amounted to $78 million before taxes ($47 million after taxes or $.11 per
share) and consisted of charges of $50 million for Union Camp merger related
severance, $18 million for one-time merger expenses and $10 million to increase
existing environmental remediation reserves related to certain former Union Camp
facilities. The extraordinary expense of $3 million after taxes, or $.01 per
share, was for the continuation of a refinancing of high interest Union Camp
debt which International Paper assumed under the merger agreement. We reported a
net loss in the 1998 third-quarter of $2 million, or $.01 per share, after
special items of $145 million ($82 million after taxes). These items included a
$45 million pre-tax gain ($27 million after taxes) for the reversal of
previously established reserves that were no longer required, a $20 million
pre-tax gain ($12 million after taxes) from the sale of the Veratec nonwovens
business, a $55 million pre-tax oil and gas impairment charge ($33 million after
taxes), and new restructuring and other pre-tax charges totaling $155 million
($88 million after taxes).
The effective tax rate on operating earnings decreased from 30% for the six
months ended June 30, 1999 to 28% for the nine months ended September 30, 1999.
This had a positive impact on earnings of about $.03 per share. Also in the
third quarter, because International Paper has a large concentration of
facilities and forestlands in the southeastern U.S., this season's Atlantic
hurricanes negatively impacted earnings by about $.03 per share.
Printing and Communications Papers 1999 third-quarter net sales increased to
$1,500 million from the 1999 second-quarter of $1,405 million and $1,455 million
in the 1998 third-quarter. Third-quarter operating profit of $84 million
improved significantly from the $22 million reported in the 1999 second-quarter
and $34 million in the 1998 third-quarter. Earnings in the U.S. papers business
increased more than four-fold over the previous quarter and more than doubled
over the 1998 third-quarter due to favorable pricing and internal cost-cutting
activities. European Papers' results were more than twice the earnings in the
1999 second-quarter and up 76% from the 1998 third-quarter. Contributing to this
earnings increase is the improving market conditions for uncoated and coated
papers combined with reduced costs.
Printing & Communications Papers (in millions)
- ----------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- ------------------------------------------
2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $1,405 $1,500 $4,380 $1,480 $1,455 $4,520
Operating Profit $ 22 $ 84 $ 114 $ 77 $ 34 $ 209
</TABLE>
16
<PAGE>
Industrial and Consumer Packaging 1999 third-quarter net sales were $1,780
million, up from $1,760 million in the 1999 second-quarter and the $1,765
million in the 1998 third-quarter. The segment posted operating profit of $171
million in the 1999 third-quarter, up from the $142 million in the previous
quarter and well ahead of the third-quarter 1998 operating profit of $95
million. Industrial Packaging is leading the improvement in the segment with a
32% increase in earnings over the 1999 second-quarter and a more than three-fold
increase over the 1998 third-quarter. The improvement is primarily a result of
favorable pricing and other benefits from the Union Camp merger. The
third-quarter 1999 average price for containerboard was about 10% higher than in
the 1999 second-quarter. Consumer Packaging earnings were up only slightly from
the prior period due in part to a slower than anticipated price recovery for the
bleached board system and tight markets for converters.
Industrial & Consumer Packaging (in millions)
- ---------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- ------------------------------------------
2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $1,760 $1,780 $5,215 $1,790 $1,765 $5,285
Operating Profit $ 142 $ 171 $ 369 $ 110 $ 95 $ 295
</TABLE>
Distribution 1999 third-quarter net sales of $1,740 million were ahead of the
1999 second-quarter net sales of $1,675 million as well as the 1998
third-quarter of $1,685 million. The increase in sales over the 1998
third-quarter reflects the impact of Zellerbach which was acquired in August
1998. Operating profit of $25 million in the 1999 third-quarter is down slightly
from the $27 million in the 1999 second-quarter but ahead of the $23 million in
the 1998 third-quarter. More benefits were realized from the Zellerbach merger
and year over year margins improved.
Distribution (in millions)
- --------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- ------------------------------------------
2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $1,675 $1,740 $5,115 $1,380 $1,685 $4,475
Operating Profit $ 27 $ 25 $ 76 $ 20 $ 23 $ 60
</TABLE>
Chemicals and Petroleum, which includes results from our approximately 68% owned
subsidiary, Bush Boake Allen, reported 1999 third-quarter net sales of $370
million which were slightly higher than the $360 million in the previous quarter
and even with the 1998 third-quarter. Operating profit of $38 million in the
current quarter is 36% higher than the previous quarter with all of the
businesses included in this segment showing an improvement. Earnings of our
Chemical businesses increased as a result of higher shipments of upgraded resins
and strong Asian demand. Results were further improved by an average increase of
27% in oil and gas prices and a 10% increase in demand for chemical specialty
pulp. Operating profit in the 1998 third-quarter was $34 million.
