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 June 30, 1997 Commission file number 1-3157 INTERNATIONAL PAPER COMPANY (Exact name of registrant as specified in its charter) <TABLE> <S> <C> 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) </TABLE> 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 July 31, 1997: 302,419,290 shares.
INTERNATIONAL PAPER COMPANY INDEX <TABLE> <CAPTION> PAGE NO. -------- <S> <C> PART I. Financial Information Item 1. Financial Statements Consolidated Statement of Earnings - Three Months and Six Months Ended June 30, 1997 and 1996 3 Consolidated Balance Sheet - June 30, 1997 and December 31, 1996 4-5 Consolidated Statement of Cash Flows - Six Months Ended June 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Other Financial Information 15 PART II. Other Information Item 1. Legal Proceedings 20 Item 2. Changes in Securities * Item 3. Defaults upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information * Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 </TABLE> - - ------------------------ * Omitted since no answer is called for, answer is in the negative or inapplicable. 2
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 SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- <S> <C> <C> <C> <C> 1997 1996 1997 1996 --------- --------- --------- --------- Net Sales............................................................. $ 5,034 $ 5,093 $ 9,896 $ 9,891 --------- --------- --------- --------- Costs and Expenses Cost of products sold............................................... 3,786 3,771 7,422 7,327 Selling and administrative expenses................................. 391 379 770 726 Depreciation and amortization....................................... 318 302 638 565 Distribution expenses............................................... 233 237 470 438 Taxes other than payroll and income taxes........................... 53 50 105 97 Business improvement charge......................................... 535 535 Provision for legal reserve......................................... 150 150 Restructuring and asset impairment charge........................... 515 --------- --------- --------- --------- Total Costs and Expenses.............................................. 5,466 4,739 10,090 9,668 --------- --------- --------- --------- Gain on sale of partnership interest................................ 592 --------- --------- --------- --------- Earnings (Loss) Before Interest, Income Taxes and Minority Interest................................................... (432) 354 (194) 815 Interest expense, net............................................... 125 137 255 262 --------- --------- --------- --------- Earnings (Loss) Before Income Taxes and Minority Interest................................................... (557) 217 (449) 553 Income tax provision (benefit)...................................... (167) 80 (127) 243 Minority interest expense, net of taxes............................. 29 38 63 113 --------- --------- --------- --------- Net Earnings (Loss)................................................... $ (419) $ 99 $ (385) $ 197 --------- --------- --------- --------- --------- --------- --------- --------- Earnings (Loss) Per Common Share...................................... $ (1.39) $ 0.33 $ (1.28) $ 0.69 --------- --------- --------- --------- --------- --------- --------- --------- Average Shares of Common Stock Outstanding............................ 301.1 299.1 300.9 284.0 --------- --------- --------- --------- --------- --------- --------- --------- Cash Dividends Per Common Share....................................... $ 0.25 $ 0.25 $ 0.50 $ 0.50 --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> - - ------------------------ The accompanying notes are an integral part of these financial statements. 3
INTERNATIONAL PAPER COMPANY Consolidated Balance Sheet (Unaudited) (In millions) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1997 1996 --------- ------------- <S> <C> <C> Assets Current Assets Cash and temporary investments............................ $ 455 $ 352 Accounts and notes receivable, net........................ 2,616 2,553 Inventories............................................... 2,857 2,840 Other current assets...................................... 265 253 --------- ----------- Total Current Assets........................................ 6,193 5,998 --------- ----------- Plants, Properties and Equipment, Net....................... 12,570 13,217 Forestlands................................................. 3,324 3,342 Investments................................................. 1,150 1,178 Goodwill.................................................... 2,688 2,748 Deferred Charges and Other Assets........................... 1,828 1,769 --------- ----------- Total Assets................................................ $ 27,753 $ 28,252 --------- ----------- --------- ----------- </TABLE> - - ------------------------ The accompanying notes are an integral part of these financial statements. 4
INTERNATIONAL PAPER COMPANY Consolidated Balance Sheet (Unaudited) (In millions) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, Liabilities and Common Shareholders' Equity 1997 1996 --------- ------------- <S> <C> <C> Current Liabilities Notes payable and current maturities of long-term debt.. $ 3,198 $ 3,296 Accounts payable........................................ 1,415 1,426 Accrued liabilities..................................... 1,607 1,172 --------- ----------- Total Current Liabilities................................. 6,220 5,894 --------- ----------- Long-Term Debt............................................ 6,656 6,691 Deferred Income Taxes..................................... 2,563 2,768 Other Liabilities......................................... 1,215 1,240 Minority Interest......................................... 1,856 1,865 International Paper-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely International Paper Subordinated Debentures........................... 450 450 Common Shareholders' Equity Common stock, $1 par value, issued 1997--302.4 shares, 1996--300.8 shares................ 302 301 Paid-in capital......................................... 3,417 3,426 Retained earnings....................................... 5,104 5,639 --------- ----------- 8,823 9,366 Less: Common stock held in treasury, at cost; 1997--0.7 shares, 1996--0.6 shares................... 30 22 --------- ----------- Total Common Shareholders' Equity........................ 8,793 9,344 --------- ----------- Total Liabilities and Common Shareholders' Equity........ $ 27,753 $ 28,252 --------- ----------- </TABLE> - - ------------------------ The accompanying notes are an integral part of these financial statements. 5
