UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2008March 31, 2009
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
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 incorporation of organization) | (I.R.S. Employer | |
Identification No.) | ||
6400 Poplar Avenue, Memphis, TN | 38197 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (901) 419-7000
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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ Smaller company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The number of shares outstanding of the registrant’s common stock as of NovemberMay 5, 20082009 was
427,530,031.432,206,914.
PAGE NO. | ||||
PART I. | FINANCIAL INFORMATION | |||
Item 1. | ||||
1 | ||||
Consolidated Balance Sheet - | 2 | |||
3 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 3. | ||||
Item 4. | ||||
PART II. | OTHER INFORMATION | |||
Item 1. | ||||
Item 1A. | ||||
Item 2. | ||||
Item 3. | Defaults upon Senior Securities | * | ||
Item 4. | Submission of Matters to a Vote of Security Holders | * | ||
Item 5. | Other Information | * | ||
Item 6. | ||||
* | Omitted since no answer is called for, answer is in the negative or inapplicable. |
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
Consolidated Statement of Operations
(Unaudited)
(In millions, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2009 | 2008 | |||||||||||||||||||
Net Sales | $ | 6,808 | $ | 5,541 | $ | 18,283 | $ | 16,049 | $ | 5,668 | $ | 5,668 | ||||||||||||
Costs and Expenses | ||||||||||||||||||||||||
Cost of products sold | 5,154 | 4,086 | 13,720 | 11,818 | 3,731 | 4,261 | ||||||||||||||||||
Selling and administrative expenses | 507 | 455 | 1,438 | 1,331 | 500 | 472 | ||||||||||||||||||
Depreciation, amortization and cost of timber harvested | 374 | 277 | 965 | 808 | 343 | 286 | ||||||||||||||||||
Distribution expenses | 376 | 255 | 962 | 765 | 279 | 285 | ||||||||||||||||||
Taxes other than payroll and income taxes | 48 | 42 | 136 | 131 | 50 | 44 | ||||||||||||||||||
Gain on sale of mineral rights | (261 | ) | — | (261 | ) | — | ||||||||||||||||||
Restructuring and other charges | 97 | 42 | 152 | 86 | 83 | 42 | ||||||||||||||||||
Forestland sales | (3 | ) | (9 | ) | (6 | ) | (9 | ) | ||||||||||||||||
Net losses (gains) on sales and impairments of businesses | 107 | 1 | 106 | (314 | ) | |||||||||||||||||||
Net gains on sales and impairments of businesses | — | (1 | ) | |||||||||||||||||||||
Interest expense, net | 144 | 77 | 306 | 218 | 164 | 81 | ||||||||||||||||||
Earnings From Continuing Operations Before Income Taxes, Equity Earnings and Minority Interest | 265 | 315 | 765 | 1,215 | ||||||||||||||||||||
Earnings From Continuing Operations Before Income Taxes and Equity Earnings | 518 | 198 | ||||||||||||||||||||||
Income tax provision | 118 | 89 | 274 | 321 | 230 | 59 | ||||||||||||||||||
Equity earnings, net of taxes | 5 | — | 51 | — | (27 | ) | 16 | |||||||||||||||||
Minority interest expense, net of taxes | 3 | 6 | 15 | 17 | ||||||||||||||||||||
Earnings From Continuing Operations | 149 | 220 | 527 | 877 | 261 | 155 | ||||||||||||||||||
Discontinued operations, net of taxes and minority interest | — | (3 | ) | (18 | ) | (36 | ) | |||||||||||||||||
Discontinued operations, net of taxes | — | (17 | ) | |||||||||||||||||||||
Net Earnings | $ | 149 | $ | 217 | $ | 509 | $ | 841 | 261 | 138 | ||||||||||||||
Less: Net earnings attributable to noncontrolling interests | 4 | 5 | ||||||||||||||||||||||
Basic Earnings Per Common Share | ||||||||||||||||||||||||
Net Earnings Attributable to International Paper Company | $ | 257 | $ | 133 | ||||||||||||||||||||
Basic Earnings Per Share Attributable to International Paper Company Common Shareholders | ||||||||||||||||||||||||
Earnings from continuing operations | $ | 0.35 | $ | 0.52 | $ | 1.25 | $ | 2.03 | $ | 0.61 | $ | 0.36 | ||||||||||||
Discontinued operations | — | (0.01 | ) | (0.04 | ) | (0.08 | ) | |||||||||||||||||
Discontinued operations, net of taxes | — | (0.04 | ) | |||||||||||||||||||||
Net earnings | $ | 0.35 | $ | 0.51 | $ | 1.21 | $ | 1.95 | $ | 0.61 | $ | 0.32 | ||||||||||||
Diluted Earnings Per Common Share | ||||||||||||||||||||||||
Diluted Earnings Per Share Attributable to International Paper Company Common Shareholders | ||||||||||||||||||||||||
Earnings from continuing operations | $ | 0.35 | $ | 0.52 | $ | 1.24 | $ | 2.01 | $ | 0.61 | $ | 0.35 | ||||||||||||
Discontinued operations | — | (0.01 | ) | (0.04 | ) | (0.08 | ) | |||||||||||||||||
Discontinued operations, net of taxes | — | (0.04 | ) | |||||||||||||||||||||
Net earnings | $ | 0.35 | $ | 0.51 | $ | 1.20 | $ | 1.93 | $ | 0.61 | $ | 0.31 | ||||||||||||
Average Shares of Common Stock Outstanding – assuming dilution | 423.4 | 425.6 | 424.2 | 435.7 | 423.1 | 423.3 | ||||||||||||||||||
Cash Dividends Per Common Share | $ | 0.25 | $ | 0.25 | $ | 0.75 | $ | 0.75 | $ | 0.25 | $ | 0.25 | ||||||||||||
Amounts Attributable to International Paper Company Common Shareholders | ||||||||||||||||||||||||
Earnings from continuing operations | $ | 257 | $ | 150 | ||||||||||||||||||||
Discontinued operations, net of taxes | — | (17 | ) | |||||||||||||||||||||
Net earnings | $ | 257 | $ | 133 | ||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
Consolidated Balance Sheet
(In millions)
September 30, 2008 | December 31, 2007 | March 31, 2009 | December 31, 2008 | |||||||||||||
Assets | (unaudited) | (unaudited) | ||||||||||||||
Current Assets | ||||||||||||||||
Cash and temporary investments | $ | 771 | $ | 905 | $ | 955 | $ | 1,144 | ||||||||
Accounts and notes receivable, net | 3,864 | 3,152 | 3,455 | 3,288 | ||||||||||||
Inventories | 2,766 | 2,071 | 2,340 | 2,495 | ||||||||||||
Assets of businesses held for sale | — | 24 | ||||||||||||||
Deferred income tax assets | 217 | 213 | 198 | 261 | ||||||||||||
Other current assets | 272 | 370 | 189 | 172 | ||||||||||||
Total Current Assets | 7,890 | 6,735 | 7,137 | 7,360 | ||||||||||||
Plants, Properties and Equipment, net | 14,755 | 10,141 | 13,802 | 14,202 | ||||||||||||
Forestlands | 712 | 770 | 598 | 594 | ||||||||||||
Investments | 1,377 | 1,276 | 1,167 | 1,274 | ||||||||||||
Goodwill | 3,877 | 3,650 | 2,113 | 2,027 | ||||||||||||
Deferred Charges and Other Assets | 1,558 | 1,587 | 1,402 | 1,456 | ||||||||||||
Total Assets | $ | 30,169 | $ | 24,159 | $ | 26,219 | $ | 26,913 | ||||||||
Liabilities and Common Shareholders’ Equity | ||||||||||||||||
Liabilities and Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Notes payable and current maturities of long-term debt | $ | 800 | $ | 267 | $ | 536 | $ | 828 | ||||||||
Accounts payable | 2,532 | 2,145 | 1,915 | 2,119 | ||||||||||||
Accrued payroll and benefits | 404 | 400 | 354 | 445 | ||||||||||||
Liabilities of businesses held for sale | — | 4 | ||||||||||||||
Other accrued liabilities | 1,219 | 1,026 | 1,546 | 1,363 | ||||||||||||
Total Current Liabilities | 4,955 | 3,842 | 4,351 | 4,755 | ||||||||||||
Long-Term Debt | 11,232 | 6,353 | 10,959 | 11,246 | ||||||||||||
Deferred Income Taxes | 3,124 | 2,919 | 1,948 | 1,957 | ||||||||||||
Pension Benefit Obligation | 3,294 | 3,260 | ||||||||||||||
Postretirement and Postemployment Benefit Obligation | 657 | 663 | ||||||||||||||
Other Liabilities | 1,854 | 2,145 | 634 | 631 | ||||||||||||
Minority Interest | 239 | 228 | ||||||||||||||
Common Shareholders’ Equity | ||||||||||||||||
Common stock, $1 par value, 493.6 shares in 2008 and 2007 | 494 | 494 | ||||||||||||||
Equity | ||||||||||||||||
Common stock, $1 par value, 2009 – 435.1 shares and 2008 – 433.6 shares | 435 | 434 | ||||||||||||||
Paid-in capital | 6,710 | 6,755 | 5,730 | 5,845 | ||||||||||||
Retained earnings | 4,559 | 4,375 | 1,575 | 1,430 | ||||||||||||
Accumulated other comprehensive loss | (614 | ) | (471 | ) | (3,518 | ) | (3,322 | ) | ||||||||
11,149 | 11,153 | 4,222 | 4,387 | |||||||||||||
Less: Common stock held in treasury, at cost, 66.0 shares in 2008 and 68.4 shares in 2007 | 2,384 | 2,481 | ||||||||||||||
Less: Common stock held in treasury, at cost, 2009-3.3 shares and 2008–6.1 shares | 78 | 218 | ||||||||||||||
Total Common Shareholders’ Equity | 8,765 | 8,672 | ||||||||||||||
Total Shareholders’ Equity | 4,144 | 4,169 | ||||||||||||||
Total Liabilities and Common Shareholders’ Equity | $ | 30,169 | $ | 24,159 | ||||||||||||
Noncontrolling interests | 232 | 232 | ||||||||||||||
Total Equity | 4,376 | 4,401 | ||||||||||||||
Total Liabilities and Equity | $ | 26,219 | $ | 26,913 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended September 30, | ||||||||
2008 | 2007 | |||||||
Operating Activities | ||||||||
Net earnings | $ | 509 | $ | 841 | ||||
Discontinued operations, net of taxes and minority interest | 18 | 36 | ||||||
Earnings from continuing operations | 527 | 877 | ||||||
Depreciation, amortization and cost of timber harvested | 965 | 808 | ||||||
Deferred income tax (benefit) expense, net | (51 | ) | 125 | |||||
Restructuring and other charges | 152 | 86 | ||||||
Payments related to restructuring and legal reserves | (71 | ) | (60 | ) | ||||
Net losses (gains) on sales and impairments of businesses | 106 | (314 | ) | |||||
Equity earnings, net | (51 | ) | — | |||||
Gains on sales of forestlands | (3 | ) | (9 | ) | ||||
Periodic pension expense, net | 89 | 158 | ||||||
Other, net | 80 | 145 | ||||||
Changes in current assets and liabilities | ||||||||
Accounts and notes receivable | (12 | ) | (6 | ) | ||||
Inventories | (104 | ) | (91 | ) | ||||
Accounts payable and accrued liabilities | 243 | (313 | ) | |||||
Other | 86 | 1 | ||||||
Cash provided by operations – continuing operations | 1,956 | 1,407 | ||||||
Cash used for operations – discontinued operations | — | (56 | ) | |||||
Cash Provided by Operations | 1,956 | 1,351 | ||||||
Investment Activities | ||||||||
Invested in capital projects | (732 | ) | (804 | ) | ||||
Acquisitions, net of cash acquired | (6,086 | ) | (227 | ) | ||||
Proceeds from divestitures | 14 | 1,675 | ||||||
Equity investment in Ilim | (21 | ) | — | |||||
Other | (147 | ) | (135 | ) | ||||
Cash (used for) provided by investment activities – continuing operations | (6,972 | ) | 509 | |||||
Cash used for investment activities – discontinued operations | — | (12 | ) | |||||
Cash (Used for) Provided by Investment Activities | (6,972 | ) | 497 | |||||
Financing Activities | ||||||||
Repurchases of common stock and payments of restricted stock tax withholding | (47 | ) | (1,124 | ) | ||||
Issuance of common stock | 1 | 122 | ||||||
Issuance of debt | 6,011 | 15 | ||||||
Reduction of debt | (627 | ) | (528 | ) | ||||
Change in book overdrafts | (45 | ) | (3 | ) | ||||
Dividends paid | (321 | ) | (330 | ) | ||||
Other | (69 | ) | — | |||||
Cash Provided by (Used for) Financing Activities | 4,903 | (1,848 | ) | |||||
Effect of Exchange Rate Changes on Cash | (21 | ) | 78 | |||||
Change in Cash and Temporary Investments | (134 | ) | 78 | |||||
Cash and Temporary Investments | ||||||||
Beginning of period | 905 | 1,624 | ||||||
End of period | $ | 771 | $ | 1,702 | ||||
The accompanying notes are an integral part of these financial statements.
Consolidated Statement of Changes in Common Shareholders’ Equity
(Unaudited)
(In millions, except share amounts in thousands)
Nine Months Ended September 30, 2008
Accumulated Other Comprehensive Income (Loss) | Total Common Shareholders’ Equity | |||||||||||||||||||||||||||
Common Stock Issued | Paid-in Capital | Retained Earnings | Treasury Stock | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance, December 31, 2007 | 493,556 | $ | 494 | $ | 6,755 | $ | 4,375 | $ | (471 | ) | 68,436 | $ | 2,481 | $ | 8,672 | |||||||||||||
Issuance of stock for various plans, net | — | — | (45 | ) | — | — | (3,899 | ) | (144 | ) | 99 | |||||||||||||||||
Repurchase of stock | — | — | — | — | — | 1,472 | 47 | (47 | ) | |||||||||||||||||||
Common stock dividends | — | — | — | (325 | ) | — | — | — | (325 | ) | ||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net earnings | — | — | — | 509 | — | — | — | 509 | ||||||||||||||||||||
Amortization of pension and post-retirement prior service costs and net loss: | ||||||||||||||||||||||||||||
U.S. plans (less tax of $43) | — | — | — | — | 62 | — | — | 62 | ||||||||||||||||||||
Non-U.S. plans (less tax of $0) | — | — | — | — | 3 | — | — | 3 | ||||||||||||||||||||
Change in cumulative foreign currency translation adjustment (less tax of $0) | — | — | — | — | (163 | ) | — | — | (163 | ) | ||||||||||||||||||
Net gains on cash flow hedging derivatives: | ||||||||||||||||||||||||||||
Net gains arising during the period (less tax of $3) | — | — | — | — | 16 | — | — | 16 | ||||||||||||||||||||
Less: Reclassification adjustment for gains included in net income (less tax of $22) | — | — | — | — | (61 | ) | — | — | (61 | ) | ||||||||||||||||||
Total comprehensive income | 366 | |||||||||||||||||||||||||||
Balance, September 30, 2008 | 493,556 | $ | 494 | $ | 6,710 | $ | 4,559 | $ | (614 | ) | 66,009 | $ | 2,384 | $ | 8,765 | |||||||||||||
Nine Months Ended September 30, 2007
Accumulated Other Comprehensive Income (Loss) | Total Common Shareholders’ Equity | |||||||||||||||||||||||||||
Common Stock Issued | Paid-in Capital | Retained Earnings | Treasury Stock | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance, December 31, 2006 | 493,340 | $ | 493 | $ | 6,735 | $ | 3,737 | $ | (1,564 | ) | 39,844 | $ | 1,438 | $ | 7,963 | |||||||||||||
Issuance of stock for various plans, net | 216 | 1 | (17 | ) | — | — | (5,031 | ) | (182 | ) | 166 | |||||||||||||||||
Repurchase of stock | — | — | — | — | — | 30,577 | 1,124 | (1,124 | ) | |||||||||||||||||||
Common stock dividends | — | — | — | (330 | ) | — | — | — | (330 | ) | ||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net earnings | — | — | — | 841 | — | — | — | 841 | ||||||||||||||||||||
Pension and post-retirement divestitures, amortization of prior service costs and net loss: | ||||||||||||||||||||||||||||
U.S. plans (less tax of $52) | — | — | — | — | 70 | — | — | 70 | ||||||||||||||||||||
Non-U.S. plans (less tax of $4) | — | — | — | — | 8 | — | — | 8 | ||||||||||||||||||||
Change in cumulative foreign currency translation adjustment (less tax of $0) | — | — | — | — | 451 | — | — | 451 | ||||||||||||||||||||
Net gains on cash flow hedging derivatives: | ||||||||||||||||||||||||||||
Net gains arising during the period (less tax of $0) | — | — | — | — | 17 | — | — | 17 | ||||||||||||||||||||
Less: Reclassification adjustment for gains included in net income (less tax of $1) | — | — | — | — | (12 | ) | — | — | (12 | ) | ||||||||||||||||||
Total comprehensive income | 1,375 | |||||||||||||||||||||||||||
Adoption of FIN 48 (Note 8) | — | — | — | (94 | ) | — | — | — | (94 | ) | ||||||||||||||||||
Balance, September 30, 2007 | 493,556 | $ | 494 | $ | 6,718 | $ | 4,154 | $ | (1,030 | ) | 65,390 | $ | 2,380 | $ | 7,956 | |||||||||||||
Three Months Ended March 31, | ||||||||
2009 | 2008 | |||||||
Operating Activities | ||||||||
Net earnings attributable to International Paper Company | $ | 257 | $ | 133 | ||||
Noncontrolling interests | 4 | 5 | ||||||
Discontinued operations, net of taxes and noncontrolling interests | — | 17 | ||||||
Earnings from continuing operations | 261 | 155 | ||||||
Depreciation, amortization and cost of timber harvested | 343 | 286 | ||||||
Deferred income tax expense (benefit), net | 70 | (130 | ) | |||||
Restructuring and other charges | 83 | 42 | ||||||
Payments related to restructuring and legal reserves | (15 | ) | (22 | ) | ||||
Net gains on sales and impairments of businesses | — | (1 | ) | |||||
Equity loss (earnings), net | 27 | (16 | ) | |||||
Periodic pension expense, net | 61 | 28 | ||||||
Alternative fuel mixture credits receivable | (395 | ) | — | |||||
Other, net | 60 | 76 | ||||||
Changes in current assets and liabilities | ||||||||
Accounts and notes receivable | 212 | 5 | ||||||
Inventories | 146 | (32 | ) | |||||
Accounts payable and accrued liabilities | (53 | ) | 12 | |||||
Interest payable | 18 | (87 | ) | |||||
Other | (24 | ) | 118 | |||||
Cash Provided by Operations | 794 | 434 | ||||||
Investment Activities | ||||||||
Invested in capital projects | (128 | ) | (215 | ) | ||||
Acquisitions, net of cash acquired | (8 | ) | — | |||||
Proceeds from divestitures | — | 14 | ||||||
Other | (57 | ) | (140 | ) | ||||
Cash Used for Investment Activities | (193 | ) | (341 | ) | ||||
Financing Activities | ||||||||
Repurchases of common stock and payments of restricted stock tax withholding | (10 | ) | (47 | ) | ||||
Issuance of common stock | — | 1 | ||||||
Issuance of debt | 486 | 83 | ||||||
Reduction of debt | (1,036 | ) | (26 | ) | ||||
Change in book overdrafts | (80 | ) | (39 | ) | ||||
Dividends paid | (108 | ) | (112 | ) | ||||
Other | (11 | ) | — | |||||
Cash Used for Financing Activities | (759 | ) | (140 | ) | ||||
Effect of Exchange Rate Changes on Cash | (31 | ) | 22 | |||||
Change in Cash and Temporary Investments | (189 | ) | (25 | ) | ||||
Cash and Temporary Investments | ||||||||
Beginning of period | 1,144 | 905 | ||||||
End of period | $ | 955 | $ | 880 | ||||
The accompanying notes are an integral part of these financial statements.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
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 that are necessary for the fair presentation of the Company’s financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed herein, such adjustments are of a normal, recurring nature. Results for the first ninethree months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in International Paper’s (the Company) Annual Report on Form 10-K for the year ended December 31, 2007, and International Paper’s Current Report on Form 8-K filed on May 9, 2008 to update the historical financial statements included in the Company’s Form 10-K for the year ended December 31, 2007 to reflect changes to the Company’s allocation of corporate overhead expenses as described below (collectively the “2007 10-K”), both of which have previously been filed with the Securities and Exchange Commission.
Financial information byOn October 5, 2007, International Paper and Ilim Holding S.A. formed a 50:50 joint venture to operate in Russia. International Paper is accounting for its investment in Ilim, a separate reportable industry segment, is presented on page 22. Effective January 1, 2008,using the equity method of accounting. Due to the complex organizational structure of Ilim’s operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company changedreports its methodshare of allocating corporate overhead expenses to its business segments to increase the expense amounts allocated to these businesses in reports reviewed by its chief executive officer to facilitate performance comparisons with other companies. Accordingly, the Company has revised its presentation of industry segmentIlim’s operating profit to reflect this change in allocation method, and has adjusted all comparative prior period informationresults on this basis, reducing reported industry segment operating profits for the three months and nine months ended September 30, 2007 by $132 million and $381 million, respectively, with no effect on reported net income.a one-quarter lag basis.
NOTE 2 - RECENT ACCOUNTING DEVELOPMENTS
Other-Than-Temporary Impairment for Debt Securities:
In April 2009, the Financial Accounting Standards Board (FASB) issued Staff Position (FSP) FAS 115-2 and FAS 124-2, which provides a new other-than-temporary impairment model for debt securities. This FSP is effective for financial statements issued in fiscal years (and interim periods) ending after June 15, 2009. The Company is currently evaluating the provisions of this FSP but does not currently anticipate that it will have a material effect on its consolidated financial statements.
Asset Transfers, Variable Interest Entities and Qualifying Special Purpose Entities:
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, which requires public companies to provide additional disclosures about transfers of financial assets and an enterprise’s involvement with variable interest entities, including qualifying special purpose entities. The disclosures required by this FSP were to be provided in financial statements for the first reporting period ending after December 15, 2008 (calendar year 2008). The Company included the requirements of this FSP in the preparation of the accompanying financial statements.
