Feb. 2, 2006 (Press Release) - International Paper today reported full-year 2005 net earnings of $1.1 billion ($2.21 per share) compared with a loss of $35 million ($0.07 per share) in 2004. The company posted a fourth quarter 2005 net loss of $77 million ($0.16 per share) compared with earnings of $169 million ($0.35 per share) in the fourth quarter of 2004 and $1.0 billion ($2.03 per share) in the third quarter of 2005. The above amounts include the effects of special items in all periods.

Full-year 2005 earnings from continuing operations and before special items were $524 million ($1.08 per share), compared with $618 million ($1.26 per share) for the 2004 full year. Earnings from continuing operations and before special items in the 2005 fourth quarter were $58 million ($0.12 per share), compared with $205 million ($0.42 per share) in the fourth quarter of 2004 and $139 million ($0.29 per share) in the third quarter of 2005.

Net sales increased in both the 2005 fourth quarter and full year. Fourth- quarter net sales rose to $6.1 billion from $6.0 billion in both the fourth quarter of 2004 and the third quarter 2005. Full-year 2005 net sales were $24.1 billion compared with $23.4 billion in 2004.

Operating profits of $397 million for the 2005 fourth quarter were lower than third-quarter 2005 operating profits of $489 million, mainly because of high input costs. Full-year 2005 operating profits were $1.9 billion versus $2.0 billion in 2004.

"Input costs skyrocketed in the fourth quarter, especially in October and November," said John Faraci, IP chairman and chief executive officer. "They were above the already high year-to-date levels -- this put a big dent in our margins. Volumes, however, were better than we expected in the fourth quarter, especially in containerboard and printing papers.

"For 2005 in total, high costs for energy, wood and other raw materials had a $585 million negative impact on earnings versus 2004 -- that's about $0.87 per share. Volumes were also down in 2005, despite some fourth-quarter upturn. We took a significant amount of lack-of-order downtime in the year, including the closure of the Ft. Madison, Iowa, medium mill in third quarter and the permanent shutdown of three uncoated freesheet machines in the fourth quarter," Faraci said. "The good news is that we were able to partially offset some of the negative impacts through operational improvements and year-over- year pricing improvements. So while our results aren't yet where they need to be, we are taking the right steps to generate improved results long term."

Commenting on the first quarter of 2006, Faraci said, "We expect first quarter results to be flat with fourth quarter, with somewhat lower earnings from land sales. While natural gas prices are trending down, costs for chemicals and fuel oil are trending up from already high levels in fourth quarter, so we expect overall input costs to be about flat. Given this continued cost pressure, operational improvement remains a priority. We expect volumes to be seasonally slow early in the quarter, with some pick-up in March. However, I feel good about the dynamics of what's happening in our business right now, as we gained some price momentum late in the fourth quarter that we expect will carry into the first quarter, particularly in our printing papers and packaging business."

SEGMENT INFORMATION

Fourth-quarter segment operating profits and business trends compared with the third quarter 2005 are as follows:

Printing Papers operating profits for the fourth quarter of 2005 were $88 million, compared with $132 million in the prior quarter. Operations were solid in the quarter. The decline in earnings was predominantly because of high input costs. Price realizations were flat in North America, down in pulp, but trending up slightly in Europe. Uncoated paper volumes increased in the quarter, while coated paper volumes experienced some seasonal slowdown.

The Industrial Packaging Business reported $11 million in operating profits in fourth quarter, compared with $33 million in the 2005 third quarter. Containerboard volumes increased and pricing was flat overall, with some improved price realizations late in the quarter; however, the gains were more than offset by higher input costs, lower box prices and higher Container Business operating costs.

Consumer Packaging operating profits totaled $21 million in the fourth quarter of 2005, compared with $37 million in the third quarter. Lack-of-order downtime and high input costs negatively impacted Bleached Board, which more than offset strong performance in Shorewood Packaging, and higher earnings in Foodservice.