INTERNATIONAL PAPER COMPANY Consolidated Statement of Cash Flows (Unaudited) (In millions) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, -------------------- 1997 1996 --------- --------- <S> <C> <C> Operating Activities Net earnings (loss)................................... $ (385) $ 197 Noncash items Depreciation and amortization........................ 638 565 Deferred income taxes................................ (176) 120 Business improvement charge.......................... 535 Provision for legal reserve.......................... 150 Restructuring and asset impairment charge............ 515 Gain on sale of partnership interest................. (592) Other, net........................................... 72 35 Changes in current assets and liabilities Accounts and notes receivable........................ (160) 91 Inventories.......................................... (82) 160 Accounts payable and accrued liabilities............. (72) (388) Other................................................ (23) (14) --------- --------- Cash Provided by Operations.............................. 497 689 --------- --------- Investment Activities Invested in capital projects........................... (460) (598) Mergers and acquisitions, net of cash acquired......... (1,303) Other.................................................. (69) (1) --------- --------- Cash Used for Investment Activities...................... (529) (1,902) --------- --------- Financing Activities Issuance of common stock............................... 91 73 Issuance of debt....................................... 299 1,483 Reduction of debt...................................... (203) (216) Change in bank overdrafts.............................. 47 6 Dividends paid......................................... (150) (140) Other.................................................. 74 58 --------- --------- Cash Provided by Financing Activities.................... 158 1,264 --------- --------- Effect of Exchange Rate Changes on Cash.................. (23) (1) --------- --------- Change in Cash and Temporary Investments................. 103 50 Cash and Temporary Investments Beginning of the period................................ 352 312 --------- --------- End of the period...................................... $ 455 $ 362 --------- --------- --------- --------- </TABLE> The accompanying notes are an integral part of these financial statements. 6
INTERNATIONAL PAPER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments (consisting only of normal recurring accruals) which are necessary for the fair presentation of results for the interim periods. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto incorporated by reference in the Company's Form 10-K for the year ended December 31, 1996, which has previously been filed with the Commission. 2. In August 1996, the Company acquired Forchem, a tall oil and turpentine processor in Finland. In September 1996, Carter Holt Harvey, a consolidated subsidiary of the Company, acquired Forwood Products, the timber processing business of the South Australian Government. On March 12, 1996, the Company completed the merger with Federal Paper Board (Federal), a diversified forest and paper products company. Under the terms of the merger agreement, Federal shareholders received, at their election and subject to certain limitations, either $55 in cash or a combination of cash and International Paper common stock worth $55 for each share of Federal common stock. To complete the merger, Federal shares were acquired for approximately $1.3 billion in cash and $1.4 billion in International Paper common stock, and approximately $800 million of debt was assumed. The results of Federal are included in the consolidated statement of earnings from March 12, 1996. All of the above acquisitions were accounted for using the purchase method. The consolidated balance sheets at June 30, 1997 and December 31, 1996 include preliminary purchase price allocations for Forchem and Forwood Products. Final allocations for these acquisitions will be completed in 1997. 3. The following unaudited pro forma financial information for the three months and six months ended June 30, 1996 presents the combined results of the continuing operations of International Paper, Federal, and the other acquisitions completed during 1996. The 1997 amounts presented in the following table are actual results for the second quarter and first half. These amounts include the results of all of the 1996 acquisitions for the entire period and are presented for comparative purposes only. The pro forma information is presented as if the transactions occurred as of the beginning of the three-month and six-month periods ended June 30, 1996. The pro forma adjustments are based on available information, preliminary purchase price allocations and certain assumptions that the Company believes are reasonable. There can be no assurance that the assumptions and estimates would have been realized. The pro forma information does not purport to represent the Company's actual results of operations if the transactions described above would have occurred at the beginning of the 1996 periods, nor is it indicative of the actual results since acquisition. In addition, the information may not be indicative of future results. 7
