<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q/A
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998 Commission file number 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York 13 0872805
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Two Manhattanville Road, Purchase, NY 10577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 914-397-1500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common stock outstanding on October 31, 1998: 307,306,313 shares.
<PAGE>
INTERNATIONAL PAPER COMPANY
<TABLE>
<CAPTION>
INDEX
Page No.
--------
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months and Nine Months Ended
September 30, 1998 and 1997 3
Consolidated Balance Sheet -
September 30, 1998 and December 31, 1997 4 - 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 6
Consolidated Statement of Common Shareholders' Equity -
Three Months and Nine Months Ended September 30, 1998 and 1997 7 - 8
Notes to Consolidated Financial Statements 9 - 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 20
Item 3. Other Financial Information 21 - 22
PART II. Other Information
Item 1. Legal Proceedings *
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 23
Signatures
</TABLE>
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In millions, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 4,939 $ 5,119 $ 14,514 $ 15,015
-------- -------- -------- --------
Costs and Expenses
Cost of products sold 3,780 3,791 10,958 11,213
Selling and administrative expenses 360 404 1,105 1,174
Depreciation and amortization 301 311 890 949
Distribution expenses 218 233 640 703
Taxes other than payroll and income taxes 45 52 144 157
Oil and gas impairment charge 55 55
Restructuring and other charges 115 115
Write off of in-process research and development costs
acquired by an investee company 6
Business improvement charge 535
Provision for legal reserve 150
-------- -------- -------- --------
Total Costs and Expenses 4,874 4,791 13,913 14,881
-------- -------- -------- --------
Gain on sale of business 20 20
Reversals of reserves no longer required 45 45
-------- -------- -------- --------
Earnings Before Interest, Income Taxes and Minority Interest 130 328 666 134
Interest expense, net 119 120 374 375
-------- -------- -------- --------
Earnings (Loss) Before Income Taxes and Minority Interest 11 208 292 (241)
Income tax provision (benefit) (15) 71 69 (56)
Minority interest expense, net of taxes 5 35 41 98
-------- -------- -------- --------
Net Earnings (Loss) $ 21 $ 102 $ 182 $ (283)
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (Loss) Per Common Share $ 0.07 $ 0.34 $ 0.60 $ (0.94)
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (Loss) Per Common Share - Assuming Dilution $ 0.07 $ 0.34 $ 0.60 $ (0.94)
-------- -------- -------- --------
-------- -------- -------- --------
Average Shares of Common Stock Outstanding 307.2 302.3 305.4 301.4
-------- -------- -------- --------
-------- -------- -------- --------
Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.75 $ 0.75
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Current Assets
Cash and temporary investments $ 857 $ 398
Accounts and notes receivable, net 2,516 2,404
Inventories 2,729 2,760
Other current assets 447 383
------- -------
Total Current Assets 6,549 5,945
------- -------
Plants, Properties and Equipment, Net 12,066 12,369
Forestlands 2,790 2,969
Investments 1,234 1,166
Goodwill 2,537 2,557
Deferred Charges and Other Assets 1,904 1,748
------- -------
Total Assets $27,080 $26,754
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 1,330 $ 2,212
Accounts payable 1,230 1,338
Accrued liabilities 1,369 1,330
-------- --------
Total Current Liabilities 3,929 4,880
-------- --------
Long-Term Debt 6,908 7,154
Deferred Income Taxes 2,672 2,681
Other Liabilities 1,165 1,236
Minority Interest 1,632 1,643
International Paper-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiaries Holding International
Paper Debentures 1,805 450
Common Shareholders' Equity
Common stock, $1 par value, issued
1998 - 307.7 shares, 1997 - 302.9 shares 308 303
Paid-in capital 3,867 3,654
Retained earnings 5,139 5,186
Accumulated other comprehensive income (loss) (313) (396)
-------- --------
9,001 8,747
Less: Common stock held in treasury, at cost,
1998 - 0.7 shares, 1997 - 0.7 shares 32 37
-------- --------
Total Common Shareholders' Equity 8,969 8,710
-------- --------
Total Liabilities and Common Shareholders' Equity $ 27,080 $ 26,754
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities
Net earnings (loss) $ 182 $ (283)
Depreciation and amortization 890 949
Deferred income taxes 21 (117)
Business improvement charge 535
Provision for legal reserve 150
Payments related to restructuring and legal reserves (66) (67)
Gain on sale of business (20)
Reversals of reserves no longer required (45)
Oil and gas impairment charge 55
Restructuring and other charges 115
Write off of in-process research and development
costs acquired by an investee company 6
Other, net (1) 91
Changes in current assets and liabilities
Accounts and notes receivable 22 (200)
Inventories 4 (139)
Accounts payable and accrued liabilities (138) (131)
Other (21) (9)
------- -------
Cash Provided by Operations 1,004 779
------- -------
Investment Activities
Invested in capital projects (686) (706)
Mergers and acquisitions, net of cash acquired (464) (37)
Proceeds from divestitures 517
Other (158) (24)
------- -------
Cash Used for Investment Activities (791) (767)
------- -------
Financing Activities
Issuance of common stock 64 135
Issuance of preferred securities by subsidiaries 1,525
Issuance of debt 141 489
Reduction of debt (1,228) (426)
Change in bank overdrafts (57) 95
Dividends paid (229) (226)
Other 42 39
------- -------
Cash Provided by Financing Activities 258 106
------- -------
Effect of Exchange Rate Changes on Cash (12) (1)
------- -------
Change in Cash and Temporary Investments 459 117
Cash and Temporary Investments
Beginning of the period 398 352