Chemicals and Petroleum (in millions)
- -------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- ------------------------------------------
2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 360 $ 370 $1,080 $ 375 $ 370 $1,110
Operating Profit $ 28 $ 38 $ 85 $ 31 $ 34 $ 95
</TABLE>
Forest Products 1999 third-quarter net sales of $825 million were up from the
$815 million in the 1999 second-quarter and $725 million in the 1998
third-quarter. Current quarter operating profit of $199 million reflects an
almost 15% improvement from the previous quarter and is well ahead of the $154
million in the 1998 third-quarter. Within the segment, Forest Resources'
earnings were up about 30% over the previous quarter, in part due to the sale of
forestlands in northeastern Maine. Building Materials earnings
were down slightly from the previous quarter but about double the 1998
third-quarter results. The decline was mainly due to lower
17
<PAGE>
European sales in Masonite and Decorative Products during the traditionally slow
summer period. The decline was partially offset by improvements in the Wood
Products business as a result of continued strong market conditions throughout
much of the quarter.
Forest Products (in millions)
- -----------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- ------------------------------------------
2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 815 $ 825 $2,425 $ 715 $ 725 $2,155
Operating Profit $ 175 $ 199 $ 548 $ 136 $ 154 $ 415
</TABLE>
Carter Holt Harvey reported net sales of $410 million in the 1999 third-quarter
compared with $400 million in the 1999 second quarter and $345 million in the
1998 third-quarter. Operating profit in the 1999 third-quarter of $12 million
reflects an improvement over the previous quarter operating profit of $8
million. Carter Holt Harvey posted a loss of $1 million in the 1998
third-quarter.
Carter Holt Harvey (in millions)
- --------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- ------------------------------------------
2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 400 $ 410 $1,175 $ 365 $ 345 $1,125
Operating Profit $ 8 $ 12 $ 20 $ 11 $ (1) $ 14
</TABLE>
International Paper's results for this segment differ from those reported by
Carter Holt Harvey in New Zealand due to (1) Carter Holt Harvey's fiscal year
ends March 31 versus our calendar year, (2) our segment earnings include only
our share of Carter Holt Harvey's operating earnings while 100% of sales are
included, (3) our results are in U.S. dollars while Carter Holt Harvey reports
in New Zealand dollars, and (4) Carter Holt Harvey reports under New Zealand
accounting standards while our segment results comply with U.S. generally
accepted accounting principles. The major accounting differences relate to cost
of timber harvested and start-up costs.
Liquidity and Capital Resources
Cash provided by operations totaled $1,157 million for the 1999 nine months
compared with $1,321 million for the 1998 nine month period. Lower earnings for
the 1999 nine months were partially offset by decreased working capital
requirements. Working capital on a cash flow basis decreased $4 million during
the nine months of 1999 compared with an increase of $154 million for the nine
months of 1998.
Investments in capital projects totaled $706 million for the 1999 nine month
period compared to the $873 million spent in the nine months of 1998. Cash flow
generated by operations, supplemented as necessary by short- or long-term
borrowings, is anticipated to be adequate to fund expected capital expenditures.
Capital expenditures for 1999 are anticipated to be approximately $1.2 billion,
which is below depreciation expense. Discretionary capital spending will be
primarily for reducing costs, stabilizing processes and improving services.
Financing activities for the 1999 and 1998 nine month periods include a $372
million net decrease and $1,078 million net decrease in primarily short-term
debt, respectively. During the 1998 first quarter, $170 million of
18
<PAGE>
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.
During the second quarter of 1998, the Company issued $550 million of preferred
securities with a dividend payment based on LIBOR, the proceeds of which were
used to retire short-term debt. During the third quarter of 1998, the Company
issued $805 million of 7 7/8% preferred securities, the proceeds of which were
also used to retire short-term debt. The dividend payments for these preferred
securities are included in minority interest expense.
Common stock dividend payments were $314 million or $.76 per common share for
the 1999 nine months and $324 million or $.78 per common share for the 1998 nine
months. Dividend payments for the third quarters ended September 30, 1999 and
1998 were $102 million or $.25 per common share and $109 million or $.26 per
common share, respectively.
Mergers and Acquisitions
In August 1999, the Company acquired Bolsaflex S.A., a diversified manufacturer
of high graphics plastic packaging for consumer products located in Buenos
Aires, Argentina. This acquisition broadens our product offering in the region.
On April 30, 1999, Carter Holt Harvey, a subsidiary of International Paper,
announced the acquisition of the corrugated packaging business of Stone
Australia, a subsidiary of Smurfit-Stone Container Corporation. The business was
acquired for approximately $25 million and consists of two sites in Melbourne
and Sydney which serve industrial and primary produce customers.
On November 24, 1998, the Company announced that it had reached an agreement to
merge with Union Camp Corporation (Union Camp), a diversified paper and forest
products company. The transaction was approved by Union Camp and International
Paper shareholders on April 30, 1999. Union Camp shareholders received 1.4852
International Paper common shares for each Union Camp share held. The exchange
ratio was calculated based on an average closing price of International Paper
common shares of $47.80625 per share. The average closing price of International
Paper common shares was determined from ten randomly selected days during the 20
trading day period from March 26 through April 23. Based on this exchange ratio
and International Paper's closing price on April 28, 1999 of $57.375 per share,
the equity value of the transaction was approximately $6.3 billion, or $85.21
per Union Camp share. The total value of the transaction, including the
assumption of debt, was approximately $7.9 billion.
International Paper issued approximately 110 million shares for approximately 74
million Union Camp shares, including options. Assuming dilution, approximately
417 million shares of International Paper are outstanding. Former Union Camp
shareowners owned 26.3% of International Paper on the merger date. The merger
was accounted for as a pooling of interests.