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans:
In December 2008, the FASB issued FSP FAS 132(R)-1 which amends Statement 132(R) to require more detailed disclosures about employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. The disclosures required by this FSP must be provided in the financial statements for fiscal years ending after December 15, 2009 (calendar year 2009). The Company is currently evaluating the provisions of this FSP.
Intangible Assets:
In April 2008, the FASB issued FSP FAS 142-3, which amends the factors that should be considered in developing renewal or extension assumptions used in determining the useful life of a recognized intangible asset. This FSP was effective for financial statements issued for fiscal years (and interim periods) beginning after December 15, 2008 (calendar year 2009). The application of the requirements of this FSP did not have a material effect on the accompanying consolidated financial statements.
Derivative Instruments and Hedging Activities:
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133.” This statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 was effective for fiscal years (and interim periods) beginning after November 15, 2008 (calendar year 2009). The Company included the disclosures required by this statement in the accompanying financial statements.
Business Combinations:
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) establishes principles and requirements for how an acquiring entity in a business combination recognizes and measures the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. This statement is effective for business combinations in 2009.
In April 2009, the FASB issued FSP FAS 141(R)-1, which established a model similar to the one entities used under SFAS
No. 141(R), to account for preacquisition contingencies. This FSP is effective prospectively for business combinations in calendar year 2009.
Noncontrolling Interests in Consolidated Financial Statements:
In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB 51.” This statement clarifies that a noncontrolling (minority) interest in a subsidiary is an ownership interest in the entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and noncontrolling interest, with disclosure on the face of the consolidated income statement of the amounts attributable to the parent and to the noncontrolling interest. This statement was effective for fiscal years beginning after December 15, 2008 (calendar year 2009), with presentation and disclosure requirements applied retrospectively to comparative financial statements. The Company included the requirements of this statement in the preparation of the accompanying financial statements.
Fair Value Measurements:
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosures about the use of fair value to measure assets and liabilities. It also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets.
In February 2008, the FASB issued FSP FAS 157-2 which delayed the effective date of SFAS No. 157 for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008 (calendar year 2009). The Company partially adopted the provisions of this statement with respect to its financial assets and liabilities that are measured at fair value effective January 1, 2008 (see Note 13). The Company adopted the remaining provisions of SFAS No. 157 in the preparation of the accompanying financial statements.
In October 2008, the FASB issued FSP FAS 157-3, which clarifies the application of SFAS No. 157 in cases where the market for the asset is not active. FSP FAS 157-3 was effective upon issuance. The Company considered the guidance provided by this FSP in the preparation of the accompanying financial statements.
In April 2009, the FASB issued FSP FAS 157-4, in accordance with SFAS No. 157, “Fair Value Measurements,” which provides guidance on estimating the fair value of an asset or liability (financial or nonfinancial) when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions are not orderly. This FSP is effective for interim and annual periods ending after June 15, 2009.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, which expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107 to interim reporting periods. The disclosures required by this FSP must be provided in financial statements for the first reporting period ending after June 15, 2009. The Company intends to provide these disclosures beginning in the second quarter of 2009.
NOTE 3 - EQUITY
A summary of the changes in equity for the quarters ended March 31, 2009 and 2008 is provided below:
Quarter Ended March 31, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
In millions | Total International Paper Shareholders’ Equity | Noncontrolling Interest | Total Equity | Total International Paper Shareholders’ Equity | Noncontrolling Interest | Total Equity | ||||||||||||||||||
Balance, January 1 | $ | 4,169 | $ | 232 | $ | 4,401 | $ | 8,672 | $ | 228 | $ | 8,900 | ||||||||||||
Issuance of stock for various plans, net | 36 | — | 36 | 14 | — | 14 | ||||||||||||||||||
Repurchase of stock | (10 | ) | — | (10 | ) | — | — | — | ||||||||||||||||
Common stock dividends ($0.25 per share) | (112 | ) | — | (112 | ) | (112 | ) | — | (112 | ) | ||||||||||||||
Dividends paid to noncontrolling interests by subsidiary | — | (4 | ) | (4 | ) | — | (3 | ) | (3 | ) | ||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||
Net earnings | 257 | 4 | 261 | 133 | 5 | 138 | ||||||||||||||||||
Amortization of pension and | ||||||||||||||||||||||||
U.S. plans | 31 | — | 31 | 20 | — | 20 | ||||||||||||||||||
Non-U.S. plans | 7 | — | 7 | 3 | — | 3 | ||||||||||||||||||
Change in cumulative foreign currency translation adjustment | (229 | ) | — | (229 | ) | 246 | 4 | 250 | ||||||||||||||||
Net losses/gains on cash flow hedging derivatives: | ||||||||||||||||||||||||
Net (losses) gains arising during the period | (22 | ) | — | (22 | ) | 36 | — | 36 | ||||||||||||||||
Less: Reclassification adjustment for losses (gains) included in net income | 17 | — | 17 | (13 | ) | — | (13 | ) | ||||||||||||||||
Total comprehensive income | 65 | 434 | ||||||||||||||||||||||
Balance, March 31 | $ | 4,144 | $ | 232 | $ | 4,376 | $ | 8,999 | $ | 234 | $ | 9,233 | ||||||||||||
NOTE 4 - EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHARESHAREHOLDERS
Basic earnings per common share from continuing operations are computed by dividing earnings from continuing operations by the weighted average number of common shares outstanding. Diluted earnings per common share from continuing operations are computed assuming that all potentially dilutive securities, including “in-the-money” stock options, arewere converted into common shares at the beginning of each period. In addition, the computation of diluted earnings per share reflects the inclusion of contingently convertible securities in periods where dilutive. A reconciliation of the amounts included in the computation of earnings per common share from continuing operations, and diluted earnings per common share from continuing operations is as follows:
In millions, except per share amounts Earnings from continuing operations Effect of dilutive securities (a) Earnings from continuing operations – assuming dilution Average common shares outstanding Effect of dilutive securities Restricted performance share plan (a) Stock options (b) Average common shares outstanding – assuming dilution Basic earnings per common share from continuing operations Diluted earnings per common share from continuing operations Three Months Ended
March 31, 2009 2008 $ 257 $ 150 — — $ 257 $ 150 423.1 420.6 — 2.6 — 0.1 423.1 423.3 $ 0.61 $ 0.36 $ 0.61 $ 0.35
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
In millions, except per share amounts | 2008 | 2007 | 2008 | 2007 | ||||||||
Earnings from continuing operations | $ | 149 | $ | 220 | $ | 527 | $ | 877 | ||||
Effect of dilutive securities | — | — | — | — | ||||||||
Earnings from continuing operations – assuming dilution | $ | 149 | $ | 220 | $ | 527 | $ | 877 | ||||
Average common shares outstanding | 421.2 | 422.3 | 421.0 | 431.8 | ||||||||
Effect of dilutive securities | ||||||||||||
Restricted stock performance share plan | 2.2 | 2.9 | 3.2 | 3.4 | ||||||||
Stock options (a) | — | 0.4 | — | 0.5 | ||||||||
Average common shares outstanding – assuming dilution | 423.4 | 425.6 | 424.2 | 435.7 | ||||||||
Earnings per common share from continuing operations | $ | 0.35 | $ | 0.52 | $ | 1.25 | $ | 2.03 | ||||
Diluted earnings per common share from continuing operations | $ | 0.35 | $ | 0.52 | $ | 1.24 | $ | 2.01 | ||||
(a) | Securities are not included in the table in periods when antidilutive. |
(b) | Options to purchase |
NOTE 35 - RESTRUCTURING CHARGES AND OTHER CHARGESITEMS
20082009:
Restructuring Charges and Other Charges
During the thirdfirst quarter of 2008,2009, restructuring and other charges totaling $97$83 million before taxes ($6065 million after taxes) were recorded, including $35a $52 million charge before taxes ($2232 million after taxes) for adjustments to legal reserves (see Note 9), $53severance and benefits associated with the Company’s 2008 overhead reduction program, a $23 million charge before taxes ($3328 million after taxes) for closure costs related to write-off supply chain initiative developmentthe Inverurie mill in Scotland, a $6 million charge before taxes ($4 million after taxes) for closure costs for U.S. container operations that will not be implemented due to the CBPR acquisition (see Note 4), $8Franklin, Virginia, lumber mill, sheet converting plant and converting innovations center, and a $2 million before taxespre-tax charge ($51 million after taxes) for costs associated with the reorganization of the Company’s Shorewood Packaging operations. Additionally, a $20 million charge was recorded related to certain tax adjustments (see Note 10).
Alternative Fuel Mixture Credits
The U.S. Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer. In January 2009, the Company received notification that its application to be registered as an alternative fuel mixer had been approved. During the 2009 first quarter, the Company filed claims for alternative fuel mixture credits covering eligible periods subsequent to November 2008 totaling approximately $516 million that were recorded in Accounts and notes receivable, net, in the accompanying consolidated balance sheet, approximately $145 million of which was received in cash later in the quarter, and accrued approximately $42 million for estimated eligible alternative fuel usage through March 31, 2009 to be included in subsequent filings. Accordingly, the accompanying statement of operations for the three months ended March 31, 2009 includes a credit of approximately $540 million in Canada, and $1 million before taxesCost of products sold ($0330 million after taxes) for severance costs, representing eligible alternative fuel mixture credits earned through March 31, 2009, less $18 million of associated with the Company’s Transformation Plan.expenses.
During the second quarter of
2008 restructuring and other charges totaling $13 million before taxes ($9 million after taxes) were recorded related to the reorganization of the Company’s Shorewood operations in Canada, including $10 million before taxes ($7 million after taxes) of severance charges and $3 million before taxes ($2 million after taxes) of accelerated depreciation expense for long-lived assets being removed from service.:
During the first quarter of 2008, restructuring and other charges totaling $42 million before taxes ($26 million after taxes) were recorded, including a $40 million charge before taxes ($25 million after taxes) for adjustments of legal reserves, (see Note 9), a $5 million charge before taxes ($3 million after taxes) related to the reorganization of the Company’s Shorewood operations in Canada and a $3 million credit before taxes ($2 million after taxes) for adjustments to previously recorded reserves associated with the Company’s organizational restructuring programs.
2007:
During the third quarter of 2007, restructuring and other charges totaling $42 million before taxes ($26 million after taxes) were recorded. These charges consisted of a pre-tax charge of $27 million ($17 million after taxes) of accelerated depreciation charges for the Terre Haute mill, a pre-tax charge of $10 million ($6 million after taxes) for closure reserves associated with the Terre Haute mill, a pre-tax charge of $3 million ($2 million after taxes) related to the restructuring of the Company’s Brazil operations, and a pre-tax charge of $2 million ($1 million after taxes) for organizational restructuring programs associated with the Company’s Transformation Plan. Additionally, a $3 million increase to the income tax provision was recorded related to the settlement of a prior year tax audit.
During the second quarter of 2007, restructuring and other charges totaling $26 million before taxes ($16 million after taxes) were recorded for organizational restructuring programs associated with the Company’s Transformation Plan, including $17 million before taxes ($11 million after taxes) of accelerated depreciation expense for long-lived assets being removed from service.
During the first quarter of 2007, restructuring and other charges totaling $18 million before taxes ($11 million after taxes) were recorded for organizational restructuring programs associated with the Company’s Transformation Plan, including $12 million before taxes ($7 million after taxes) of accelerated depreciation charges for long-lived assets being removed from service. Additionally, a $2 million pre-tax credit ($1 million after taxes) was recorded in Interest expense, net, for interest received from the Canadian government on refunds of prior-year softwood lumber duties.
NOTE 4 – ACQUISITIONS, EXCHANGES AND JOINT VENTURES
Acquisitions:
2008:
On August 4, 2008, International Paper completed the acquisition of the assets of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business (CBPR) for $6 billion in cash, subject to post-closing adjustments. In June 2008, the Company had issued $3 billion of unsecured senior notes in anticipation of the CBPR business acquisition. The remainder of the purchase price was financed through borrowings under a $2.5 billion bank term loan, $0.4 billion of borrowings under a receivables securitization program and existing cash balances. The CBPR operating results are included in International Paper’s North American Industrial Packaging business from the date of acquisition.
The following table summarizes the preliminary allocation of the purchase price, plus direct acquisition costs, to the fair value of assets and liabilities acquired. The final allocation is expected to be completed in the first half of 2009.
In millions | |||
Cash and temporary investments | $ | 2 | |
Accounts and notes receivable, net | 662 | ||
Inventory | 611 | ||
Other current assets | 15 | ||
Plants, properties and equipment, net | 4,920 | ||
Goodwill | 279 | ||
Other intangible assets | 48 | ||
Deferred charges and other assets | 61 | ||
Total assets acquired | 6,598 | ||
Accounts payable and accrued liabilities | 471 | ||
Deferred income taxes | 8 | ||
Other liabilities | 50 | ||
Total liabilities assumed | 529 | ||
Net assets acquired | $ | 6,069 | |
The identifiable intangible assets acquired in connection with the CBPR acquisition included the following:
In millions | Estimated Fair Value | Average Remaining Useful Life (at acquisition date) | |||
Asset Class: | |||||
Trade names | $ | 5 | 4 - 12 years | ||
Patented technology | 9 | 4 - 12 years | |||
Proprietary software | 16 | 4 - 5 years | |||
Power agreements | 16 | 1 - 7 years | |||
Water rights | 2 | Indefinite | |||
Total | $ | 48 | |||
In connection with the preliminary purchase price allocation, inventories were written up by approximately $39 million before taxes ($24 million after taxes) to their estimated fair value. As the related inventories were sold during the 2008 third quarter, this amount was included in Cost of products sold for the quarter.
Additionally, Selling and administrative expenses for the 2008 third quarter included a $19 million charge before taxes ($12 million after taxes) for integration costs associated with the acquisition.
The following unaudited pro forma information for the three months and nine months ended September 30, 2008 and 2007 presents the results of operations of International Paper as if the CBPR acquisition, and the 2007 acquisition and exchange discussed below, had occurred on January 1, 2007. This pro forma information does not purport to represent International Paper’s actual results of operations if the transaction described above would have occurred on January 1, 2007, nor is it necessarily indicative of future results.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
In millions, except per share amounts | 2008 | 2007 | 2008 | 2007 | ||||||||
Net sales | $ | 7,298 | $ | 6,937 | $ | 21,405 | $ | 20,385 | ||||
Earnings from continuing operations | 138 | 189 | 411 | 752 | ||||||||
Net earnings | 138 | 186 | 393 | 716 | ||||||||
Earnings from continuing operations per common share | 0.33 | 0.44 | 0.97 | 1.73 | ||||||||
Net earnings per common share | 0.33 | 0.44 | 0.93 | 1.64 |
The CBPR financial position and results of operations have been included in International Paper’s consolidated financial statements since its acquisition date on August 4, 2008.
2007:
On August 24, 2007, International Paper completed the acquisition of Central Lewmar LLC, a privately held paper and packaging distributor in the United States, for $189 million. During the first quarter of 2008, the Company finalized the allocation of the purchase price to the fair value of the assets and liabilities acquired as follows:
In millions | �� | ||
Accounts receivable | $ | 116 | |
Inventory | 31 | ||
Other current assets | 7 | ||
Plants, properties and equipment, net | 2 | ||
Goodwill | 81 | ||
Deferred tax asset | 2 | ||
Other intangible assets | 33 | ||
Total assets acquired | 272 | ||
Other current liabilities | 79 | ||
Other liabilities | 4 | ||
Total liabilities assumed | 83 | ||
Net assets acquired | $ | 189 | |
The identifiable intangible assets acquired in connection with the Central Lewmar acquisition included the following:
In millions | Estimated Fair Value | Average Remaining Useful Life (at acquisition date) | |||
Asset Class: | |||||
Customer lists | $ | 18 | 13 years | ||
Non-compete covenants | 7 | 5 years | |||
Trade names | 8 | 15 years | |||
Total | $ | 33 | |||
Central Lewmar’s financial position and results of operations have been included in International Paper’s consolidated financial statements since its acquisition on August 24, 2007.
Exchanges:
On February 1, 2007, the Company completed the non-cash exchange of certain pulp and paper assets in Brazil with Votorantim Celulose e Papel S.A. (VCP) that had been announced in the fourth quarter of 2006. The Company exchanged its in-progress pulp mill project and certain forestland operations including approximately 100,000 hectares of surrounding forestlands in Tres Lagoas, Brazil, for VCP’s Luiz Antonio uncoated paper and pulp mill and approximately 55,000 hectares of forestlands in the state of Sao Paulo, Brazil. The exchange improved the Company’s competitive position by adding a globally cost-competitive paper mill, thereby expanding the Company’s uncoated freesheet capacity in Latin America and providing additional growth opportunities in the region. The exchange was accounted for based on the fair value of assets exchanged, resulting in the recognition in the 2007 first quarter of a pre-tax gain of $205 million ($164 million after taxes) representing the difference between the fair value and book value of the assets exchanged. This gain is included in Net losses (gains) on sales and impairments of businesses in the accompanying consolidated statement of operations.
The following table summarizes the final allocation of the fair value of the assets exchanged to the assets and liabilities acquired.
In millions | |||
Accounts receivable | $ | 55 | |
Inventory | 19 | ||
Other current assets | 40 | ||
Plants, properties and equipment, net | 582 | ||
Forestlands | 434 | ||
Goodwill | 521 | ||
Other intangible assets | 154 | ||
Other long-term assets | 9 | ||
Total assets acquired | 1,814 | ||
Other current liabilities | 18 | ||
Deferred income taxes | 270 | ||
Other liabilities | 6 | ||
Total liabilities assumed | 294 | ||
Net assets acquired | $ | 1,520 | |
Identifiable intangible assets included the following:
In millions | Estimated Fair Value | Average Remaining Useful Life (at acquisition date) | |||
Asset Class: | |||||
Non-competition agreement | $ | 10 | 2 years | ||
Customer lists | 144 | 10 - 20 years | |||
Total | $ | 154 | |||
The following unaudited pro forma information for the three months and nine months ended September 30, 2007 presents the results of operations of International Paper as if the Central Lewmar acquisition and the Luiz Antonio asset exchange had occurred on January 1, 2007. This pro forma information does not purport to represent International Paper’s actual results of operations if the transactions described above would have occurred on January 1, 2007, nor is it necessarily indicative of future results.
In millions, except per share amounts Net sales Earnings from continuing operations Net earnings Earnings from continuing operations per common share Net earnings per common share Three Months Ended
September 30, 2007 Nine Months Ended
September 30, 2007 $ 5,669 $ 16,627 225 886 222 851 0.53 2.03 0.52 1.95
Joint Ventures:
On October 5, 2007, International Paper and Ilim Holding S.A. announced the completion of the formation of a 50:50 joint venture to operate in Russia as Ilim Group. To form the joint venture, International Paper purchased 50% of Ilim Holding S.A. (Ilim) for approximately $620 million, including $545 million in cash and $75 million of notes payable, and contributed an additional $21 million in 2008. The Company’s investment in Ilim totaled $765 million at September 30, 2008, which is approximately $350 million higher than the Company’s share of the underlying net assets of Ilim. Based on current estimates, approximately $250 million of this basis difference, principally related to the estimated fair value write-up of Ilim plant, property and equipment, is being amortized as a reduction of reported net income over the estimated remaining useful lives of the related assets. Approximately $100 million of the difference represents estimated goodwill.
International Paper is accounting for its investment in Ilim, a separate reportable industry segment, using the equity method of accounting. Due to the complex organizational structure of Ilim’s operations, and the extended time required for Ilim to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reports its share of Ilim’s results of operations on a one-quarter lag basis. Accordingly, the accompanying consolidated statement of operations for the three months and nine months ended September 30, 2008 includes the Company’s share of Ilim’s operating results for the three-month and nine-month periods ended June 30, 2008 under the caption Equity earnings, net of taxes.
NOTE 56 - ACQUISITIONS, EXCHANGES AND JOINT VENTURES
On August 4, 2008, International Paper completed the acquisition of the assets of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business (CBPR) for $6 billion in cash, subject to post-closing adjustments. In June 2008, the Company had issued $3 billion of unsecured senior notes in anticipation of the CBPR business acquisition. The remainder of the purchase price was financed through borrowings under a $2.5 billion bank term loan, $0.4 billion of borrowings under a receivables securitization program and existing cash balances. CBPR’s financial position and operating results have been included in International Paper’s North American Industrial Packaging business from the date of acquisition.
The following table summarizes the preliminary allocation of the purchase price, plus direct acquisition costs, to the fair value of assets and liabilities acquired through March 31, 2009. The final allocation is expected to be completed by the end of the second quarter of 2009.
In millions | |||
Cash and temporary investments | $ | 2 | |
Accounts and notes receivable, net | 656 | ||
Inventory | 565 | ||
Other current assets | 9 | ||
Plants, properties and equipment, net | 4,872 | ||
Goodwill | 398 | ||
Other intangible assets | 65 | ||
Deferred charges and other assets | 59 | ||
Total assets acquired | 6,626 | ||
Accounts payable and accrued liabilities | 462 | ||
Deferred income taxes | 6 | ||
Other liabilities | 81 | ||
Total liabilities assumed | 549 | ||
Net assets acquired | $ | 6,077 | |
The identifiable intangible assets acquired in connection with the CBPR acquisition included the following:
In millions | Estimated Fair Value | Average Remaining Useful Life (at acquisition date) | |||
Asset Class: | |||||
Trade names | $ | 8 | 4 - 12 years | ||
Patented technology | 15 | 4 - 12 years | |||
Proprietary software | 16 | 4 - 5 years | |||
Power agreements | 20 | 1 - 7 years | |||
Water rights | 6 | Indefinite | |||
Total | $ | 65 | |||
Selling and administrative expenses for the 2009 first quarter included a $36 million charge before taxes ($22 million after taxes) for costs related to the CBPR business integration.
The following unaudited pro forma information for the three months ended March 31, 2008, presents the results of operations of International Paper as if the CBPR acquisition had occurred on January 1, 2008. This pro forma information does not purport to represent International Paper’s actual results of operations if the transaction described above would have occurred on January 1, 2008, nor is it necessarily indicative of future results.
In millions, except per share amounts | Three Months Ended March 31, 2008 | ||
Net sales | $ | 6,930 | |
Earnings from continuing operations | 125 | ||
Net earnings | 108 | ||
Earnings from continuing operations per common share | 0.29 | ||
Net earnings per common share | 0.25 |
NOTE 7 - BUSINESSES HELD FOR SALE AND DIVESTITURES
Discontinued Operations:
2008:
During the first quarter of 2008, the Company recorded a pre-tax charge of $25 million ($16 million after taxes) related to the final settlement of a post-closing adjustment to the purchase price received by the Company for the sale of its Beverage Packaging business, (see Note 9), and a $2 million charge before taxes ($1 million after taxes) for operating losses related to certain wood products facilities.
