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International Paper Posts Third Quarter Profit

Nov. 2, 2006 (Press Release) - International Paper today reported preliminary third-quarter 2006 net earnings of $201 million ($0.42 per share) compared with second-quarter net earnings of $115 million ($0.24 per share) and $1 billion ($2.03 per share) in the third quarter of 2005. Amounts in all periods include special items, including credits of $1.19 per share related to a favorable U.S. federal tax agreement and $0.55 per share related to the sale of Carter Holt Harvey Limited in the third quarter of 2005.

Earnings from continuing operations and before special items in the third quarter of 2006 were $188 million ($0.39 per share), compared with $196 million ($0.40 per share) in the second quarter and up from $130 million ($0.27 per share) in the third quarter of 2005, including $13 million ($0.03 per share), $31 million ($0.06 per share), and $27 million ($0.05 per share) for the 2006 third quarter, 2006 second quarter and 2005 third quarter, respectively, from the U.S. coated papers business.

Quarterly net sales were $5.9 billion for the quarter, down from $6.2 billion in the second quarter, and flat with the third quarter of 2005. The decrease reflects declining average prices for wood products and the sale of the U.S. coated papers business. Paper and packaging product sales remained strong in the 2006 third quarter.

Operating profits continue to rise, at $636 million for the 2006 third quarter versus $624 million in the second quarter and $475 million in the third quarter of 2005. The increase is due to continued price realizations and strong manufacturing operations.

"International Paper had a solid quarter in its platform businesses, driven by continued improved price realizations and strong operations in our North American paper and packaging businesses," said IP Chairman and Chief Executive Officer John Faraci. "North American paper and packaging operating profits more than doubled from third-quarter 2005 levels and were up about 30 percent from second quarter of this year. Volumes were solid for the third quarter, and distribution costs continue to be high. We lost money in wood products in the third quarter, reflecting a weaker housing market and excess capacity."

Commenting on the fourth quarter of 2006, Faraci said, "We expect volumes will be seasonally slower toward the end of the year. Through the end of the third quarter, for North America, we've realized most of our announced paper and packaging increases, and believe we are near the bottom on wood products pricing. Input costs will likely remain high, but we see some favorable signs on the horizon. In light of these factors, we expect earnings from continuing operations and before special items to be slightly lower than in third quarter."

SEGMENT INFORMATION

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

Third-quarter operating profits for Printing Papers were $249 million ($231 million, excluding U.S. coated papers), up slightly from second-quarter operating profits of $247 million ($198 million, excluding U.S. coated papers). Despite some elevated costs for input materials and distribution, the improvement (excluding U.S. coated papers) reflects a $25 million increase in U.S. uncoated papers earnings, driven by continued realization of previously announced price increases and strong mill operations.

Industrial Packaging operating profits increased significantly to $138 million in third quarter (including a $13 million gain from sale of a facility property in Spain), compared with $100 million in the second quarter. Improvements were largely due to higher average price realizations. Volumes increased in our mill system, but were down slightly in converting.

Consumer Packaging operating profits were $64 million in the third quarter, up from $41 million in the second quarter. Mill operations were much stronger, more than offsetting continuing inflationary increases in costs.

The company's distribution business, xpedx, reported record third-quarter operating profits of $34 million compared with operating profits in the prior quarter of $36 million. A solid third-quarter business environment resulted in higher revenues, but margins were slightly down due to rising product costs.

Third-quarter Forest Products operating profits declined to $129 million from second-quarter operating profits of $184 million principally as a result of declining price realizations in wood products. Earnings from forestland and real estate sales were $130 million in third quarter 2006, flat with the second quarter.

Net corporate expenses totaled $216 million for the quarter, up from $174 million in the second quarter due principally to benefit-related charges in third quarter.

EFFECTIVE TAX RATE

The effective tax rate from continuing operations and before special items for the third quarter of 2006 was 27 percent, compared with tax rates of 34 percent in the second quarter and 33 percent in the third quarter of 2005, reflecting a reduction of the 2006 estimated full-year rate to 31 percent.

COATED PAPERS

In the 2006 first quarter, the company had reported its U.S. coated papers business as a discontinued operation. 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. The sale of this business was completed on Aug. 1.

DISCONTINUED OPERATIONS

Discontinued operations includes the operating results of the company's kraft papers business and Brazil coated papers business. In the third quarter of 2006, International Paper completed the sale of its Brazil coated papers business to Stora Enso, resulting in a pre-tax gain of $101 million ($80 million after taxes, or $0.17 per share). In the 2006 first quarter, a pre-tax charge of $101 million ($62 million after taxes, or $0.13 per share) had been recorded to write down the carrying value of the assets of the kraft papers 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.

EFFECTS OF SPECIAL ITEMS

Special items in the third quarter of 2006 included a pre-tax charge of $92 million ($56 million after taxes) for restructuring and other charges, including a pre-tax charge of $57 million ($35 million after taxes) for severance and other charges associated with the company's transformation plan, and a pre-tax charge of $35 million ($21 million after taxes) for adjustments to legal reserves; and a pre-tax gain of $110 million (a loss of $19 million after taxes) for net gains (losses) on sales and impairments of businesses, including pre-tax credits of $304 million ($185 million after taxes) for gains on sales of U.S. forestlands included in the transformation plan, the recognition of a previously deferred $110 million pre-tax gain ($68 million after taxes) related to a 2004 sale of forestlands in Maine, pre-tax losses of $165 million and $115 million ($165 million and $82 million after taxes) to adjust the carrying values of the company's wood products and beverage packaging businesses to estimated fair values, a pre-tax charge of $38 million ($23 million after taxes) to reflect the completion of the sale of the company's U.S. coated papers business in the 2006 third quarter, and a net pre-tax gain of $14 million (a loss of $2 million after taxes) related to other smaller sales. The net after-tax effect of these special items was an expense of $0.16 per share.

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 pre-tax charge of $75 million ($51 million after taxes) for net gains (losses) on sales and impairments of businesses, 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 company's U.S. coated papers business to estimated fair value, 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 special items in the second quarter was an expense of $0.17 per share.

Special items in the 2005 third quarter consisted of a pre-tax charge of $70 million ($48 million after taxes) for restructuring and other charges, a pre-tax credit of $188 million ($109 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, a $5 million pre-tax charge ($3 million after taxes) for adjustments of losses on business previously sold, and a $3 million pre-tax credit ($2 million after taxes) for net adjustments 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, and a $43 million pre-tax credit ($26 million after taxes) was recorded in net interest expense relating to this agreement. The net after-tax effect of these special items was a credit of $1.19 per share.

SOURCE: International Paper




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