The merger is expected to result in at least $425 million in annual cost savings
by the end of the year 2000, an increase from previously reported cost savings
of $300 million, through a combination of reductions in overhead, process
improvements, facility rationalization, purchasing and logistics savings.
Restructuring, Special and Extraordinary Items
During the third quarter of 1999 the Company recorded special items amounting to
a net pre-tax charge of $78 million ($47 million after taxes). The charge
consisted of $50 million ($30 million after taxes) for Union Camp merger-related
termination benefits, $18 million ($11 million after taxes) for one-time merger
expenses and $10 million ($6 million after taxes) to increase existing
environmental remediation reserves related to former Union Camp facilities.
19
<PAGE>
Also during the 1999 third quarter, the Company recorded an extraordinary $5
million pre-tax charge ($3 million after taxes) related to the continuation of a
refinancing of high interest Union Camp debt, which the Company assumed under
the merger agreement.
During the second quarter of 1999 the Company recorded special items amounting
to a net pre-tax charge of $234 million ($158 million after taxes). The special
items included a $98 million pre-tax charge ($67 million after taxes) for Union
Camp merger-related termination benefits, a $59 million pre-tax charge ($49
million after taxes) for one-time merger expenses, a $113 million charge ($69
million after taxes) for asset shutdowns of excess internal capacity and cost
reduction actions, and a $36 million pre-tax credit ($27 million after taxes)
for the reversal of reserves that were no longer required.
The Company also recorded an extraordinary $21 million pre-tax charge ($13
million after taxes) during the second quarter related to the refinancing of
high interest Union Camp debt, which the Company assumed under the merger
agreement.
The following table shows the impact of special items on 1999 pre-tax earnings
by quarter:
<TABLE>
<CAPTION>
Quarter
-------------------------------------- Year to
In millions First Second Third Date
- ----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Earnings before special items, income taxes,
minority interest and extraordinary item $ 94 $ 198 $ 320 $ 612
Merger-related termination benefits (98) (50) (148)
One-time merger expenses (59) (18) (77)
Restructuring and other charges (113) (113)
Reversal of reserves no longer required 36 36
Environmental reserve (10) (10)
------ ------ ------ -------
Earnings (loss) before income taxes, minority
interest and extraordinary item $ 94 $ (36) $ 242 $ 300
====== ====== ====== =======
</TABLE>
The one-time merger expenses of $77 million consist of $49 million of merger
costs and $28 million of post-merger expenses. The merger costs are primarily
investment banker, consulting, legal and accounting fees. Post-merger expenses
include costs related to employee retention, such as stay bonuses and
relocation. Other post-merger expenses include consulting fees and the costs
related to integrating Union Camp systems.
The Union Camp merger-related termination benefit charges result from the
integration of the previously separate International Paper and Union Camp
organizations. Under an integration benefits program 1,218 employees of the
combined company were identified for termination during the second and third
quarters at a total cost of $148 million. Benefits for certain senior executives
and managers are payable from the general assets of the Company. Benefits for
remaining employees are payable from plan assets of the Company's qualified
pension plan. Terminated employees may elect to receive termination benefits in
a one-time upfront payment or over a period of time. Through September 30, 1999,
567 employees have been terminated at a cost of $83 million. Substantially all
of the 1,218 positions are expected to be eliminated by May 31, 2000. No further
adjustments are anticipated to be made to the merger-related termination benefit
charges.
The following table is a roll forward of the Union Camp merger-related
termination benefit charges and costs incurred by quarter. The amounts
identified below as incurred include all payments made or to be made to
employees that have been terminated. The payments are made from the general
assets of the Company or from the assets of the Company's qualified pension
plan.
20
<PAGE>
Termination
In millions Benefits
----------- ---------------
Special charge (572 employees) $ 98
Incurred costs - second quarter 1999 (83 employees) (30)
Special charge (646 employees) 50
Incurred costs - third quarter 1999 (484 employees) (53)
---------------
Balance, September 30, 1999 (651 employees) $ 65
===============
Note: Benefit costs are treated as incurred on termination date of employee.
The $113 million second quarter charge for the asset shutdowns of excess
internal capacity and cost reduction actions includes $57 million of asset
write-downs and $56 million of severance and other charges. The following table
and discussion present additional detail related to the $113 million charge.
Asset Severance
In millions Write-downs and Other Total
- ----------- ----------- --------- -----
Printing and Communication Papers (a) $ 6 $ 27 $ 33
European Papers (b) 3 7 10
Consumer Packaging (c) 19 12 31
Industrial Packaging (d) 12 12
Chemicals and Petroleum (e) 10 3 13
Industrial Papers (f) 7 7 14
----------- --------- -----
$ 57 $ 56 $113
=========== ========= =====
(a) The Company recorded a charge of $24 million for severance related to the
second phase of the Printing and Communication Papers business plan to
improve the cost position of its mills. The charge, pursuant to the
Company's ongoing severance program, covers a reduction of approximately
289 employees at 14 mills in the U.S. At September 30, 1999, 146 employees
had been terminated.
