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International Paper Swings to 1st Quarter Profit

April 30, 2009 - International Paper today reported preliminary 2009 first-quarter net earnings of $257 million ($0.61 per share) compared with a loss of $1.79 billion ($4.25 per share) in the fourth quarter of 2008 and earnings of $133 million ($0.31 per share) in the first quarter of 2008. Amounts in all periods include special items, including $330 million ($0.78 per share) in the first quarter of 2009 for alternative fuel mixture credits, and a $1.8 billion goodwill impairment charge ($4.22 per share) in the 2008 fourth quarter.

Earnings from continuing operations and before special items in the 2009 first quarter totaled $34 million ($0.08 per share), compared with $89 million ($0.21 per share) in the fourth quarter of 2008 and $175 million ($0.41 per share) in the first quarter of 2008.

Quarterly net sales were $5.7 billion in the first quarter compared with $6.5 billion in the fourth quarter of 2008 and $5.7 billion reported in the first quarter of 2008.

Operating profits in the 2009 first quarter were $779 million, up from $132 million in the fourth quarter of 2008 and $332 million in the first quarter of 2008.

At the end of the 2009 first quarter, International Paper had $3.5 billion in cash and committed facilities. During the quarter, the company recorded $666 million of free cash flow (cash provided by operations less capital expenditures), including $145 million from the receipt of alternative fuel mixture credits, and repaid $550 million of debt.

"Six months into the weakest economic environment we've seen in decades, we continue to execute well," said John Faraci, chairman and chief executive officer. "During the quarter, we also benefited from lower input costs, the realization of integration synergies and reduced overhead spending."

SEGMENT INFORMATION

To measure the performance of the company's business segments from quarter to quarter without variations caused by special or unusual items, management focuses on business segment operating profits excluding those items. First-quarter 2009 segment operating profits and business trends, excluding special items, compared with the prior quarter are as follows:

Industrial Packaging operating profits increased to $188 million, up from $145 million in the fourth quarter of 2008. Considering fourth-quarter results included a $33 million gain related to insurance recovery for our Vicksburg, Miss., mill, the improvement quarter over quarter was substantial as favorable input costs, strong operations, and synergy benefits related to the industrial packaging acquisition offset weak volume and lower export pricing.

Printing Papers had an operating profit of $101 million compared with $113 million in the fourth quarter of 2008. Benefits from strong mill operations and input cost relief were offset by continued weak demand in the global paper and pulp markets. Except for pulp, pricing remained fairly steady in North America.

Consumer Packaging had an operating profit of $22 million, compared to $1 million in the previous quarter. Favorable price and operations along with benefits from lower input costs more than offset declining volumes.

The company's distribution business, xpedx, reported an operating loss of $7 million, down from the $26 million gain posted in the fourth quarter of 2008. Weakened paper and packaging volumes and lower margins were partly offset by favorable cost reductions.

Forest Products operating profits totaled $2 million, down from $38 million in the fourth quarter of 2008, as the company's land sales slowed due to the economic downturn. The company's previously announced transaction involving 143,000 acres is now expected to close by the end of the third quarter, subject to the buyer's receipt of financing. Net corporate expense totaled $51 million for the 2009 first quarter, up from $21 million in the fourth quarter of 2008 and $21 million in the 2008 first quarter, reflecting higher pension expense in 2009.

EFFECTIVE TAX RATE

The effective tax rate from continuing operations and before special items for the first quarter of 2009 was 33 percent, compared with 23 percent in the fourth quarter of 2008, reflecting a higher proportion of taxable income in higher tax rate jurisdictions and certain one-time credits in the fourth quarter.

EFFECTS OF SPECIAL ITEMS

Special items in the first quarter of 2009 included a credit of $540 million before taxes ($330 million after taxes) for alternative fuel mixture credits earned under 2007 legislation enacted to provide a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses, a pre-tax charge of $36 million ($22 million after taxes) for costs related to the industrial packaging business integration, a pre-tax charge of $83 million ($65 million after taxes) for restructuring and other charges, and a $20 million after-tax charge for certain income tax adjustments. Restructuring and other charges included a $52 million pre-tax charge ($32 million after taxes) for severance and benefits associated with the company's 2008 overhead reduction program, a pre-tax charge of $23 million ($28 million after taxes) for closure costs for the Inverurie mill in Scotland, a $6 million pre-tax charge ($4 million after taxes) for facility closure costs in Franklin, Va., and a $2 million pre-tax charge ($1 million after taxes) for costs associated with the reorganization of the company's Shorewood operations.

Special items in the fourth quarter of 2008 included a pre-tax charge of $218 million ($132 million after taxes) for restructuring and other charges, a $1.8 billion charge, before and after taxes, for impairments of goodwill for the company's U.S. printing papers and U.S. and European coated paperboard businesses, a pre-tax charge of $26 million ($16 million after taxes) for costs related to the integration of the industrial packaging business, and a $40 million after-tax benefit for a reduction in deferred taxes related to the restructuring of the company's international operations. Restructuring and other charges included a $123 million pre-tax charge ($75 million after taxes) associated with the closure of the Louisiana mill, a $30 million pre-tax charge ($18 million after taxes) for the shutdown of a paper machine at the Franklin mill, a $53 million pre-tax charge ($32 million after taxes) for costs associated with the company's 2008 overhead cost reduction initiative, an $8 million pre-tax charge ($5 million after taxes) related to the closure of the company's Ace Packaging business, and a $4 million pre-tax charge ($2 million after taxes) associated with the reorganization of Shorewood operations.

Special items in the first quarter of 2008 included a $40 million pre-tax charge ($25 million after taxes) for adjustments of legal reserves, a pre-tax charge of $5 million ($3 million after taxes) for costs associated with the reorganization of Shorewood operations in Canada, a $3 million pre-tax gain ($2 million after taxes), for adjustments to previously recorded reserves associated with the company's transformation plan, and a $1 million credit before and after taxes for adjustments to estimated gains/losses of businesses previously sold. The net after-tax effect of these special items is a loss of $25 million, or $0.06 per share.

ALTERNATIVE FUEL MIXTURE CREDITS

The U.S. Internal Revenue Code allows an excise tax credit for alternative fuel mixtures produced by a taxpayer for sale, or for use as a fuel in a taxpayer's trade or business. The credit is scheduled to expire on Dec. 31, 2009. In January 2009, the company was notified that its registration as an alternative fuel mixer was approved by the Internal Revenue Service. The company has submitted refund claims totaling $558 million ($330 million after associated expenses and taxes) for the period of Nov. 14, 2008, through March 31, 2009, based on actual production at its 20 integrated U.S. mills, and has received in the quarter refund checks of $145 million.

International Paper qualifies for the alternative fuel mixtures tax credit because it uses a bio-fuel known as black liquor, which is a byproduct of its wood pulping process, to power its mills. "This highly efficient process is one of the most environmentally beneficial and responsible energy-use practices by any energy-intensive industry," said John Faraci.

"Today, we generate more than 70 percent of the energy used in our integrated U.S. mills from renewable resources, and we continue to reduce our fossil fuel usage every year. The availability of this tax credit is both timely and beneficial for our shareholders, employees, customers and the communities in which we operate. The funds provide important flexibility as the company strengthens its balance sheet while protecting as many jobs as we can in a challenging economy," Faraci added.

SOURCE: International Paper




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