------- -------
End of the period $ 857 $ 469
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Three Months Ended September 30, 1998
<TABLE>
<CAPTION>
Common Stock Issued
----------------------
Accumulated Other
Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss)
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 307,675 $ 308 $ 3,872 $ 5,195 $ (350)
Issuance of stock for various plans 3 (5)
Repurchase of stock
Cash dividends - common stock
($.25 per share) (77)
Comprehensive income
Net earnings 21
Realized foreign currency translation
adjustment related to divestitures (4)
Change in cumulative foreign
currency translation adjustment 41
Total comprehensive income
-------- -------- -------- -------- --------
Balance, September 30, 1998 307,678 $ 308 $ 3,867 $ 5,139 $ (313)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
---------------------
Total Common
Shareholders'
Shares Amount Equity
-------- -------- --------
<S> <C> <C> <C>
Balance, June 30, 1998 260 $ 12 $ 9,013
Issuance of stock for various plans (126) (6) 1
Repurchase of stock 610 26 (26)
Cash dividends - common stock
($.25 per share) (77)
Comprehensive income
Net earnings 21
Realized foreign currency translation
adjustment related to divestitures (4)
Change in cumulative foreign
currency translation adjustment 41
--------
Total comprehensive income 58
-------- -------- --------
Balance, September 30, 1998 744 $ 32 $ 8,969
======== ======== ========
</TABLE>
Three Months Ended September 30, 1997
<TABLE>
<CAPTION>
Common Stock Issued
---------------------
Paid-In Retained
Shares Amount Capital Earnings
------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 302,439 $ 302 $ 3,649 $ 5,104
Issuance of stock for various plans 401 1 12
Repurchase of stock
Cash dividends - common stock
($.25 per share) (76)
Comprehensive income
Net earnings 102
Change in cumulative foreign
currency translation adjustment
Total comprehensive income
------- -------- -------- --------
Balance, September 30, 1997 302,840 $ 303 $ 3,661 $ 5,130
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
---------------------
Accumulated Other Total Common
Comprehensive Shareholders'
Income (Loss) Shares Amount Equity
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 $ (232) 678 $ 30 $ 8,793
Issuance of stock for various plans (864) (39) 52
Repurchase of stock 640 35 (35)
Cash dividends - common stock
($.25 per share) (76)
Comprehensive income
Net earnings 102
Change in cumulative foreign
currency translation adjustment (87) (87)
--------
Total comprehensive income 15
-------- -------- -------- --------
Balance, September 30, 1997 $ (319) 454 $ 26 $ 8,749
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Common Stock Issued
-------------------
Accumulated Other
Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss)
------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 302,910 $ 303 $ 3,654 $ 5,186 $ (396)
Issuance of stock for acquisition 4,683 5 227
Issuance of stock for various plans 85 (14)
Repurchase of stock
Cash dividends - common stock
($.75 per share) (229)
Comprehensive income
Net earnings 182
Realized foreign currency translation
adjustment related to divestitures 7
Change in cumulative foreign
currency translation adjustment 76
Total comprehensive income
------- -------- -------- -------- --------
Balance, September 30, 1998 307,678 $ 308 $ 3,867 $ 5,139 $ (313)
------- -------- -------- -------- --------
------- -------- -------- -------- --------
<CAPTION>
Treasury Stock
-----------------------
Total Common
Shareholders'
Shares Amount Equity
-------- -------- -----------
<S> <C> <C> <C>
Balance, December 31, 1997 726 $ 37 $ 8,710
Issuance of stock for acquisition 232
Issuance of stock for various plans (1,832) (90) 76
Repurchase of stock 1,850 85 (85)
Cash dividends - common stock
($.75 per share) (229)
Comprehensive income
Net earnings 182
Realized foreign currency translation
adjustment related to divestitures 7
Change in cumulative foreign
currency translation adjustment 76
--------
Total comprehensive income 265
-------- -------- --------
Balance, September 30, 1998 744 $ 32 $ 8,969
======== ======== ========
</TABLE>
Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Common Stock Issued
----------------------
Accumulated Other
Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss)
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 300,824 $ 301 $ 3,599 $ 5,639 $ (173)
Issuance of stock for various plans 2,016 2 62
Repurchase of stock
Cash dividends - common stock
($.75 per share) (226)
Comprehensive income
Net earnings (loss) (283)
Change in cumulative foreign
currency translation adjustment (146)
Total comprehensive income (loss)
-------- -------- -------- -------- --------
Balance, September 30, 1997 302,840 $ 303 $ 3,661 $ 5,130 $ (319)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
-------------------
Total Common
Shareholders'
Shares Amount Equity
------ ------ ------------
<S> <C> <C> <C>
Balance, December 31, 1996 554 $ 22 $ 9,344
Issuance of stock for various plans (1,987) (85) 149
Repurchase of stock 1,887 89 (89)
Cash dividends - common stock
($.75 per share) (226)
Comprehensive income
Net earnings (loss) (283)
Change in cumulative foreign
currency translation adjustment (146)
--------
Total comprehensive income (loss) (429)
-------- -------- --------
Balance, September 30, 1997 454 $ 26 $ 8,749
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
INTERNATIONAL PAPER COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, in the
opinion of Management, include all adjustments (consisting only of normal
recurring accruals) which are necessary for the fair presentation of
results for the interim periods. It is suggested that these consolidated
financial statements be read in conjunction with the audited financial
statements and the notes thereto incorporated by reference in the Company's
Form 10-K for the year ended December 31, 1997, which has previously been
filed with the Commission.