Also, management approved a decision to permanently shut down the Hudson
River mill No. 4 paper machine located in Corinth N.Y. and the No. 2 paper
machine at the Franklin V.A. mill. The Franklin machine was shut down in
September 1999 and the Hudson River machine was previously shut down. The
Hudson River machine had been temporarily shut down in October 1998
because of lack of orders. The machines were written down by $6 million to
their estimated fair value of zero. Severance costs of $3 million cover
the termination of 147 employees. At September 30, 1999, 79 employees had
been terminated.
(b) The charge for European Papers, which covers the shutdown of two mills,
consists of $3 million in asset write downs, $6 million in severance costs
and $1 million of other exit costs. The Company decided to shut down the
Lana mill in Docelles, France due to excess capacity. The Lana mill
produces approximately 5,000 metric tons of high-end uncoated specialty
paper per year. The Company plans to shift this production to the La
Robertsau mill in Strasbourg, France. The mill shutdown will be competed
by June 2000. The Lana mill fixed assets were written down $3 million to
their estimated fair value of zero. Costs related to the site closure are
expected to be $1 million and severance related to the termination of 42
employees will be approximately $4 million. The Lana mill had revenues of
$9 million and an operating loss of $1 million for the nine months ended
September 30, 1999. At September 30, 1999, 2 employees had been
terminated.
The Corimex coating plant was shut down in April 1999. The market for
thermal fax paper, which was produced at the plant, has been shrinking
since the mid-1990's. The assets at this plant were considered to be
impaired in 1997 and were written down accordingly at that time. A $2
million severance charge
21
<PAGE>
was recorded during the second quarter of 1999 to cover the costs of
terminating 81 employees. Corimex had revenues of $6 million and an
operating loss of $3 million for the nine months ended September 30, 1999.
At September 30, 1999, 81 employees had been terminated.
(c) The Company's Consumer Packaging business is implementing a plan to
improve the overall performance of the Moss Point, Miss., mill. Included
in this plan is the shutdown of the No. 3 paper machine which produces
labels. This production is being transferred to the Hudson River mill. The
machine was written down $6 million to its estimated fair value of zero.
Severance costs including, but not limited to, employees associated with
the No. 3 machine total $10 million and cover the elimination of 360
positions. At September 30, 1999, 272 employees had been terminated.
Consumer Packaging shut down a facility in Brazil in an effort to reduce
excess capacity. Customers are being supplied by other International Paper
facilities in Latin America. The assets were written down $13 million to
their estimated fair value of zero and a severance charge of $1 million
covers the elimination of 29 positions. Other exit costs total $1 million.
At September 30, 1999, 16 employees had been terminated.
(d) As a result of the merger with Union Camp, the Company entered into
negotiations with Union Camp's joint venture partner in an Industrial
Packaging business in Turkey to resolve a non-compete clause in the joint
venture agreement. As a result of these negotiations and evaluation of
this entity, it was determined that the investment was impaired. A $12
million charge was recorded to reflect this impairment and the related
costs of resolving the non-compete agreement.
(e) As a result of an overall reduction in market demand for dissolving pulp,
the decision was made to downsize the Company's Natchez mill. Charges
associated with capacity reduction total $10 million and include the
shutdown of several pieces of equipment. A severance charge of $3 million
includes the elimination of 89 positions. At September 30, 1999, 88
employees had been terminated.
(f) The Company's Industrial Papers business is implementing a plan to reduce
excess capacity at several of its locations. Certain equipment at the
Kaukauna, De Pere, and Menasha, Wis., plants is scheduled to be shut down
and the Toronto, Canada plant has been closed. The total amount related to
the write-down of these assets is $7 million. Severance costs related to
these shutdowns are $5 million and are based on a personnel reduction of
123 employees. Other exit costs total $2 million. At September 30, 1999,
26 employees had been terminated.
The following table is a roll forward of the severance costs included in the
1999 restructuring plan:
In millions Severance
----------- -------------
Opening balance - second quarter 1999 $ 49
Cash charges - third quarter 1999 (13)
-------------
Balance, September 30, 1999 $ 36
=============
The $36 million pre-tax credit for the reversal of reserves that were no longer
required consists of $30 million related to a retained exposure at the Lancey
mill in France and $6 million of excess reserves previously established by Union
Camp. The Lancey mill was sold to an employee group in October of 1997. In April
1999, the Company's remaining exposure to potential obligations under this sale
were resolved, and the reserve was returned to income in the second quarter.
22
<PAGE>
International Paper continually evaluates its operations for improvement. When
any such plans are finalized the Company may incur costs or charges in future
periods related to the implementation of such plans. We expect to incur
additional one-time merger costs related to the Union Camp merger in the 1999
fourth quarter and to finalize some plans to reduce excess capacity.
Other
Interest expense decreased from $461 million for the nine months of 1998 to $400
million in the 1999 nine months. During 1998 about $1.5 billion of preferred
securities of subsidiaries were issued and debt was reduced by approximately
$1.8 billion. The distributions of the preferred securities are included in
minority interest expense. This decrease in debt was the primary reason for the
decline in interest expense.
Minority interest expense for the 1999 nine months increased due to increased
expense related to preferred securities.
