Your SlideShare is downloading. ×
UNITED STATES
              SECURITIES AND EXCHANGE COMMISSION
                                                      WASHI...
INTERNATIONAL PAPER COMPANY

                                                              INDEX
                         ...
PART I. FINANCIAL INFORMATION

      ITEM 1. FINANCIAL STATEMENTS

                                                       ...
INTERNATIONAL PAPER COMPANY
                                                                        Consolidated Balance S...
INTERNATIONAL PAPER COMPANY
                                                                        Consolidated Statement...
INTERNATIONAL PAPER COMPANY
                                                          Consolidated Statement of Changes in...
INTERNATIONAL PAPER COMPANY
                                                 Condensed Notes to Consolidated Financial Sta...
NOTE 3 - RESTRUCTURING AND OTHER CHARGES
During the third quarter of 2005, restructuring and other charges totaling $70 mi...
NOTE 4 – ACQUISITIONS
In 2001, International Paper and Carter Holt Harvey Limited had each acquired a 25% interest in Inte...
International Paper has restated all prior periods to present the operating results of CHH as a discontinued operation.
Re...
December 31,
                                                                                                             ...
Other Divestitures:
2005:

In the third quarter of 2005, charges totaling $5 million before taxes ($3 million after taxes)...
NOTE 6 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
     Inventories by major category were:
                           ...
The following tables present changes in the goodwill balances as allocated to each business segment for the nine-month
   ...
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
international paper 	 Q3 2005 10-Q
Upcoming SlideShare
Loading in...5
×

international paper Q3 2005 10-Q

237

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
237
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Transcript of "international paper Q3 2005 10-Q"

  1. 1. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2005 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 (I.R.S. Employer incorporation of organization) Identification No.) 400 Atlantic Street, Stamford, CT 06921 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (203) 541-8000 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 ⌧ No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ⌧ No Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange No ⌧ Act). Yes The number of shares outstanding of the registrant’s common stock as of October 31, 2005 was 490,498,543. 1
  2. 2. INTERNATIONAL PAPER COMPANY INDEX PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Operations - Three Months and Nine Months Ended September 30, 2005 and 2004 1 Consolidated Balance Sheet - September 30, 2005 and December 31, 2004 2 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2005 and 2004 3 Consolidated Statement of Changes in Common Shareholders’ Equity - Nine Months Ended September 30, 2005 and 2004 4 Condensed Notes to Consolidated Financial Statements 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21 Financial Information by Industry Segment 38 Item 3. Quantitative and Qualitative Disclosures About Market Risk 41 Item 4. Controls and Procedures 42 PART II. OTHER INFORMATION Item 1. Legal Proceedings 43 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds * Item 3. Defaults Upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders * Item 5. Other Information * Item 6. Exhibits 44 Signatures .................. 45 * Omitted since no answer is called for, answer is in the negative or inapplicable. 2
  3. 3. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERNATIONAL PAPER COMPANY Consolidated Statement of Operations (Unaudited) (In millions, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 $ 6,016 $ 17,342 Net Sales........................................................................................................................ $ 6,036 $ 17,963 Costs and Expenses Cost of products sold ............................................................................................ 4,412 12,811 4,532 13,413 Selling and administrative expenses ..................................................................... 471 1,423 463 1,420 Depreciation, amortization and cost of timber harvested ..................................... 346 1,003 342 1,015 Distribution expenses ........................................................................................... 260 764 264 782 Taxes other than payroll and income taxes........................................................... 59 179 59 176 Restructuring and other charges ........................................................................... 26 153 70 125 Insurance recoveries ............................................................................................. (103) (103) (188) (223) Net losses on sales and impairments of businesses held for sale.......................... 38 60 5 65 Reversal of reserves no longer required, net......................................................... (6) (19) (3) (3) Interest expense, net ............................................................................................. 180 541 120 442 Earnings From Continuing Operations Before Income Taxes and Minority 333 530 Interest 372 751 Income tax (benefit) provision.............................................................................. 113 209 (373) (198) Minority interest expense, net of taxes ................................................................. 5 21 3 8 215 300 Earnings From Continuing Operations ..................................................................... 