<TABLE> <CAPTION> PRO FORMA FINANCIAL INFORMATION THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1996 1997 1996 (ACTUAL) (ACTUAL) --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> Net Sales................................................................... $ 5,034 $ 5,146 $ 9,896 $ 10,313 --------- --------- --------- --------- --------- --------- --------- --------- Net Earnings (Loss)......................................................... $ (419) $ 99 $ (385) $ 183 --------- --------- --------- --------- --------- --------- --------- --------- Earnings (Loss) Per Common Share............................................ $ (1.39) $ 0.33 $ (1.28) $ 0.61 --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> 4. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, "Environmental Remediation Liabilities" (the SOP), which was adopted by the Company in the first quarter of 1997. The SOP provides guidance concerning the recognition, measurement and disclosure of environmental remediation liabilities. The adoption of the SOP did not have a material effect on the Company's financial position or results of operations. 5. In February 1997, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which specifies the computation, presentation and disclosure requirements for earnings per share. This statement is effective for fiscal years ending after December 15, 1997, and earlier adoption is not permitted. Adoption of the provisions of this statement is not expected to have a material effect on reported earnings per share. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components. This statement is effective for fiscal years beginning after December 15, 1997. 6. On March 29, 1996, IP Timberlands, Ltd. (IPT), a consolidated subsidiary of International Paper, completed the sale of a 98% general partnership interest in a subsidiary partnership that owns approximately 300,000 acres of forestlands located in Oregon and Washington. Included in the net assets of the partnership interest sold were forestlands, roads and $750 million of long-term debt. As a result of this transaction, International Paper recognized in its consolidated results for the first quarter of 1996 a $592 million pre-tax gain ($336 million after taxes and minority interest expense or $1.25 per share). IPT and International Paper retained non-operating interests in the partnership. 7. In June 1997, a $535 million pre-tax business improvement reserve ($385 million after taxes or $1.28 per share) was established under a plan to improve the Company's financial performance through closing or divesting of operations that no longer meet financial or strategic objectives. The second-quarter charge to establish the business improvement reserve included approximately $230 million for asset write-downs, $210 million for the estimated losses on sales of businesses included in the reserve and $95 million for severance and other expenses. The majority of the reserve relates to the restructuring of the printing papers business in the United States and overseas and the sale of certain specialty businesses. Annual improvement in earnings before interest and income taxes of approximately $100 million is expected by the end of 1998. 8
8. Also in June 1997, the Company recorded a $150 million pre-tax charge ($93 million after taxes or $.31 per share) to add to its legal reserves. On July 14, 1997, Masonite Corporation, a wholly-owned subsidiary of the Company, announced that it had reached a proposed settlement in a class action pending in Mobile County, Alabama. The Company believes its legal reserves are adequate to cover any amounts to be paid pursuant to the proposed settlement, which is subject to Court approval. 9. During the first quarter of 1996, the Company's Board of Directors authorized a series of management actions to restructure and strengthen existing businesses which resulted in a pre-tax charge to earnings of $515 million ($362 million after taxes or $1.35 per share). The charge included $305 million for the write-off of certain assets, $100 million for asset impairments, $80 million in associated severance costs and $30 million of other expenses, including the cancellation of leases. Accruals for one-time cash costs, which include severance costs and other expenses, totaled $110 million. Approximately $34 million of these costs were incurred in 1996 and the remainder will be spent in 1997. 10. In the third quarter of 1995, International Paper Capital Trust (the Trust) issued $450 million of International Paper-obligated mandatorily redeemable preferred securities. The Trust is a wholly owned consolidated subsidiary of International Paper and its sole assets are International Paper 5-1/4% convertible subordinated debentures. The obligations of the Trust related to its preferred securities are fully and unconditionally guaranteed by International Paper. These preferred securities are convertible into International Paper common stock. Preferred securities distributions of $12 million were paid during each of the six months ended June 30, 1997 and 1996. 11. Inventories by major category include (in millions): <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------- <S> <C> <C> Raw materials............................................................................ $ 488 $ 534 Finished pulp, paper and packaging products.............................................. 1,424 1,365 Finished lumber and panel products....................................................... 198 215 Operating supplies....................................................................... 400 397 Other.................................................................................... 347 329 ----------- ----------- Total.................................................................................... $ 2,857 $ 2,840 ----------- ----------- ----------- ----------- </TABLE> 12. Interest payments made during the six months ended June 30, 1997 and 1996 were $361 million and $336 million, respectively. Interest income for the six months ended June 30, 1997 and 1996 was $33 million and $24 million, respectively, including income of $14 million and $13 million for the 1997 and 1996 second quarters. Income tax payments made during the six months ended June 30, 1997 and 1996 were $82 million and $174 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 $268 million and $221 million at June 30, 1997 and December 31, 1996, respectively. 14. Accumulated depreciation was $9.9 billion at June 30, 1997 and $9.5 billion at December 31, 1996. The allowance for doubtful accounts was $105 million at June 30, 1997 and $101 million at December 31, 1996. 15. The Company uses financial instruments primarily to hedge its exposure to currency and interest rate risk. To qualify as hedges, financial 9