The effective income tax rate for the 1999 nine months declined to 21% from 26%
in the 1998 nine months primarily due to changes in the mix of estimated annual
earnings. Fourth quarter 1998 adjustments lowered the full year 1998 rate to
22%. The adjustments were a result of the impact of state tax credits, changes
in the geographic mix of overall taxable earnings, and permanent tax benefits on
sales of non-U.S. businesses and non-strategic timberland assets. The effective
tax rate before special and extraordinary items was 28% and 31% for the nine
months ended September 30, 1999 and 1998, respectively. The following table
presents the components of pre-tax earnings and losses and the related income
tax expense or benefit for each of the nine month periods ended September 30,
1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ----------------------------------
Pre-Tax Tax Pre-Tax Tax
Earnings Expense Effective Earnings Expense Effective
In millions (Loss) (Benefit) Tax Rate (Loss) (Benefit) Tax Rate
- ----------- -------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Before special and extraordinary
items $ 638 $ 181 28% $ 490 $ 154 31%
Union Camp merger-related
termination benefits (148) (51) 34%
One-time merger expenses (77) (17) 22%
Restructuring and other charges (113) (44) 39% (155) (67) 43%
Oil and gas impairment charge (55) (22) 40%
Reversals of reserves no longer
required 36 9 25% 45 18 40%
Environmental reserve (10) (4) 40%
Gain on sale of business 20 8 40%
Loss on extinguishment of debt (26) (10) 38%
Write-off of in-process research
and development costs acquired
by an investee company (6) (2) 33%
-------- --------- -------- ---------
After special and extraordinary
items $ 300 $ 64 21% $ 339 $ 89 26%
======== ========= ======== =========
</TABLE>
23
<PAGE>
Year 2000 Readiness
The Year 2000 problem concerns the inability of systems to properly recognize
and process date-sensitive information beyond January 1, 2000. We have
substantially completed the necessary testing, remediation and final action
plans at International Paper in an effort to ensure that we will enter the Year
2000 without a material disruption to our customers. The program covers
information systems infrastructure, financial and administrative systems,
process control and manufacturing operating systems. It also includes readiness
assessment of significant vendors and customers, as well as a contingency and
continuing compliance plan. The former Union Camp facilities acquired in our
recent merger have met our September 30, 1999 target date for completion of this
program. The Year 2000 Program Office, a centralized department which
coordinates Y2K efforts throughout the Company, will continue to support our
extensive network of Y2K coordinators and contacts up to and through the Year
2000.
Some systems will be addressed between now and year end for practical business
reasons. These exceptions to our target dates represent less than 0.5% of our
total inventory of potential Y2K exposure and do not present major risks to the
continued operation of the Company. Examples include:
o There were replacement projects initiated before the Year 2000 plan
was developed which will be kept on schedule to avoid disruption and
additional cost. While these projects solve some of the Company's
Year 2000 problems, their implementation was driven by efficiency
considerations and would have been conducted even in the absence of
the Year 2000 plan.
o Some systems will be remediated during normal facility maintenance
shutdowns scheduled during the second half of the year, because this
is the most feasible time to complete the work.
o There are cases where system remediation is resolved through
workarounds that cannot be scheduled before late 1999. An example
would be shutting a system down on December 31, 1999, and restarting
it on January 1, 2000.
The Company adopted a 9-step process toward Year 2000 readiness: (1) planning
and awareness; (2) inventory; (3) triage (assess risks and prioritize efforts);
(4) detailed assessment (identification of where failures may occur, solutions
and workarounds, and plans to repair or replace); (5) resolution (repair,
replace or retire systems that cannot properly process Year 2000 dates; create
bridges to other systems and perform unit testing); (6) test planning; (7) test
execution (some manufacturing systems require scheduling of equipment downtime);
(8) deployment of compliant systems; and (9) fallout (remove bridges and
patches; recertify). These steps are essentially complete.
Our estimate of the incremental Year 2000-related costs is $90 million plus or
minus 10%. This cost excludes software and systems that are being replaced or
upgraded in the normal course of business. The majority of these costs relate to
production facility systems. Spending through September 30, 1999 was $77
million. Our policy is to expense as incurred information system maintenance and
modification costs and to capitalize the cost of new software and amortize it
over the assets' useful lives.
We utilized internal personnel, contract programmers and vendors to identify
Year 2000 noncompliance problems, modify code and test the modifications. In
some cases, non-compliant software and hardware were replaced.
We rely on third-party suppliers for raw materials, water, utilities,
transportation and other key services. Interruption of supplier operations due
to Year 2000 issues could affect Company operations. An ongoing program is in
place to evaluate the status of suppliers' efforts and to determine alternatives
and contingency plan
24
<PAGE>
requirements. This program includes both written correspondence with suppliers
and visits to supplier facilities to assess their readiness. We are receiving
assurances from our supplier base that they will be able to handle the
transition to the Year 2000. These activities are intended to provide a means of
managing risk, but cannot entirely eliminate the potential for disruption due to
third-party failure. Approaches to reduce the risks of interruption due to
supplier failures vary by business and facility. Contingency options include
identification of alternate suppliers and accumulation of inventory to assure
production capability where feasible or warranted. We believe that no individual
vendor is material to our total business.