742 941 Discontinued operations, net of taxes and minority interest................................. (685) (504) 281 236 $ (470) $ $ (204) Net Earnings (Loss)...................................................................................................... $ 1,023 1,177 Basic Earnings Per Common Share Earnings from continuing operations.................................................................... $ $ 0.44 $ $ 0.62 1.53 1.94 Discontinued operations ....................................................................................... (1.41) (1.04) 0.58 0.48 Net earnings (loss) ................................................................................................ $ $ (0.97) $ $ (0.42) 2.11 2.42 Diluted Earnings Per Common Share Earnings from continuing operations.................................................................... $ $ 0.44 $ $ 0.61 1.48 1.90 Discontinued operations ....................................................................................... (1.35) (1.03) 0.55 0.46 Net earnings (loss) ................................................................................................ $ $ (0.91) $ $ (0.42) 2.03 2.36 509.0 488.2 Average Shares of Common Stock Outstanding - Assuming dilution ..................... 507.1 507.5 $ 0.25 $ 0.75 Cash Dividends Per Common Share .......................................................................... $ 0.25 $ 0.75 The accompanying notes are an integral part of these financial statements. 3
  4. 4. INTERNATIONAL PAPER COMPANY Consolidated Balance Sheet (Unaudited) (In millions) September 30, December 31, 2005 2004 Assets ................................................................................................................................................... Current Assets Cash and temporary investments ................................................................................................ $ $ 2,180 1,092 Accounts and notes receivable, net ............................................................................................. 2,743 2,918 Inventories .................................................................................................................................. 2,371 2,427 Assets of businesses held for sale ............................................................................................... 4,729 57 Deferred income tax assets ......................................................................................................... 410 389 Other current assets..................................................................................................................... 153 180 Total Current Assets............................................................................................................................. 12,586 7,063 Plants, Properties and Equipment, net .................................................................................................. 12,216 11,850 Forestlands ........................................................................................................................................... 2,157 2,207 Investments........................................................................................................................................... 655 597 Goodwill............................................................................................................................................... 4,994 5,043 Deferred Charges and Other Assets...................................................................................................... 1,609 1,691 $ 34,217 Total Assets ......................................................................................................................................... $ 28,451 Liabilities and Common Shareholders’ Equity Current Liabilities Notes payable and current maturities of long-term debt ............................................................. $ $ 222 796 Accounts payable........................................................................................................................ 2,026 2,038 Accrued payroll and benefits ...................................................................................................... 425 387 Liabilities of businesses held for sale ......................................................................................... 3,165 51 Other accrued liabilities .............................................................................................................. 1,496 1,091 Total Current Liabilities ....................................................................................................................... 7,334 4,363 Long-Term Debt................................................................................................................................... 13,632 10,772 Deferred Income Taxes ........................................................................................................................ 1,118 1,287 Other Liabilities.................................................................................................................................... 3,691 2,959 Minority Interest................................................................................................................................... 188 203 Common Shareholders’ Equity Common stock, $1 par value, 490.5 shares in 2005 and 487.5 shares in 2004 ........................... 487 490 Paid-in capital ............................................................................................................................. 6,562 6,604 Retained earnings........................................................................................................................ 2,562 3,371 Accumulated other comprehensive loss...................................................................................... (1,357) (1,595) 8,254 8,870 Less: Common stock held in treasury, at cost, 2005 - 0.1 shares................................................ — 3 Total Common Shareholders’ Equity ................................................................................................... 8,254 8,867 $ 34,217 Total Liabilities and Common Shareholders’ Equity ..................................................................... $ 28,451 The accompanying notes are an integral part of these financial statements. 4