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 demoninated 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 and losses from the revaluation of foreign exchange contracts are included in earnings. Amounts payable to or due from the counterparties to the foreign exchange contracts are included in accrued liabilities or accounts receivable as applicable. The Company also utilizes foreign exchange contracts to hedge certain transactions that are denominated in foreign currencies, primarily export sales and equipment purchases from nonresident vendors. These contracts serve to protect the Company from currency fluctuations between the transaction and settlement dates. Gains or losses from the revaluation of these contracts, based on published currency exchange rates, along with offsetting gains or losses resulting from the revaluation of the underlying transactions, are recognized in earnings or deferred and recognized in the basis of the underlying transaction when completed. Any gains or losses arising from the cancellation of the underlying transactions or early termination of the foreign currency contracts are included in earnings. The Company uses cross-currency and interest rate swap agreements to manage the composition of its fixed and floating rate debt portfolio. Amounts to be paid or received as interest under these agreements are recognized over the life of the swap agreements as adjustments to interest expense. Gains or losses from the revaluation of cross-currency swap agreements that qualify as hedges of investments are recorded as translation adjustments in common shareholders' equity. Gains or losses from the revaluation of cross-currency swap agreements that do not qualify as hedges of investments are included in earnings. The related amounts payable to or receivable from the counterparties to the agreements are included in accrued liabilities or accounts receivable. If swap agreements are terminated early, the resulting gain or loss is deferred and amortized over the remaining life of the related debt. The Company does not hold or issue financial instruments for trading purposes. 16. Through a public tender offer from July 23, 1997 through August 6, 1997, the Company's wholly owned subsidiary, Federal Paper Board, repurchased $164 million of its 10% debentures due April 15, 2011. The earnings impact of the debt retirement was not material. 17. Certain reclassifications have been made to prior-year amounts to conform with the current-year presentation. 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS International Paper's second-quarter 1997 net sales of $5.0 billion were slightly below the $5.1 billion reported in the 1996 second-quarter. First-quarter 1997 net sales were $4.9 billion. First half 1997 net sales of $9.9 billion were even with the 1996 first half. Second-quarter 1997 results were a net loss of $419 million or $1.39 per share after a $535 million pre-tax charge ($385 million after taxes or $1.28 per share) to establish a business improvement reserve and a $150 million pre-tax charge ($93 million after taxes or $.31 per share) to add to the Company's legal reserves. Second-quarter net earnings before these charges of $59 million or $.20 per share were below second-quarter 1996 net earnings of $99 million or $.33 per share, but were well ahead of 1997 first-quarter net earnings of $34 million or $.11 per share. First-half 1997 results were a net loss of $385 million or $1.28 per share after the special charges. Before these charges, 1997 first-half net earnings were $93 million or $.31 per share compared with first-half 1996 net earnings of $223 million or $.79 per share before a $515 million pre-tax restructuring and asset impairment charge ($362 million after taxes or $1.35 per share) and a $592 million pre-tax gain ($336 million after taxes and minority interest expense or $1.25 per share) on the sale of a partnership interest. Before special charges, second-quarter 1997 net earnings declined significantly from the 1996 second quarter primarily due to lower prices for key paper and packaging products. Second-quarter earnings before special items increased significantly from the 1997 first quarter reflecting the favorable trend in industry conditions that began earlier in the year. The strong demand currently experienced by the industry is expected to lead to increased profitability over the next six months. The consolidated results of operations include Federal Paper Board (Federal) since March 12, 1996. Federal contributed about 8% of first half 1997 consolidated net sales. Operating results for Carter Holt Harvey, adjusted as necessary to conform with International Paper's classifications, are also included in each segment as applicable. The following segment discussions are based on results before the charges for the business improvement and legal reserves. Printing Papers 1997 second-quarter net sales of $1.3 billion were slightly below net sales of $1.4 billion recorded in the 1996 second quarter and the 1997 first quarter. Net sales of $2.7 billion for the 1997 first half were down slightly from the $2.8 billion reported in the 1996 first half. Operating profits for the 1997 second quarter were below the comparable 1996 period primarily due to lower prices. Second-quarter 1997 earnings improved significantly from the previous quarter reflecting higher prices for coated and uncoated papers. Operating profits reported by the European papers businesses improved over the prior quarter and the 1996 second quarter. Packaging second-quarter 1997 net sales of $1.3 billion were about even with the 1996 second-quarter and increased slightly over reported 1997 first-quarter net sales of $1.2 billion. First-half 1997 net sales of $2.4 billion were about even with the 1996 first-half. Second-quarter 1997 operating profits, which were up slightly over the 1997 first quarter, declined significantly from the 1996 second quarter reflecting lower containerboard and corrugated box prices. Although demand for containerboard was strong, excess industry capacity continued to depress prices. Bleached board results were comparable to the previous 11