We are also dependent upon our customers for sales and cash flow. Year 2000
interruptions in our customers' operations could result in reduced sales,
increased inventory or receivable levels, and cash flow reductions. While these
events are possible, we believe that our customer base is broad enough to
minimize the effects of a single occurrence. We are, however, monitoring the
status of our customers through discussions and correspondence as a means of
determining risks and alternatives. We believe that no individual customer is
material to our total business. None of our larger customers are significant as
defined by the provisions of Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Our manufacturing facilities (mills and converting plants) rely on control
systems that include production monitoring, power, emissions and safety. The
pulp and paper mills operated by the Company utilize various complex control
systems to monitor and regulate power, emissions and production operations.
Failure to identify, correct and test Year 2000-sensitive systems at any one of
these facilities could result in manufacturing interruptions, possible
environmental contamination or safety hazards. Annual sales for our larger U.S.
mills range from approximately $100 million to $500 million at each site.
Control systems used at the converting facilities cover comparable operations.
The production impact of a Year 2000-related interruption varies significantly
between facilities, but would be typically much smaller in terms of sales than a
comparable event at a pulp and paper mill.
While comparable control systems are used, specific facility-related
configurations exist to meet the needs of production equipment at each of the
Company's mills and plants. If a failure were to occur, the potential impact
would be isolated to the affected facility. Also, in many cases, the Company has
the capability of manufacturing the same product at different facilities.
The consequences of a Year 2000-related event could range from an orderly
shutdown of one or more facilities to a sudden halt at one or more facilities,
with possible safety, environmental and equipment impact. The likelihood of
either type of event, or the related financial impact, is not reasonably
predictable. Our contingency planning efforts include consideration of reduced
operations or shutdowns over the new year. Decisions regarding the need or
feasibility of such actions are not expected to be made until later in 1999.
Production facility systems represent our greatest area of risk, and plans are
in place to reduce the risk of noncompliance of these systems, including
contingency planning. While we believe our efforts will provide reasonable
assurance that material disruptions will not occur due to internal failure, the
potential for interruption still exists. Production facility shutdowns could
have a material adverse effect on the Company's results of operations, financial
condition and cash flows. Recovery under existing insurance policies may be
available depending upon the circumstances of a Year 2000-related event and the
type of facility involved. Potential recoveries in the event of facility damage,
including business interruption, would be subject to deductibles that range from
$100,000 to $10 million.
We also rely on various administrative and financial applications (e.g., order
processing and collection systems) that require correction to properly handle
Year 2000 dates. In the event that one of these systems were not corrected, our
ability to capture, schedule and fulfill customer demands could be impaired.
Likewise, if a
25
<PAGE>
collection processing system were to fail, we may not be able to properly apply
payments to customer balances or correctly determine cash balances. Centrally
controlled administrative applications are essentially complete. Various
non-centrally controlled systems are also utilized by our businesses. The impact
of a failure of these systems would be limited to the business using the
affected system, and then only to the extent that manual or other alternate
processes were not able to meet processing requirements. Such an occurrence is
not expected to have a significant adverse impact on the Company.
THE ESTIMATES AND CONCLUSIONS HEREIN CONTAIN FORWARD-LOOKING STATEMENTS AND ARE
BASED ON THE COMPANY'S BEST ESTIMATES OF FUTURE EVENTS. RISKS GOING FORWARD
INCLUDE THE AVAILABILITY OF RESOURCES, OUR ABILITY TO HAVE DISCOVERED AND
CORRECTED ALL THE POTENTIAL YEAR 2000 PROBLEMS THAT COULD HAVE A SERIOUS IMPACT
ON SPECIFIC FACILITIES, AND THE ABILITY OF SUPPLIERS TO BRING THEIR SYSTEMS INTO
YEAR 2000 COMPLIANCE.
26
<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,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Printing and Communications Papers $ 1,500 $ 1,455 $ 4,380 $ 4,520
Industrial and Consumer Packaging 1,780 1,765 5,215 5,285
Distribution 1,740 1,685 5,115 4,475
Chemicals and Petroleum 370 370 1,080 1,110
Forest Products 825 725 2,425 2,155
Carter Holt Harvey 410 345 1,175 1,125
Corporate and Intersegment Sales (1) (374) (313) (1,111) (799)
-------- -------- -------- --------
Net Sales $ 6,251 $ 6,032 $ 18,279 $ 17,871
======== ======== ======== ========
</TABLE>
Operating Profit by Industry Segment
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Printing and Communications Papers $ 84 $ 34 $ 114 $ 209
Industrial and Consumer Packaging 171 95 369 295
Distribution 25 23 76 60
Chemicals and Petroleum 38 34 85 95
Forest Products 199 154 548 415
Carter Holt Harvey (2) 12 (1) 20 14
------- ------- ------- -------
Operating Profit 529 339 1,212 1,088
Interest expense, net (134) (147) (400) (461)
Minority interest adjustment 21 3 42 45
Corporate items, net (1) (3) (96) (68) (245) (184)
Restructuring and other charges (155) (113) (155)
Merger integration costs (68) (225)
Reversal of reserves no longer required 45 36 45
Oil and gas impairment charge (55) (55)
Environmental remediation charge (10) (10)
Gain on sale of business 20 20
Scitex restructuring and other charges 1 3 (4)
------- ------- ------- -------
Earnings (loss) before income taxes,
minority interest and extraordinary item $ 242 $ (17) $ 300 $ 339
======= ======= ======= =======
</TABLE>
(1) Includes results from operations that were disposed of in 1998.