2. Earnings per common share were computed by dividing net earnings by the
weighted average number of common shares outstanding. Earnings per common
share - assuming dilution were computed assuming that all potentially
dilutive securities were converted into common shares at the beginning of
each period. A reconciliation of the amounts included in the computation of
earnings per common share and earnings per common share - assuming dilution
is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
In millions 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 21 $ 102 $ 182 $ (283)
Effect of dilutive securities
Preferred securities of subsidiary trust
-------- -------- -------- --------
Net earnings (loss) - assuming dilution $ 21 $ 102 $ 182 $ (283)
-------- -------- -------- --------
-------- -------- -------- --------
Average common shares outstanding 307.2 302.3 305.4 301.4
Effect of dilutive securities
Long-term incentive plan deferred compensation (0.8) (0.8) (0.8) (0.9)
Stock options 0.8 3.1 1.5
Preferred securities of subsidiary trust
-------- -------- -------- --------
Average common shares outstanding - assuming dilution 307.2 304.6 306.1 300.5
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per common share $ 0.07 $ 0.34 $ 0.60 $ (0.94)
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per common share - assuming dilution $ 0.07 $ 0.34 $ 0.60 $ (0.94)
-------- -------- -------- --------
-------- -------- -------- --------
If an amount does not appear in the above table, the security was antidilutive for the period presented.
</TABLE>
3. In July 1998, International Paper acquired the Zellerbach distribution
business from The Mead Corporation for approximately $263 million.
Zellerbach is being integrated into xpedx, the Company's distribution
business.
In April 1998, International Paper completed the previously announced
acquisition of Weston Paper and Manufacturing Company by exchanging about
4.7 million International Paper common shares valued at approximately $232
million for the outstanding Weston shares in a noncash transaction.
Carter Holt Harvey, a subsidiary of International Paper, acquired Riverwood
International, an Australia - based folding carton business for
approximately $46 million. The results of this acquisition are included in
the consolidated financial statements of International Paper as of April
1998.
9
<PAGE>
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 will allow Carter Holt Harvey and
International Paper's cup subsidiary, Imperial Bondware, to offer a full
line of food service products in the Australian and New Zealand markets.
In September 1997, the Company acquired Merbok Formtec, a company that has
pioneered the development of door facing products through postforming
medium-density fiberboard. In November 1997, the stock of Taussig Graphics
Supply, Inc. was acquired.
All of the above acquisitions were accounted for using the purchase method.
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 June 1998, a $6 million pre-tax charge ($4 million after taxes or $.01
per share) 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.
6. 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.
This 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.
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. A
distribution of $10 million was paid in the quarter ended September 30,
1998.
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.
10
<PAGE>
In the third quarter of 1995, International Paper Capital Trust (the Trust)
issued $450 million of International Paper-obligated mandatorily redeemable
preferred securities. The Trust is a wholly-owned consolidated subsidiary
of International Paper, and its sole assets are International Paper 5 1/4%
convertible subordinated debentures. The obligations of the Trust related
to its preferred securities are fully and unconditionally guaranteed by
International Paper. These preferred securities are convertible into
International Paper common stock. Preferred securities distributions of $18
million were paid during each of the nine months ended September 30, 1998
and 1997.
Distributions related to each of the above preferred securities are
classified as minority interest expense in the consolidated statement of
earnings.
8. In the 1998 third quarter, the Company recorded special items totaling a
pre-tax loss of $105 million ($56 million after taxes and minority interest
or $.18 per share). These special items included a $20 million pre-tax gain
($12 million after taxes or $.04 per share) on the sale of the Company's
Veratec nonwovens business; a $45 million pre-tax gain ($27 million after
taxes or $.09 per share) from the reversal of previously established
reserves that are no longer required; and a $55 million pre-tax charge ($33
million after taxes or $.11 per share) for the impairment of oil and gas
reserves due to low prices. The third-quarter special items also included a
$115 million pre-tax charge ($62 million after taxes and minority interest
or $.20 per share) primarily related to the first phase of a program in the
printing papers segment to realign U.S. manufacturing operations with
customers and simplify product mix; the indefinite shutdown of the
Gardiner, Oregon linerboard mill; the closure of Carter Holt Harvey's
Taupo, New Zealand sawmill and its Myrtleford, Australia tissue pulp mill;
severance and systems costs, primarily for the reorganization of the forest
resources and distribution businesses; and our share of the write-down
taken by Scitex, a 13% investee company, to exit its digital video
business. The $115 million charge included $65 million of asset write-downs
and $50 million of severance costs.
In June 1997, a $535 million pre-tax business improvement reserve ($385
million after taxes or $1.28 per share) was established under a plan to
improve the Company's financial performance through closing or divesting of
operations that no longer met financial or strategic objectives. It
included approximately $230 million for asset write-downs, $210 million for
the estimated losses on sales of businesses included in the reserve and $95
million for severance and other expenses. The majority of the reserve
related to the restructuring of the printing papers business in the United
States and overseas and the sale of certain specialty businesses. In
December 1997, an additional pre-tax charge of $125 million ($80 million
after taxes or $.26 per share) was recorded for anticipated losses on the
sale of the remaining imaging businesses. While certain other actions are
still underway, we have determined that $45 million of the $660 million of
previously established reserves, primarily related to the Imaging sale and
the Veratec restructuring which did not take place because of its eventual
sale, are no longer required and have been returned to earnings in the 1998
third quarter. At this point, approximately 85% of the anticipated earnings
improvement of $100 million has been realized.