The company's distribution business, primarily xpedx, showed operating profits of $25 million, up from $23 million in the third quarter, on the strength of improved margins. Volumes were flat.

Forest Products operating profits decreased slightly in fourth quarter to $257 million from $272 million in the third quarter. Prices for lumber fell over the quarter, reflecting seasonal slowness in the market. Earnings from land sales were $179 million, slightly lower than third quarter's $190 million.

Net corporate expenses of $167 million in the 2005 fourth quarter were up from $142 million in the 2005 third quarter, reflecting increases in benefit- related accruals and environmental reserves, and $156 million in the 2004 fourth quarter, reflecting higher pension and supply chain initiative costs. Other corporate overhead costs continued to trend downward.

DISCONTINUED OPERATIONS

Discontinued operations amounts reflect income and losses related to the company's interests in Carter Holt Harvey Limited sold in the third quarter of 2005 and Weldwood of Canada, Ltd. sold in the third quarter of 2004.

EFFECTIVE TAX RATE

The effective tax rate, excluding special items and discontinued operations, was 22 percent for the fourth quarter of 2005, compared with 33 percent in the prior quarter. The 2005 full-year tax rate was 27.5 percent, compared with 26 percent in 2004.

EFFECTS OF SPECIAL ITEMS

Special items in the fourth quarter included a pretax charge of $233 million ($143 million after taxes) for restructuring charges and other charges, a pretax charge of $46 million ($30 million after taxes) for adjustments of estimated losses on businesses sold or held for sale, a $35 million pretax credit ($21 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, and a $1 million credit for changes to previously provided reserves. The $233 million restructuring and other charge included $199 million ($123 million after taxes) for organizational restructuring charges associated with the company's previously announced transformation plan, a $27 million charge ($16 million after taxes) for legal reserves, and a $7 million charge ($4 million after taxes) for losses on early debt extinguishment. In addition, an $11 million net income tax benefit was recorded in the quarter, reflecting a $74 million favorable adjustment from the finalization of the company's 1997 through 2000 U.S. federal income tax audit, a $43 million provision for deferred taxes related to earnings being repatriated under the American Jobs Creation Act of 2004, and $20 million of other tax charges. The net after-tax effect of all of these special items was a charge of $0.29 per share.

Special items in the third quarter included a pretax charge of $70 million ($48 million after taxes) for organizational restructuring charges and losses on debt extinguishment, a pretax credit of $188 million ($109 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, a $5 million pretax charge ($3 million after taxes) for adjustments of losses on businesses previously sold, and a $3 million pretax credit ($2 million after taxes) for the net adjustment of previously provided reserves. In addition, a $517 million income tax benefit was recorded, principally as a result of an agreement reached with the U.S. Internal Revenue Service concerning the 1997 through 2000 U.S. federal income tax audit. Net interest expense also includes a $43 million pretax credit ($26 million after taxes) relating to this agreement. The net after-tax effect of all of these special items was a credit of $1.19 per share.

Special items in the 2004 fourth quarter included a charge of $79 million ($64 million after taxes) for estimated losses on sales and impairments of businesses held for sale, a charge of $13 million before taxes ($8 million after taxes) for restructuring and other costs, a pre-tax credit of $20 million ($12 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, and a $17 million credit ($11 million after taxes) for the net reversal of restructuring and realignment of reserves no longer required. The $13 million charge for restructuring and other costs included $10 million ($6 million after taxes) for legal reserves and $3 million ($2 million after taxes) for losses on early extinguishment of debt. The net after-tax effect of all of these special items was expense of $0.10 per share.

Headquartered in the United States, International Paper is the world's largest paper and forest products company. Businesses include paper, packaging, and forest products. As one of the largest private forest landowners in the world, the company manages its forests under the principles of the Sustainable Forestry Initiative® (SFI) program, a system that ensures the continual planting, growing and harvesting of trees while protecting wildlife, plants, soil, air and water quality.

SOURCE: International Paper