2007:
During the third quarter of 2007, the Company completed the sale of the remainder of its non-U.S. Beverage Packaging business.
During the second quarter of 2007, the Company recorded pre-tax charges of $6 million ($4 million after taxes) and $5 million ($3 million after taxes) relating to adjustments to estimated losses on the sales of its Wood Products and Beverage Packaging businesses, respectively.
During the first quarter of 2007, the Company recorded pre-tax credits of $21 million ($9 million after taxes) and $6 million ($4 million after taxes) relating to the sales of its Wood Products and Kraft Papers businesses, respectively. In addition, a $15 million pre-tax charge ($39 million after taxes) was recorded for adjustments to the loss on the completion of the sale of most of the Beverage Packaging business. Finally, a pre-tax credit of approximately $10 million ($6 million after taxes) was recorded for refunds received from the Canadian government of duties paid by the Company’s former Weldwood of Canada Limited business.
Forestlands:
2008:
During both the second and third quarters of 2008, the Company recorded a $3 million gain before taxes ($2 million after taxes) to reduce estimated transaction costs accrued in connection with the 2006 Transformation Plan sale of forestlands.
2007:
During the third quarter of 2007, a pre-tax gain of $9 million ($5 million after taxes) was recorded to reduce estimated transaction costs accrued in connection with the 2006 Transformation Plan forestlands sales.
Other Divestitures and Impairments:
2008:
During the third quarter of 2008, based on a current strategic plan update of projected future operating results of the Company’s Inverurie mill, a determination was made that the current book value of the mill’s long-lived assets exceeded their estimated fair value, calculated using the probability-weighted present value of projected future cash flows. As a result, a $107 million pre-tax charge ($84 million after taxes) was recorded in the Company’s Printing Papers industry segment to write down the long-lived assets of the mill to their estimated fair value. This charge is included in Net losses (gains) on sales and impairments of businesses in the accompanying consolidated statement of operations.
During the first quarter of 2008, a $1 million pre-tax credit ($1 million after taxes) was recorded to adjust previously estimated gains/losses of businesses previously sold.
2007:
During the third quarter of 2007, a pre-tax charge of $1 million ($1 million credit after taxes) was recorded to adjust previously estimated losses on businesses previously sold.
During the second quarter of 2007, a $1 million net pre-tax credit (a $7 million charge after taxes, including a $5 million tax charge in Brazil) was recorded to adjust previously estimated gains/losses of businesses previously sold.
During the first quarter of 2007, a $103 million pre-tax gain ($96 million after taxes) was recorded upon the completion of the sale of the Company’s Arizona Chemical business. As part of the transaction, International Paper acquired a minority interest of approximately 10% in the resulting new entity. Since the interest acquired represents significant continuing involvement in the operations of the business under accounting principles generally accepted in the United States, the operating results for Arizona Chemical have been included in continuing operations in the accompanying consolidated statement of operations through the date of sale.
In addition, during the first quarter of 2007, a $6 million pre-tax credit ($4 million after taxes) was recorded to adjust previously estimated gains/losses of businesses previously sold.
These gains are included, along with the gain on the exchange for the Luiz Antonio mill in Brazil (see Note 4), in Net losses (gains) on sales and impairments of businesses in the accompanying consolidated statement of operations.
NOTE 6 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $522 million and $578 million at September 30, 2008 and December 31, 2007, respectively.
Inventories by major category were:
In millions | September 30, 2008 | December 31, 2007 | ||||
Raw materials | $ | 447 | $ | 320 | ||
Finished pulp, paper and packaging | 1,831 | 1,413 | ||||
Operating supplies | 438 | 308 | ||||
Other | 50 | 30 | ||||
Total | $ | 2,766 | $ | 2,071 | ||
Accumulated depreciation was $15.5 billion at September 30, 2008 and $14.9 billion at December 31, 2007. Theallowance for doubtful accounts was $122 million at September 30, 2008 and $95 million at December 31, 2007.
The following tables present changes ingoodwill balances as allocated to each business segment for the nine-month periods ended September 30, 2008 and 2007:
In millions | Balance December 31, 2007 | Reclassifications and Other (a) | Additions/ (Reductions) | Balance September 30, 2008 | ||||||||||
Printing Papers | $ | 2,043 | $ | (43 | ) | $ | (21 | ) (b) | $ | 1,979 | ||||
Industrial Packaging | 683 | (2 | ) | 281 | (c) | 962 | ||||||||
Consumer Packaging | 530 | 6 | 5 | (d) | 541 | |||||||||
Distribution | 394 | — | 1 | (e) | 395 | |||||||||
Total | $ | 3,650 | $ | (39 | ) | $ | 266 | $ | 3,877 | |||||
In millions | Balance December 31, 2006 | Reclassifications and Other (a) | Additions/ (Reductions) | Balance September 30, 2007 | |||||||||
Printing Papers | $ | 1,441 | $ | 81 | $ | 531 | (b) | $ | 2,053 | ||||
Industrial Packaging | 670 | 3 | (6 | ) (c) | 667 | ||||||||
Consumer Packaging | 510 | 4 | 14 | (d) | 528 | ||||||||
Distribution | 308 | — | 96 | (e) | 404 | ||||||||
Total | $ | 2,929 | $ | 88 | $ | 635 | $ | 3,652 | |||||
There was no material activity related toasset retirement obligationsduring either the first nine months of 2008 or 2007.
Interest payments made during the nine-month periods ended September 30, 2008 and 2007 were $321 million and $353 million, respectively. Capitalized interest costs were $19 million and $25 million for the nine months ended September 30, 2008 and 2007, respectively.Total interest expense was $374 million for the first nine months of 2008 and $342 million for the first nine months of 2007.Interest income was $68 million and $124 million for the nine months ended September 30, 2008 and 2007, respectively. Interest expense and interest income in 2008 and 2007 exclude approximately $179 million and $256 million, respectively, related to investments in and borrowings from variable interest entities for which the Company has a legal right of offset.Distributions under preferred securitiespaid by Southeast Timber, Inc., a consolidated subsidiary of International Paper, were $8 million and $10 million during the first nine months of 2008 and 2007, respectively. The expense related to these preferred securities was included in Minority interest expense in the consolidated statement of operations.Income tax payments of $104 million and $243 million were made during the first nine months of 2008 and 2007, respectively.
Equity earnings, net of taxes includes the Company’s share of earnings from its investment in Ilim Holding S.A. ($5 million and $54 million for the three and nine months ended September 30, 2008, respectively) and certain other smaller investments.
The components of the Company’spostretirement benefit cost were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In millions | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Service cost | $ | 1 | $ | — | $ | 2 | $ | 1 | ||||||||
Interest cost | 8 | 9 | 25 | 26 | ||||||||||||
Actuarial loss | 7 | 6 | 21 | 17 | ||||||||||||
Amortization of prior service cost | (9 | ) | (11 | ) | (27 | ) | (33 | ) | ||||||||
Net postretirement benefit cost (a) | $ | 7 | $ | 4 | $ | 21 | $ | 11 | ||||||||
Fair Value Measurements
In accordance with the provisions of FASB Staff Position FAS 157-2 (see Note 7), the Company has partially applied the provisions of SFAS No. 157 only to its financial assets and liabilities recorded at fair value, which consist of derivative contracts, including interest rate swaps, foreign currency forward contracts, and other financial instruments that are used to hedge exposures to interest rate, commodity and currency risks. For these financial instruments, fair value is determined at each balance sheet date using an income approach, which consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts using current market information as of the reporting date, such as prevailing interest rates and foreign currency spot and forward rates. The following table provides a summary of the inputs used to develop these estimated fair values under the hierarchy defined in SFAS No. 157:
In millions Assets: Interest rate swaps (a) Commodity forward contracts (b) Foreign currency forward contracts (c) Total Liabilities: Interest rate swaps (d) Commodity forward contracts (e) Foreign currency forward contracts (f) Embedded derivatives (g) Total Fair Value Measurements at September 30, 2008 Using Total Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 60 $ — $ 60 $ — 4 — 4 — 85 — 85 — $ 149 $ — $ 149 $ — $ 8 $ — $ 8 $ — 19 19 43 — 43 — 4 — 4 — $ 74 $ — $ 74 $ —
NOTE 7 – RECENT ACCOUNTING DEVELOPMENTS8 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
AccountingTemporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $763 million and $908 million at March 31, 2009 and December 31, 2008, respectively.
Inventories by major category were:
In millions | March 31, 2009 | December 31, 2008 | ||||
Raw materials | $ | 369 | $ | 405 | ||
Finished pulp, paper and packaging | 1,572 | 1,658 | ||||
Operating supplies | 371 | 379 | ||||
Other | 28 | 53 | ||||
Total | $ | 2,340 | $ | 2,495 | ||
Accumulated depreciation was $15.7 billion at March 31, 2009 and $15.6 billion at December 31, 2008. Theallowance for Convertible Debt Securities:doubtful accounts was $120 million at March 31, 2009 and $121 million at December 31, 2008.
The gross carrying amount ofIntangible Assets, excluding goodwill, was $278 million ($238 million net of accumulated amortization) and $284 million ($246 million net of accumulated amortization) at March 31, 2009 and December 31, 2008, respectively. The Company recognized amortization expense of intangible assets of approximately $8 million for the first three months of both 2009 and 2008.
There was no material activity related toasset retirement obligationsduring either the first three months of 2009 or 2008.
Interest payments made during the three-month periods ended March 31, 2009 and 2008 were $89 million and $86 million, respectively. Capitalized interest costs were $3 million and $4 million for the three months ended March 31, 2009 and 2008, respectively.Total interest expense was $173 million for the first three months of 2009 and $99 million for the first three months of 2008.Interest income was $9 million and $18 million for the three months ended March 31, 2009 and 2008, respectively. Both interest expense and interest income in 2009 and 2008 exclude approximately $44 million and $74 million, respectively, related to investments in and borrowings from variable interest entities for which the Company has a legal right of offset.Distributions under preferred securitiespaid by Southeast Timber, Inc., a consolidated subsidiary of International Paper, were $2 million and $3 million during the first three months of 2009 and 2008, respectively. The expense related to these preferred securities was included as a component of Net earnings attributable to noncontrolling interests.Income tax payments of $1 million and $19 million were made during the first three months of 2009 and 2008, respectively.
Equity earnings, net of taxes includes the Company’s share of earnings from its investment in Ilim Holding S.A. (losses of $26 million and earnings of $17 million for the three months ended March 31, 2009 and 2008, respectively) and certain other smaller investments.
The components of the Company’spostretirement benefit cost were as follows:
Three Months Ended March 31, | ||||||||
In millions | 2009 | 2008 | ||||||
Service cost | $ | 1 | $ | — | ||||
Interest cost | 8 | 9 | ||||||
Actuarial loss | 8 | 7 | ||||||
Amortization of prior service cost | (7 | ) | (9 | ) | ||||
Net postretirement benefit cost (a) | $ | 10 | $ | 7 | ||||
(a) | Excludes a $1.5 million charge for the three-month period ended March 31, 2009 for termination benefits related to cost reduction programs recorded in Restructuring and other charges in the consolidated statement of operations. |
NOTE 9 - GOODWILL
The following tables present changes in goodwill balances as allocated to each business segment for the three-month periods ended March 31, 2009 and 2008:
In millions | Balance December 31, 2008 | Reclassifications and Other (a) | Additions/ (Reductions) | Balance March 31, 2009 | ||||||||||
Industrial Packaging | $ | 989 | $ | (1 | ) | $ | 92 | (b) | $ | 1,080 | ||||
Printing Papers | 537 | 2 | (5 | ) (c) | 534 | |||||||||
Consumer Packaging | 102 | — | — | 102 | ||||||||||
Distribution | 399 | (2 | ) | — | 397 | |||||||||
Total | $ | 2,027 | $ | (1 | ) | $ | 87 | $ | 2,113 | |||||
(a) | Represents the effects of foreign currency translations and reclassifications. |
(b) | Reflects purchase accounting adjustments related to the CBPR acquisition. |
(c) | Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in Brazil. |
In millions | Balance December 31, 2007 | Reclassifications and Other (a) | Additions/ (Reductions) | Balance March 31, 2008 | |||||||||
Industrial Packaging | $ | 683 | $ | 3 | $ | — | $ | 686 | |||||
Printing Papers | 2,043 | 11 | (7 | ) (b) | 2,047 | ||||||||
Consumer Packaging | 530 | 4 | — | 534 | |||||||||
Distribution | 394 | — | (3 | ) | 391 | ||||||||
Total | $ | 3,650 | $ | 18 | $ | (10 | ) | $ | 3,658 | ||||
(a) | Represents the effects of foreign currency translations and reclassifications. |
(b) | Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in Brazil. |
In Maythe fourth quarter of 2008, the Financial Accounting Standards Board (FASB) issued FSP APB 14-1, “AccountingCompany performed an interim test for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This FSP specifies that issuers that have convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued in fiscal years (and interim periods) beginning after December 15, 2008 (calendar year 2009), and should be applied retrospectively to all past periods presented even if the instrument has matured, has been converted, or has otherwise been extinguishedpossible goodwill impairment as of the FSP’s effective date. The Company currently has no convertible debt instruments that may be settled in cash upon conversion.
Intangible Assets:
In AprilDecember 31, 2008, the FASB issued FSP FAS 142-3, “Determinationand recorded preliminary estimated impairment charges of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used in determining the useful life of a recognized intangible asset. This FSP is effective for financial statements issued for fiscal years (and interim periods) beginning after December 15, 2008 (calendar year 2009). The Company is currently evaluating the provisions of this FSP.
Derivative Instruments and Hedging Activities:
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133.” This statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. Statement No. 161 is effective for fiscal years (and interim periods) beginning after November 15, 2008 (calendar year 2009). The Company is currently evaluating the provisions of this statement.
Business Combinations:
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” Statement No. 141(R) establishes principles and requirements for how an acquiring entity in a business combination recognizes and measures the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users$379 million, representing all of the information needed to evaluategoodwill for the U.S. Coated Paperboard business, and understand the nature and financial effect$1.3 billion, representing all of the business combination. This statement will be effective prospectivelygoodwill for business combinations for which the acquisition date is on or after the beginning ofU.S. Printing Papers business. During the first annual reporting period beginning on or after December 15, 2008 (calendar year 2009). Thequarter of 2009, the Company is currently evaluatingfinalized the provisions of this statement.
Noncontrolling Intereststesting for these businesses resulting in Consolidated Financial Statements:
In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB 51.” This statement clarifies that a noncontrolling (minority) interest in a subsidiary is an ownership interest in the entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and noncontrolling interest, with disclosure on the face of the consolidated income statement of the amounts attributedno changes to the parent and to the noncontrolling interest. This statement will be effective prospectively for fiscal years beginning after December 15, 2008 (calendar year 2009), with presentation and disclosure requirements applied retrospectively to comparative financial statements. The Company is currently evaluating the provisions of this statement.recorded impairment charges.
Fair Value Measurements:
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosures about the use of fair value to measure assets and liabilities. It also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. In February 2008, the FASB issued FSP FAS 157-2 which delays the effective date of Statement No. 157 for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008 (calendar year 2009). The Company partially adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities that are measured at fair value effective January 1, 2008 (see Note 6). In October 2008, the FASB issued FSP FAS 157-3, which clarifies the application of SFAS No. 157 in cases where the market for the asset is not active. FSP FAS 157-3 is effective upon issuance. The Company considered the guidance provided by this FSP in the preparation of the accompanying financial statements. The Company is currently evaluating the effects of the remaining provisions of SFAS No. 157.
NOTE 810 - INCOME TAXES
International Paper adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), on January 1, 2007. The adoption of this standard resulted in a charge to the beginning balance of retained earnings of $94 million at the date of adoption. TotalAt December 31, 2008, cumulative unrecognized tax benefits atunder the dateprovisions of adoption including this cumulative effect charge were $919FIN 48 totaled $435 million. At December 31, 2007, unrecognized tax benefits totaled $794 million.
During the thirdfirst quarter of 2008,2009, due to current period transactions, unrecognized tax benefits increased by $2$9 million to $515$444 million and accrued estimated interest and tax penalties increased by $3$4 million to $77$78 million. The Company currently estimates that, as a result of ongoing discussions, pending tax settlements and expirations of statutes of limitations, the amount of unrecognized tax benefits could be reduced by approximately $240$160 million during the next 12 months.
AlsoDuring the 2009 first quarter, the Company recorded in income tax expense charges totaling $20 million, consisting of a $14 million adjustment of deferred income taxes relating to incentive compensation payments during the 2008 third quarter and a $29$6 million charge was recorded for estimated U.S. income taxes on a gain recorded by the Company’s Ilim Holding S.A. joint venture relating to the sale of a Russian subsidiary.recent state income tax legislation.
NOTE 911 - COMMITMENTS AND CONTINGENCIES
In May 2008, a recovery boiler at the Company’s Vicksburg, Mississippi facility exploded, resulting in one fatality and injuries to employees of contractors working on the site. The Company has been served with several lawsuits and is on notice of additional claims, and currently believes that it has adequate insurance to coverresolve these lawsuits and other claims. Additionally, the Company also has property damage and business interruption insurance policies that are expected to be adequate to cover any significant losses resulting from this event. Accordingly, theThe Company believes that neither the settlement of these lawsuits nor the resolution of the property damage and business interruption claims will not have a material adverse effect on its consolidated financial statements.
Exterior Siding and Roofing Litigation:
International Paper has established reserves relating to the settlement, during 1998 and 1999, of three nationwide class action lawsuits against the Company and Masonite Corp., a former wholly-owned subsidiary of the Company. Those settlements relate to (1) exterior hardboard siding installed during the 1980’s (the 1980’s Hardboard Claims) and during the 1990’s (the 1990’s Hardboard Claims, and together with the 1980’s Hardboard Claims, the Hardboard Claims); (2) Omniwood siding installed during the 1990’s (the Omniwood Claims); and (3) Woodruf roofing installed during the 1980’s and 1990’s (the Woodruf Claims). Each of these settlements is discussed in detail in Note 10,11, Commitments and Contingent Liabilities, to the financial statements included in International Paper’s 20072008 10-K. All Hardboard Claims were required to be made by January 15, 2008, while all Omniwood and Woodruf Claims mustwere required to be made by January 6, 2009.
Claims Data and Reserve Analysis
Claims activity for the Hardboard, Omniwood and Woodruf claims during 2007 was generally in line with updated projections made in the fourth quarter of 2006, although in connection with the January 15, 2008 filing deadline for Hardboard siding claims, the Company received a large number of claims at the end of 2007 and the beginning of 2008. During the first quarter of 2008, based on a current estimate of payments to be made for all claims received to date and projected future claim filings, an additional charge of $40 million was recorded to increase the reserve to management’s best estimate of the amount required for future payments. During the third quarter of 2008, the Company completed a revised claims projection taking into account current actual claim settlement costs, recent claim filing activity, and updated projections of claims activity through the end of the settlement period. Based on these projections, the Company recorded a $42 million increase in the reserve balance in the 2008 third quarter to increase the reserve to management’s best
estimate of the amount required for future payments. This increase, together with a $7 million reduction of a related liability, is included in Restructuring and other charges in the accompanying consolidated statement of operations for the three and nine months ended September 30, 2008.
The following table presents the claims activity of the Hardboard Claims for the nine-month period ended September 30, 2008:
In thousands | Single Family | Multi- Family | Total | ||||||
December 31, 2007 | 29.8 | 2.2 | 32.0 | ||||||
No. of Claims Filed | 8.7 | 1.5 | 10.2 | ||||||
No. of Claims Paid | (14.1 | ) | (1.0 | ) | (15.1 | ) | |||
No. of Claims Dismissed | (17.9 | ) | (0.3 | ) | (18.2 | ) | |||
September 30, 2008 | 6.5 | 2.4 | 8.9 | ||||||
The average settlement cost per claim for the nine-month period ended September 30, 2008, for the Hardboard settlement was $2,261.
The following table presents the claims activity of the Omniwood Claims and the Woodruf Claims for the nine-month period ended September 30, 2008:
Omniwood | Woodruf | Total | ||||||||||||||||||
In thousands | Single Family | Multi- Family | Single Family | Multi- Family | Single Family | Multi- Family | Total | |||||||||||||
December 31, 2007 | 3.1 | 0.6 | 1.0 | 0.3 | 4.1 | 0.9 | 5.0 | |||||||||||||
No. of Claims Filed | 4.6 | 0.1 | 0.9 | — | 5.5 | 0.1 | 5.6 | |||||||||||||
No. of Claims Paid | (3.4 | ) | (0.1 | ) | (0.3 | ) | — | (3.7 | ) | (0.1 | ) | (3.8 | ) | |||||||
No. of Claims Dismissed | (0.8 | ) | (0.1 | ) | (0.4 | ) | — | (1.2 | ) | (0.1 | ) | (1.3 | ) | |||||||
September 30, 2008 | 3.5 | 0.5 | 1.2 | 0.3 | 4.7 | 0.8 | 5.5 | |||||||||||||
The average settlement costs per claim for the nine-month period ended September 30, 2008, for the Omniwood and Woodruf settlements were $5,294 and $4,138, respectively.
The following table presents an analysis of the net reserve activity for these actions for the nine-monththree-month period ended September 30, 2008:March 31, 2009:
In millions | Hardboard | Omniwood | Woodruf | Total | ||||||||||||
Balance, December 31, 2007 | $ | 20 | $ | 25 | $ | 1 | $ | 46 | ||||||||
Additional Provisions | 45 | 29 | 8 | 82 | ||||||||||||
Payments | (49 | ) | (20 | ) | (3 | ) | (72 | ) | ||||||||
Balance, September 30, 2008 | $ | 16 | $ | 34 | $ | 6 | $ | 56 | ||||||||
In millions | Hardboard | Omniwood | Woodruf | Total | ||||||||||||
Balance, December 31, 2008 | $ | 6 | $ | 29 | $ | 6 | $ | 41 | ||||||||
Payments | (6 | ) | (8 | ) | (1 | ) | (15 | ) | ||||||||
Balance, March 31, 2009 | $ | — | $ | 21 | $ | 5 | $ | 26 | ||||||||
Other Legal Matters:
International Paper is involved in various other inquiries, administrative proceedings and litigation relating to contracts, sales of property, intellectual property, environmental permits, taxes,protection, tax, antitrust, personal injury, labor and employment and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, the Company believes that the outcome of any of the lawsuits or claims that are pending or threatened, or all of them combined, will not have a material adverse effect on its consolidated financial statements.