  5. 5. INTERNATIONAL PAPER COMPANY Consolidated Statement of Cash Flows (Unaudited) (In millions) Nine Months Ended September 30, 2005 2004 Operating Activities................................................................................................................................................... Net earnings (loss)............................................................................................................................................. $ 1,177 $ (204) Discontinued operations, net of taxes and minority interest .............................................................................. 504 (236) Earnings from continuing operations ...................................................................................................... 300 941 Depreciation and amortization .......................................................................................................................... 1,003 1,015 Deferred income tax expense (benefit), net ....................................................................................................... (2) 143 Tax benefit - non-cash settlement of IRS audits................................................................................................ — (553) Restructuring and other charges ........................................................................................................................ 153 125 Payments related to restructuring and legal reserves ......................................................................................... (179) (133) Insurance recoveries .......................................................................................................................................... (103) (223) Reversal of reserves no longer required, net...................................................................................................... (19) (3) Net losses on sales and impairments of businesses held for sale ....................................................................... 60 65 Other, net........................................................................................................................................................... 225 277 Changes in current assets and liabilities ............................................................................................................ Accounts and notes receivable................................................................................................................ (378) (106) Inventories .............................................................................................................................................. (28) (44) Accounts payable and accrued liabilities ................................................................................................ (72) (609) Other ....................................................................................................................................................... 106 320 1,066 Cash provided by operations - continuing operations ............................................................................................ 1,215 (129) Cash provided by (used for) operations - discontinued operations........................................................................ 157 937 Cash Provided by Operations ................................................................................................................................... 1,372 Investment Activities Invested in capital projects ................................................................................................................................ (743) (771) Acquisitions, net of cash acquired..................................................................................................................... (186) (39) Proceeds from divestitures ................................................................................................................................ 44 1,440 Other ................................................................................................................................................................. 261 77 (624) Cash provided by (used for) investment activities - continuing operations........................................................... 707 427 Cash (used for) provided by investment activities - discontinued operations ....................................................... (218) (197) Cash Provided by (Used for) Investment Activities ................................................................................................ 489 Financing Activities ................................................................................................................................................... Issuance of common stock ................................................................................................................................ 132 20 Issuance of debt................................................................................................................................................. 2,136 278 Reduction of debt .............................................................................................................................................. (3,104) (2,543) Change in book overdrafts................................................................................................................................. (122) (30) Dividends paid .................................................................................................................................................. (364) (368) Other ................................................................................................................................................................. (121) (44) (1,443) Cash used for financing activities - continuing operations ..................................................................................... (2,687) (166) Cash used for financing activities - discontinued operations.................................................................................. (172) (1,609) Cash Used for Financing Activities .......................................................................................................................... (2,859) (10) Effect of Exchange Rate Changes on Cash - Continuing Operations .................................................................... (85) 73 Effect of Exchange Rate Changes on Cash - Discontinued Operations................................................................. (5) (806) Change in Cash and Temporary Investments ......................................................................................................... (1,088) Cash and Temporary Investments Beginning of the period..................................................................................................................................... 2,258 2,180 End of the period ............................................................................................................................................... $ $ 1,452 1,092 The accompanying notes are an integral part of these financial statements. 5