9. Also in June 1997, the Company recorded a $150 million pre-tax charge ($93
million after taxes or $.31 per share) to add to its legal reserves. On
July 14, 1997, Masonite Corporation, a wholly-owned subsidiary of the
Company, announced that it had reached a proposed settlement in a class
action pending in Mobile County, Alabama. The Company believes its legal
reserves, totaling $133 million at September 30, 1998, related to the
proposed settlement, which is now final, and other Masonite litigation,
are adequate to cover any amounts to be paid.
10. In December 1997, the Company recorded a $170 million pre-tax gain ($97
million after taxes and minority interest expense or $.32 per share) from
the redemption of certain retained west coast partnership interests and the
release of a related debt guaranty.
11
<PAGE>
11. Inventories by major category include (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 447 $ 478
Finished pulp, paper and packaging products 1,544 1,466
Finished lumber and panel products 182 160
Operating supplies 390 387
Other 166 269
------ ------
Total $2,729 $2,760
------ ------
------ ------
</TABLE>
12. Interest payments made during the nine-month periods ended September 30,
1998 and 1997 were $484 million and $493 million, respectively. The Company
capitalized net interest costs of $34 million for the nine months ended
September 30, 1998 and $47 million for the nine months ended September 30,
1997. Total interest expense was $445 million for the 1998 nine months and
$441 million for the 1997 nine months. Income tax payments made during the
nine months ended September 30, 1998 and 1997 were $119 million and $161
million, respectively.
13. Temporary investments with a maturity of three months or less are treated
as cash equivalents and are stated at cost. Temporary investments totaled
$243 million and $268 million at September 30, 1998 and December 31, 1997,
respectively.
14. Accumulated depreciation was $10.4 billion at September 30, 1998 and $10.0
billion at December 31, 1997. The allowance for doubtful accounts was $89
million at September 30, 1998 and $93 million at December 31, 1997.
15. The Company uses financial instruments primarily to hedge its exposure to
currency and interest rate risk. To qualify as hedges, financial
instruments must reduce the currency or interest rate risk associated with
the related underlying items and be designated as hedges by management.
Gains or losses from the revaluation of financial instruments which do not
qualify for hedge accounting treatment are recognized in earnings.
The Company has a policy of financing a portion of its investments in
overseas operations with borrowings denominated in the same currency as the
investment or by entering into foreign exchange contracts in tandem
with U.S. dollar borrowings. These contracts are effective in providing a
hedge against fluctuations in currency exchange rates. Gains or losses from
the revaluation of these contracts, which are fully offset by gains or
losses from the revaluation of the net assets being hedged, are determined
monthly based on published currency exchange rates and are recorded as
translation adjustments in common shareholders' equity. Upon liquidation of
the net assets being hedged or early termination of the foreign exchange
contracts, the gains or losses from the revaluation of foreign exchange
contracts are included in earnings. Amounts payable to or due from the
counterparties to the foreign exchange contracts are included in accrued
liabilities or accounts receivable as applicable.
The Company also utilizes foreign exchange contracts to hedge certain
transactions that are denominated in foreign currencies, primarily export
sales and equipment purchases from nonresident vendors. These contracts
serve to protect the Company from currency fluctuations between the
transaction and settlement dates. Gains or losses from the revaluation of
these contracts, based on published currency exchange rates, along with
offsetting gains or losses resulting from the revaluation of the underlying
transactions, are recognized in earnings or deferred and recognized in the
basis of the underlying transaction when completed. Any gains or losses
arising from the cancellation of the underlying transactions or early
termination of the foreign currency contracts are included in earnings.
12
<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.
16. 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, 1999.
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).
We have not yet quantified the impacts of adopting the Statement on our
consolidated financial statements and have not determined the timing of or
method of our adoption. However, adoption of the provisions of the
Statement could increase volatility in earnings and other comprehensive
income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which requires the presentation of
segment information on a basis consistent with that used by management for
operating decisions. The provisions of this statement will be adopted in
the 1998 fourth quarter.
17. Certain reclassifications have been made to prior-year amounts to conform
with the current-year presentation.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
International Paper's third-quarter 1998 net sales were $4.9 billion compared
with 1997 third-quarter net sales of $5.1 billion and 1998 second-quarter net
sales of $4.7 billion. Sales contributions from acquisitions were offset by
lower pricing and volumes for many products; the sale of certain businesses; and
the decline in the New Zealand dollar versus the U.S. dollar.
Third-quarter 1998 earnings were $77 million or $.25 per share before special
items compared with net earnings of $90 million or $.29 per share before special
items in the 1998 second quarter and $102 million or $.34 per share in the 1997
third quarter. Third-quarter 1998 net earnings were $21 million or $.07 per
share after special items that amounted to a pre-tax loss of $105 million ($56
million after taxes and minority interest or $.18 per share). Second-quarter net
earnings were $86 million or $.28 per share after a charge to write off
in-process research and development costs acquired by Scitex, a 13% investee
company of International Paper.
Earnings declined from the 1998 second quarter and the 1997 third quarter due to
difficult market conditions that continue to negatively impact our performance.
The strong U.S. dollar and uncertain global economic conditions have resulted in
continued weak industry demand. While worldwide market conditions cannot be
significantly influenced by the Company, our restructuring measures and cost
reduction efforts will allow for the improved performance of our businesses. The
Company continues to closely monitor paper and packaging inventory levels and
took about 200,000 tons of market and maintenance related downtime during the
1998 third quarter.
Third-quarter 1998 operating profit totaled $285 million compared with $305
million in the 1998 second quarter and $340 million in the 1997 third quarter.