quarter and the 1996 second quarter. Carter Holt Harvey earnings were below the 1996 second quarter and about even with the 1997 first quarter. Distribution net sales of $1.2 billion for the 1997 second quarter were even with the 1996 second quarter and slightly ahead of the 1997 first quarter. Net sales were $2.3 billion for the 1997 and 1996 six-month periods. Operating profits were also about even with the 1996 second quarter and ahead of the 1997 first quarter largely due to improved volumes and increases in printing papers prices. Specialty Products 1997 second-quarter net sales were $890 million compared with $885 million for the 1996 second quarter and $860 million for the 1997 first quarter. First half net sales remained at $1.7 billion. Second-quarter 1997 operating profits were about even with the 1996 second quarter and improved from 1997 first-quarter levels largely due to a strong performance by the building products business. Earnings for the chemicals business improved over the 1996 second quarter and the 1997 first quarter. Forchem, a tall oil and turpentine processor in Finland acquired in August of 1996 contributed to the increase over the 1996 period. Sales and profits for the petroleum business were behind the 1997 first quarter and the 1996 second quarter. Forest Products 1997 second-quarter net sales were $680 million compared with $695 million for the 1996 second quarter and $605 million for the 1997 first quarter. Net sales totaled $1.3 billion for the 1997 and 1996 six-month periods. Operating profits were down from the 1996 second quarter and the 1997 first quarter that included a timberland sale transaction. Contributions from Carter Holt Harvey, with its acquisition of Forwood Products in September 1996, were comparable to 1996 second-quarter and 1997 first-quarter levels. Siding markets continued to be weak while demand for lumber remained strong. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations totaling $497 million for the 1997 first half decreased from $689 million for the 1996 first half. Lower earnings and higher working capital levels for the 1997 first half were primarily responsible for the decrease. Working capital increased $337 million in the 1997 first half compared with an increase of $151 million in 1996. About half of the 1997 working capital increase was due to an increase in accounts and notes receivable. Noncash operating items for the 1997 first half included the business improvement charge and a provision to add to the Company's legal reserves. Prior-year noncash operating items included the $77 million net impact of special items recorded in the 1996 first quarter. Investments in capital projects totaled $460 million for the 1997 first half compared with $598 million reported for the 1996 first half. Approximately $1.3 billion of cash was spent and $1.4 billion of International Paper common stock was exchanged (35.4 million shares) to acquire the outstanding shares of Federal during the first quarter of 1996. Financing activities for the 1997 first half include $96 million of net borrowing activities primarily consisting of short-term debt. During the 1996 first half, approximately $1.3 billion of short-term debt was issued to acquire the Federal common shares. Dividend payments totaled $150 million or $.50 per common share for the first six months of 1997 compared with $140 million paid in the 1996 first half. This change reflects the increase in common shares outstanding due to the Federal merger. Cash flow generated by operations, supplemented as necessary by short- or long-term borrowings, is anticipated to be adequate to fund expected 1997 capital expenditures, which have been reduced to approximately $1.2 billion, about equal to expected 1997 depreciation expense. 12
MERGERS AND ACQUISITIONS On March 12, 1996, International Paper completed the merger with Federal Paper Board, a diversified forest and paper products company. Under the terms of the merger agreement, Federal shareholders received, at their election and subject to certain limitations, either $55 in cash or a combination of cash and International Paper common stock worth $55 for each share of Federal common stock. To complete the merger, Federal shares were acquired for approximately $1.3 billion in cash and $1.4 billion in International Paper common stock, and approximately $800 million of debt was assumed. The results of Federal are included in the consolidated statement of earnings from March 12, 1996. As a result of the merger, Federal contributed about 8% of consolidated net sales for the 1997 first half and between 2% and 14% for each of the components of consolidated costs and expenses. The consolidated balance sheets at June 30, 1997 and December 31, 1996 include the balances of Federal. In August 1996, the Company acquired Forchem, a tall oil and turpentine processor in Finland for approximately $100 million. In September 1996, Carter Holt Harvey acquired Forwood Products, the timber processing business of the South Australian Government for approximately $100 million. SPECIAL CHARGES In June 1997, a $535 million pre-tax business improvement reserve ($385 million after taxes or $1.28 per share) was established under a plan to improve the Company's financial performance through closing or divesting of operations that no longer meet financial or strategic objectives. The majority of the reserve relates to the restructuring of the printing papers business in the United States and overseas and the sale of certain specialty businesses. Included in the reserve are costs to shut down or close the Woronoco, Mass. mill; three production lines at the Erie, Pa. mill; the de-inking pulp operation at the Lock Haven, Pa. mill; and a paper machine producing kraft papers at the Moss Point, Miss. mill. Also included are estimated losses on dispositions of the Imaging Products business; three multiwall kraft bag plants; Veratec's InterSpun business; four low pressure laminates plants; two particleboard facilities; two medium density fiberboard facilities; and six Pluswood distribution centers. Other actions are included in the reserve but have not yet been announced. The second-quarter charge to establish the business improvement reserve included approximately $230 million for asset write-downs, $210 million for the estimated losses on the sales of businesses included in the reserve and $95 million for severance and other expenses. Annual improvement in earnings before interest and income taxes of approximately $100 million is expected by the end of 1998. Also in June 1997, the Company recorded a $150 million pre-tax charge ($93 million after taxes or $.31 per share) to add to its legal reserves. On July 14, 1997, Masonite Corporation, a wholly-owned subsidiary of the Company, announced that it had reached a proposed settlement in a class action pending in Mobile County, Alabama. The Company believes its legal reserves are adequate to cover any amounts to be paid pursuant to the proposed settlement, which is subject to Court approval. During the first quarter of 1996, the Company's Board of Directors authorized a series of management actions to restructure and strengthen existing businesses, which resulted in a pre-tax charge to earnings of $515 million ($362 million after taxes or $1.35 per share). The charge included $305 million for the write-off of certain assets, $100 million for asset impairments, $80 million in associated severance costs and $30 million of other expenses, including the cancellation of leases. Accruals for one-time cash costs, which include severance costs and other expenses, totaled $110 million. Approximately $34 million of these costs were incurred in 1996 and the remainder will be spent in 1997. 13