  6. 6. INTERNATIONAL PAPER COMPANY Consolidated Statement of Changes in Common Shareholders’ Equity (Unaudited) (In millions, except share amounts in thousands) Nine Months Ended September 30, 2005 Common Stock Issued Accumulated Treasury Stock Total Other Common Paid-in Retained Comprehensive Shareholders’ Capital Earnings Shares Amount Income (Loss) Shares Amount Equity 487,495 $ 487 $ 6,562 $ 2,562 $ (1,357) 16 $ — $ 8,254 Balance, December 31, 2004 .............. Net issuance of stock for various plans 3,004 3 42 — — 78 3 42 Cash dividends - Common stock ($0.75 per share) ............................ — — — (368) — — — (368) Comprehensive income (loss): Net earnings............................. — — — 1,177 — — — 1,177 Minimum pension liability adjustment (less tax of $1) 3 3 Change in cumulative foreign currency translation adjustment (less tax of $1) — — — — (215) — — (215) Net gains (losses) on cash flow hedging derivatives:.. Net gain arising during the period (less tax of $13) .... — — — — 38 — — 38 Less: Reclassification adjustment for gains included in net income (less tax of $29) ............ — — — — (64) — — (64) Total comprehensive income .................. 939 Balance, September 30, 2005 490,499 $ 490 $ 6,604 $ 3,371 $ (1,595) 94 $ 3 $ 8,867 Nine Months Ended September 30, 2004 Common Stock Issued Accumulated Treasury Stock Total Other Common Paid-in Retained Comprehensive Shareholders’ Capital Earnings Income (Loss) Equity Shares Amount Shares Amount 485,162 $ 485 $ 6,500 $ 3,082 $ (1,690) 3,668 $ 140 $ 8,237 Balance, December 31, 2003 ............. Net issuance of stock for various plans............................................... 142 1,331 1 1 — — (3,634) (140) Cash dividends - Common stock ($0.75 per share)............................ — — — (364) — — — (364) Comprehensive income (loss): Net loss ................................... — — — (204) — — — (204) Change in cumulative foreign currency translation adjustment (less tax of $0)..................................... — — — — 44 — — 44 Net gains (losses) on cash flow hedging derivatives:. Net gain arising during the period — — — — 18 — — (less tax of $6) ..... 18 Less: Reclassification adjustment for gains included in net loss (less tax of $10) ................. — — — — (20) — — (20) Total comprehensive loss....................... (162) 486,493 $ 486 $ 6,501 $ 2,514 $ (1,648) 34 $— $ 7,853 Balance, September 30, 2004 ............ The accompanying notes are an integral part of these financial statements. 6
  7. 7. INTERNATIONAL PAPER COMPANY 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 (consisting only of normal recurring accruals) that are necessary for the fair presentation of results for the interim periods. Results for the first nine 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, 2004, which has previously been filed with the Securities and Exchange Commission. Financial information by industry segment is presented on page 38. Beginning with the 2005 first quarter, Industrial Packaging and Consumer Packaging are reported as separate industry segments. Prior period segment information has been restated to reflect this presentation. See Note 13 for required pro forma and additional disclosures related to stock-based compensation awards. Prior year amounts have been restated to present Carter Holt Harvey Limited (CHH) as a discontinued operation. See Note 5 for additional disclosures. NOTE 2 - EARNINGS PER COMMON SHARE Earnings per common share from continuing operations are computed by dividing earnings from continuing operations by the weighted average number of common shares outstanding. Earnings per common share from continuing operations, assuming dilution, are computed assuming that all potentially dilutive securities, including “in-the-money” stock options, are 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 when dilutive. Furthermore, as required by the Emerging Issues Task Force of the Financial Accounting Standards Board (FASB), the computations of diluted earnings per share for all prior periods have been restated on this basis. A reconciliation of the amounts included in the computation of earnings per common share from continuing operations, and earnings per common share from continuing operations, assuming dilution, is as follows: Three Months Ended Nine Months Ended September 30, September 30, In millions, except per share amounts 2005 2004 2005 2004 742 $ 215 $ 941 $ 300 Earnings from continuing operations ............................................................... $ Effect of dilutive securities ................................................................................... 7 — 7 20 749 $ 222 $ 961 $ 300 Earnings from continuing operations - assuming dilution.............................. $ 486.4 485.5 Average common shares outstanding................................................................ 486.0 486.0 Effect of dilutive securities Performance share plan ............................................................................... — — 1.0 1.1 Stock options............................................................................................... 2.6 2.7 0.1 0.4 Zero coupon convertible debentures ........................................................... 20.0 — 20.0 20.0 509.0 488.2 Average common shares outstanding - assuming dilution .............................. 507.1 507.5 1.53 $ 0.44 $ 1.94 $ 0.62 Earnings per common share from continuing operations............................... $ Earnings per common share from continuing operations - assuming 1.48 $ 0.44 $ 1.90 $ 0.61 dilution ............................................................................................................ $ Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. 7