After consideration of the components of the special items which impacted the
segment operating results, third-quarter 1998 operating profit totaled $185
million. Following are discussions of 1998 third-quarter results for each of the
business segments which are based on results before special items.
Printing Papers 1998 third-quarter net sales of $1.2 billion were down from $1.4
billion in the 1997 third quarter and $1.3 billion in the 1998 second quarter.
Operating profit for the 1998 third quarter was $20 million, down from $50
million in the 1998 second quarter and $65 million reported in the 1997 third
quarter. Lower prices primarily for uncoated papers and pulp, which more than
offset modest increases in sales volumes from the previous quarter, were
responsible for the earnings decline.
Packaging 1998 third-quarter net sales were $1.3 billion, about even with the
1998 second quarter, and ahead of 1997 third-quarter net sales of $1.2
billion. The acquisition of Weston Paper contributed to the increase over the
1997 third quarter. Third-quarter 1998 operating profit declined to $70
million from $90 million in the previous quarter mainly due to lower prices
and volumes. Third-quarter 1998 operating profit was ahead of the $35 million
recorded in the 1997 third quarter mainly due to improved containerboard
prices.
Distribution 1998 third-quarter net sales of $1.5 billion were ahead of the 1998
second quarter and the 1997 third quarter primarily due to the acquisition of
Zellerbach. Operating profit increased to $25 million for the 1998 third
quarter, up from the $20 million reported in the 1998 second quarter and the
1997 third quarter. Earnings improvements were due to cost reduction efforts, an
increased focus on account profitability, and the continued smooth integration
of the Zellerbach business.
14
<PAGE>
Specialty Products 1998 third-quarter net sales declined to $565 million from
$625 million in the 1998 second quarter and $860 million in the 1997 third
quarter primarily due to the divestiture of the imaging products and Veratec
nonwovens businesses and lower tissue sales for Carter Holt Harvey.
Third-quarter operating profit was $60 million, up slightly from $55 million in
the 1998 second quarter but down from $85 million in the 1997 third quarter.
Lower oil and gas prices, divestitures and lower Carter Holt Harvey earnings
were primarily responsible for the decline in operating profit from the 1997
third quarter.
Forest Products 1998 third-quarter net sales were $565 million compared with
$575 million in the 1998 second quarter and $720 million in the 1997 third
quarter. Operating profit of $110 million for the 1998 third quarter was up from
$90 million in the 1998 second quarter primarily due to price improvements for
oriented strand board. Operating profit declined from the $135 million reported
in the 1997 third quarter reflecting lower wood products prices. Sales and
earnings for Carter Holt Harvey's forest products business declined from the
1997 third quarter due to significant reductions in prices and volumes
reflecting continued weakness in Asian markets. The 1998 third quarter benefited
from a $37 million gain before taxes from the sale of a partnership interest in
the Company's Allegheny forestlands. This sale was the fifth and final in a
series of transactions announced in the 1997 second quarter.
Carter Holt Harvey reported net sales of $345 million in the 1998 third quarter
compared with $365 million in the 1998 second quarter and $480 million in the
1997 third quarter. Third-quarter 1998 operating profit for Carter Holt Harvey
was breakeven, down from $10 million in the 1998 second quarter and $20 million
in the 1997 third quarter. The major factors impacting the reduction in
operating earnings were volume and price declines for many of Carter Holt
Harvey's export products due to the Asian economic crisis; downtime and
subsequent ramp-up associated with the Kinleith mill modernization; and the weak
New Zealand economy. Carter Holt Harvey's operating profit that is consolidated
into the Company's financial statements and is included in each of the preceding
segment discussions has been adjusted to reflect U.S. generally accepted
accounting principles.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $1.0 billion for the 1998 nine months
compared with $779 million for the 1997 nine months. Lower working capital
requirements, primarily for accounts receivable and inventories, accounted for
much of the increase in operating cash flow.
Investments in capital projects declined to $686 million for the 1998 nine
months, down from $706 million for the 1997 nine months. Mergers and
acquisitions totaled $464 million for the 1998 nine month period. A
description of the current-year acquisitions is included in the following
mergers and acquisitions section. Proceeds from businesses divested during
1998 totaled $517 million which included certain Imaging products businesses;
the label business; the building products business of Carter Holt Harvey; and
the Veratec nonwovens business.
Cash flow generated by operations is anticipated to be adequate to fund expected
capital expenditures, which have been lowered to approximately $1.1 billion for
1998, below expected 1998 depreciation expense. Capital spending will continue
to be focused on the Company's stronger, more competitive businesses and is
expected to be less than $1.0 billion for 1999.
Financing activities for the 1998 nine months include a $1.1 billion net
reduction in primarily short-term debt and the issuance of $1.5 billion of
preferred securities of subsidiaries. During the 1998 first quarter, $170
million of 7.005% preferred securities were issued by a wholly-owned domestic
subsidiary of the Company as part of the financing to repurchase the outstanding
units of IP Timberlands, Ltd. In June 1998, a wholly-owned non-U.S. subsidiary
of the Company issued $550 million of preferred securities with a dividend
payment that is based on LIBOR. In September 1998, IP Capital Trust III, a
wholly-owned U.S. subsidiary of the Company issued $805 million of 7 7/8%
mandatorily redeemable preferred securities due 2038. Proceeds from these
transactions were primarily used to retire short-term
15
<PAGE>
borrowings and for other corporate purposes. All of the above subsidiaries
are consolidated into the financial statements of International Paper.