GAIN ON SALE OF PARTNERSHIP INTEREST On March 29, 1996, IP Timberlands Ltd. (IPT), a consolidated subsidiary of International Paper, completed the sale of a 98% general partnership interest in a subsidiary partnership that owns approximately 300,000 acres of forestlands located in Oregon and Washington. Included in the net assets of the partnership interest sold were forestlands, roads and $750 million of long-term debt. As a result of this transaction, International Paper recognized in its 1996 first-quarter consolidated results a $592 million pre-tax gain ($336 million after taxes and minority interest expense or $1.25 per share). OTHER Minority interest expense for the 1997 first half decreased significantly from the comparable 1996 period due to the minority interestholders' share of the gain on the sale of a partnership interest that was recorded in the 1996 first quarter. In August 1997, IP Timberlands, Ltd. entered into an agreement for the sale of certain partnership interests, including a general partnership interest in a subsidiary partnership that will control approximately 175,000 acres of forestlands in Pennsylvania and New York. The effective tax rate for the first half of 1997 was a 28% benefit compared with a 44% expense for the first half of 1996 primarily because of the impact of the special charges. The following table presents the components of pre-tax earnings and losses and the related income tax expense and benefit for each period. <TABLE> <CAPTION> First Half Effective Income Tax Rate 1997 1996 ----------------------------------- ----------------------------------- 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 Charges......... $ 236 $ 80 34% $ 476 $ 172 36% Business Improvement Charge.... (535) (150) 28% Provision for Legal Reserve.... (150) (57) 38% Restructuring and Asset Impairment Charge............. (515) (153) 30% Gain on Sale of Partnership Interest...................... 592 224 38% --------- --------- --------- --------- Total.......................... $ (449) $ (127) 28% $ 553 $ 243 44% --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> Both the business improvement charge and the restructuring and asset impairment charge included expenses that were not deductible for tax purposes. The effective tax rate on earnings before special charges for the first half of 1997 was 34% compared with 36% in the 1996 first half and 37% in the 1997 first quarter. This decline was the result of changes in the mix of estimated earnings. 14
ITEM 3. OTHER FINANCIAL INFORMATION Financial Information by Industry Segment (Unaudited) (In millions) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- NET SALES BY INDUSTRY SEGMENT 1997 1996 1997 1996 - - ----------------------------------------------------------------------------- --------- --------- --------- --------- <S> <C> <C> <C> <C> Printing Papers.............................................................. $ 1,340 $ 1,430 $ 2,720 $ 2,785 Packaging.................................................................... 1,255 1,285 2,445 2,420 Distribution................................................................. 1,160 1,155 2,280 2,340 Specialty Products........................................................... 890 885 1,750 1,745 Forest Products.............................................................. 680 695 1,285 1,270 Less: Intersegment Sales..................................................... (291) (357) (584) (669) --------- --------- --------- --------- Net Sales.................................................................... $ 5,034 $ 5,093 $ 9,896 $ 9,891 --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> <TABLE> <CAPTION> OPERATING PROFIT BY INDUSTRY SEGMENT SIX MONTHS ENDED JUNE 30, 1997 -------------------------------------- BEFORE AFTER SPECIAL SPECIAL SPECIAL ITEMS ITEMS(1) ITEMS ----------- ----------- ----------- <S> <C> <C> <C> Printing Papers....................................................................... $ 22 $ (212) $ (190) Packaging............................................................................. 117 (48) 69 Distribution.......................................................................... 49 (16) 33 Specialty Products.................................................................... 171 (202) (31) Forest Products....................................................................... 157 (46) 111 --------- --------- -------- Operating Profit (Loss)............................................................... 516 (524) (8) Corporate items, net............................................................... (25) (161)(2) (186) Interest expense, net.............................................................. (255) (255) Income tax (provision) benefit..................................................... (80) 207 127 Minority interest expense, net of taxes............................................ (63) (63) --------- --------- -------- Net Earnings (Loss)................................................................... $ 93 $ (478) $ (385) --------- --------- -------- --------- --------- -------- </TABLE> - - ------------------------ (1) Includes a $535 million pre-tax business improvement charge ($385 million after taxes or $1.28 per share). (2) Includes a $150 million pre-tax provision for legal reserve ($93 million after taxes or $.31 per share). 15