NOTE 1012 - DEBT
In August 2008,March 2009, International Paper Investments (Luxembourg) S.a.r.l, a wholly-owned subsidiary of International Paper, borrowed $2.5 billion$468 million of long-term debt with an initial interest rate of LIBOR plus a margin of 162.5450 basis points. The marginpoints, that can vary depending upon the credit rating of the Company. TheCompany, and a maturity date in March 2012. International Paper used the $468 million of proceeds from the loan and cash of approximately $170 million to repay its 500 million euro-denominated debt requires quarterly principal payments starting(equivalent to $638 million at date of payment) with an original maturity date in August 2009. Other debt activities in the fourthfirst quarter of 2008 and has a final maturity in August 2013. Debt issuance costs2009 included the repayment of approximately $50 million related to this borrowing were recorded in Deferred charges and other assets in the accompanying consolidated balance sheet and will be amortized over the term of the loan. Also in August 2008, International Paper borrowed approximately $395 million under its receivables securitization program. These funds, together with the $3 billion from the unsecured senior notes borrowed in the second quarter discussed below and other available cash, were used for the CBPR business acquisition in August. A $500 million bridge loan that was available to fund the acquisition was not used by the Company and was cancelled upon the closing of the acquisition.
Also in the third quarter of 2008, International Paper repaid approximately $355 million it had borrowed under its receivables securitization program. The Company also repaid $125 million of the $2.5 billion long-term debt, and repurchased $63.5$366 million of notes with interest rates ranging from 4.25% to 8.70% and original maturities from5.0% that had matured.
Also in the first quarter of 2009, to 2038.
The Company also entered into a series of forward floating-to-fixedInternational Paper terminated an interest rate swap agreements with a notional amountvalue of $1.5 billion$100 million designated as a fair value hedge, resulting in anticipationa gain of borrowing against the $3 billion committed bank credit agreement for the purchase of the CBPR business. The floating-to-fixed interest rate swaps were effective September 2008$11 million that was deferred and mature in September 2010. These forward interest rate swaps are being accounted for as cash flow hedges in accordance with SFAS No. 133 as hedges of the benchmark interest rate of future interest payments related to any borrowing under the bank credit agreement.
In the second quarter of 2008, International Paper issued $3 billion of unsecured senior notes consisting of $1 billion of 7.4% notes due in 2014, $1.7 billion of 7.95% notes due in 2018 and $300 million of 8.7% notes due in 2038. Debt issuance costs of approximately $20 million related to the new debt were recorded in Deferred charges and other assetsLong-term debt in the accompanying consolidated balance sheet andsheet. As the swap agreement was terminated early, the resulting gain will be amortized over the termlife of the notes.related debt through April 2016.
Also in the second quarter ofAt March 31, 2009 and December 31, 2008, International Paper entered into a series of fixed-to-floating interest rate swap agreements with a notional amount of $1 billion and maturities ranging from 2014 to 2018 to manage interest rate exposures associated with the new $3 billion of unsecured senior notes. These interest rate swaps are being accounted for as fair value hedges in accordance with SFAS No. 133.
In the second quarter of 2007, International Paper repurchased $35 million of 5.85% notes with an original maturity in October 2012.
In March 2007, International Paper Investments (Luxembourg) S.ar.l, a wholly-owned subsidiary of International Paper, repaid $143 million of long-term debt with an interest rate of LIBOR plus 40 basis points and a maturity date in November 2010. Other debt activity in the first quarter included the repayment of $198 million of 7.625% notes that matured in the quarter.
At September 30, 2008 and December 31, 2007, International Paper classified $806$100 million and $112$796 million, respectively, of tenderable bonds, commercial paper and bank notes and Current maturities of long-term debt as Long-term debt. International Paper has the intent and ability, as evidence by its contractually committed credit facility, to renew or convert these obligations, as evidenced by its contractually committed $1.5 billion bank credit agreement.obligations.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2008,March 31, 2009, the Company held long-term credit ratings of BBB (negative outlook) and Baa3 (negative outlook) by Standard and Poor’s (S&P) and Moody’s Investor Services (Moody’s), respectively. The Company currently has short-term credit ratings of A-3 and P-3 by S&P and Moody’s, respectively.
NOTE 13 - DERIVATIVES AND HEDGING ACTIVITIES
International Paper periodically uses derivatives and other financial instruments to hedge exposures to interest rate, commodity and currency risks. International Paper does not hold or issue financial instruments for trading purposes. For hedges that meet the criteria under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” International Paper, at inception, formally designates and documents the instrument as a fair value hedge, a cash flow hedge or a net investment hedge of a specific underlying
exposure, as well as the risk management objective and strategy for undertaking each hedge transaction. Derivatives are recorded in the consolidated balance sheet at fair value, determined using available market information or other appropriate valuation methodologies, in Other current assets, Other assets, Other accrued liabilities and Other liabilities. The earnings impact resulting from changes in the fair value of derivative instruments is recorded in the same line item in the consolidated statement of operations as the underlying exposure being hedged or in Other comprehensive income for derivatives that qualify as cash flow hedges. Any ineffective portion of a financial instrument’s change in fair value is recognized currently in earnings together with changes in the fair value of any derivatives not designated as hedges.
Foreign exchange contracts are used by International Paper to offset the earnings impact relating to the variability in exchange rates on certain monetary assets and liabilities denominated in non-functional currencies and are not designated as hedges. Changes in the fair value of these instruments, recognized currently in earnings to offset the remeasurement of the related assets and liabilities, were not significant.
Fair Value Hedges
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in earnings.
International Paper utilizes interest rate swaps as fair value hedges of the benchmark interest rates of fixed rate debt. At March 31, 2009 and December 31, 2008, the outstanding notional amounts of interest rate swap agreements that qualify as fully effective fair value hedges under SFAS No. 133 were approximately $34 million and $484 million, respectively.
In the first quarter of 2009, an interest rate swap agreement designated as a fair value hedge with a notional value of $100 million was terminated. The termination was not in connection with early retirement of debt. The resulting gain of $11 million was deferred and recorded in Long-term debt and will be amortized as an adjustment of interest expense over the life of the underlying debt through 2016.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Other comprehensive income (OCI) and reclassified into earnings in the same period or periods in which the hedged transaction affects earnings. Financial instruments designated as cash flow hedges are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in the cash flows of the related underlying exposures. The fair value of the hedge instruments are reclassified out of OCI to earnings if the hedge ceases to be highly effective or if the hedged transaction is no longer probable.
International Paper utilizes interest rate swaps as cash flow hedges of the benchmark interest rate of future interest payments. At March 31, 2009 and December 31, 2008, the outstanding notional amounts of interest rate swap agreements that qualify as cash flow hedges under SFAS No. 133 were approximately $1 billion. As of March 31, 2009, these contracts had maturities of two years or less. Losses of $15 million after taxes are expected to be reclassified to earnings within the next 12 months.
To minimize volatility in earnings due to large fluctuations in the price of commodities, International Paper utilizes swap contracts to manage risks associated with market fluctuations in energy prices. These contracts are designated as cash flow hedges of forecasted commodity purchases. As of March 31, 2009, the hedged volumes of these energy contracts totaled one million barrels of fuel oil and 23 million MMBTU (Million British Thermal Units) of natural gas. As of December 31, 2008, the hedged volumes totaled one million barrels of fuel oil and 21 million MMBTUs of natural gas. These contracts had maturities of three years or less as of March 31, 2009. Losses of $35 million after taxes are expected to be reclassified to earnings within the next 12 months.
Foreign exchange contracts (including forward, swap and purchase option contracts) are also used as cash flow hedges of certain forecasted transactions denominated in foreign currencies, to manage volatility associated with these transactions and to protect International Paper from currency fluctuations between the contract date and ultimate settlement. As of March 31, 2009, these contracts have maturities of one year or less, with expected losses totaling $12 million after taxes to be reclassified to earnings. As of March 31, 2009 and December 31, 2008, the following outstanding foreign exchange contracts were entered into as cash flow hedges of forecasted transactions:
In millions | March 31 2009 | December 31, 2008 | ||
Sell / Buy | Sell Notional | Sell Notional | ||
European euro / Brazilian real | 17 | 21 | ||
US dollar / Brazilian real | 127 | 166 | ||
European euro / Polish zloty | 73 | 96 |
Fair Value Measurements
International Paper applies the provisions of SFAS No. 157 to its financial assets and liabilities that are recorded at fair value, which consist of derivative contracts, including interest rate swaps, foreign currency forward contracts, and other financial instruments that are used to hedge exposures to interest rate, commodity and currency risks. SFAS No. 157 sets out a fair value hierarchy that groups fair value measurement inputs into three classifications: Level 1, Level 2 and Level 3. Level 1 inputs are quoted prices in an active market for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. All of International Paper’s fair value measurements use Level 2 inputs. The following table provides a summary of the impact of our derivative instruments in the consolidated balance sheet:
Fair Value Measurements
Level 2 – Significant Other Observable Inputs
Assets | Liabilities | |||||||||||||||
In millions | March 31, 2009 | December 31, 2008 | March 31, 2009 | December 31, 2008 | ||||||||||||
Derivatives designated as hedging instruments under SFAS 133 | ||||||||||||||||
Interest rate contracts – fair value | $ | 4 | (a) | $ | 27 | (b) | $ | — | $ | — | ||||||
Interest rate contracts – cash flow | — | — | 35 | (c) | 39 | (c) | ||||||||||
Commodity contracts - cash flow | 2 | (a) | — | 87 | (d) | 75 | (e) | |||||||||
Foreign exchange contracts – cash flow | 11 | (f) | 27 | (f) | 33 | (g) | 47 | (g) | ||||||||
Total derivatives designated as hedging instruments under SFAS 133 | $ | 17 | $ | 54 | $ | 155 | $ | 161 | ||||||||
Derivatives not designated as hedging instruments under SFAS 133 | ||||||||||||||||
Interest rate contracts | $ | — | $ | — | $ | 8 | (c) | $ | 8 | (c) | ||||||
Embedded derivatives | 8 | (a) | 8 | (a) | — | — | ||||||||||
Foreign exchange contracts | 6 | (f) | 40 | (f) | 8 | (g) | 19 | (g) | ||||||||
Total derivatives not designated as hedging instruments under SFAS 133 | $ | 14 | $ | 48 | $ | 16 | $ | 27 | ||||||||
Total derivatives | $ | 31 | $ | 102 | $ | 171 | $ | 188 | ||||||||
(a) | Included in Deferred charges and other assets in the accompanying consolidated balance sheet. |
(b) | Includes $2 million recorded in Other current assets, $3 million recorded in Accounts and notes receivable, net and $22 million recorded in Deferred charges and other assets in the accompanying consolidated balance sheet. |
(c) | Included in Other liabilities in the accompanying consolidated balance sheet. |
(d) | Includes $58 million recorded in Other accrued liabilities and $29 million recorded in Other liabilities in the accompanying consolidated balance sheet. |
(e) | Includes $47 million recorded in Other accrued liabilities and $28 million recorded in Other liabilities in the accompanying consolidated balance sheet. |
(f) | Included in Other current assets in the accompanying consolidated balance sheet. |
(g) | Included in Other accrued liabilities in the accompanying consolidated balance sheet. |
The following table provides the change in Accumulated other comprehensive income, net of tax, related to derivative instruments:
Gain or (Loss) Recognized in OCI (Effective Portion) | Location of Gain or (Loss) (Effective Portion) | (Gain) or Loss Reclassified from OCI into Income (Effective Portion) | ||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Interest rate contracts | $ | (1 | ) | $ | — | Interest expense, net | $ | 5 | $ | — | ||||||
Commodity contracts | (15 | ) | 22 | Cost of products sold | 9 | — | ||||||||||
Foreign exchange contracts | (6 | ) | 14 | Cost of products sold | 3 | (13 | ) | |||||||||
Total | $ | (22 | ) | $ | 36 | $ | 17 | $ | (13 | ) | ||||||
Credit-Risk-Related Contingent Features
International Paper evaluates credit risk by monitoring its exposure with each counterparty to ensure that exposure stays within acceptable policy limits. Credit risk is also mitigated by contractual provisions with the majority of our banks. Most of the contracts include a credit support annex that requires the posting of collateral by the counterparty or International Paper based on each party’s rating and level of exposure. Based on the Company’s current credit rating, the collateral threshold is generally $10 million. If the lower of the Company’s credit rating by Moody’s or S&P were to drop below investment grade, the Company would be required to post collateral for all derivatives in a net liability position, although no derivatives would terminate. The fair values of derivative instruments containing credit-risk-related contingent features in a net liability position were $118 million as of March 31, 2009 and $109 million as of December 31, 2008. In addition, existing derivative contracts provide for netting across all derivative positions in the event a counterparty defaults on a payment obligation. International Paper currently does not expect any of the counterparties to default on their obligations.
NOTE 1114 - RETIREMENT PLANS
International Paper maintains pension plans that provide retirement benefits to substantially all salaried U.S. employees hired prior to July 1, 2004 and substantially all hourly and union employees regardless of hire date. These employees generally are eligible to participate in the plans upon completion of one year of service and attainment of age 21. Employees hired after June 30, 2004, who are not eligible for these pension plans, receive an additional company contribution to their individual savings plans.
The pension plans provide defined benefits based on years of credited service and either final average earnings (salaried employees), hourly job rates or specified benefit rates (hourly and union employees). A detailed discussion of these plans is presented in Note 1516 to the financial statements included in International Paper’s 20072008 10-K.
Net periodic pension expense for our qualified and nonqualified U.S. defined benefit plans consisted of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2008 | 2007 | 2008 | 2007 | 2009 | 2008 | ||||||||||||||||||
Service cost | $ | 28 | $ | 28 | $ | 76 | $ | 85 | $ | 31 | $ | 25 | ||||||||||||
Interest cost | 135 | 130 | 404 | 390 | 137 | 133 | ||||||||||||||||||
Expected return on plan assets | (168 | ) | (158 | ) | (503 | ) | (475 | ) | (158 | ) | (167 | ) | ||||||||||||
Actuarial loss | 30 | 48 | 90 | 143 | 44 | 30 | ||||||||||||||||||
Amortization of prior service cost | 7 | 5 | 22 | 15 | 7 | 7 | ||||||||||||||||||
Net periodic pension expense (a) | $ | 32 | $ | 53 | $ | 89 | $ | 158 | $ | 61 | $ | 28 | ||||||||||||
(a) | Excludes a |
The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plan, tax deductibility, the cash flows generated by the Company, and other factors. The Company has no obligation to fund its domestic qualified plan in 2008.2009. The Company continually reassesses the amount and timing of any discretionary contributions. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $21$7 million through September 30, 2008.March 31, 2009.
NOTE 1215 - STOCK-BASED COMPENSATION
International Paper has a Long-Term Incentive Compensation Plan (LTICP) that includes a performance share program, a service-based restricted stock award program, an executive continuity award program that provides for tandem grants of restricted stock and stock options, and a stock option program that has been discontinued as described below. The LTICP is administered by the Management Development and Compensation Committee of the Board of Directors (the Committee). Non-employee directors are not eligible for awards under the LTICP. A detailed discussion of these plans is presented in Note 1718 to the Financial Statementsfinancial statements included in International Paper’s 20072008 10-K. As of September 30, 2008, 27.4March 31, 2009, 26.8 million shares were available for grant under the LTICP.
Total stock-based compensation cost recognized in Selling and administrative expenses in the accompanying consolidated statement of operations for the ninethree months ended September 30,March 31, 2009 and 2008 and 2007 was $83$17 million and $94$29 million, respectively. The actual tax deduction realized for stock-based compensation costs
related to non-qualified stock options was $19,000$0 and $15 million$19,000 for the nine-monththree-month periods ended September 30,March 31, 2009 and 2008, and 2007, respectively. The actual tax deduction realized for stock-based compensation costs related to restricted and performance shares was $130$28 million and $60$130 million for the nine-monththree-month periods ended September 30,March 31, 2009 and 2008, and 2007, respectively. At September 30, 2008, $97March 31, 2009, $74 million, net of estimated forfeitures, of compensation cost related to unvested restricted performance shares, executive continuity awards and restricted stock attributable to future performance had not yet been recognized. This amount will be recognized in expense over a weighted-average period of one year.1.5 years.
Performance-Based Restricted Share Program:
Under the Performance Share Program (PSP), contingent awards of International Paper common stock are granted by the Committee to approximately 9001,100 employees. Awards are earned based on the achievement of defined performance rankings of return on investment (ROI) and total shareholder return (TSR) compared to peer groups. Awards are weighted 75% for ROI and 25% for TSR for all participants except for officers for whom awards are weighted 50% for ROI and 50% for TSR. The ROI component of the PSP awards is valued at the closing stock price on the day prior to the grant date. As the ROI component contains a
performance condition, compensation expense, net of estimated forfeitures, is recorded over the requisite service period based on the most probable number of awards expected to vest. The TSR component of the PSP awards is valued using a Monte Carlo simulation as the TSR component contains a market condition. The Monte Carlo simulation estimates the fair value of the TSR component based on the expected term of the award, the risk-free rate, expected dividends, and the expected volatility for the Company and its competitors. The expected term was estimated based on the vesting period of the awards, the risk-free rate was based on the yield on U.S. Treasury securities matching the vesting period, the expected dividends were assumed to be zero for all companies, and the volatility was based on the Company’s historical volatility over the expected term.
PSP awards issued to certain members of senior management are liability awards, which are required to be remeasured at fair value at each balance sheet date. The valuation of these PSP liability awards is computed based on the same methodology as other PSP awards.
The following table sets forth the assumptions used to determine compensation cost for the market condition component of the PSP consistent with the requirements of SFAS No. 123(R):
Expected volatility | % | % | ||||
Risk-free interest rate | % | 1.199% | % |
The following summarizes the activity for PSP for the ninethree months ended September 30, 2008:March 31, 2009:
Nonvested Shares | Weighted Average Grant Date Fair Value | Nonvested Shares | Weighted Average Grant Date Fair Value | |||||||||
Outstanding at December 31, 2007 | 6,217,012 | $ | 35.67 | |||||||||
Outstanding at December 31, 2008 | 6,254,256 | $ | 32.69 | |||||||||
Granted | 3,984,146 | 36.26 | 4,097,913 | 19.08 | ||||||||
Shares Issued (a) | (3,585,430 | ) | 41.65 | (3,111,896 | ) | 33.67 | ||||||
Forfeited | (262,354 | ) | 34.64 | (170,022 | ) | 26.24 | ||||||
Outstanding at September 30, 2008 | 6,353,374 | $ | 32.71 | |||||||||
Outstanding at March 31, 2009 | 7,070,251 | $ | 24.53 | |||||||||
(a) | Includes |
Stock Option Program:
The Company discontinued its stock option program in 2004 for members of executive management, and in 2005 for all other eligible U.S. and non-U.S. employees.
A summary of option activity under the plan as of September 30, 2008March 31, 2009 is presented below:
Options | Weighted Average Exercise Price | Weighted Average Remaining Life (years) | Aggregate Intrinsic Value (thousands) | Options | Weighted Average Exercise Price | Weighted Average Remaining Life (years) | Aggregate Intrinsic Value (millions) | |||||||||||||||
Outstanding at December 31, 2007 | 28,013,735 | $ | 39.81 | |||||||||||||||||||
Outstanding at December 31, 2008 | 25,093,122 | $ | 39.68 | |||||||||||||||||||
Granted | — | — | — | — | ||||||||||||||||||
Exercised | (14,800 | ) | 31.55 | — | — | |||||||||||||||||
Forfeited | (92,648 | ) | 44.40 | (52,433 | ) | 43.34 | ||||||||||||||||
Expired | (2,217,875 | ) | 41.92 | (1,363,910 | ) | 41.24 | ||||||||||||||||
Outstanding at September 30, 2008 | 25,688,412 | $ | 39.62 | 3.90 | $ | — | ||||||||||||||||
Outstanding at March 31, 2009 | 23,676,779 | $ | 39.58 | 3.5 | $ | — | ||||||||||||||||
All options were fully vested and exercisable as of September 30, 2008.March 31, 2009.
Executive Continuity and Restricted Stock Award Program:
The following summarizes the activity of the Executive Continuity and Restricted Stock Award Program for the ninethree months ended September 30, 2008:March 31, 2009:
Nonvested Shares | Weighted Average Grant Date Fair Value | Nonvested Shares | Weighted Average Grant Date Fair Value | ||||||||
Outstanding at December 31, 2007 | 122,625 | $ | 37.18 | ||||||||
Outstanding at December 31, 2008 | 102,000 | $ | 35.11 | ||||||||
Granted | 18,000 | 28.34 | 5,000 | 11.80 | |||||||
Shares Issued | (28,625 | ) | 38.80 | — | — | ||||||
Forfeited | (3,000 | ) | 33.70 | — | — | ||||||
Outstanding at September 30, 2008 | 109,000 | $ | 35.39 | ||||||||
Outstanding at March 31, 2009 | 107,000 | $ | 34.03 | ||||||||
NOTE 16 - SUBSEQUENT EVENT
On May 4, 2009, the Company announced that it had priced $1.0 billion of 9.35% senior unsecured notes due in 2019. The Company intends to use the net proceeds from the sale of the notes primarily to repay and extend the maturities of other long-term debt.