Dividend payments on these preferred securities are included in minority
interest expense.
Common stock dividend payments were $229 million or $.75 per common share for
the 1998 nine months, even with the prior-year on a per share basis.
MERGERS AND ACQUISITIONS
In February 1998, the Company entered into a joint venture with Olmuksa in
Turkey for the manufacture of containerboard and corrugated boxes for markets in
Turkey and surrounding countries.
Also in February 1998, Carter Holt Harvey and International Paper jointly
acquired Australia-based Continental Cup. This acquisition will allow Carter
Holt Harvey and International Paper's cup subsidiary, Imperial Bondware, to
offer a full line of food service products in the Australian and New Zealand
markets.
In March 1998, IP Forest Resources Company, a subsidiary of International Paper,
purchased all of the 7,299,500 publicly traded Class A Depositary Units of IP
Timberlands, Ltd. for a cash purchase price of $13.6325 per unit.
Early in the 1998 second quarter, Carter Holt Harvey acquired the Australian
folding carton business of Riverwood International.
In April 1998, the Company completed the acquisition of Weston Paper and
Manufacturing Company, a corrugated manufacturer, in a noncash transaction by
exchanging approximately 4.7 million shares of International Paper common stock
worth approximately $232 million for all of the outstanding Weston Paper shares.
In June 1998, the Company signed an agreement to purchase OAO Svetogorsk, a
Russia-based pulp and paper business. This acquisition should complement
International Paper's leading European position in business papers and should
enhance the Company's ability to serve growing market demand in Russia and
Eastern Europe.
Early in the 1998 third quarter, the Company acquired the Zellerbach
distribution business from The Mead Corporation for approximately $263 million.
This business is being combined with the Company's xpedx distribution
operations.
RESTRUCTURING AND SPECIAL ITEMS
In the 1998 third quarter, the Company recorded special items totaling a
pre-tax loss of $105 million ($56 million after taxes and minority interest
or $.18 per share). These special items included a $20 million pre-tax gain
($12 million after taxes or $.04 per share) on the sale of the Company's
Veratec nonwovens business; a $45 million pre-tax gain ($27 million after
taxes or $.09 per share) from the reversal of previously established reserves
that are no longer required; and a $55 million pre-tax charge ($33 million
after taxes or $.11 per share) for the impairment of oil and gas reserves due
to low prices. The third-quarter special items also included a $115 million
pre-tax charge ($62 million after taxes and minority interest or $.20 per
share) primarily related to the first phase of a program in the printing
papers segment to realign U.S. manufacturing operations with customers and
simplify product mix; the indefinite shutdown of the Gardiner, Oregon
linerboard mill; the closure of Carter Holt Harvey's Taupo, New Zealand
sawmill and its Myrtleford, Australia tissue pulp mill; severance and systems
costs, primarily for the reorganization of the forest resources and
distribution businesses; and our share of the write-down taken by Scitex, a
13% investee company, to exit its digital video business. The $115 million
charge included $65 million of asset write-downs and $50 million of severance
costs.
16
<PAGE>
In 1997, reserves amounting to $660 million were established to improve the
Company's financial performance by closing or divesting of operations that no
longer met financial or strategic objectives. While certain other actions are
still underway, we have determined that $45 million of the reserves,
primarily related to the Imaging sale and the Veratec restructuring, which
did not take place because of its eventual sale, are no longer required and
have been returned to earnings in the 1998 third quarter. At this point,
approximately 85% of the anticipated earnings improvement of $100 million has
been realized.
The divestitures anticipated in the previously announced restructuring plan,
which resulted in $1 billion in proceeds, have been completed, and the
Company has announced the intent to sell an additional $500 million of
nonstrategic assets. Divestitures in 1998 included certain Imaging products
businesses which were sold during the first and second quarters; the
Company's label business and Carter Holt Harvey's building products business
which were sold during the second quarter; and the Veratec nonwovens business
which was sold during the third quarter.
OTHER
Minority interest expense for the 1998 third quarter declined primarily due
to lower earnings associated with Carter Holt Harvey, which is owned
just over 50% by International Paper.
The effective income tax rate for the 1998 nine months declined to 28% from 34%
for the 1997 nine months before special items primarily due to certain state tax
credits and changes in the mix of estimated annual earnings. After special
items, the 1998 third-quarter effective tax rate was 24% and the 1997
third-quarter effective tax rate was a benefit of 23%. 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,
1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ -------------------------------------
Pre-Tax Tax Pre-Tax Tax
Earnings Expense Effective Earnings Expense Effective
(Loss) (Benefit) Tax Rate (Loss) (Benefit) Tax Rate
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Before special items $ 403 $ 113 28% $ 444 $ 151 34%
Gain on sale of business 20 8 40%
Reversal of reserves no longer required 45 18 40%
Oil and gas impairment charge (55) (22) 40%
Restructuring and other charges (115) (46) 40%
Write off of in-process research and
development costs acquired by an
investee company (6) (2) 33%
Business improvement charge (535) (150) 28%
Provision for legal reserve (150) (57) 38%
----- ----- ----- -----
After special items $ 292 $ 69 24% $(241) $ (56) 23%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
17
<PAGE>
YEAR-2000 COSTS
The Year 2000 problem concerns the inability of information systems to properly
recognize and process date-sensitive information beyond January 1, 2000.