<TABLE> <CAPTION> OPERATING PROFIT BY INDUSTRY SEGMENT SIX MONTHS ENDED JUNE 30, 1996 ------------------------------------- BEFORE AFTER SPECIAL SPECIAL SPECIAL ITEMS ITEMS(1) ITEMS --------- ----------- ---------- <S> <C> <C> <C> Printing Papers....................................................................... $ 117 $ (35) $ 82 Packaging............................................................................. 248 (42) 206 Distribution.......................................................................... 48 48 Specialty Products.................................................................... 155 (370) (215) Forest Products....................................................................... 178 535 713 --------- ------- ------- Operating Profit...................................................................... 746 88 834 Corporate items, net............................................................... (8) (11) (19) Interest expense, net.............................................................. (262) (262) Income tax (provision) benefit..................................................... (172) (71) (243) Minority interest expense, net of taxes............................................ (81) (32) (113) --------- ------- ------- Net Earnings.......................................................................... $ 223 $ (26) $ 197 --------- ------- ------- --------- ------- ------- </TABLE> (1) Includes a $515 million pre-tax restructuring and asset impairment charge ($362 million after taxes or $1.35 per share) and a $592 million pre-tax gain ($336 million after taxes and minority interest expense or $1.25 per share) on the sale of a partnership interest. <TABLE> <CAPTION> JUNE 30, DECEMBER 31, ASSETS BY INDUSTRY SEGMENT 1997 1996 - - ------------------------------------------------------------------------------- --------------- --------------- <S> <C> <C> <C> Printing Papers................................................................ $ 8,010 $ 8,627 Packaging...................................................................... 6,229 6,088 Distribution................................................................... 1,344 1,346 Specialty Products............................................................. 3,512 3,636 Forest Products................................................................ 5,382 5,369 Equity Investments............................................................. 1,045 1,070 Corporate...................................................................... 2,231 2,116 ---------- --------- Assets......................................................................... $ 27,753 $ 28,252 ---------- --------- ---------- --------- </TABLE> 16
Financial Information by Geographic Area (Unaudited) (In millions) <TABLE> <CAPTION> SIX MONTHS ENDED NET SALES BY GEOGRAPHIC AREA JUNE 30, -------------------- 1997 1996 --------- --------- <S> <C> <C> United States................................................................................... $ 7,178 $ 7,104 Europe.......................................................................................... 1,736 1,783 Pacific Rim..................................................................................... 1,082 1,106 Other........................................................................................... 105 84 Less:Intergeographic Sales...................................................................... (205) (186) --------- --------- Net Sales....................................................................................... $ 9,896 $ 9,891 --------- --------- --------- --------- </TABLE> <TABLE> <CAPTION> OPERATING PROFIT BY GEOGRAPHIC AREA SIX MONTHS ENDED JUNE 30, 1997 ------------------------------ BEFORE AFTER SPECIAL SPECIAL SPECIAL ITEMS ITEMS(1) ITEMS - - --------------------------------------------------------------------------------------- ----------- ----------- ----------- <S> <C> <C> <C> United States.......................................................................... $ 394 $ (339) $ 55 Europe................................................................................. 44 (185) (141) Pacific Rim............................................................................ 69 69 Other.................................................................................. 9 9 ----- ----- --- Operating Profit (Loss)................................................................ $ 516 $ (524) $ (8) ----- ----- --- ----- ----- --- </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1996 ------------------------------------- BEFORE AFTER SPECIAL SPECIAL SPECIAL ITEMS ITEMS(2) ITEMS ----------- ----------- ----------- <S> <C> <C> <C> United States.......................................................................... $ 637 $ 306 $ 943 Europe................................................................................. (1) (218) (219) Pacific Rim............................................................................ 107 107 Other.................................................................................. 3 3 ----- ----- ----- Operating Profit....................................................................... $ 746 $ 88 $ 834 ----- ----- ----- ----- ----- ----- </TABLE> (1) Includes a $535 million pre-tax business improvement charge ($385 million after taxes or $1.28 per share). (2) Includes a $515 million pre-tax restructuring and asset impairment charge ($362 million after taxes or $1.35 per share) and a $592 million pre-tax gain ($336 million after taxes and minority interest expense or $1.25 per share) on the sale of a partnership interest. 17
ITEM 3: OTHER FINANCIAL INFORMATION--CONTINUED <TABLE> <CAPTION> ASSETS BY GEOGRAPHIC AREA JUNE 30, 1997 DECEMBER 31, 1996 - - -------------------------------------------------------------------------------------------- -------------- ----------------- <S> <C> <C> United States............................................................................... $ 15,726 $ 15,695 Europe...................................................................................... 3,908 4,405 Pacific Rim................................................................................. 4,654 4,779 Other....................................................................................... 189 187 Equity Investments.......................................................................... 1,045 1,070 Corporate................................................................................... 2,231 2,116 --------- --------- Assets...................................................................................... $ 27,753 $ 28,252 --------- --------- --------- --------- </TABLE> INTERNATIONAL PAPER AND CARTER HOLT HARVEY NET SALES <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, -------------------------------------------------------------------------------------- 1997 1996 ----------------------------------------- ----------------------------------------- CARTER CARTER INTERNATIONAL HOLT INTERNATIONAL HOLT PAPER HARVEY CONSOLIDATED PAPER HARVEY CONSOLIDATED ------------------ ------ ------------ ------------------ ------- ------------ <S> <C> <C> <C> <C> <C> <C> Printing Papers................ $ 2,658 $ 62 $ 2,720 $ 2,718 $ 67 $ 2,785 Packaging...................... 2,148 297 2,445 2,087 333 2,420 Distribution................... 2,214 66 2,280 2,275 65 2,340 Specialty Products............. 1,481 269 1,750 1,484 261 1,745 Forest Products................ 829 456 1,285 816 454 1,270 Less: Intersegment Sales....... (431) (153) (584) (505) (164) (669) ------- ------ -------- -------- ------- ------- Net Sales...................... $ 8,899 $ 997 $ 9,896 $ 8,875 $1,016 $ 9,891 ------- ------ -------- -------- ------- ------- ------- ------ -------- -------- ------- ------- </TABLE> 18