Financial Information by Industry Segment
(Unaudited)
(In millions)
Sales by Industry Segment
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2009 | 2008 | |||||||||||||||||||
Industrial Packaging | $ | 2,180 | $ | 1,445 | ||||||||||||||||||||
Printing Papers | $ | 1,800 | $ | 1,660 | $ | 5,305 | $ | 4,810 | 1,325 | 1,715 | ||||||||||||||
Industrial Packaging | 2,320 | 1,305 | 5,235 | 3,855 | ||||||||||||||||||||
Consumer Packaging | 830 | 775 | 2,395 | 2,235 | 715 | 770 | ||||||||||||||||||
Distribution | 2,075 | 1,880 | 6,030 | 5,275 | 1,590 | 1,985 | ||||||||||||||||||
Forest Products | 55 | 120 | 135 | 295 | 5 | 25 | ||||||||||||||||||
Other Businesses (6) | — | — | — | 135 | ||||||||||||||||||||
Corporate and Inter-segment Sales | (272 | ) | (199 | ) | (817 | ) | (556 | ) | (147 | ) | (272 | ) | ||||||||||||
Net Sales | $ | 6,808 | $ | 5,541 | $ | 18,283 | $ | 16,049 | $ | 5,668 | $ | 5,668 | ||||||||||||
Operating Profit by Industry Segment
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2008 | 2007 (2) | 2008 | 2007 (2) | 2009 | 2008 | |||||||||||||||||||
Industrial Packaging | $ | 360 | (2,3) | $ | 97 | |||||||||||||||||||
Printing Papers | $ | 103 | (3) | $ | 241 | $ | 514 | (3) | $ | 596 | 312 | (2,4) | 185 | |||||||||||
Industrial Packaging | 95 | (4) | 84 | 279 | (4) | 265 | ||||||||||||||||||
Consumer Packaging | (2 | )(5) | 27 | 20 | (5) | 97 | 112 | (2,5) | 9 | (5) | ||||||||||||||
Distribution | 35 | 30 | 77 | 80 | (7 | ) | 16 | |||||||||||||||||
Forest Products | 305 | 96 | 371 | 287 | 2 | 25 | ||||||||||||||||||
Other Businesses (6) | — | — | — | 6 | ||||||||||||||||||||
Operating Profit (1) | 536 | 478 | 1,261 | 1,331 | 779 | 332 | ||||||||||||||||||
Interest expense, net | (144 | ) | (77 | ) | (306 | ) | (218 | ) | (164 | ) | (81 | ) | ||||||||||||
Minority interest/equity earnings adjustment (7) | (1 | ) | 4 | 11 | 15 | |||||||||||||||||||
Noncontrolling interest/equity earnings adjustment (6) | 6 | 4 | ||||||||||||||||||||||
Corporate items, net | (40 | ) | (56 | ) | (82 | ) | (150 | ) | (51 | ) | (21 | ) | ||||||||||||
Restructuring and other charges | (89 | ) | (42 | ) | (126 | ) | (86 | ) | (52 | ) | (37 | ) | ||||||||||||
Sale of forestlands | 3 | 9 | 6 | 9 | ||||||||||||||||||||
Net (gains) losses on sales and impairments of businesses | — | (1 | ) | 1 | 314 | — | 1 | |||||||||||||||||
Earnings from continuing operations before income taxes, equity earnings and minority interest | $ | 265 | $ | 315 | $ | 765 | $ | 1,215 | ||||||||||||||||
Earnings from continuing operations before income taxes and equity earnings | $ | 518 | $ | 198 | ||||||||||||||||||||
Equity earnings, net of taxes – Ilim Holding S.A. (1) | $ | 5 | $ | — | $ | 54 | $ | — | $ | (26 | ) | $ | 17 | |||||||||||
(1) | In addition to the operating profits shown above, International Paper recorded |
(2) |
(3) | Includes a charge of |
(4) | Includes |
(5) | Includes charges of |
(6) |
Operating profits for industry segments include each segment’s percentage share of the profits of subsidiaries included in that segment that are less than wholly owned. The pre-tax |
INTERNATIONALINTERANTIONAL PAPER COMPANY
Sales Volumes By Product (1) (2)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||
In thousands of short tons | 2008 | 2007 | 2008 | 2007 | 2009 | 2008 | ||||||
Industrial Packaging | ||||||||||||
Corrugated Packaging (3) | 1,776 | 882 | ||||||||||
Containerboard (3) | 471 | 506 | ||||||||||
Recycling (3) | 595 | — | ||||||||||
Saturated Kraft | 21 | 46 | ||||||||||
Bleached Kraft | 13 | 19 | ||||||||||
European Industrial Packaging | 270 | 295 | ||||||||||
Asia Industrial Packaging | 88 | 138 | ||||||||||
Industrial Packaging | 3,234 | 1,886 | ||||||||||
Printing Papers | ||||||||||||
U.S. Uncoated Papers | 875 | 940 | 2,653 | 2,871 | 693 | 910 | ||||||
European and Russian Uncoated Papers | 355 | 351 | 1,101 | 1,081 | 370 | 373 | ||||||
Brazilian Uncoated Papers | 217 | 225 | 638 | 567 | 180 | 210 | ||||||
Asian Uncoated Papers | 6 | 6 | 21 | 18 | 3 | 8 | ||||||
Uncoated Papers | 1,453 | 1,522 | 4,413 | 4,537 | 1,246 | 1,501 | ||||||
Market Pulp (3) | 448 | 348 | 1,218 | 1,020 | ||||||||
Industrial Packaging | ||||||||||||
Corrugated Packaging (4) | 1,641 | 896 | 3,419 | 2,683 | ||||||||
Containerboard (4) | 686 | 466 | 1,686 | 1,315 | ||||||||
Recycling (4) | 397 | — | 397 | — | ||||||||
Saturated Kraft | 45 | 42 | 130 | 124 | ||||||||
Bleached Kraft | 24 | 19 | 65 | 53 | ||||||||
European Industrial Packaging | 261 | 274 | 844 | 879 | ||||||||
Asia Industrial Packaging | 154 | 116 | 443 | 329 | ||||||||
Industrial Packaging | 3,208 | 1,813 | 6,984 | 5,383 | ||||||||
Market Pulp (4) | 317 | 354 | ||||||||||
Consumer Packaging | ||||||||||||
U.S. Coated Paperboard | 403 | 413 | 1,202 | 1,200 | 290 | 400 | ||||||
European Coated Paperboard | 81 | 79 | 235 | 238 | 87 | 81 | ||||||
Asia Coated Paperboard | 138 | 127 | 386 | 371 | 189 | 125 | ||||||
Other Consumer Packaging | 48 | 42 | 136 | 125 | 46 | 41 | ||||||
Consumer Packaging | 670 | 661 | 1,959 | 1,934 | 612 | 647 | ||||||
(1) | Sales volumes include third party and inter-segment sales and exclude sales of equity investees. |
(2) | Sales volumes for divested businesses are included through the date of sale, except for discontinued operations. |
(3) | Includes |
(4) | Includes |
Sales Volumes represent supplemental information that is not included in Part I, Item 1. Financial Information.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
EXECUTIVE SUMMARY
Despite difficult marketeconomic conditions during the 2009 first quarter, International Paper deliveredCompany posted solid operating results inresults. Sales volumes declined compared with the 2008 third quarter. The Company achieved improvements infourth quarter as we continued to match our production to customer orders while controlling our inventory levels. Our manufacturing operations ran very efficiently, and we realized more than $30 million of overhead cost savings. While average price realizations for most major products; however this favorable effect was offset by higherdeclined modestly, input costs for wood,raw materials and energy and chemicals and higher freight costs. Resultscosts were also benefited from reducedlower. We generated solid operating costs, contributions from our global operations and the addition of the containerboard, packaging and recycling business acquired on August 4, 2008 from Weyerhaeuser Company. Finally, cash providedflow, enabling us to reduce debt balances by operations increased significantly to nearly $950$550 million well above the $250 million used for capital expenditures during the quarter.quarter, and an additional $390 million in April.
Looking ahead to the 2008 fourthsecond quarter, the recent decline in economic conditions, weakness in global financial markets, and global currency fluctuations have created difficult fourth-quarter market conditions. Average price realizations should improve for uncoated freesheet, containerboard, corrugated boxes and coated paperboard products in North America as we continue to realize announced price increases. Price realizations in Brazil for uncoated freesheet should also move higher, but prices in Europe are expected to be about flat. Global market prices for pulp, however, are expectedexpect to continue to decline.face a challenging economic environment. Demand for paperpackaging, printing papers and packaging products in North America, and for market pulp globally, weakened sharply toward the end of the third quarter,improved slightly in early April, although it is unclear if this improvement will prove to be sustainable. Costs for fiber, energy, chemicals and are expectedfreight should continue to remain weak during the fourth quarter. Printing papers demand is expected to remain stable in Brazil. While prices for natural gas, electricity and fuel oil have declined, prices for other inputdecline. Maintenance outage costs are expected to remain high or towill increase with no significant decrease in total input costs expectedsignificantly in the fourth quarter.
Insecond quarter reflecting a seasonal increase in planned maintenance activity, although manufacturing operations should remain strong. Equity earnings from our Ilim joint venture in Russia will be below first-quarter levels, principally due to larger unfavorable U.S. dollar debt currency remeasurement charges. Thus, in summary, we expect that operating profitsearnings for the fourthsecond quarter will be less than third-quarter earnings, with the amount of the decline dependent upon global economic activity and its impact on demand for our major products as we continue to manage our production to meet our customers’ needs and to maximize cash flow.below first-quarter levels.
RESULTS OF OPERATIONS
For the thirdfirst quarter of 2008,2009, International Paper Company reported net sales of $6.8$5.7 billion, compared with $5.5$5.7 billion in the thirdfirst quarter of 20072008 and $5.8$6.5 billion in the secondfourth quarter of 2008.
Net earnings attributable to International Paper totaled $149$257 million, or $0.35$0.61 per share, in the 2008 third2009 first quarter. This compared with earnings of $217$133 million, or $0.51$0.31 per share, in the thirdfirst quarter of 20072008 and earningsa loss of $227 million,$1.8 billion, or $0.54$4.25 per share, in the secondfourth quarter of 2008.
Earnings from continuing operations attributable to International Paper Company (excluding noncontrolling interests) were $149$257 million in the thirdfirst quarter of 2009 compared with $150 million in the first quarter of 2008 compared with $220 million in the third quarterand a loss of 2007 and $228 million$1.8 billion in the 2008 secondfourth quarter. Compared with the thirdfirst quarter of 2007,2008, earnings in the 2008 third2009 first quarter benefited from higher average price realizations ($11837 million), higher sales volumes ($52 million), including salesearnings from the former Weyerhaeuser Company CBPR business acquired in the 2008 third quarter ($81 million), and lower operating costs and a more favorable mix of products sold ($72 million), higher earnings from land and mineral rights sales ($149 million), and slightly lower corporate items and other costs ($3131 million). These benefits were offset by lower sales volumes and higher lack-of-order downtime ($219 million), higher mill outage costs ($814 million), significantly higher raw material and freight costs ($20419 million), lower earnings from land sales ($16 million), higher net interest expense ($56 million), higher corporate items and other costs ($21 million), and a higher income tax provision ($202 million) reflecting a higher estimated effective tax rate in 2008, and higher net interest expense ($48 million). Costs associated with the extended shutdown of the Vicksburg mill caused by a recovery boiler explosion during the second quarter also reduced earnings ($6 million). The 2008 third-quarter results included equity2009. Equity earnings, net of taxes, relating to International Paper’s investment in Ilim Holding S.A. ($5 million). Additionally, netwere $43 million lower in the 2009 first quarter than in the 2008 first quarter. Net special items were a lossgain of $207$223 million in the 2008 third2009 first quarter, reflecting a $330 million after-tax gain from alternative fuel mixture credits, versus a loss of $23$25 million in the thirdfirst quarter of 2007.2008.
Compared with the secondfourth quarter of 2008, earnings from continuing operations benefited from higher average price realizations ($41 million), higher sales volumes ($45 million), including sales from the CBPR business acquired in the 2008 third quarter, higher earnings from land and mineral sales ($176 million), and lower mill outage costs ($16 million). These benefits were partially offset by higher manufacturing costs ($764 million), higher and lower raw material and freight costs ($6795 million). These benefits were more than offset by lower average price realizations ($18 million), lower sales volumes and higher lack-of-order downtime ($93 million), lower earnings from land sales ($28 million), higher mill outage costs ($15 million), increased corporate items and other costs ($1420 million)., and a higher income tax provision ($9 million) reflecting a higher estimated effective tax rate in 2009. Net interest expense increaseddecreased ($4420 million). Earnings were positively impacted by lower costs associated withFourth-quarter 2008 earnings included income of approximately $26 million after taxes related to the extended shutdown offinal
insurance settlement for the Vicksburg mill ($2 million).recovery boiler explosion. Equity earnings, net of taxes, for Ilim Holding S.A. decreased by $27$26 million versus the secondfourth quarter. Net special items were a lossgain of $207$223 million in the 2008 third2009 first quarter versus a loss of $7 million$1.9 billion in the secondfourth quarter of 2008.2008, which included a $1.8 billion goodwill impairment charge.
To measure the performance of the Company’s business segments from period to period without variations caused by special or unusual items, International Paper’s management focuses on business segment operating profit. This is defined as earnings before taxes, and equity earnings and minority interestnoncontrolling interests net of taxes, excluding interest expense, corporate charges and special items that include restructuring charges, early debt extinguishment costs, legal reserves, insurance recoveries, gains (losses) on sales and impairments of businesses, and the reversal of reserves no longer required.
The following table presents a reconciliation of International Paper’s net earnings attributable to International Paper Company to its operating profit:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, | June 30, 2008 | March 31, | December 31, 2008 | |||||||||||||||||||||
In millions | 2008 | 2007 | 2009 | 2008 | ||||||||||||||||||||
Net Earnings | $ | 149 | $ | 217 | $ | 227 | ||||||||||||||||||
Net Earnings (Loss) Attributable to International Paper Company | $ | 257 | $ | 133 | $ | (1,791 | ) | |||||||||||||||||
Deduct – Discontinued operations: | ||||||||||||||||||||||||
Losses from operations | — | 3 | — | |||||||||||||||||||||
Earnings (loss) from operations | — | 1 | (5 | ) | ||||||||||||||||||||
Loss on sales or impairments | — | — | 1 | — | 16 | — | ||||||||||||||||||
Earnings From Continuing Operations | 149 | 220 | 228 | |||||||||||||||||||||
Earnings (Loss) From Continuing Operations Attributable to International Paper Company | 257 | 150 | (1,796 | ) | ||||||||||||||||||||
Add back (deduct): | ||||||||||||||||||||||||
Income tax provision | 118 | 89 | 97 | |||||||||||||||||||||
Income tax provision (benefit) | 230 | 59 | (112 | ) | ||||||||||||||||||||
Equity earnings, net of taxes | (5 | ) | — | (30 | ) | 27 | (16 | ) | 2 | |||||||||||||||
Minority interest expense, net of taxes | 3 | 6 | 7 | |||||||||||||||||||||
Noncontrolling interests, net of taxes | 4 | 5 | (12 | ) | ||||||||||||||||||||
Earnings From Continuing Operations Before Income Taxes, Equity Earnings and Minority Interest | 265 | 315 | 302 | |||||||||||||||||||||
Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 518 | 198 | (1,918 | ) | ||||||||||||||||||||
Interest expense, net | 144 | 77 | 81 | 164 | 81 | 186 | ||||||||||||||||||
Minority interest / equity earnings included in operations | 1 | (4 | ) | (8 | ) | |||||||||||||||||||
Noncontrolling interests / equity earnings included in operations | (6 | ) | (4 | ) | 13 | |||||||||||||||||||
Corporate items | 40 | 56 | 21 | 51 | 21 | 21 | ||||||||||||||||||
Special items: | ||||||||||||||||||||||||
Restructuring and other charges | 89 | 42 | — | 52 | 37 | 53 | ||||||||||||||||||
Sale of forestlands | (3 | ) | (9 | ) | (3 | ) | ||||||||||||||||||
Net losses on sales and impairments of businesses | — | 1 | — | |||||||||||||||||||||
Impairments of goodwill | — | — | 1,777 | |||||||||||||||||||||
Net gains on sales and impairments of businesses | — | (1 | ) | — | ||||||||||||||||||||
$ | 536 | $ | 478 | $ | 393 | $ | 779 | $ | 332 | $ | 132 | |||||||||||||
Industry Segment Operating Profit | ||||||||||||||||||||||||
Industrial Packaging | $ | 360 | $ | 97 | $ | 111 | ||||||||||||||||||
Printing Papers | $ | 103 | $ | 241 | $ | 226 | 312 | 185 | (40 | ) | ||||||||||||||
Industrial Packaging | 95 | 84 | 87 | |||||||||||||||||||||
Consumer Packaging | (2 | ) | 27 | 13 | 112 | 9 | (3 | ) | ||||||||||||||||
Distribution | 35 | 30 | 26 | (7 | ) | 16 | 26 | |||||||||||||||||
Forest Products | 305 | 96 | 41 | 2 | 25 | 38 | ||||||||||||||||||
Total Industry Segment Operating Profit (1) | $ | 536 | $ | 478 | $ | 393 | $ | 779 | $ | 332 | $ | 132 | ||||||||||||
(1) | In addition to operating profit shown above, International Paper recorded |
Industry Segment Operating Profit
Industry segment operating profits of $536$779 million in the third2009 first quarter were higher than both the $478 million in the 2007 third quarter and the $393$332 million in the 2008 secondfirst quarter and the $132 million in the 2008 fourth quarter. Compared with the thirdfirst quarter of 2007,2008, earnings in the current quarter benefited from significantly higher average price realizations ($16654 million), higher sales volumes ($73 million), including salesearnings from the CBPR business acquired in the 2008 third quarter ($119 million) and lower operating costs and a more favorable mix of products sold ($101 million), and higher gains from land and mineral sales ($209192 million). These benefits were partially offset by lower sales volumes and increased lack-of-order downtime ($320 million), higher mill outage costs ($1120 million), significantly higher raw material and freight costs ($28628 million), lower gains from land sales ($23 million), and higher corporate items and other costs ($12 million). Costs associated with the extended shutdown of the Vicksburg mill caused by a recovery boiler explosion during the second quarter also reduced earnings ($95 million). Special items consisted of a gain of $473 million in the 2009 first quarter, including a pre-tax gain of $540 million from alternative fuel mixture credits, compared with a loss of $173$5 million in the 2008 thirdfirst quarter.
Compared with the 2008 secondfourth quarter, operating profits benefited from higher average price realizations ($60 million), higher sales volumes ($67 million), including sales from the CBPR business acquired in the 2008 third quarter, significantly lower mill outagemanufacturing costs ($2383 million), and higher gains from landlower raw material and mineral salesfreight costs ($261124 million). These benefits were offset by lower average price realizations ($24 million), lower sales volumes and increased lack-of-order downtime ($121 million), higher manufacturingmill outage costs ($1120 million), and higher raw material and freight costslower gains from land sales ($9936 million). Corporate items and
other costs increaseddecreased ($19 million). Profits were also positively impacted by lower costs associated withFourth-quarter 2008 earnings included income of approximately $33 million related to the extended shutdown offinal insurance settlement for the Vicksburg mill ($3 million).recovery boiler explosion. Special items consisted of a lossgain of $173$473 million in the 2008 third2009 first quarter versus a loss of $13$192 million in the secondfourth quarter of 2008.
During the 2008 third2009 first quarter, International Paper took approximately 315,0001,220,000 tons of downtime, including 35,0001,075,000 tons that were market-related, compared with approximately 105,000120,000 tons of downtime in the thirdfirst quarter of 2007,2008, which included 7,00017,000 tons of market-related downtime. During the 2008 secondfourth quarter, International Paper took approximately 270,0001,080,000 tons of downtime, including 2,000998,000 tons that were market-related. Market-related downtime is taken to balance internal supply with our customer demand to help manage inventory levels, while maintenance downtime, which makes up the majority of the difference between total downtime and market-related downtime, is taken periodically during the year.
Discontinued Operations
2008:
During the first quarter of 2008, the Company recorded a pre-tax charge of $25 million ($16 million after taxes) related to the final settlement of a post-closing adjustment of the purchase price received by the Company for the sale of its Beverage Packaging business, (see Note 9), and a $2 million charge before taxes ($1 million after taxes) for operating losses related to certain wood products facilities.
2007:
During the third quarter of 2007, the Company completed the sale of the remainder of its non-U.S. Beverage Packaging business.
During the second quarter of 2007, the Company recorded pre-tax charges of $6 million ($4 million after taxes) and $5 million ($3 million after taxes) relating to adjustments to estimated losses on the sales of its Wood Products and Beverage Packaging businesses, respectively.
During the first quarter of 2007, the Company recorded pre-tax credits of $21 million ($9 million after taxes) and $6 million ($4 million after taxes) relating to the sales of its Wood Products and Kraft Papers businesses, respectively. In addition, a $15 million pre-tax charge ($39 million after taxes) was recorded for adjustments to the loss on the completion of the sale of most of the Beverage Packaging business. Finally, a pre-tax credit of approximately $10 million ($6 million after taxes) was recorded for refunds received from the Canadian government of duties paid by the Company’s former Weldwood of Canada Limited business.
Income Taxes
The income tax provision was $118$230 million for the 2008 third2009 first quarter. Excluding a $52$14 million benefitexpense attributable to an adjustment of deferred income taxes relating to incentive compensation payments, a $6 million expense relating to recent state income tax legislative changes and an expense of $178 million relating to the tax effects of special items, the effective income tax rate for continuing operations was 32.5%33% for the quarter.
In the 2008 secondfourth quarter thethere was an income tax provision was $97benefit of $112 million. Excluding a $3$40 million benefit relating to the restructuring of the Company’s international operations and a benefit of $96 million relating to the tax effects of special items, the effective tax rate for continuing operations was 32.5%23% for the quarter.
The income tax provision totaled $89$59 million in the 2007 third2008 first quarter. Excluding an $11a $16 million benefit related to the tax effects of special items, the effective income tax rate for continuing operations before special items was 29%31.5%.
Interest Expense and Corporate Items
Net interest expense for the third2009 first quarter of 2008 was $144$164 million compared with $186 million for the 2008 fourth quarter and $81 million for the second quarter of 2008 and $77 million forfirst quarter. The higher net expense compared with the 2007 third quarter, reflectingprior year reflects the issuance of $6 billion of debt, mainly in connection with the acquisition of the CBPR business.
Corporate items, net, were $40 million in the third quarter of 2008 compared with $21 million in the second quarter of 2008 and $56 million in the third quarter of 2007. Compared with the prior quarter, the higher costs reflect a $10 million settlement of a multi-employer pension fund liability and an $11 million gain in the second quarter resulting from the sale of the former Natchez, MS mill site. The decrease compared with the comparable prior-year2008 fourth quarter primarily reflects lowerrepayments of debt during the last two quarters.
Corporate items, net, of $51 million in the 2009 first quarter were higher than the $21 million of net expense in both the 2008 fourth quarter and 2008 first quarter due to increased 2009 pension costs.
expenses. Overhead charges allocated to industry segments in the thirdfirst quarter of 20082009 were $28$23 million higher than in the secondfourth quarter of 2008 reflecting higher incentivebenefit-related costs, partially offset by lower inventory-related and workers’ compensation and inventory-related costs. Overhead charges allocated to industry segments in the thirdfirst quarter of 20082009 were $28$18 million lower than in the 2007 thirdfirst quarter primarilyof 2008 due to lower benefits-related costs and gains on natural gas hedges.inventory-related costs.