Many of our systems and related software are Year 2000 compliant. However, we
have a program in place designed to bring the remaining software and systems
into Year 2000 compliance in time to minimize any significant detrimental
effects on operations. The program covers information systems infrastructure,
financial and administrative systems, process control and manufacturing
operating systems and significant vendors and customers. Our program recognizes
that date sensitive systems may fail at different points in time depending on
their function. Forward-looking production and procurement systems may fail
earlier and require corrective actions sooner to allow for reasonable testing.
Other applications, including gauging and recording systems, may fail only
during the transition to Year 2000.
We are utilizing 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 will be
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 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
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, our customer base is broad enough to minimize the
affects 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. Further, none of our major 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 which include production monitoring, power, emissions and safety. The 46
pulp and paper mills operated by the Company utilize various complex control
systems comprised of roughly 1,000-2,000 components per mill 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 219 converting facilities cover comparable
operations, but are typically comprised of 300-500 components per facility. 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 our
mills and plants. If a failure were to occur, the potential impact would be
isolated to the affected facility. Also, in many cases, we have 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.
18
<PAGE>
Production facility systems represent our greatest area of risk and plans are
currently being formulated to reduce the risk of noncompliance of these
systems. This includes contingency plans and the establishment of critical
milestones. 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 should be available depending upon the circumstances of a Year 2000
related event and the type of facility involved. Generally, no recovery would
be available in the event of an orderly shutdown which does not result in
damage to a facility. Potential recoveries in the event of facility damage,
including business interruption, would be subject to deductibles which range
from $100,000 to $10 million.
The Company has adopted a nine-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). The first three steps, planning and awareness,
inventory and triage, are largely complete. Step four, detailed assessment,
is scheduled for completion during the fourth quarter of 1998. Steps five
through nine are scheduled to be approximately 25% complete by the end of
1998. We expect to reach 50% by the end of the first quarter of 1999 and to
complete these efforts by the end of June 1999.
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 one of these systems was not corrected, our
ability to capture, schedule and fulfill customer demands could be impaired.
Likewise, if a 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 approximately 55%
complete, with the remainder in the process of code correction or testing.
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.
We estimate that the incremental Year 2000 related costs will be
approximately $135 million plus or minus 30%, exclusive of 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 the end of 1998 is expected to total $32 million, with the remaining
costs expected to be incurred during the first two quarters of 1999. 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.
There is a risk that our plans for achieving Year 2000 compliance may not be
completed on time. However, failure to meet critical milestones being
identified in our plans would provide advance notice, and steps would be
taken to prevent injuries to employees and others, and to prevent
environmental contamination. Customers and suppliers would also receive
advance notice allowing them to implement alternate plans.
19
<PAGE>
THE ESTIMATES AND CONCLUSIONS HEREIN CONTAIN FORWARD-LOOKING STATEMENTS AND ARE
BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS. RISKS TO COMPLETING THE
PLAN INCLUDE THE AVAILABILITY OF RESOURCES, OUR ABILITY TO DISCOVER AND CORRECT
THE POTENTIAL YEAR 2000 SENSITIVE PROBLEMS WHICH COULD HAVE A SERIOUS IMPACT ON
SPECIFIC FACILITIES, AND THE ABILITY OF SUPPLIERS TO BRING THEIR SYSTEMS INTO
YEAR 2000 COMPLIANCE.
EFFECT OF INFLATION
General inflation has had a minimal impact on International Paper's operating
results during the nine months of 1998 and the last three fiscal years. Sales
prices and volumes are more strongly influenced by supply and demand factors
in specific markets and by exchange rate fluctuations than by inflationary
factors.
20
<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,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Printing Papers $ 1,220 $ 1,415 $ 3,855 $ 4,135
Packaging 1,300 1,235 3,785 3,680
Distribution 1,495 1,170 3,925 3,385
Specialty Products 565 860 1,940 2,610
Forest Products 565 720 1,730 2,005
Less: Intersegment Sales (206) (281) (721) (800)
-------- -------- -------- --------
Net Sales $ 4,939 $ 5,119 $ 14,514 $ 15,015
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The above amounts include Carter Holt Harvey net sales of $345 million and $480
million for the three months ended September 30, 1998 and 1997, respectively,
and $1.1 billion and $1.5 billion for the nine months ended September 30, 1998
and 1997, respectively.
Operating Profit by Industry Segment
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------------------------- -------------------------------------
Before After Before After
Special Special Special Special Special Special
Items Items (1,2) Items Items Items (3) Items
------ ----------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Printing Papers $ 140 $ (25) $ 115 $ 90 $(215) $(125)
Packaging 220 (20) 200 150 (45) 105
Distribution 65 (30) 35 70 (15) 55
Specialty Products 165 (10) 155 255 (200) 55
Forest Products 290 (15) 275 295 (50) 245
----- ----- ----- ----- ----- -----
Operating Profit (Loss) 880 (100) 780 860 (525) 335
Corporate items, net (103) (11) (114) (41) (160) (201)
Interest expense, net (374) (374) (375) (375)
Income tax (provision) benefit (113) 44 (69) (151) 207 56
Minority interest expense, net of taxes (48) 7 (41) (98) (98)
----- ----- ----- ----- ----- -----
Net Earnings (Loss) $ 242 $ (60) $ 182 $ 195 $(478) $(283)
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
The above amounts include Carter Holt Harvey operating profit of $20 million and
$85 million for the nine months ended September 30, 1998 and 1997, respectively.
(1) Includes a $20 million pre-tax gain on the sale of the Veratec nonwovens
business ($12 million after taxes or $.04 per share), a $45 million
pre-tax gain ($27 million after taxes or $.09 per share) from the
reversal of previously established reserves that are no longer required,
a $55 million pre-tax oil and gas impairment charge ($33 million after
taxes or $.11 per share), and new restructuring and asset impairment
charges totaling $115 million before taxes ($62 million after taxes and
minority interest or $.20 per share).