  8. 8. NOTE 3 - RESTRUCTURING AND OTHER CHARGES During the third quarter of 2005, restructuring and other charges totaling $70 million before taxes ($48 million after taxes) were recorded. Included in this charge were a pre-tax charge of $44 million ($32 million after taxes) for organizational restructuring charges and a pre-tax charge of $26 million ($16 million after taxes) for losses on early extinguishment of debt. Also recorded in the third quarter were a pre-tax credit of $188 million ($109 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation (see Note 9) and a $3 million pre-tax credit ($2 million after taxes) for the net adjustment of previously provided reserves. In addition, a $517 million net reduction of the income tax provision was recorded, including a credit from an agreement reached with the U.S. Internal Revenue Service concerning the 1997 through 2000 U.S. federal income tax audits, a charge related to cash repatriations from non-U.S. subsidiaries, and a charge relating to a change in Ohio state tax laws (see Note 8). Interest expense, net, also includes a $43 million pre-tax credit ($26 million after taxes) relating to this agreement. During the second quarter of 2005, a pre-tax charge of $31 million ($19 million after taxes) for organizational restructuring charges, and a pre-tax credit of $35 million ($21 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation were recorded. Additionally, an $82 million increase in the income tax provision was recorded, including approximately $79 million for deferred taxes related to earnings repatriated during the quarter under the American Jobs Creation Act of 2004. During the first quarter of 2005, charges totaling $24 million before taxes ($15 million after taxes) were recorded for losses on early extinguishment of high-coupon-rate debt. Also during the 2005 first quarter, a $19 million reduction in the income tax provision was recorded reflecting the favorable settlement of a tax matter. During the third quarter of 2004, restructuring and other charges totaling $26 million before taxes ($16 million after taxes) were recorded. Included in this charge were $18 million before taxes ($11 million after taxes) for organizational restructuring programs, and $8 million before taxes ($5 million after taxes) for losses on early extinguishment of debt. The $18 million restructuring charge included $17 million of severance costs covering the termination of 351 employees and other cash costs of $1 million. In addition, a pre-tax credit of $103 million ($64 million after taxes) was recorded for insurance recoveries related to the hardboard siding and roofing litigation, and a $6 million credit before taxes ($4 million after taxes) was recorded for the net reversal of restructuring and realignment reserves no longer required. During the first two quarters of 2004, restructuring and other charges totaling $127 million before taxes ($79 million after taxes) were recorded. Included in this charge were $46 million before taxes ($29 million after taxes) for a corporate-wide organizational restructuring program and $81 million before taxes ($50 million after taxes) for losses on early extinguishment of debt. In addition, a $13 million credit before taxes ($7 million after taxes) was recorded for the net reversal of restructuring and realignment reserves no longer required. Also, a $32 million increase in the tax provision was recorded reflecting an adjustment of deferred tax balances. During the last quarter of 2004, restructuring and other charges totaling $13 million before taxes ($8 million after taxes) were recorded. These charges included a $10 million charge before taxes ($6 million after taxes) for legal settlements and a $3 million charge before taxes ($2 million after taxes) for losses on early extinguishment of debt. In addition, credits of $20 million before taxes ($12 million after taxes) for net insurance recoveries related to the hardboard siding and roofing litigation and $17 million before taxes and ($11 million after taxes) for the net reversal of reserves no longer needed were recorded. 8
  9. 9. NOTE 4 – ACQUISITIONS In 2001, International Paper and Carter Holt Harvey Limited had each acquired a 25% interest in International Paper Pacific Millennium Limited (IPPM). International Paper recorded goodwill of $25 million in connection with its portion of this acquisition. IPPM is a Hong Kong-based distribution and packaging company with operations in China and other Asian countries. On August 1, 2005, pursuant to an existing agreement, International Paper purchased the 50% outside interest of IPPM for $46.1 million to facilitate possible further growth in Asian markets. Beginning in August 2005, the financial position and results of operations of IPPM have been included in International Paper’s consolidated financial statements. The accompanying unaudited consolidated balance sheet as of September 30, 2005 includes preliminary estimates of the fair values of the assets and liabilities acquired, including approximately $46 million of goodwill. It is anticipated that the allocation of the purchase price to the assets and liabilities acquired will be completed by December 31, 2005, and could result in a goodwill impairment charge when completed. On July 1, 2004, International Paper completed the acquisition of Box USA Holdings, Inc. (Box USA). The operating results of Box USA are included in the accompanying consolidated financial statements from that date. International Paper acquired all of the outstanding common and preferred stock of Box USA for approximately $189 million in cash and a $15 million 6% note payable issued to Box USA’s controlling shareholders. In addition, International Paper assumed approximately $197 million of debt, of which approximately $193 million was repaid by July 31, 2004. The note payable represents contingent consideration to be paid if no claims for indemnification were offset against the notes. Subsequent claims for indemnification totaling $5.5 million reduced the note payable to $9.5 million plus interest payable. The first installment of $3 million plus interest was paid in the third quarter of 2005. The remaining installments to be paid are $2 million in 2006 and $4.5 million in 2009, subject to any additional claims for indemnification. The following unaudited pro forma information for the nine months ended September 30, 2004 presents the combined results of the continuing operations of International Paper and Box USA as if the acquisition had occurred as of January 1, 2004. 