(2) Includes equity earnings (in millions) of $14 and $2 for the 3 months ended
September 30, 1999 and 1998, respectively, and $36 and $13 for the nine months
ended September 30, 1999 and 1998, respectively. Half of these equity earnings
amounts are in the Carter Holt Harvey segment and half are in the minority
interest adjustment.
(3) Includes goodwill amortization related to Federal Paper Board (in millions)
of $10 for the three months ended September 30, 1999 and 1998 and $29 for the
nine months ended September 30, 1999 and 1998.
27
<PAGE>
Production by Product
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Printing Papers (In thousands of tons)
White Papers and Bristols (a) 1,232 1,294 3,937 3,931
Coated Papers 308 317 963 957
Market Pulp (b) 545 494 1,538 1,500
Newsprint 26 24 74 71
Packaging (In thousands of tons)
Containerboard (a) 1,230 1,185 3,600 3,535
Bleached Packaging Board 561 538 1,676 1,610
Industrial Papers 227 212 677 657
Industrial and Consumer Packaging (c) 1,263 1,249 3,765 3,646
Specialty Products (In thousands of tons)
Tissue 37 39 118 111
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) (d) 518 464 1,497 1,347
Lumber (board feet) 715 695 2,213 2,050
MDF (sq. ft. 3/4" - basis) 53 75 167 233
Particleboard (sq. ft. 3/4" - basis) 51 51 148 146
</TABLE>
(a) Certain reclassifications and adjustments have been made to current and
prior year amounts.
(b) This excludes market pulp purchases.
(c) 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.
(d) Panels include plywood and oriented strand board.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following matters discussed in previous filings under the Act, are updated
as follows:
Masonite Litigation
Three nationwide class action lawsuits filed against the Company have been
settled.
The first suit alleged that hardboard siding manufactured by Masonite fails
prematurely, allowing moisture intrusion that in turn causes damage to the
structure underneath the siding. The class consisted of all U.S. property owners
having Masonite hardboard siding installed on and incorporated into buildings
between 1980 and January 15, 1998. Final approval of the settlement was granted
by the court on January 15, 1998. The settlement provides for monetary
compensation to class members meeting the settlement requirements on a
claims-made basis. It also provides for the payment of attorneys' fees equaling
fifteen percent of the settlement amounts paid to class members, with a
nonrefundable advance of $47.5 million plus $2.5 million in costs.
The second suit made similar allegations with regard to Omniwood siding
manufactured by Masonite (the "Omniwood Lawsuit"). The class consists of all
U.S. property owners having Omniwood siding installed on and incorporated into
buildings from January 1, 1992 to January 6, 1999. The third suit alleged that
Woodruf roofing manufactured by Masonite is defective and causes damage to the
structure underneath the roofing (the "Woodruf Lawsuit"). The class consists of
all U.S. property owners on which Masonite Woodruf roofing has been incorporated
and installed from January 1, 1980 to January 6, 1999.
Final approval of the settlements of the Omniwood and Woodruf lawsuits was
granted by the Court on January 6, 1999. The settlements provide for monetary
compensation to class members meeting the settlement requirements on a
claims-made basis, and provides for payment of attorneys' fees equaling thirteen
percent of the settlement amounts paid to class members with a nonrefundable
advance of $1.7 million plus $75,000 in costs for each of the two cases.
While the total cost of these three settlements is not presently known with
certainty, the Company believes its reserves, totaling $85 million at September
30, 1999, are adequate to cover any amounts to be paid and that these
settlements will not have a material adverse effect on its consolidated
financial position or results of operations. The reserve balance is net of $51
million of expected insurance recoveries (apart from the insurance recoveries to
date). Through September 30, 1999, settlement payments of $154 million,
including the $51 million of nonrefundable advances of attorneys' fees discussed
above, have been made. Also, we have received $26 million from our insurance
carriers through September 30, 1999. The Company and Masonite have the right to
terminate each of the settlements after seven years from the dates of final
approval.
Linerboard Litigation
On May 14, 1999 and May 18, 1999, two lawsuits were filed against International
Paper, the former Union Camp Corporation and other manufacturers of linerboard
alleging that the defendants conspired to fix prices for linerboard and
corrugated sheets during the period October 1, 1993 through November 30, 1995.
Both lawsuits were filed seeking nationwide class certification. The lawsuits
allege that various purchasers of corrugated sheets and corrugated containers
were injured as a result of the alleged conspiracy. The cases have been
consolidated in federal court in the Eastern District of Pennsylvania. Motions
to dismiss the cases are pending before the Court.
29
<PAGE>
COPEC
The Company's majority-owned subsidiary, Carter Holt Harvey ("CHH"), has an
indirect shareholding of 30.05% in Chile's largest industrial company, COPEC,
through CHH's subsidiary Carter Holt Harvey International. This shareholding is
held through Carter Holt Harvey International'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
International commenced several actions in Chilean courts challenging certain
corporate governance documents of Los Andes, as well as agreements between
Carter Holt Harvey and Socoroma. All of those actions have now been terminated.