Special Items
Restructuring and Other Charges
20082009:
During the thirdfirst quarter of 2008,2009, restructuring and other charges totaling $97$83 million before taxes ($6065 million after taxes) were recorded, including $35a $52 million charge before taxes ($2232 million after taxes) for adjustments to legal reserves, $53severance and benefits associated with the Company’s 2008 overhead reduction program, a $23 million charge before taxes ($3328 million after taxes) to write-off supply chain initiative developmentfor closure costs for U.S. container operations that will not be implemented duerelated to the CBPR acquisition, $8Inverurie mill in Scotland, a $6 million charge before taxes ($54 million after taxes) related to the shutdown of certain operations at the Franklin, Virginia mill, and a $2 million charge before taxes ($1 million after taxes) for costs associated with the reorganization of the Company’s Shorewood operations in Canada, and $1Packaging operations. Additionally, a $20 million ($0 million after taxes)charge was recorded for severance costs associated with the Company’s Transformation Plan.certain tax adjustments
(see Note 10).
During the second quarter of 2008 restructuring and other charges totaling $13 million before taxes ($9 million after taxes) were recorded related to the reorganization of the Company’s Shorewood operations in Canada, including $10 million before taxes ($7 million after taxes) of severance charges and $3 million before taxes ($2 million after taxes) of accelerated depreciation expense for long-lived assets being removed from service.:
During the first quarter of 2008, restructuring and other charges totaling $42 million before taxes ($26 million after taxes) were recorded, including a $40 million charge before taxes ($25 million after taxes) for adjustments of legal reserves, a $5 million charge before taxes ($3 million after taxes) related to the reorganization of the Company’s Shorewood operations in Canada and a $3 million credit before taxes ($2 million after taxes) for adjustments to previously recorded reserves associated with the Company’s organizational restructuring programs.
2007:
During the third quarter of 2007, restructuring and other charges totaling $42 million before taxes ($26 million after taxes) were recorded. These charges consisted of a pre-tax charge of $27 million ($17 million after taxes) of accelerated depreciation charges for the Terre Haute mill, a pre-tax charge of $10 million ($6 million after taxes) for closure reserves associated with the Terre Haute mill, a pre-tax charge of $3 million ($2 million after taxes) related to the restructuring of the Company’s Brazil operations, and a pre-tax charge of $2 million ($1 million after taxes) for organizational restructuring programs associated with the Company’s Transformation Plan. Additionally, a $3 million increase to the income tax provision was recorded related to the settlement of a prior year tax audit.
During the second quarter of 2007, restructuring and other charges totaling $26 million before taxes ($16 million after taxes) were recorded for organizational restructuring programs associated with the Company’s Transformation Plan, including $17 million before taxes ($11 million after taxes) of accelerated depreciation expense for long-lived assets being removed from service.
During the first quarter of 2007, restructuring and other charges totaling $18 million before taxes ($11 million after taxes) were recorded for organizational restructuring programs associated with the Company’s Transformation Plan, including $12 million before taxes ($7 million after taxes) of accelerated depreciation charges for long-lived assets being removed from service. Additionally, a $2 million pre-tax credit ($1 million after taxes) was recorded in Interest expense, net, for interest received from the Canadian government on refunds of prior-year softwood lumber duties.
Forestlands
2008:
During both the second and third quarters of 2008, the Company recorded a $3 million gain before taxes ($2 million after taxes) to reduce estimated transaction costs accrued in connection with the 2006 Transformation Plan sale of forestlands.
2007:
During the third quarter of 2007, a pre-tax gain of $9 million ($5 million after taxes) was recorded to reduce estimated transaction costs accrued in connection with the 2006 Transformation Plan forestlands sales.
Net Losses (Gains)Gains on Sales and Impairments of Businesses
2008:
During the third quarter of 2008, based on a current strategic plan update of projected future operating results of the Company’s Inverurie mill, a determination was made that the current book value of the mill’s long-lived assets exceeded their estimated fair value, calculated using the probability-weighted present value of projected future cash flows. As a result, a $107 million pre-tax charge ($84 million after taxes) was recorded in the Company’s Printing Papers industry segment to write down the long-lived assets of the mill to their estimated fair value. This charge is included in Net losses (gains) on sales and impairments of businesses in the accompanying consolidated statement of operations.
During the first quarter of 2008, a $1 million pre-tax credit ($1 million after taxes) was recorded to adjust previously estimated gains/losses of businesses previously sold.
2007:
During the third quarter of 2007, a pre-tax charge of $1 million ($1 million credit after taxes) was recorded to adjust previously estimated losses on businesses previously sold.
During the second quarter of 2007, a $1 million net pre-tax credit (a $7 million charge after taxes, including a $5 million tax charge in Brazil) was recorded to adjust previously estimated gains/losses of businesses previously sold.
During the first quarter of 2007, a $103 million pre-tax gain ($96 million after taxes) was recorded upon the completion of the sale of the Company’s Arizona Chemical business. As part of the transaction, International Paper acquired a minority interest of approximately 10% in the resulting new entity.
In addition, during the first quarter of 2007, a $6 million pre-tax credit ($4 million after taxes) was recorded to adjust previously estimated gains/losses of businesses previously sold.
These gains are included, along with the $205 million pre-tax gain ($164 million after taxes) on the exchange for the Luiz Antonio mill in Brazil (see Note 4), in Net losses (gains) on sales and impairments of businesses in the accompanying consolidated statement of operations.
BUSINESS SEGMENT OPERATING RESULTS
The following presents business segment discussions for the first nine months of 2008.
Printing Papers
2008 | 2007 | |||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | ||||||||||||
Sales | $ | 1,800 | $ | 1,790 | $ | 5,305 | $ | 1,660 | $ | 1,610 | $ | 4,810 | ||||||
Operating Profit | 103 | 226 | 514 | 241 | 188 | 596 |
Printing Papers net sales for the third quarter of 2008 were 1% higher than the second quarter of 2008 and 8% higher than the third quarter of 2007. Operating profits in the third quarter of 2008 were 54% lower than the second quarter of 2008, and 57% lower than the third quarter of 2007. Operating profits for the third quarter of 2008 included a $107 million impairment charge to write down the assets of a mill in Europe to estimated fair value.
North American Printing Papersnet sales were $905 million in the third quarter of 2008 compared with $880 million in the second quarter of 2008 and $870 million in the third quarter of 2007. Operating earnings were $131 million in the third quarter of 2008 compared with $125 million in the second quarter of 2008 and $135 million in the third quarter of 2007.
Average sales prices for uncoated freesheet were significantly higher than the second quarter, due to price increases during the period. However, this favorable pricing impact was largely offset by higher input costs for wood, energy and chemicals and higher freight costs. Sales volumes were slightly higher than in the second quarter. Mill operations improved further from a strong second quarter, resulting in favorable operating costs. In addition, planned maintenance downtime costs were about $9 million lower than in the second quarter reflecting third-quarter outages at only three mills compared with four in the prior quarter.
Compared with the third quarter of 2007, average sales price realizations were up significantly in the third quarter of 2008 reflecting the realization of price increases implemented in the second half of 2007 and in the first three quarters of 2008. However, these improvements were largely offset by significantly higher input costs for wood, energy and chemicals and increased transportation expenses. Sales volumes were lower in the third quarter of 2008 as production was kept in balance with customer demand, including the conversions of the uncoated freesheet machine at the Pensacola, Florida mill to linerboard production in the summer of 2007 and the Bastrop, Louisiana mill to 100% pulp production in June 2008. Manufacturing costs improved reflecting these conversions. Planned maintenance downtime costs were $13 million higher in the current quarter, with outages at three mills versus one in the 2007 third quarter.
Looking ahead to the fourth quarter of 2008, average sales price realizations are expected to improve slightly, reflecting the full realization of third-quarter sales price increases. Sales volumes are expected to decline as we continue to balance production with our customers’ demand, reflecting overall slowdown in the economy. Although energy costs should be lower, costs for wood and chemicals are expected to continue to rise. Planned maintenance expenses will be lower in the fourth quarter as the majority of the 2008 planned outages have been completed.
European Printing Papersnet sales were $425 million in the third quarter of 2008 compared with $445 million in the second quarter of 2008 and $370 million in the third quarter of 2007. Operating earnings in the third quarter of 2008 were a loss of $78 million (including an impairment charge of $107 million to write down the assets of the Inverurie, Scotland mill to estimated fair value) compared with earnings of $39 million in the second quarter of 2008 and $34 million in the third quarter of 2007.
Average sales price realizations in the third quarter of 2008 improved for uncoated freesheet paper in Russia and the UK, but declined for pulp compared with the second quarter of 2008. Sales volumes were lower due to decreased sales of uncoated freesheet paper in Western Europe. However, the earnings impact of this decline was partially offset by improved sales volumes in Russia at higher average margins. Manufacturing costs were higher during the quarter due to the annual maintenance outage at our Kwidzyn mill in Poland. Raw material costs were higher as lower wood costs in Russia only partially offset the effect of higher energy costs in the UK. Operating earnings were also lower due to unfavorable foreign exchange effects, particularly the impact caused by the strengthening of the Polish Zloty.
Compared with the third quarter of 2007, average sales price realizations were significantly higher. Sales volumes in the third quarter of 2008 declined slightly despite higher sales of uncoated freesheet in Russia and Central Europe and higher pulp sales from the new BCTMP facility in Svetogorsk. Manufacturing costs were favorable reflecting the timing of the annual maintenance outage at the Saillat mill in France. Input costs, however, were significantly higher for energy, wood and chemicals. Operating earnings were also lower due to unfavorable foreign exchange effects.
Entering the 2008 fourth quarter, sales volumes of uncoated freesheet paper are expected to increase seasonally, but sales of BCTMP will be lower reflecting weaker pulp demand. Average sales price realizations for uncoated freesheet papers should improve slightly due to the full implementation of the UK and Russian price increases, but pulp prices are expected to be significantly lower. Manufacturing costs will be favorable as there are no annual maintenance outages scheduled for the fourth quarter, but raw material costs are expected to continue to increase due to higher energy costs.
Brazilian Printing Papersnet sales were $255 million in both the third and second quarters of 2008 compared with $250 million in the third quarter of 2007. Operating earnings in the third quarter of 2008 were $58 million compared with $51 million in the second quarter of 2008 and $54 million in the third quarter of 2007.
Average sales price realizations in the third quarter of 2008 were higher than in the second quarter of 2008 reflecting higher prices in both domestic and export markets. Sales volumes increased slightly due to stronger domestic cut-size paper sales and increased pulp shipments. Margins were positively affected by an increased proportion of higher-margin domestic sales. Input costs were higher reflecting a full-quarter impact of a 38% increase in natural gas prices at the end of the second quarter and increases in pulp and chemicals costs in the third quarter. Manufacturing costs were higher due to the planned pulp mill outage at the Luiz Antonio mill. Third-quarter results benefited from the 20% devaluation of the Brazilian Real toward the end of the quarter.
Compared with the third quarter of 2007, average sales price realizations increased reflecting higher prices in both domestic and export markets. Sales volumes were down slightly from last year for both pulp and paper reflecting reduced demand in export markets. Margins were positively impacted by an increased proportion of higher-margin domestic sales. Input costs were significantly higher, primarily for electricity, natural gas and chemicals. Manufacturing operating costs were higher as a result of the planned pulp mill outage at the Luiz Antonio mill.
Looking ahead to the fourth quarter, average sales price realizations are expected to continue to improve in both domestic and export markets with the full-quarter impact of third quarter price increases and the partial realization of an announced price increase on domestic cut-size and offset paper effective in November. Sales volumes should be seasonally higher for cut-size paper and pulp. Input costs are expected to be slightly higher reflecting the full-quarter impact of chemical cost increases.
Asian Printing Papersnet sales were approximately $5 million for all periods presented. Operating earnings in the third quarter of 2008 were $1 million compared with breakeven for the second quarter of 2008 and the third quarter of 2007.
U.S. Market Pulpnet sales were $210 million in the third quarter of 2008 compared with $205 million in the second quarter of 2008 and $165 million in the third quarter of 2007. Operating earnings were a loss of $9 million in the third quarter of 2008 compared with earnings of $11 million in the second quarter of 2008 and $18 million in the third quarter of 2007.
Sales volumes in the third quarter of 2008 were higher than in the second quarter of 2008 reflecting additional pulp production at the Louisiana mill which shifted to 100% pulp production in June 2008. However as demand weakened during the quarter, 17,000 tons of lack-of-order downtime was taken to balance inventory levels. Average sales price realizations for market pulp declined during the quarter, while fluff pulp prices were generally stable. Manufacturing costs were slightly higher, reflecting costs associated with the conversion of the Louisiana mill. Input costs for wood, energy and chemicals increased, and freight costs were also higher.
Compared with the third quarter of 2007, sales volumes were higher reflecting the increased pulp production at the Louisiana mill and the ramp-up of fluff pulp production at the Riegelwood mill. However, the lack-of-order downtime taken in the quarter partially offset these volume increases. Average sales price realizations were significantly higher reflecting sales price increases implemented during 2007 and in the first three quarters of 2008. Manufacturing operating costs increased reflecting the increased pulp production at the Louisiana mill. Wood, energy, chemicals and freight costs were also higher.
Entering the 2008 fourth quarter, weakening market demand for pulp is expected to result in further lack-of-order downtime to balance production with customer demand. Average sales prices for market pulp are expected to soften as slowing demand puts pressure on sales prices. Fluff pulp shipments are expected to decline, but average sales prices should remain at third-quarter levels. Planned mill maintenance downtime costs will be lower; however, input costs are expected to be higher than the third quarter, with the benefits of lower domestic energy prices being offset by higher wood and export freight costs.2009.
Industrial Packaging
2008 | 2007 | 2009 | 2008 | ||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | ||||||||||||||||||
Sales | $ | 2,320 | $ | 1,470 | $ | 5,235 | $ | 1,305 | $ | 1,315 | $ | 3,855 | $ | 2,180 | $ | 1,445 | $ | 2,455 | |||||||||
Operating Profit | 95 | 87 | 279 | 84 | 108 | 265 | 360 | 97 | 111 |
Industrial Packaging net sales for the thirdfirst quarter of 2009 were 11% lower than in the fourth quarter of 2008 were 58%and 51% higher than in the secondfirst quarter of 2008. Operating profits in the first quarter of 2009 included a gain of $208 million relating to alternative fuel mixture credits and $36 million for CBPR integration costs, while operating profits in the fourth quarter of 2008 included $34 million of CBPR integration and other closure costs. Excluding these items, operating profits in the first quarter of 2009 were 30% higher than in the fourth quarter of 2008 and 78%94% higher than in the thirdfirst quarter of 2007. Operating2008. Sales and profits in the third quarter of 2008 were 9% higher than in the second quarter of 2008, and 13% higher than the third quarter of 2007. Results for the 2009 first quarter and 2008 thirdfourth quarter include the operating results of the CBPR business acquired on August 4, 2008.
North American Industrial Packagingnet sales were $1.9 billion in the thirdfirst quarter of 20082009 compared with $1.1$2.1 billion in the secondfourth quarter of 2008 and $975 million$1.05 billion in the thirdfirst quarter of 2007.2008. Operating earnings were $82$347 million ($175 million excluding alternative fuel mixture credits and the CBPR integration costs) in the thirdfirst quarter of 20082009 compared with $65$96 million ($130 million excluding CBPR integration and other closure costs) in the secondfourth quarter of 2008 and $74$79 million in the thirdfirst quarter of 2007. Sales and profits for the third quarter of 2008 include the operating results of the CBPR acquisition from the August 4 acquisition date. Operating profits also included a charge of $39 million related to the write-up of CBPR inventory to fair value and a charge of $19 million for CBPR integration costs, and $9 million of costs, net of insurance recoveries, related to the second-quarter Vicksburg recovery boiler explosion.2008.
Excluding the effect of the CBPR acquisition, sales
Sales volumes in the thirdfirst quarter of 20082009 compared with the secondfourth quarter of 2008 were slightly lower asreflecting weaker customer demand began to weaken late in the quarter.demand. Average sales price realizations improved versus second-quarter levels reflectingfor domestic and export containerboard declined. Average sales price realizations for boxes were higher than in the partial realization of a $55 per ton containerboard price increase effective2008 fourth quarter although box prices began to decline during the quarter. Planned maintenance downtime costs were lower than$23 million higher in the second2009 first quarter when significant maintenance projects were completed.with outages at the Mansfield and Savannah mills. Input costs for wood, recycled fiber, energy, wax and chemicals continued to move substantially higher.decline. Freight costs also declined due to better utilization and lower fuel costs. Manufacturing costs were favorable reflecting the realization of CBPR acquisition synergies and cost control initiatives. The business took 730,000 tons of lack-of-order downtime in the first quarter of 2009 compared with 702,000 tons in the fourth quarter of 2008. Fourth-quarter 2008 results also included approximately $33 million of income related to the final insurance settlement for the Vicksburg mill recovery boiler explosion.
Compared with the thirdfirst quarter of 2007,2008, excluding the effects ofadded volumes from the CBPR acquisition, sales volumes for both containerboard and boxes were about flat while box volumes declined.lower due to weaker customer demand. Average sales price realizations were significantly higher due toreflecting sales price increases implemented in late 2007 andduring 2008. Manufacturing costs were significantly lower, particularly in the 2008 third quarter. However,box plants, reflecting the benefits of these price increases were more than offset by higher costs for wood, energy, and chemicals. Freight costs also increased significantly reflecting higher fuel costs. Costs associated with planned maintenancefrom cost control initiatives. There was no lack-of-order downtime were $5 million lower thantaken in the thirdfirst quarter of 2007. Results2008 compared with the 730,000 tons taken in the third quarter of 2007 had also included $23 million of expenses related to the conversion of the Pensacola mill to linerboard production.2009 first quarter.
Looking ahead to the 2008 fourth2009 second quarter, sales volumes are expected to decline as weakening economic conditions cause customer box demand to soften, and containerboard production is balanced with customer orders. Average sales price realizations should improve slightly for both containerboard and boxes, with the full-quarter impact of price increases implemented in the third quarter.and lack-of-order downtime should be lower. Profit margins are expected to reflect continued pressures. Costs associated with planned maintenance outages should be somewhat higher in the fourthsecond quarter with outages planned for the Pensacola and Prattvillefive mills. Input costs are expected to remain high in the fourth quarter as wood costs increase while recycled fiber costs moderate. Fourth-quarter results should benefit from the additional insurance recoveries relatedcontinue to the Vicksburg recovery boiler explosion and the start-up of the mill .decline, principally for energy.
European Industrial Packagingnet sales were $285$240 million in the thirdfirst quarter of 2009 compared with $255 million in the fourth quarter of 2008 compared withand $315 million in the secondfirst quarter of 2008. Operating earnings were $13 million in the first quarter of 2009 compared with $15 million in the fourth quarter of 2008 and $265 million for the third quarter of 2007. Operating earnings were $11$18 million in the thirdfirst quarter of 2008 compared with $20 million in the second quarter of 2008 and $10 million in the third quarter of 2007. The Company completed the purchase of the minority shares of its operations in Morocco during the 2007 third quarter.2008.
Sales volumes in the thirdfirst quarter of 20082009 were lower than in the secondfourth quarter of 2008 principally reflecting a seasonal declineweaker demand in demandpackaging markets for boxes in the fruit and vegetable markets and weaker industrial marketsproducts throughout Europe. Sales margins improved as reductions in kraft and recycled containerboard costs were greater than the declines in box prices. Operating expenses were favorable reflecting a larger proportionthe benefits of higher-margin sales in France. Box prices held generally steady during the quarter. Unfavorablecost reduction initiatives, but were partially offset by unfavorable operating expenses reflected the planned annual maintenance outagecosts at the Etienne mill. EnergyInput costs were higher quarter over quarter.decreased slightly due to lower energy costs.
Compared with the third2008 first quarter, of 2007, sales volumes in the 2008 third2009 first quarter were lower, reflecting athe weaker market for industrial products throughout Europe, particularly in Spain and Italy, and lowerpackaging. Agricultural box sales of banana boxes in Morocco.volumes were seasonally strong. Sales margins were higher reflecting stronger pricing and decliningas the result of lower costs for kraft and recycled containerboard. These benefitscontainerboard combined with strong box prices. Input costs were partially offset by higher energy andabout flat, while operating costs.costs were favorable.
Entering the fourthsecond quarter, sales volumes are expected to be higher reflectingabout flat due to continued weakness in industrial markets and seasonally strongerslower agricultural markets for citrus fruitsbusiness in Spain and Morocco and applesSpain, partially offset by additional fruit and kiwi fruitvegetable box volume in Italy, although industrial markets throughout Europe are expected to continue to remain weak.France. Sales margins are expected to reflect competitive pressure on box prices.
Asian Industrial Packagingnet sales were $100$55 million in the thirdfirst quarter of 2009 compared with $75 million in the fourth quarter of 2008 and $80 million in the first quarter of 2008. Operating earnings were about breakeven in all periods.
Printing Papers
2009 | 2008 | |||||||||
In millions | 1st Quarter | 1st Quarter | 4th Quarter | |||||||
Sales | $ | 1,325 | $ | 1,715 | $ | 1,505 | ||||
Operating Profit (Loss) | 312 | 185 | (40 | ) |
Printing Papers net sales for the first quarter of 2009 were 12% lower than in the fourth quarter of 2008 and 23% lower than in the first quarter of 2008. Operating profits in the first quarter of 2009 included a gain of $240 million relating to alternative fuel mixture credits and $29 million of facility closure costs, while operating profits in the fourth quarter of 2008 included $153 million of shutdown costs for the Louisiana mill and a paper machine at the Franklin mill. Excluding these items, operating profits in the first quarter of 2009 were 11% lower than in the fourth quarter of 2008 and 45% lower than in the first quarter of 2008.
North American Printing Papersnet sales were $705 million in the first quarter of 2009 compared with $95$765 million in the fourth quarter of 2008 and $885 million in the first quarter of 2008. Operating earnings were $276 million ($84 million excluding alternative fuel mixture credits and facility closure costs) in the first quarter of 2009 compared with $43 million ($73 million excluding closure costs) in the fourth quarter of 2008 and $106 million in the first quarter of 2008.