(2) Includes a $6 million pre-tax charge ($4 million after taxes or $.01 per
share) to write off in-process research and development costs related to an
acquisition by an investee company.
(3) Includes a $535 million pre-tax business improvement charge ($385 million
after taxes or $1.28 per share) and a $150 million pre-tax provision for
legal reserve ($93 million after taxes or $.31 per share).
21
<PAGE>
Production by Products
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Printing Papers (In thousands of tons)
White Papers and Bristols 914 999 2,820 3,004
Coated Papers 317 316 957 960
Market Pulp (A) 464 558 1,414 1,659
Newsprint 24 23 71 63
Packaging (In thousands of tons)
Containerboard 751 773 2,158 2,170
Bleached Packaging Board 538 543 1,610 1,634
Industrial Papers 149 175 461 514
Industrial and Consumer Packaging (B) 903 850 2,581 2,554
Specialty Products (In thousands of tons)
Tissue 39 39 111 110
Forest Products (In millions)
Panels (sq. ft. 3/8" basis) (C) 409 387 1,183 1,057
Lumber (board feet) 566 572 1,658 1,598
MDF (sq. ft. 3/4" basis) 44 48 141 154
Particleboard (sq. ft. 3/4" basis) 51 46 146 138
</TABLE>
(A) This excludes market pulp purchases.
(B) A significant portion of this tonnage was fabricated from paperboard and
paper produced at the Company's own mills and included in the
containerboard, bleached packaging board, and industrial papers amounts in
this table.
(C) Panels include plywood and oriented strand board.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
(a) Exhibits
(11) Statement of Computation of Per Share Earnings
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
Reports on Form 8-K were filed on September 10, September 29, and October
20, 1998.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(Registrant)
Date: February 10, 1999 By /s/ MARIANNE M. PARRS
----------------------
Marianne M. Parrs
Senior Vice President
and Chief Financial Officer
Date: February 10, 1999 By /s/ ANDREW R. LESSIN
--------------------
Andrew R. Lessin
Vice President, Controller and
Chief Accounting Officer
<PAGE>
(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,
------------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 21 $ 102 $ 182 $ (283)
Reduction in minority interest expense, net of taxes, assuming
conversion of preferred securities of subsidiary trust
---------- ---------- ---------- ----------
Net earnings (loss) - assuming dilution $ 21 $ 102 $ 182 $ (283)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average common shares outstanding 307.2 302.3 305.4 301.4
Shares assumed to be repurchased using long-term
incentive plan deferred compensation at average
market price (0.8) (0.8) (0.8) (0.9)
Shares assumed to be issued upon exercise of
stock options, net of treasury buyback at average
market price 0.8 3.1 1.5
Shares assumed to be issued upon conversion of preferred
securities of subsidiary trust
---------- ---------- ---------- ----------
Average common shares outstanding - assuming dilution 307.2 304.6 306.1 300.5
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per common share $ 0.07 $ 0.34 $ 0.60 $ (0.94)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per common share - assuming dilution $ 0.07 $ 0.34 $ 0.60 $ (0.94)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
<PAGE>
(Exhibit 12)
INTERNATIONAL PAPER COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
(Unaudited)
<TABLE>
<CAPTION>
For the Years Ended December 31, Nine Months Ended
September 30,
TITLE 1993 1994 1995 1996 1997 1997 1998
- ------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
A) Earnings (loss) before income taxes,
minority interest and
accounting changes $ 538.0 $ 715.0 $ 2,028.0 $ 802.0 $ 16.0 $ (241.0) $ 292.0
B) Less: Minority interest expense, net of
taxes (36.0) (47.0) (156.0) (169.0) (129.0) (98.0) (41.0)
C) Add: Fixed charges excluding
capitalized interest 365.3 412.3 605.9 672.4 686.6 503.4 523.3
D) Add: Amortization of previously
capitalized interest 12.2 12.8 13.0 17.8 20.0 14.9 15.6
E) Less: Equity in undistributed
earnings of affiliates (25.9) (49.1) (94.5) 6.2 (40.4) (28.3) 25.2
--------- --------- --------- --------- --------- --------- ---------
F) Earnings (loss) before income taxes,
minority interest, accounting changes
and fixed charges $ 853.6 $ 1,044.0 $ 2,396.4 $ 1,329.4 $ 553.2 $ 151.0 $ 815.1
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Fixed Charges
G) Interest and amortization of debt expense $ 334.5 $ 371.0 $ 542.3 $ 582.8 $ 593.0 $ 441.1 $ 444.6
H) Interest factor attributable to rentals 30.8 41.3 53.0 66.0 70.0 44.6 43.7
I) Preferred dividends of subsidiary 10.6 23.6 23.6 17.7 35.0
J) Capitalized interest 12.2 18.0 58.0 66.7 61.9 47.0 34.3
--------- --------- --------- --------- --------- --------- ---------
K) Total fixed charges $ 377.5 $ 430.3 $ 663.9 $ 739.1 $ 748.5 $ 550.4 $ 557.6
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
L) Ratio of earnings to fixed charges 2.26 2.43 3.61 1.80 1.46
---- ---- ---- ---- ----
---- ---- ---- ---- ----
M) Deficiency in earnings necessary
to cover fixed charges $ 195.3 $ 399.4
--------- ---------
--------- ---------
</TABLE>
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<S> <C>
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1,805
0
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