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, 2004, nor is it necessarily indicative of future results. Nine Months Ended September 30, 2004 In millions, except per share amounts Net sales ..................................................................................................................................... $17,595 Earnings from continuing operations.......................................................................................... 297 Net loss ....................................................................................................................................... (207) Earnings from continuing operations per common share – assuming dilution ........................... 0.61 Net loss per common share – assuming dilution ........................................................................ (0.42) NOTE 5 - BUSINESSES HELD FOR SALE AND DIVESTITURES Discontinued Operations: On September 21, 2005, International Paper completed the sale of its 50.5% interest in Carter Holt Harvey Limited to Rank Group Investments Ltd. for approximately U.S. $1.14 billion that will be used primarily to reduce debt. The pre-tax gain on the sale of $29 million ($361 million after taxes), including a $186 million pre-tax credit from cumulative translation adjustments, was included in Discontinued operations, together with CHH’s operating results prior to the sale. Additionally, in May 2004, CHH sold its Tissue business. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 9
  10. 10. International Paper has restated all prior periods to present the operating results of CHH as a discontinued operation. Revenues associated with this discontinued operation were $541 million and $1.7 billion, respectively, for the three-month and nine-month periods ended September 30, 2005. Revenues for the comparable 2004 periods were $562 million and $1.8 billion, respectively. Earnings and earnings per share related to this operation were as follows: Three Months Ended Nine Months Ended September 30, September 30, In millions, except per share amounts 2005 2004 2005 2004 Earnings (loss) from discontinued operation Earnings (loss) from operation ...................................................................... $ (11) $ (1) $ (43) $ 21 Income tax (expense) benefit ........................................................................ (9) 38 (67) (90) Minority interest (expense) benefit, net of taxes ........................................... 3 (33) (2) 8 (7) 26 Earnings (loss) from discontinued operation, net of taxes ................................ (80) (125) Gain on sale of CHH ..................................................................................... — — 29 29 Gain on sale of CHH Tissue business ........................................................... — 268 — — Income tax benefit (expense) ........................................................................ — (69) 332 332 Minority interest expense, net of taxes.......................................................... — (109) — — — 90 Gain on sale, net of taxes and minority interest ................................................. 361 361 Earnings (loss) from discontinued operation, net of taxes and minority $ (7) $ $ 116 interest............................................................................................................... $ 281 236 Earnings (loss) per common share from discontinued operation - assuming dilution Earnings (loss) from operation, net of taxes.................................................. $ (0.16) $ (0.02) $ (0.25) $ 0.05 Gain on sale, net of taxes and minority interest ............................................ — 0.19 0.71 0.71 Earnings (loss) per common share from discontinued operation, net of taxes $ (0.02) $ $ 0.24 and minority interest - assuming dilution ...................................................... $ 0.55 0.46 Assets and liabilities of CHH, included in International Paper’s consolidated balance sheet at December 31, 2004, as Assets and Liabilities of businesses held for sale, were as follows: 10
  11. 11. December 31, 2004 In millions Cash and temporary investments .......................................................................................................................... $ 416 Accounts receivable, net ....................................................................................................................................... 251 Inventories ............................................................................................................................................................ 347 Plants, properties and equipment, net ................................................................................................................... 1,216 Forestlands............................................................................................................................................................ 1,779 Other assets........................................................................................................................................................... 491 Assets of business held for sale .......................................................................................................................... $ 4,500 Notes payable and current maturities of long-term debt ....................................................................................... $ 284 Accounts payable.................................................................................................................................................. 253 Accrued payroll and benefits ................................................................................................................................ 67 Other accrued liabilities ........................................................................................................................................ 17 Long-term debt ..................................................................................................................................................... 500 Other liabilities ..................................................................................................................................................... 