Sales volumes in the first quarter of 2009 were lower than in the fourth quarter of 2008 reflecting weaker customer demand. The business took 152,000 tons of lack-of-order downtime in the first quarter compared with 127,000 tons in the fourth quarter. Average sales price realizations for uncoated freesheet paper declined moderately. Input costs for wood, energy and chemicals and freight costs were significantly lower. Planned maintenance downtime costs were about $6 million lower reflecting an outage at the Georgetown mill in the 2009 first quarter compared with three mills in the 2008 fourth quarter. Manufacturing operating costs were favorable due to the impact of cost reduction efforts and excellent machine performance.
Compared with the first quarter of 2008, average sales price realizations were up significantly in the first quarter of 2009, reflecting the realization of price increases implemented during 2008. Sales volumes, however, were significantly lower reflecting weak customer demand, the reduction in capacity resulting from the conversion of the Louisiana mill to pulp production in June 2008, and the shutdown of the Franklin paper machine. Lack-of-order downtime in the current quarter was higher than in the first quarter of 2008 when none was taken. Input costs were higher for wood and chemicals, partially offset by lower energy costs. Freight costs were also lower. Manufacturing costs were favorable reflecting cost reduction efforts, strong operations, and the absence of the higher-cost Louisiana mill. Planned maintenance downtime costs were $9 million lower in the current quarter, with an outage at one mill versus two in the 2008 first quarter.
Looking ahead to the second quarter of 2009, sales volumes are expected to be about flat. Input costs for wood, energy and chemicals are expected to continue to decrease. Planned maintenance expenses will be higher in the second quarter with planned outages at the Courtland, Franklin, Eastover and Riverdale mills.
European Printing Papersnet sales were $325 million in the first quarter of 2009 compared with $350 million in the fourth quarter of 2008 and $65$435 million in the thirdfirst quarter of 2008. Operating earnings in the first quarter of 2009 were $2 million ($25 million excluding expenses associated with the closure of the Inverurie, Scotland mill at the end of the quarter) compared with earnings of $36 million in the fourth quarter of 2008 and $42 million in the first quarter of 2008.
Sales volumes in the first quarter of 2009 were higher than in the fourth quarter of 2008 reflecting increased sales of uncoated freesheet paper, particularly in Russia, following a very weak fourth quarter. Average sales price realizations declined significantly across most of Western Europe but increased in the UK, Poland and Russia. Manufacturing costs were unfavorable, despite improved operating performance, as the Saillat mill in
France commenced an 18 month maintenance outage in late March. Energy costs were also higher, particularly in Poland. Foreign exchange movements during the quarter significantly improved the margins at the Kwidzyn mill in Poland but this was partially offset by higher foreign exchange translation losses on U.S. dollar-denominated loans at the Svetogorsk mill in Russia.
Compared with the 2008 first quarter, sales volumes in the 2009 first quarter were slightly lower due to reduced shipments from the Inverurie, Scotland mill, partially offset by higher uncoated freesheet paper shipments from the Svetogorsk mill in Russia to Western Europe. Average sales price realizations were significantly lower across most of Western Europe but remained higher in the UK, Poland and Russia due to local currency devaluations. The unfavorable impact of the start of the Saillat mill maintenance outage in late March was more than offset by improved operating performance. Input costs were unfavorable as higher energy costs in Poland and Russia and higher chemical costs in Russia more than offset significantly lower wood costs. Foreign exchange movements during the quarter significantly improved the margins at the Kwidzyn mill in Poland, but this was almost entirely offset by translation losses on the U.S. dollar loans at the Svetogorsk mill in Russia.
In the 2009 second quarter, sales volumes are expected to be lower than in the first quarter reflecting the closure of the Inverurie mill in Scotland and lower shipments from the Svetogorsk mill in Russia to Western Europe. Average sales price realizations are expected to continue to be under pressure in Western Europe but should improve in Russia. Planned maintenance downtime expenses are expected to be higher, but energy costs should decline due to seasonally lower tariffs and reduced consumption.
Brazilian Printing Papersnet sales were $170 million in the first quarter of 2009 compared with $215 million in the fourth quarter of 2008 and $225 million in the first quarter of 2008. Operating earnings in the first quarter of 2009 were $20 million compared with $44 million in the fourth quarter of 2008 and $33 million in the first quarter of 2008.
Average sales price realizations in the first quarter of 2009 were lower than in the fourth quarter of 2008 as higher prices in the domestic market were more than offset by lower prices in export markets, primarily Europe. Sales volumes decreased reflecting seasonally weaker uncoated freesheet paper demand in both the domestic and export markets. Average margins were negatively affected by an increased proportion of lower-margin export sales. Input costs were slightly favorable due to lower fuel oil and chemical costs. Planned maintenance downtime costs in the first quarter were higher than in the fourth quarter. Manufacturing operating costs were unfavorable reflecting costs associated with the start-up of a new paper machine at Tres Lagoas. Additionally, earnings were impacted by unfavorable foreign exchange effects.
Compared with the first quarter of 2008, sales volumes decreased reflecting weaker customer demand for uncoated freesheet paper. Average sales price realizations were higher in the domestic market, but were lower in export markets. Input costs for wood, energy and chemicals increased. Manufacturing operating costs were also higher due to the start-up of the Tres Lagoas paper machine.
Looking ahead to the second quarter of 2009, sales volumes are expected to improve reflecting seasonally stronger customer demand for uncoated freesheet paper. Profit margins are expected to reflect continued competitive pressure on price realizations, offset by lower input costs for chemicals and energy. Planned maintenance outage expenses should also decline. Earnings are expected to be negatively affected by unfavorable foreign exchange rates.
Asian Printing Papersnet sales were minimal in the first quarter of 2009 compared with $5 million in both the fourth and first quarters of 2008. Operating earnings were about breakeven for all periods presented.
U.S. Market Pulpnet sales were $125 million in the first quarter of 2009 compared with $170 million in the fourth quarter of 2008 and $165 million in the first quarter of 2007. Operating earnings were $2$14 million (a loss of $28 million excluding alternative fuel mixture credits) in the first quarter of 2009 compared with a loss of $162 million (a loss of $39 million excluding costs associated with the shutdown of the Louisiana mill) in the fourth quarter of 2008 and earnings of $4 million in both the third and second quartersfirst quarter of 2008.
Sales volumes in the first quarter of 2009 were slightly lower than in the fourth quarter of 2008 up from about breakevenreflecting weaker customer demand. During the quarter, 48,000 tons of lack-of-order downtime was taken compared with 120,000 tons in the thirdfourth quarter of 2007.
Compared with the first quarter of 2008, sales volumes were lower and lack-of-order downtime was higher due to weaker customer demand. Average sales price realizations were significantly lower as the decline in customer demand caused prices for market pulp and fluff pulp to fall. Manufacturing operating costs decreased and planned maintenance downtime costs were also lower. Higher wood and chemical costs were partially offset by lower energy costs, while freight costs increased slightly.
Entering the 2009 second quarter, sales volumes are expected to remain at about first-quarter levels as the Riegelwood mill continues to ramp up its production of fluff pulp. Costs associated with planned maintenance outages are expected to be less in the second quarter, while operating costs should remain flat. Input costs for wood, energy and chemicals and freight costs should be slightly favorable.
Consumer Packaging
2008 | 2007 | 2009 | 2008 | ||||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | ||||||||||||||||||||
Sales | $ | 830 | $ | 795 | $ | 2,395 | $ | 775 | $ | 745 | $ | 2,235 | $ | 715 | $ | 770 | $ | 800 | |||||||||||
Operating Profit | (2 | ) | 13 | 20 | 27 | 30 | 97 | ||||||||||||||||||||||
Operating Profit (Loss) | 112 | 9 | (3 | ) |
Consumer Packaging net sales for the thirdfirst quarter of 20082009 were 4% higher11% lower than in the secondfourth quarter of 2008, and 7% higherlower than in the thirdfirst quarter of 2007.2008. Operating profits in the thirdfirst quarter of 2008 resulted in2009 included a small loss comparedgain of $92 million relating to alternative fuel mixture credits, and included costs associated with earningsthe reorganization of the Shorewood business of $2 million, $4 million and $5 million in the second2009 first quarter, the 2008 fourth quarter and the 2008 first quarter, respectively. Excluding these items, operating profits in the first quarter of 20082009 were higher than in both the fourth and the third quarterfirst quarters of 2007.2008.
North American Consumer Packagingnet sales were $645$530 million in the thirdfirst quarter of 20082009 compared with $625$635 million in the secondfourth quarter of 2008 and $620$600 million in the thirdfirst quarter of 2007.2008. Operating earnings in the thirdfirst quarter of 20082009 were a loss of $1$94 million ($4 million excluding the alternative fuel mixture credits and Shorewood reorganization costs) compared with about breakeven$12 million ($16 million excluding Shorewood reorganization costs) in the secondfourth quarter of 2008 and a loss of $3 million (a gain of $20$2 million excluding Shorewood reorganization costs) in the thirdfirst quarter of 2007.2008.
Coated paperboard average sales pricesprice realizations improved in the thirdfirst quarter of 2009 compared with the fourth quarter of 2008 compared with the second quarter of 2008 with the realization ofreflecting price increases for cup stock, folding carton board and coated bristols. Sales volumes, were up slightly ashowever, decreased for all product lines, and 127,000 tons of lack-of-order downtime was taken to balance supply with customer demand remained steady.compared with 14,000 tons of lack-of-order downtime in the fourth quarter. Demand softened during the quarter reflecting a decline in consumer spending. Planned maintenance downtime costs were $2$10 million lower than in the secondprevious quarter. Costs for wood, energy, and chemicals were significantly higherlower than in the second quarter. Manufacturingfourth quarter, while manufacturing operating costs were also unfavorable. about flat.
Compared with the thirdfirst quarter of 2007,2008, average sales pricesprice realizations were significantly higher withreflecting the realization of price increases implemented in late 2007during 2008. However, sales volumes decreased and inlack-of-order downtime increased reflecting weaker market conditions. Input costs were comparable to the first three quartersquarter of 2008. Sales volumes were up slightly. However, input2008 as higher energy costs were significantly higher, particularlylargely offset by lower costs for energy and chemicals,chemicals. Manufacturing operating costs were favorable while planned maintenance downtime expenses were about $3 million higher.
Shorewood sales volumes in the thirdfirst quarter of 2008 increased2009 decreased from the secondfourth quarter of 2008 reflecting a seasonal increasedecline in demand in the home entertainment segment and slightlyweak general economic conditions, partially offset by higher shipments in the tobacco segment. Average margins benefited fromwere lower as a higher proportionresult of lower sales volume in the higher-margin home entertainment market.segment. Raw material costs in the first quarter of 2009 were higher reflecting continuingabout the same as in the fourth quarter of 2008, but the benefits from cost increases for coated paperboard. Third quarterreduction initiatives had a favorable impact on earnings. First-quarter results included $8$2 million of expenses related to the reorganization of Shorewood’s Canadian operations versus $13$4 million in the secondfourth quarter. Compared with the third2008 first quarter, of 2007, sales volumes in the third2009 first quarter of 2008 weredecreased slightly, reflecting lower reflecting softer demand in the tobacco and display segments, partially offset by improvementshipments in the home entertainment segment.and tobacco segments. Average sales margins improved primarilyreflecting a more favorable mix of products sold. Earnings also improved due to an increaseincreased efficiencies from the business reorganization actions undertaken in higher-margin products within the home entertainment segment. Results for the 2008 third quarter included the $8 million charge related to the reorganization of the Canadian operations, while the third quarter of 2007 included $4 million of costs related to the closures of the Edison, NJ and the Waterbury, CT plants.2009.
Foodservice sales volumes in the thirdfirst quarter of 20082009 were seasonally slightly lower than in the secondfourth quarter of 2008.2008 due to normal seasonal factors and the impact of the weak economy. Average margins improved as the result of higher contract price realizations coupled with stable board and lower resin costs. Operating costs were about flat. Compared with the first quarter of 2008, sales volumes in the 2009 first quarter decreased, while average margins increased reflecting improved average sales price realizations improved with the full-quarter realizationand a more favorable mix of a second quarter price increase and contract price increases during the quarter. Converting operating costs were unfavorable due to increased waste and operating costs.products sold. Raw material costs were higher reflecting continued increases in board and resin costs. Compared with the third quarter of 2007, sales volumes in the 2008 third quarter increased, while average sales prices were also higher. However, raw material costs increasedlower, primarily for board and resins, and freightbut operating costs were also higher.
Looking ahead to the fourth2009 second quarter, coated paperboard sales volumes are expectedshould increase, although lack-of-order downtime will be taken as needed to seasonally decrease. Average sales price realizations should continue to improvebalance supply with a full-quarter impact of price increases announced in the third quarter for folding carton board, cup stock and coated bristols.customer demand. Input costs are expected to rise slightly as energy costs and chemical costs should moderate while wood costs continue to increase. Manufacturing costs are expected to reflect improved operations, but planneddecrease. Planned maintenance costsdowntime will be higher in the second quarter with outages planneddowntime scheduled at three mills compared with one mill in the third quarter.mills. Shorewood’s
sales volumes are expected to be ahead of third quarter, but slightly behind prior year, due to softer tobacco segment demand, particularly in Asia.increase, reflecting higher home entertainment and consumer products shipments. Operating results should also improve inwith the fourth quarter with seasonally stronger sales volumes in the home entertainment segment and significantly lower expenses related to thecompletion of Shorewood’s business reorganization of the Canadian operations.initiatives. Foodservice operating results should benefit from seasonally higher sales volumes, the full-quarter realization of January sales price increases and a more favorable product mix, although inputmix. Input costs for coated board and resinoperating costs are expected to continue to increase.remain about flat.
European Consumer Packagingnet sales were $80$70 million in the thirdfirst quarter of 2009 compared with $70 million in the fourth quarter of 2008 compared withand $75 million in the secondfirst quarter of 2008. Operating earnings were $14 million in the first quarter of 2009 compared with $5 million in the fourth quarter of 2008 and $70$9 million in the thirdfirst quarter of 2007. Operating earnings were about breakeven in the third quarter of 2008 compared with $8 million in the second quarter of 2008 and $3 million in the third quarter of 2007.2008.
Sales volumes in the thirdfirst quarter of 2009 were higher than the fourth quarter of 2008, were higher than in the second quarter of 2008, andwhile average sales price realizations improved.declined. Manufacturing costs were significantly higher during the quarter due to expenses related to the annual maintenance outage at the Kwidzyn mill in Poland. Operating earnings were alsofavorable, reflecting strong operating performance and lower due to unfavorable foreign exchange effects, particularly the impact caused by the strengthening of the Polish Zloty.lack-of-order downtime. Compared with the thirdfirst quarter of 2007,2008, sales volumes and averagein the first quarter of 2009 were higher reflecting increased sales to export markets. Average sales price realizations were higher,declined, due in part to the increase in lower-margin export sales, but this benefit was more than offset by higher annual maintenance and raw material costs. also due to lower sales prices in European domestic markets.
Operating results forin the 2008 fourth2009 second quarter should improve as there are nowill reflect costs associated with the annual planned maintenance outages scheduled.shutdown of the Svetogorsk mill.
Asian Consumer Packagingnet sales were $105$115 million in the thirdfirst quarter of 20082009 compared with $95 million in both the secondfourth and first quarters of 2008. Operating earnings in the first quarter of 2009 were $4 million compared with a loss of $20 million in the fourth quarter of 2008 and $85a gain of $3 million in the thirdfirst quarter of 2007. Operating earnings in the third quarter of 2008 were a loss of $1 million compared with gains of $5 million in the second quarter of 2008 and $4 million in the third quarter of 2007.2008. Costs related to the start-up of the Shandong International Paper and& Sun Coated Paperboard Co., Ltd. joint venture’s new folding box board paper machine and weaker demand in China led to the earnings decrease.loss in the fourth quarter of 2008.
Distribution
2008 | 2007 | 2009 | 2008 | |||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||||
Sales | $ | 2,075 | $ | 1,970 | $ | 6,030 | $ | 1,880 | $ | 1,720 | $ | 5,275 | $ | 1,590 | $ | 1,985 | $ | 1,940 | ||||||||||
Operating Profit | 35 | 26 | 77 | 30 | 30 | 80 | ||||||||||||||||||||||
Operating Profit (Loss) | (7 | ) | 16 | 26 |
Distribution’s2008 second2009 first quarter sales were 5% higher18% lower than in the secondfourth quarter of 2008 whileand 20% lower than the first quarter of 2008. Weak U.S. economic conditions were the major factor in the decline in operating profits increased 35%. Compared to the 2007 third quarter,profits.
First-quarter 2009 sales rose 10% while operating profits increased 17%.
While unit demand remained weak, third-quarter 2008 revenues of printing papers and graphic arts supplies and equipment totaled $1.4$1.0 billion an increase fromcompared with $1.2 billion in the fourth quarter of 2008 and $1.3 billion in the second quarter of 2008 first quarter. First-quarter 2009 revenues reflect a decline in shipments to publishing and $1.2 billioncommercial printers corresponding to reduced published industry trade activity. Mill direct sales were down more than 20% compared with prior quarters while stock sales were also down significantly. Credit tightness, a reduction in the 2007 third quarter due to price increasesprint advertising, and contributions from Central Lewmar sales in 2008. Print volumes improved over the second quarter. Publication printing activity (magazines, catalogs and books) continued to outpace commercial printing. Trade margins decreased as a result of changes in product mix in the third quarter 2008, but otherwise held firm as supplier cost increases were passed throughgeneral economic conditions all contributed to the marketplace.reduction in demand.
Packaging sales were $0.4 billion$300 million in the thirdfirst quarter of 2008, up 6% versus the second quarter of 2008 and up 3% versus the third quarter of 2007. Trade margins for packaging products decreased2009 compared with $400 million in both the second quarterfourth and first quarters of 2008 and third quarter of 2007 reflecting a change in product and service mix.
2008. Sales of facility supply products were $0.3 billiontotaled $250 million in the secondfirst quarter of 2008, up 9% versus2009, compared with $300 million in both the secondfourth and first quarters of 2008.
Operating results fell to a $7 million loss in the first quarter of 2009 compared with profit of $26 million in the fourth quarter of 2008 and 7% versus the third quarter of 2007. Strong re-distribution sales growth and national accounts activity led the improvement in this segment. However, trade margins for facility supplies were lower than the second quarter of 2008 and third quarter 2007 reflecting a less favorable product mix.
Operating profits totaled $35$16 million in the thirdfirst quarter of 2008 compared with $26 million in the second quarter of 2008 and $30 million in the third quarter of 2007. Increased2008. Lower sales and lower operating costsvolumes were the major factorsprincipal cause of the earnings decline compared to both prior quarters. First-quarter 2009 earnings were also affected by lower prices, margin pressure and higher bad debt levels. Cost reduction efforts initiated in the improvement over prior periods.2008 partially mitigated these unfavorable earnings effects.
Looking ahead to the 2008 fourth2009 second quarter, revenue and earnings growthoperating results are expected to slow reflecting declining economic activitybenefit from improved sales volumes and seasonal patterns.continued benefits from cost reduction actions.
Forest Products
2008 | 2007 | 2009 | 2008 | ||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | ||||||||||||||||||
Sales | $ | 55 | $ | 55 | $ | 135 | $ | 120 | $ | 90 | $ | 295 | $ | 5 | $ | 25 | $ | 65 | |||||||||
Operating Profit | 305 | 41 | 371 | 96 | 94 | 287 | 2 | 25 | 38 |
Forest Products netsales and profits are driven by forestland sales, which can vary from quarter to quarter due to various factors. Net sales in the thirdfirst quarter of 2009 were 92% lower than in the fourth quarter of 2008 and 80% lower than in the first quarter of 2008. Operating earnings in the first quarter of 2008 were even with the second quarter of 2008, but 54%95% lower than in the third quarter of 2007. Operating earnings in the second quarter of 2008 were significantly higher than in both the secondfourth quarter of 2008 and the third quarter of 2007.
Forest Productsearnings from harvest and recreational income and the sales of mineral rights increased $266 million versus the second quarter, including $261 million from the sale of 13,000 net acres of subsurface mineral rights in Louisiana. Earnings from forestland sales in the third quarter of 2008 were $7 million92% lower than in the secondfirst quarter of 2008 due2008. Second quarter results are currently projected to be similar to the timing of the completion of sale transactions. Forestland operating expenses were $2 million lower, while profits from the sales of real estate properties increased $3 million. Compared with the 2007 third quarter, earnings from harvest and recreational income and sales of mineral rights increased $267 million, while earnings from forestland sales declined $60 million. Forestland operating expenses were $2 million lower than in the third quarter of 2007, while profits from sales of real estate properties were unchanged. Operating results in the 2008 fourth quarter are expected be significantly below third-quarter levels, reflecting lower earnings from forestland and mineral rights sales.
Other Businesses
2008 | 2007 | |||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | ||||||||||||
Sales | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 135 | ||||||
Operating Profit | — | — | — | — | — | 6 |
The Other Businesses segment principally included the operating results of Arizona Chemical, as well as certain smaller businesses. The Arizona Chemical business was sold in February 2007; and thus operating results in 2007 reflect only two months of activity.first quarter.
Equity Earnings, Net of Taxes – Ilim Holding S.A.
On October 5, 2007, International Paper and Ilim Holding S.A. (“Ilim”)(Ilim) announced the completion of a 50:50 joint venture to operate in Russia. Due to the complex organizational structure of Ilim’s operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company is reportingreports its share of Ilim’s operating results on a one-quarter lag basis. Accordingly, the accompanying consolidated statement of operations for the three months ended September 30, 2008March 31, 2009 includes the Company’s 50% share of Ilim’s operating results for the three-month period ended June 30,December 31, 2008 under the caption “EquityEquity earnings, net of taxes.” Ilim is reported as a separate reportable industry segment.
The Company recorded an equity earnings for Ilim,loss, net of taxes, of $5$26 million in the first quarter of 2009 compared with about breakeven results in the fourth quarter of 2008. Sales volumes in the fourth quarter of 2008 decreased compared with the third quarter of 2008, principally for market pulp, reflecting significantly weaker customer demand, particularly in markets in China. Sales price realizations decreased across all product lines, but most sharply for softwood and hardwood pulp. Input costs increased for wood, chemicals and energy. The business took 106,000 metric tons of lack-of-order downtime during the fourth quarter compared with $32 millionnone in the secondthird quarter. In addition, fourth-quarter results included a $19 million charge to write-off project development expenses and a $5 million provision for the write-down of assets. Additionally, foreign exchange losses on the remeasurement of U.S. dollar-denominated debt were $5 million higher compared with the third quarter of 2008. Earnings
In the first quarter of 2008, the Company had recorded equity earnings, net of taxes, of $17 million related to operations in the fourth quarter of 2007. Sales volumes in the 2007 fourth quarter reflected strong customer demand for the second quarter hadboth pulp and containerboard. Average sales price realizations were also strong for both Russian domestic and export sales. Equity earnings also included a $14$4 million after-tax foreign exchange gain on the remeasurement of U.S. dollar denominateddollar-denominated debt into Russian rubles and a $3$6 million after-tax charge to write off a share repurchase option.write-up inventory to its fair value as of the acquisition date.