In December 1994, Socoroma commenced an arbitration action seeking to expel
Carter Holt Harvey International from Los Andes. In April 1998, the arbitrator
dismissed Socoroma's request, but granted it the right to claim monetary damages
for what he found were Carter Holt Harvey International's breach of certain of
its obligations as a participant in the Los Andes joint venture. As of this
time, Socormoa has not filed with Chilean ordinary courts or arbitrators any
formal claim for money damages against Carter Holt Harvey International or
against CHH.
The actual resolution of any claim Socoroma might file for money damages cannot
be predicted because of uncertainties involved in litigation. In addition,
Socoroma has filed a notice indicating that it intends to submit additional new
claims to arbitration. The nature of these claims is presently unknown, as
Socoroma has been given until a later date to set forth the claims. Because of
uncertainties involved in arbitration and the absence of information concerning
the nature of the new claims, the resolution of these claims cannot be
predicted.
The following are new litigation matters
Other Litigation
On August 5, 1999, the Company and the New York Department of Environmental
Conservation entered into a consent order which resolved several alleged air
permit violations at the Company's paper mill in Ticonderoga, New York, for a
civil penalty of $100,000.
In August 1998 the former Union Camp Corporation informed the Virginia
Department of Environmental Quality (DEQ) of certain New Source Performance
Standards (NSPS) permitting discrepancies related to a power boiler at the paper
mill in Franklin, Virginia. On August 11, 1999, the DEQ proposed a consent order
with a civil penalty exceeding $100,000. Terms of the consent order, including
the penalty, are being negotiated with the DEQ.
The Company is also involved in other contractual disputes, administrative and
legal proceedings and investigations of various types. While any litigation,
proceeding or investigation has an element of uncertainty, the Company believes
that the outcome of any proceeding, lawsuit or claim that is pending or
threatened, or all of them combined, will not have a material adverse effect on
its consolidated financial position or results of operations.
30
<PAGE>
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
Reports on Form 8-K were filed on August 30 and October 12, 1999.
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 15, 1999 By /s/ JOHN V. FARACI
------------------------------
John V. Faraci
Senior Vice President and Chief
Financial Officer
Date: November 15, 1999 By /s/ ANDREW R. LESSIN
------------------------------
Andrew R. Lessin
Vice President and Controller and
Chief Accounting Officer
31
(Exhibit 11)
INTERNATIONAL PAPER COMPANY
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 142 $ (2) $ 103 $ 201
Effect of dilutive securities
Preferred securities of subsidiary trust
------- ------- ------- -------
Net earnings (loss) - assuming dilution $ 142 $ (2) $ 103 $ 201
======= ======= ======= =======
Average common shares outstanding 413.5 412.2 412.9 410.5
Effect of dilutive securities
Long-term incentive plan deferred
compensation (0.8) (0.8)
Stock options 3.3 0.9 3.3 2.7
Preferred securities of subsidiary trust
------- ------- ------- -------
Average common shares outstanding -
assuming dilution 416.8 412.3 416.2 412.4
======= ======= ======= =======
Earnings (loss) per common share $ 0.34 $ (0.01) $ 0.25 $ 0.49
======= ======= ======= =======
Earnings (loss) per common share -
assuming dilution $ 0.34 $ (0.01) $ 0.25 $ 0.49
======= ======= ======= =======
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
(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,
------------------------------------------------------------- ---------------------
TITLE 1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
A) Earnings before income taxes,
minority interest, extraordinary item
and accounting changes $ 832.0 $ 2,742.0 $ 938.0 $ 146.0 $ 431.0 $ 339.0 $ 300.0
B) Less: Minority interest expense, net
of taxes (54.0) (166.0) (180.0) (140.0) (87.0) 49.0 117.0
C) Add: Fixed charges excluding
capitalized interest 554.4 740.3 802.1 826.6 866.7 610.7 611.0
D) Add: Amortization of previously
capitalized interest 27.7 29.6 34.2 37.0 38.8 15.6 12.6
E) Less: Equity in undistributed
earnings of affiliates (49.1) (94.5) 6.2 (40.4) 23.7 23.8 (24.6)
--------- --------- --------- --------- --------- --------- ---------
F) Earnings before income taxes,
minority interest, extraordinary
item, accounting changes and fixed
charges $ 1,311.0 $ 3,251.4 $ 1,600.5 $ 829.2 $ 1,273.2 $ 1,038.1 $ 1,016.0
========= ========= ========= ========= ========= ========= =========
Fixed Charges
G) Interest and amortization of debt
expense $ 501.8 $ 664.9 $ 699.5 $ 720.0 $ 716.9 $ 532.0 $ 456.8
H) Interest factor attributable to rentals 52.6 64.8 79.0 83.0 80.7 43.7 54.8
I) Preferred dividends of subsidiary 10.6 23.6 23.6 69.1 35.0 99.4
J) Capitalized interest 39.6 66.9 71.2 71.6 53.2 34.3 27.0
--------- --------- --------- --------- --------- --------- ---------
K) Total fixed charges $ 594.0 $ 807.2 $ 873.3 $ 898.2 $ 919.9 $ 645.0 $ 638.0
========= ========= ========= ========= ========= ========= =========
L) Ratio of earnings to fixed charges 2.21 4.03 1.83 1.38 1.61 1.59
========= ========= ========= ========= ========= =========
M) Deficiency in earnings necessary
to cover fixed charges $ (69.0)
=========
</TABLE>
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