602 Minority interest ................................................................................................................................................... 1,360 Liabilities of business held for sale .................................................................................................................... $ 3,083 In July 2004, International Paper reached an agreement to sell its Weldwood of Canada, Ltd. business. This transaction was completed in December 2004. All periods presented have been restated to present the operating results of Weldwood as a discontinued operation. Revenues associated with this discontinued operation were $282 million and $765 million, respectively, for the three-month and nine-month periods ended September 30, 2004. Earnings and earnings per share related to the discontinued operation were as follows: Three Months Ended Nine Months Ended September 30, September 30, In millions, except per share amounts 2004 2004 Earnings (loss) from discontinued operation...................................................... Earnings from operation................................................................................ $ 59 $ 140 Income tax expense ....................................................................................... (21) (44) 38 96 Earnings from discontinued operation, net of taxes .......................................... Asset impairment .......................................................................................... (306) (306) Income tax expense (a).................................................................................. (410) (410) (716) (716) Asset impairment, net of taxes............................................................................. Loss from discontinued operation, net of taxes .................................................. $ (678) $ (620) Earnings (loss) per common share from discontinued operation - assuming dilution Earnings from operation, net of taxes ........................................................... $ 0.08 $ 0.20 Asset impairment, net of taxes ...................................................................... (1.41) (1.47) Loss per common share from discontinued operation, net of taxes - assuming dilution ............................................................................................. $ (1.33) $ (1.27) (a) Reflects the low historic tax basis in Weldwood that was carried over in connection with the acquisition of Champion in June 2000. 11
  12. 12. Other Divestitures: 2005: In the third quarter of 2005, charges totaling $5 million before taxes ($3 million after taxes) were recorded for adjustments of losses on businesses previously sold. During the second quarter of 2005, the Company completed the sales of its Fine Papers and Industrial Papers businesses and Papeteries de France for approximately $61 million, $180 million and $14 million, respectively. The accompanying consolidated statement of operations includes a net $19 million pre-tax credit ($12 million after taxes), including a $25 million credit before taxes ($15 million after taxes) from the collection of a note receivable from the 2001 sale of the Flexible Packaging business, final charges related to the sale of Fine Papers and Industrial Papers, as well as net adjustments of losses from businesses previously sold. In addition, interest income of $11 million before taxes ($7 million after taxes) was collected on the Flexible Packaging business note, which is included in Interest expense, net. In March 2005, International Paper announced an agreement to sell its Fine Papers business to Mohawk Paper Mills, Inc. of Cohoes, New York. A $24 million pre-tax loss ($13 million after taxes) was recorded in the first quarter to write down the net assets of the Fine Papers business to their estimated net realizable value. Included in the sale were the Hamilton, Ohio paper mill with an annual production capacity of approximately 65,000 tons; the Saybrook, Ohio converting center; and the Westfield, Massachusetts artist papers converting operation. The sale also included the Strathmore®, Brite Hue®, VIA ® and Beckett® brands. Also in March 2005, International Paper announced that it had signed an agreement to sell its Industrial Papers business to an affiliate of Kohlberg and Company, LLC. A $49 million pre-tax loss ($35 million after taxes) was recorded in the first quarter to write down the net assets of the Industrial Papers business and related corporate assets to their estimated net realizable value. The Industrial Papers business included packaging and pressure sensitive papers and related converting assets. Also in the first quarter of 2005, charges totaling $6 million before taxes ($4 million after taxes) were recorded for adjustments to estimated losses on sales of certain smaller operations. 2004: In July 2004, International Paper signed an agreement to sell Scaldia Papier B.V., and its subsidiary, Recom B.V., to Stora Enso for approximately $36 million in cash. This sale was completed in the third quarter and resulted in a loss of $34 million (no impact from taxes). In addition, a $4 million loss, (no impact from taxes) was recorded to adjust the estimated loss on sale of Papeteries de Souche L.C. In the second quarter of 2004, a $27 million pre-tax loss ($27 million after taxes) was recorded to write down the assets of the Company’s Anould mill to their estimated net realizable value. In addition, a $4 million loss before taxes ($2 million after taxes) was recorded to write down the assets of Food Pack S.A. in Chile to their estimated net realizable value. In the first quarter of 2004, a $9 million pre-tax gain ($6 million after taxes) was recorded to adjust estimated gains/losses of businesses previously sold. At September 30, 2005, assets and liabilities of businesses held for sale totaled $57 million and $51 million, respectively, consisting of certain smaller businesses held for sale. Assets and liabilities of businesses held for sale at December 31, 2004 totaled $4.7 billion and $3.2 billion, respectively, and included CHH and the Fine Papers business as well as certain smaller businesses. 12