Compared withLooking ahead to the second quarter sales volumes for paper were about flat, but were lower for pulp primarily dueof 2009, demand in both the domestic and export markets is expected to the reduced production volumes resulting from annual maintenance outages at the Bratsk and Ust-Ilimsk mills.remain weak, although lack-of-order downtime is expected to moderate slightly. Average sales price realizations improved for both domestic and export sales, but pulp prices declined late in the quarter. Input costs increased for wood, chemicals and energy. Distribution costs decreased slightly reflecting lower volumes, a more favorable geographical mix and the effect of supply chain initiatives. A small exchange loss and higher income tax expense also contributed to the earnings decrease.
For the 2008 third quarter to be reported in the Company’s fourth quarter, strong domestic market conditions are expected to continue but demand in China will be reduced due to impacts from the Olympics. Production volume will be affected by a partial maintenance shutdown at the Kotlas mill. Average sales price realizations should remain solid, except for some expected price erosion for exported hardwood and softwood pulp. Input costs for wood, chemicals and energy are expected to remain high. A largeweak, especially in the Russian domestic market. The strengthening of the U.S. dollar versus the Russian ruble will result in an additional unfavorable foreign exchange lossremeasurement impact on remeasurement of U.S. dollar debt will also lead to lower overall results.earnings.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations totaled $2.0 billion$794 million for the first ninethree months of 2008,2009, up from $1.4 billion$434 million for the comparable 2007 nine-month2008 three-month period. Earnings from continuing operations adjusted for non-cash charges were $1.7 billion$495 million for the first ninethree months of 20082009 compared to $1.8 billion$418 million for the first ninethree months of 2007.2008. Cash provided by working capital components totaled $213$299 million for the first ninethree months of 2008,2009, up from a use of $409$16 million for the comparable 2007 nine-month2008 three-month period.
Cash used for acquisitions for the first nine months of 2008 totaled $6.1 billion, including the acquisition of the assets of the CBPR business from Weyerhaeuser Company in the third quarter. Cash proceeds from divestitures totaled approximately $14 million for the first nine months of 2008, relating to the sales of certain remaining Wood Products facilities during the first quarter. Investments in capital projects totaled $732$128 million in the first ninethree months of 20082009 compared to $804$215 million in the first ninethree months of 2007.2008. Full-year 20082009 capital spending is currently expected to be approximately $1.1 billion,$600 million, or about 80%40% of depreciation and amortization expense for our current businesses.
Financing activities for the first ninethree months of 20082009 included a $5.4 billion$550 million net increasereduction in debt versus a $513$57 million net decreaseincrease during the comparable 2007 nine-month2008 three-month period.
In August 2008,March 2009, International Paper Investments (Luxembourg) S.a.r.l, a wholly-owned subsidiary of International Paper, borrowed $2.5 billion$468 million of long-term debt with an initial interest rate of LIBOR plus a margin of 450 basis points that can vary depending upon the credit rating of the Company and a maturity date in March 2012. International Paper then used the $468 million of proceeds from the loan and cash of approximately $170 million to repay its 500 million euro-denominated debt (equivalent to $638 million at the date of payment) with an original maturity date in August 2009. Other debt activities in the first quarter of 2009 included the repayment of approximately $366 million of maturing notes with interest rates ranging from 4.25% to 5.0%.
Also in the first quarter of 2009, International Paper terminated an interest rate swap with a notional value of $100 million designated as a fair value hedge, resulting in a gain of $11 million that was deferred and recorded in Long-term debt in the accompanying consolidated balance sheet. As the swap agreement was terminated early, this gain will be amortized to earnings over the life of the related debt through April 2016.
In April 2009, subsequent to the end of the first quarter, International Paper repaid $313 million of the $2.5 billion long-term debt issued in connection with the CBPR business acquisition. The debt has an initial interest rate of LIBOR plus a margin of 162.5 basis points. The marginpoints that can vary depending upon the credit rating of the Company. The debt requires quarterly principal payments starting in the fourth quarter of 2008 and has a final maturity in August 2013. Debt issuance costs of approximately $50 million related to this borrowing were recorded in Deferred charges and other assets in the accompanying consolidated balance sheet and will be amortized over the term of the loan. Also in August 2008, International Paper borrowed approximately $395 million under its receivables securitization program. These funds, together with the $3 billion from unsecured senior notes borrowed in the second quarter discussed below and other available cash, were used for the CBPR business acquisition in August. A $500 million bridge loan that was available to fund the acquisition was not used by the Company and was cancelled upon the closing of the acquisition.
Also in the third quarter of 2008, International Paper repaid approximately $355 million it had borrowed under its receivables securitization program. The Company also repaid $125 million of the $2.5 billion long-term debt and repurchased $63.5 million of notes with interest rates ranging from 4.25% to 8.70% and original maturities from 2009 to 2038.
The Company also entered into a series of forward starting floating-to-fixed interest rate swap agreements with a notional amount of $1.5 billion in anticipation of borrowing against the $3 billion committed bank credit agreement for the purchase of the CBPR business. The floating-to-fixed interest rate swaps were effective September 2008 and mature in September 2010. These forward starting interest rate swaps are being accounted for as cash flow hedges in accordance with SFAS No. 133 as hedges of the benchmark interest rate of future interest payments related to any borrowing under the bank credit.
In the second quarter of 2008, International Paper issued $3 billion of unsecured senior notes consisting of $1 billion of 7.4% notes due in 2014, $1.7 billion of 7.95% notes due in 2018, and $300 million of 8.7% notes due in 2038. Debt issuance costs of approximately $20 million related to the new debt were recorded in Deferred charges and other assets in the accompanying consolidated balance sheet and will be amortized over the terms of the respective notes.
Also in the second quarter of 2008, International Paper entered into a series of fixed-to-floating interest rate swap agreements, with a notional amount of $1 billion and maturities in 2014 and 2018, to manage interest rate exposures associated with the new $3 billion of unsecured senior notes. These interest rate swaps are being accounted for as fair value hedges in accordance with SFAS No. 133.
In the second quarter of 2007, International Paper repurchased $35 million of 5.85% notes with an original maturity in October 2012.
In March 2007, International Paper Investments (Luxembourg) S.ar.l.,Additionally, IP Co Europe Ltd, a wholly-owned subsidiary of International Paper, repaid $143$75 million of long-term debtnotes issued in connection with the investment in Ilim. These notes had an initial interest rate of LIBOR plus 40100 basis points and a maturity date in November 2010. Other debt activityApril 2009.
On May 4, 2009, the Company announced that it had priced $1.0 billion of 9.375% senior unsecured notes due in 2019. The Company intends to use the first quarter includednet proceeds from the repaymentsale of $198 millionthe notes primarily to repay and extend the maturities of 7.625% notes that matured within the quarter.other long-term debt.
At September 30, 2008March 31, 2009 and December 31, 2007,2008, International Paper classified $806$100 million and $112$796 million, respectively, of tenderable bonds, commercial paper and bank notes and currentCurrent maturities of long-term debt as Long-term debt. International Paper has the intent and ability, as evidenced by its contractuallyfully committed $1.5 billion bank credit agreement,facility, to renew or convert these obligations.
During the first ninethree months of 2008,2009, International Paper issued approximately 2.44.0 million shares of treasury stock for various incentive plans. Payments of restricted stock withholding taxes totaled $10 million. During the first three months of 2008, the Company issued approximately 2.5 million shares of treasury stock for various incentive plans, including stock option exercises that generated approximately $1 million of cash and restricted stock that did not generate cash. Payments of restricted stock withholding taxes totaled $47 million. During the first nine months of 2007, the Company purchased 30.6 million shares of its common stock through open market purchases for approximately $1.1 billion, and issued approximately 5.0 million shares of treasury stock for various incentive plans, including stock option exercises that generated approximately $122 million of cash and restricted stock that did not generate cash. Common stock dividend payments totaled $321$108 million and $330$112 million for the first ninethree months of 20082009 and 2007,2008, respectively. Dividends were $.75$0.25 per share for the first ninethree months in both years.
Contractual obligations for payments of future debt maturities by calendar year at September 30, 2008 were as follows (in millions): $102009 and 2008. In March 2009, the Company announced that the quarterly dividend would be reduced to $0.025 per share in 2008; $853 in 2009; $1,339 in 2010; $1,403 in 2011; $967 in 2012; $1,503 in 2013; and $5,959 thereafter.the 2009 second quarter.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2008,March 31, 2009, the Company held long-term credit ratings of BBB (negative outlook) and Baa3 (negative outlook) by Standard and Poor’s (S&P) and Moody’s Investor Services (Moody’s), respectively. The Company currently has short-term credit ratings of A-3 and P-3 by S&P and Moody’s, respectively.
At September 30, 2008,March 31, 2009, International Paper had approximately $2.5 billion of committed liquidity facilities, including a $1.5 billion contractually committed bank credit agreement that expires in March 2011 and $1 billion of commercial paper-based financings based on eligible receivable balances ($870 million at March 31, 2009) under a receivables securitization program that expires in October 2009. There were approximately $40 million of outstanding borrowings underprogram. On January 23, 2009, the Company amended the receivables securitization program and no outstanding borrowings underto extend the fully committed bank creditmaturity date from October 2009 to January 2010. The amended agreement at September 30, 2008.has a facility fee of 0.75% payable quarterly.
International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements through 20082009 using existing cash balances plus cash from operations, supplemented as required by its existing credit facilities. Funding decisions will be guided by our capital structure planning and debt management practices. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors.
While the recent disruption in the credit market and increased risk associated with financial institutions has increased market volatility and the cost of credit, the Company does not believe that these conditions currently have had a significant impact on its liquidity. The Company believes it can borrow as needed on its committed credit and receivables securitization facilities.
At September 30, 2008, International Paper had
Alternative Fuel Mixture Credits
The U.S. Internal Revenue Code provides a $47 million investmenttax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in a money market fund thatthe mixture, is currently being liquidated. As a result ofrefundable to the liquidation process, the timing of redemptions from the fund is uncertain, buttaxpayer. In January 2009, the Company does not expectreceived notification that its application to be registered as an alternative fuel mixer had been approved. During the liquidation2009 first quarter, the Company filed claims for alternative fuel mixture credits covering eligible periods subsequent to have a material impact on its financial condition or results of operations. The Company has classified $24November 2008 totaling approximately $516 million of its investmentthat were recorded in this fund as Other current assetsAccounts and notes receivable, net, in the accompanying consolidated balance sheet, sinceapproximately $145 million of which was received in cash later in the timing of receipt of these funds is uncertain.
A further discussion of potential future effects of any ongoing disruption of capitalquarter, and credit markets isaccrued approximately $42 million for estimated eligible alternative fuel usage through March 31, 2009 to be included in Item 1A Risk Factors.subsequent filings. Accordingly, the accompanying statement of operations for the three months ended March 31, 2009 includes a credit of approximately $540 million in Cost of products sold ($330 million after taxes), representing eligible alternative fuel mixture credits earned through March 31, 2009, less $18 million of associated expenses. An additional $403 million was received for these credits after March 31, 2009.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.
Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include SFAS No. 5, “Accounting for Contingencies,” SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” SFAS No. 142, “Goodwill and Other Intangible Assets,” SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” as amended by SFAS No. 132 and 132(R), “Employers’ Disclosures About Pension and Other Postretirement Benefits,” SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” and SFAS No. 109, “Accounting for Income Taxes,” including recent accounting requirements under FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.”
The Company has included in its 20072008 Form 10-K a discussion of these critical accounting policies, which are important to the portrayal of the Company’s financial condition and results of operations and require management’s judgments. While theThe Company has not made any changes in these critical accounting policies during the first ninethree months of 2008, the discussion of accounting for possible impairments of long-lived assets and goodwill, as shown below, has been modified to emphasize certain key judgments and estimates required by management.
Impairment of Long-Lived Assets and Goodwill.
An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material, energy and freight costs, and various other projected operating and economic factors. As these key factors change in future periods, the Company will update its impairment analyses to reflect its latest estimates and projections.
SIGNIFICANT ACCOUNTING ESTIMATES
Pension Accounting.
Net pension expense totaled approximately $89$61 million for International Paper’s U.S. plans for the ninethree months ended September 30, 2008,March 31, 2009, or about $69$33 million lessmore than the pension expense for the first ninethree months of 2007.2008. Net pension expense for non-U.S. plans was about $2 million and $3 million for the first ninethree months of 2008both 2009 and 2007, respectively.2008. The decreaseincrease in U.S. plan pension expense was principally due to an increasea decrease in the assumed discount rate to 6.00% in 2009 from 6.20% in 2008, from 5.75% in 2007 and lowerhigher amortization of unrecognized actuarial losses.losses and the addition of CBPR employees.
After consultation with our actuaries, International Paper determines key actuarial assumptions on December 31 of each year that are used to calculate liability information as of that date and pension expense for the following year. Key assumptions affecting pension expense include the discount rate, the expected long-term rate of return on plan assets, the expected rate of future salary increases, and various demographic assumptions including expected mortality. The discount rate assumption is determined based on a yield curve that incorporates approximately 500-550500 Aa-graded bonds. The plan’s projected cash flows are then matched to the yield curve to develop the discount rate. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. At September 30, 2008,March 31, 2009, the market value of plan assets for International Paper’s U.S. plans totaled approximately $7.1$5.6 billion, consisting of approximately 44%39% equity securities, 36%39% fixed income securities, and 20%22% real estate and other assets.
The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flow generated by the Company, and other factors. The Company has no obligation to fund its domestic qualified plans in 2008.2009, and does not currently expect any required cash contributions until 2011. The Company continually reassesses the amount and timing of any discretionary contributions. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $26$24 million in 2008.
Accounting for Share-Based Compensation Plans. The Company discontinued its stock option program in 2004 for members of executive management, and in 2005 for all other eligible U.S. and non-U.S. employees. In the United States, the stock option program was replaced with a performance-based restricted share program to more closely tie long-term compensation to Company performance on two key performance drivers: return on investment (ROI) and total shareholder return (TSR). As part of this shift in focus away from stock options to performance-base restricted stock, the Company accelerated the vesting of all 14 million unvested stock options to July 12, 2005.
The Company adopted SFAS No. 123(R), “Share-Based Payment,” effective January 1, 2006 using the modified prospective transition method. This standard requires that compensation cost related to share-based payments be recognized in the financial statements. The amount of compensation cost is measured based on the grant date fair value of the award. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. The adoption
of SFAS No. 123(R) resulted in a $1 million increase in stock-based compensation expense for the three months ended March 31, 2006, with no effect on prior periods. Prior to January 1, 2006, the Company had accounted for share-based compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.”2009.
Accounting for Uncertainty in Income Taxes.
The Company adopted the provisions of FIN 48 on January 1, 2007. This interpretation requiresrequire management to make judgments regarding the probability that certain income tax positions taken by the Company in filing tax returns in the various jurisdictions in which it operates will be sustained upon examination by the respective tax authorities based on the technical merits of these tax positions, and to make estimates of the amount of tax benefits that will be realized upon the settlement of these positions. The adoption of this interpretation resulted in a charge to the 2007 beginning balance of retained earnings of $94 million.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, and in particular, statements found in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, whichthat are not historical in nature may constitute forward-looking statements. These statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar import.nature. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ include, among other things, the following: our ability to realize the expected benefits of our acquisition of the containerboard, packaging and recycling business of Weyerhaeuser Company in light of integration difficulties and other challenges; changes in the cost or availability of raw materials, energy and energy;transportation; economic cyclicality and changes in transportation availability or costs;consumer preferences in the industries in which we operate; changes in the pricing and demand for our products; the effects of competition from foreignin the United States and domestic producers; changesinternationally; continued adverse developments in our product mix; delays in implementing previously announced price increases; the strength of demand for our productgeneral business and changes in overall demand; changeseconomic conditions; downgrades in credit ratings issued by nationally recognized statistical rating organizations;ratings; the availabilityimpairment of credit;financial institutions with which we execute transactions; pension and health care costs; changes related to international economic conditions;pension plan funding obligations that could be material
over the next several years; changes in currency exchange rates;international conditions; the amount of our debt obligations and our ability to refinance or repay our debt; unanticipated expenditures relating to the cost of compliance with environmental and other governmental regulations; results of legal proceedings; whether we experience a material disruptiondisruptions at one of our manufacturing facilities; whether expected non-price improvements can be realized; increasesrisks related to operations conducted by joint ventures and changes in interest rates; our substantial indebtedness; our ability to meet our debt service obligations and the bankruptcy or event of default by one of our counterparties.tax laws. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Information relating to quantitative and qualitative disclosures about market risk is shown on page 4246 of International Paper’s 20072008 10-K, which information is incorporated herein by reference. In June 2008, in anticipation of the CBPR business acquisition, International Paper issued $3 billion of unsecured senior notes and entered into $1 billion of fixed-to-floating interest rate swaps to hedge the new debt. At September 30, 2008, the fair value of the new unsecured bonds still exposed to interest rate risk was approximately $1.8 billion. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would have been approximately $114 million at September 30, 2008. There have been no other material changes in the Company’s exposure to market risk since December 31, 2007.
International Paper evaluates credit risk by monitoring its exposure with each counterparty and ensuring that exposure stays within the Company’s policy limits. Credit risk is also mitigated by contractual provisions with the majority of our banks. Most of the contracts include a credit support annex that requires the posting of collateral by the counterparty or International Paper based on each party’s rating and level of exposure. In addition, our derivative contracts provide for netting across all derivative positions in the event a counterparty defaults on a payment obligation. International Paper currently does not expect any of the counterparties to default on their obligations.2008.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures:
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and completely and accurately reported (and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure) within the time periods specified in the Securities and Exchange Commission’s rules and forms. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Controls over Financial Reporting:
There have been no changes in our internal control over financial reportingcontrols during the quarter ended September 30, 2008March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controlcontrols over financial reporting.
During theIn August 2008, third quarter, the Company completed the acquisition of the Containerboard, Packaging and Recycling business (CBPR) from Weyerhaeuser Company’s CBPR business.Company. Integration activities, including a preliminary assessment of internal controls over financial reporting, are currently in process. The initial annual assessment of internal controls over financial reporting for the CBPR business will be conducted over the course of our 2009 assessment cycle.
During the 2007 first quarter, the Company completed the non-cash exchange of assets for the Luiz Antonio mill in Brazil. During the 2007 third quarter, the Company completed the acquisition of Central Lewmar LLC. The integration of financial processes and business systems is continuing for these two operations. We are in the process of conducting our annual assessment of internal controls over financial reporting over the course of our 2008 assessment cycle. These two operations contributed approximately 3% of net sales for the year ended December 31, 2007, and approximately 4% of total assets as of December 31, 2007.
The Company has ongoing initiatives to standardize and upgrade its financial, operating and supply chain systems. The system upgrades will be implemented in stages, by business, over the next several years. Management believes the necessary procedures are in place to maintain effective internal controls over financial reporting as these initiatives continue.
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
A discussion of material developments in the Company’s litigation and settlement matters occurring in the period covered by this report is found in Note 911 to the Financial Statements in this Form 10-Q.
ITEM 1A. | RISK FACTORS |
The Company’s 20072008 10-K contains important risk factors that could cause the Company’s actual results to differ materially from those projected in any forward-looking statement. Forward-looking statements are statements that are not historical in nature and are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar nature.
The Company has identified the following additional risk factor to supplement those set forth in the 20072008 10-K:
The ImpairmentChanges in Tax Laws May Have a Material Effect on Our Future Cash Flows and Results of Financial Institutions Could Adversely Affect UsOperations
Our earnings in the first quarter of 2009 included an excise tax credit of $540 million before taxes for alternative fuel mixtures produced for use as a fuel in our business. Cash provided by operations in the first quarter of 2009 included $145 million relating to this credit. The capital and credit marketsis scheduled to expire December 31, 2009. If this excise tax credit were to be terminated or materially changed prior to December 31, 2009, this may have been experiencing volatility and disruption for more than twelve months. In the past several months, volatility and disruptions have increased and recently reached unprecedented levels. We have exposure to counterparties with which we routinely execute transactions. Such counterparties include commercial banks, insurance companies, investment banks, investment funds and other financial institutions, some of which may be exposed to bankruptcy or liquidity risks. While we have not realized any significant losses to date, a bankruptcy or illiquidity event by one ofmaterial effect on our significant counterparties may materially and adversely affect our access to capital, future businesscash flows and results of operations.
These risk factors do
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Period | Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
February 1, 2009 – February 28, 2009 | 1,283,937 | $ | 8.00 | — | — | ||||
(a) | Shares acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs. |
No activity occurred in months not represent a comprehensive list of factors that could cause our results to differ from those that are currently anticipated and should be read together with the risk factors set forth in the 2007 10-K and in the Company’s other filings with the Securities and Exchange Commission.presented above.
ITEM 6. | EXHIBITS |
(a) | Exhibits |
10.1 | Pension Restoration Plan for salaried employees. | |
10.2 | Loan Agreement, dated March 12, 2009, by and among International Paper Investments (Luxembourg) S.à r.l., International Paper Company as guarantor, the Lenders party thereto and BNP Paribas as administrative agent (incorporated by reference to Exhibit 10.1 to the Company Current Report on Form 8-K dated March 16, 2009). | |
10.3 | Amendment No.1, dated as of January 23, 2009, to the Second Amended and Restated Credit and Security Agreement dated as of March 13, 2008. Certain confidential portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. | |
10.4 | Amendment No. | |
Amendment No. | ||
11 | Statement of Computation of Per Share Earnings. | |
12 | Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. | |
31.1 | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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: | By | /s/ TIM S. NICHOLLS | ||||||
Tim S. Nicholls | ||||||||
Senior Vice President and Chief Financial Officer | ||||||||
Date: | By | /s/ ROBERT J. GRILLET | ||||||
Robert J. Grillet | ||||||||
Vice President – Finance and Controller |
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