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International Paper Sees 2nd Quarter Earnings Rise

Aug. 1, 2006 (Press Release) - International Paper today reported preliminary second-quarter 2006 net earnings of $115 million ($0.24 per share) compared with a first-quarter net loss of $1.24 billion ($2.54 per share) and net earnings of $77 million ($0.16 per share) in the second quarter of 2005. Amounts in all periods include special items, including a $2.57 per share charge in the first quarter of 2006 to write down the assets of the Coated and Supercalendered Papers business to their estimated fair value.

Earnings from continuing operations and before special items in the second quarter of 2006 were $200 million ($0.41 per share), compared with $95 million ($0.20 per share) in the previous quarter and $152 million ($0.31 per share) in the second quarter of 2005, including $31 million ($0.06 per share), $6 million ($0.01 per share) and $15 million ($0.03 per share) for the 2006 second quarter, 2006 first quarter and 2005 second quarter, respectively, from the Coated and Supercalendered Papers business, the sale of which is expected to close today.

Quarterly net sales of $6.3 billion were the company's highest second- quarter sales since 2000. Sales in the first quarter were $6.1 billion and second-quarter 2005 sales were $5.9 billion.

Operating profits of $631 million for the 2006 second quarter showed marked improvement from first quarter's operating profits of $464 million because of higher average price realizations, manufacturing cost and sales mix improvements.

"International Paper had a solid second quarter, driven by increasing price realizations, good volume and excellent operations in our key platform businesses," said IP Chairman and Chief Executive Officer John Faraci. "We had record results for the quarter in printing papers and distribution, and total sales were up 7 percent from a year ago."

Further commenting on the third quarter of 2006 compared with the second quarter, Faraci said, "We expect higher earnings in the third quarter as we continue to realize previously announced price increases in North America. Our volumes remain solid, and costs are likely to continue at their current high levels, with some puts and takes."

COATED PAPERS

In the 2006 first quarter, the company had reported its Coated and Supercalendered Papers business as a discontinued operation, in anticipation of selling it. In the second quarter, the company signed a definitive agreement to sell this business for approximately $1.4 billion, subject to certain post-closing adjustments, and agreed to acquire a 10-percent limited partnership interest in CMP Investments L.P., the parent company that will own it. Because of the required accounting treatment for this continuing interest, results for this business and write-downs to its estimated fair value are now included in continuing operations for all periods presented.

DISCONTINUED OPERATIONS

Discontinued operations includes the operating results of the company's Kraft Papers business. In the 2006 first quarter, a pre-tax charge of $101 million ($0.13 per share) had been recorded to write down the carrying value of the assets of this business to their estimated fair value. During the 2006 second quarter, International Paper signed a definitive agreement to sell this business to Stone Arcade Acquisition Corp. and recorded an additional pre-tax charge of $16 million ($0.02 per share) based on the terms of this agreement.

SEGMENT INFORMATION

Second-quarter 2006 segment operating profits and business trends compared with the first quarter of 2006 are as follows:

Second-quarter operating profits for Printing Papers were $254 million ($205 million, excluding coated papers), markedly better than first-quarter operating profits of $128 million ($120 million, excluding coated papers). The segment's results were bolstered by much stronger sales and earnings in the U.S. uncoated freesheet business, driven by increasing average prices, better input costs, strong mill operations and good sales mix. Higher price realizations and sales mix improvements also boosted results in pulp, coated papers and European papers. Coated papers operating results for the second quarter included a $31 million reduction ($19 million after taxes, or $0.04 per share) in depreciation expense to reflect its treatment as a business held for sale.

Industrial Packaging had its best quarter since 2004, with second-quarter operating profits of $100 million, compared with first-quarter operating profits of $38 million. Improvements were largely due to higher average price realizations, modest volume and mix improvements, good cost control, and lower input costs.

Consumer Packaging operating profits were $41 million in the second quarter, up from $35 million in the first quarter, due to slightly stronger volumes and price realizations. Results were negatively impacted by an $8 million charge related to the write-off of obsolete equipment.

The company's distribution business, primarily xpedx, reported record operating profits of $36 million for the quarter compared with operating profits in the prior quarter of $27 million. Improved margins and good cost control drove xpedx to its best-ever quarterly earnings and highest sales in more than five years.

Second-quarter Forest Products operating profits declined to $184 million from first-quarter operating profits of $226 million principally as a result of lower price realizations in wood products and lower forestland sales. Earnings from forestland and real estate sales were $130 million in second quarter 2006 versus $148 million in the prior quarter.

Net corporate expenses totaled $174 million for the quarter, down slightly from $176 million in the first quarter.

EFFECTIVE TAX RATE

The effective tax rate from continuing operations and before special items for the second quarter of 2006 was 34 percent, compared with a tax rate of 30 percent in the first quarter and 31 percent in the second quarter of 2005. The 2006 first-quarter rate included $5 million of credits related to state tax audit settlements and non-U.S. tax credits.

EFFECTS OF SPECIAL ITEMS

Special items in the second quarter of 2006 consisted of a pre-tax charge of $54 million ($33 million after taxes) for restructuring and other charges, including a pre-tax charge of $50 million ($30 million after taxes) for severance and other charges associated with the company's transformation plan and a $4 million charge ($3 million after taxes) for a legal settlement; and a pre-tax charge of $75 million ($51 million after taxes) for net gains (losses) on sales and impairments of businesses held for sale, including a pre-tax credit of $62 million ($39 million after taxes) for gains on sales of U.S. forestlands included in the transformation plan, a pre-tax charge of $85 million ($53 million after taxes) to adjust the carrying value of the assets of the company's Coated and Supercalendered Papers business to their estimated fair value based on the terms of the definitive sales agreement signed in the second quarter, and a pre-tax charge of $52 million ($37 million after taxes) to write down the carrying value of certain assets in Brazil to their estimated fair value. The net after-tax effect of these special items was an expense of $0.17 per share.

Special items in the first quarter of 2006 consisted of a pre-tax charge of $46 million ($28 million after taxes) for restructuring and other charges, including a pre-tax charge of $18 million ($11 million after taxes) charge for adjustments to legal reserves; a pre-tax credit of $19 million ($12 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation; a $1.3 billion pre-tax charge ($1.3 billion after taxes) for net losses on sales and impairments of businesses held for sale, principally relating to the write-down of the assets of the Coated and Supercalendered Papers business to their estimated fair values; and a charge of $6 million related to tax adjustments. The net after-tax effect of these special items was an expense of $2.62 per share.

Special items in the second quarter of 2005 included a pretax charge of $31 million ($19 million after taxes) for organizational restructuring charges, a pretax credit of $35 million ($21 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, and a $19 million pretax credit ($12 million after taxes) for net adjustments of losses on businesses previously sold, including a $25 million credit from the collection of a note receivable from the 2001 sale of the Flexible Packaging business. In addition, Interest expense, net, included pretax interest income of $11 million ($7 million after taxes) collected on this note. Additionally, an $82 million increase in the income tax provision was recorded principally for deferred taxes related to earnings repatriated during the quarter under the American Jobs Creation Act of 2004. The net after-tax effect of all of these special items was an expense of $0.12 per share.

SOURCE: International Paper

Related: "Transforming a Giant" - An exclusive interview with IP chairman John Faraci. (PaperAge, March/April 2006)




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