  13. 13. NOTE 6 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION Inventories by major category were: September 30, December 31, In millions 2005 2004 Raw materials ........................................................................................................................................ $ 359 $ 321 Finished pulp, paper and packaging products........................................................................................ 1,650 1,639 Finished lumber and panel products ...................................................................................................... 38 28 Operating supplies ................................................................................................................................. 298 328 Other ...................................................................................................................................................... 64 73 2,427 $ 2,371 Total ............................................................................................................................................ $ Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $807 million and $1.7 billion at September 30, 2005 and December 31, 2004, respectively. Interest payments made during the nine-month periods ended September 30, 2005 and 2004 were $630 million and $601 million, respectively. The 2005 interest payments include a $52 million payment to the U.S. Internal Revenue Service related to the settlement of the 1997-2000 U.S. federal income tax audits. Capitalized net interest costs were $8 million and $6 million for the nine months ended September 30, 2005 and 2004, respectively. Total interest expense was $507 million for the first nine months of 2005, net of a $43 million credit related to the settlement of the tax audits described above, and $592 million for the first nine months of 2004. Distributions paid under all of International Paper’s preferred securities of subsidiaries were $11 million and $38 million during the first nine months of 2005 and 2004, respectively. The decrease in 2005 was due to preferred securities redeemed in February 2005 and in 2004. The expense related to these preferred securities was included in minority interest expense in the consolidated statement of operations, except for $3 million in 2005 and $25 million in 2004 related to the Trust preferred securities that were deconsolidated in the last half of 2003 and redeemed in February 2005. Income tax payments of $374 million and $173 million were made during the first nine months of 2005 and 2004, respectively. Accumulated depreciation was $17.5 billion at September 30, 2005 and $17.3 billion at December 31, 2004. The allowance for doubtful accounts was $110 million at September 30, 2005 and $124 million at December 31, 2004. 13
  14. 14. The following tables present changes in the goodwill balances as allocated to each business segment for the nine-month periods ended September 30, 2005 and 2004: Balance Reclassifications Balance December 31, and September 30, Additions/ In millions 2004 Other (Reductions) 2005 Printing Papers .............................................................................. $ 2,876 $ 3$ — $ 2,879 Industrial Packaging ...................................................................... 591 (5) 16 (a) 602 Consumer Packaging ..................................................................... 1,014 (4) 51 (b) 1,061 Distribution.................................................................................... 299 — — 299 Forest Products .............................................................................. 190 1 — 191 Corporate and Other Businesses.................................................... 24 — (13)(c) 11 Total..................................................................................... $ 4,994 $ $ 5,043 (5) $ 54 (a) Completion of the accounting for the acquisition of Box USA, $22 million, and the sale of the Industrial Papers business, $(6) million (b) Acquisition of minority interest in Shorewood EPC Europe Ltd, $5 million. Acquisition of 50% interest in International Paper Pacific Millennium, $46 million (c) Sale of Fine Papers business Balance Reclassifications Balance December 31, and Additions/ September 30, In millions 2003 Other 2004 (Reductions) Printing Papers .............................................................................. $ 2,878 $ (1) $ — $ 2,877 Industrial Packaging ...................................................................... 345 5 263 (a) 613 Consumer Packaging ..................................................................... 1,016 — (3)(b) 1,013 Distribution.................................................................................... 334 — (23)(c) 311 Forest Products .............................................................................. 190 1 — 191 Corporate and Other Businesses.................................................... 30 (6) 1 25 Total ..................................................................................... $ 4,793 $ (1) $ 238 $ 5,030 (a) Acquisition of Box USA, $264 million, and the sale of Asian box plants, $(1) million (b) Food Pack S.A. reclassified to assets held for sale (c) Sale of Scaldia Papier B.V. The following table presents an analysis of activity related to asset retirement obligations: Nine Months Ended September 30, In millions 2005 2004 Asset retirement obligations, January 1 .................................................................................................. $ 41 $ 48 New liabilities......................................................................................................................................... 3 10 Liabilities settled..................................................................................................................................... (6) (5) Net adjustments to existing liabilities ..................................................................................................... (2) (4) Accretion expense................................................................................................................................... 1 1 $ 44 Asset retirement obligations, September 30 ....................................................................................... $ 43 This obligation is included in Other liabilities in the accompanying consolidated balance sheet. 14

×