PRODUCTION BY PRODUCTS <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ----------------- <CAPTION> 1997(D) 1996(D)(F) 1997(D) 1996(E)(F) ---------- ---------- ------- -------- <S> <C> <C> <C> <C> Printing Papers (In thousands of tons) White Papers and Bristols..................................................... 978 979 2,005 1,812 Coated Papers................................................................. 334 254 644 500 Market Pulp (A)............................................................... 526 496 1,101 900 Newsprint..................................................................... 19 24 40 46 Packaging (In thousands of tons) Containerboard................................................................ 698 657 1,397 1,309 Bleached Packaging Board...................................................... 542 531 1,091 874 Industrial Papers............................................................. 167 155 339 315 Industrial and Consumer Packaging (B)......................................... 897 857 1,704 1,631 Specialty Products (In thousands of tons) Tissue........................................................................ 39 28 71 53 Forest Products (In millions) Panels (sq.ft. 3/8" basis)(C)................................................. 369 314 670 559 Lumber (board feet)........................................................... 545 459 1,026 798 MDF (sq. ft. 3/4" basis)...................................................... 54 67 106 138 Particleboard (sq. ft. 3/4" basis)............................................ 47 49 92 94 </TABLE> - - ------------------------ (A) This excludes market pulp purchases. (B) A significant portion of this tonnage was fabricated from paperboard and paper produced at the Company's own mills and included in the containerboard, bleached packaging board, and industrial papers amounts in this table. (C) Panels include plywood and oriented strand board. (D) Includes Federal for the full period. (E) Includes Federal from March 12, 1996. (F) Certain reclassifications and adjustments have been made to prior-period amounts. 19
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS MASONITE As previously reported on Forms 10-K and 10-Q, a lawsuit which had been certified as a nationwide class action was filed against the Company and its wholly owned subsidiary, Masonite Corporation, on December 27, 1994, in Mobile County Circuit Court, Mobile, Alabama. The lawsuit alleged that hardboard siding, which is used as exterior cladding for residential dwellings and is manufactured by Masonite, fails prematurely, allowing moisture intrusion. It further alleged that the presence of moisture in turn causes the failure of the structure underneath. In August 1996, the single issue of product defect was tried to a jury and they returned a split decision, finding partly for the plaintiffs and partly for Masonite. The jury was not asked to determine any other liability issues, causation or damages. A phase II trial had been set for July 14, 1997 on the remaining issues in the case. On July 14th, Masonite announced that a proposed settlement of the matter had been reached. The settlement, which provides for payment to class members making claims to an independent administrator, is subject to approval by the Court in Mobile, Alabama. The Company believes that its legal reserves will be sufficient to cover any payments to be made pursuant to the settlement. In the event the settlement is not approved, the Company will continue to vigorously defend all claims asserted by the plaintiffs. While any litigation has an element of uncertainty, it is believed that the outcome of any further proceedings in this matter will not have a material adverse effect on the Company's consolidated financial position or results of operations. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of shareholders of the common stock of the Company was held on May 8, 1997. The shareholders voted on*: (a) the election of five directors to Class II. The votes for and those withheld for each nominee were: <TABLE> <S> <C> <C> Mr. Eaton............................................................ 241,889,337 3,462,329 Mr. Georges.......................................................... 239,975,515 5,376,151 Mr. McHenry.......................................................... 241,700,047 3,651,619 Mr. Noonan........................................................... 241,857,078 3,494,588 Mr. Shoemate......................................................... 241,778,622 3,573,044 </TABLE> (b) the appointment of Arthur Andersen LLP as independent auditors for 1997 was approved and the votes were: For 242,521,213; Against 2,066,213; and Abstention 764,241. (c) the shareholder proposal for total phaseout of chlorine and chlorine- containing compounds for papermaking: For 13,186,667; Against 187,813,394; and Abstention 7,910,596. - - ------------------------- *If a specific vote category for, against withheld, abstentions and broker no-votes is omitted, the number is zero. 21
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 July 8, 1997, July 23, 1997 and August 7, 1997. 22
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: August 14, 1997 By /s/ MARIANNE M. PARRS --------------------------------- Marianne M. Parrs Senior Vice President and Chief Financial Officer Date: August 14, 1997 By /s/ ANDREW R. LESSIN --------------------------------- Andrew R. Lessin Vice President, Controller and Chief Accounting Officer 23