Index to Annual Report on Form 10-K
For the Year Ended December 31, 20042005
PART I |
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ITEM 1. |
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ITEM 2. |
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| ITEM 9. |
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ITEM 3. |
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ITEM 4. |
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| ITEM 9B. |
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PART II. |
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| PART III. |
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ITEM 5. |
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| ITEM 10. |
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| ITEM 11. |
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ITEM 6. |
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ITEM 7. |
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| ITEM 14. |
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| Executive Summary | 9 |
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| Corporate Overview | 11 |
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| Results of Operations | 11 |
| PART IV. |
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| Description of Industry Segments | 15 |
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| Industry Segment Results | 17 |
| ITEM 15. |
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| Liquidity and Capital Resources | 21 |
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| Critical Accounting Policies | 24 |
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| Significant Accounting Estimates | 25 |
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| Income Taxes | 27 |
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| Recent Accounting Developments | 28 |
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| Legal Proceedings | 30 |
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| Effect of Inflation | 31 |
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| Foreign Currency Effects | 31 |
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| Market Risk | 31 |
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ITEM 7A. |
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| PART | ||
| ITEM 1. BUSINESS | ||
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Financial Information About International and Domestic Operations
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| ITEM 1A. RISK FACTORS | 4 | |
| ITEM 1B. UNRESOLVED STAFF COMMENTS | 6 | |
| ITEM 2. PROPERTIES | ||
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| ITEM 3. LEGAL PROCEEDINGS | 7 | |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 7 | |
| PART II. | ||
| ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 7 | |
| ITEM 6. SELECTED FINANCIAL DATA | 8 | |
| ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
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GENERAL
International Paper Company (the “Company” or “International Paper,” which may be referred to as “we” or “us”), is a global forest products, paper and packaging company that is complemented by an extensive North American merchant distribution system, with primary markets and manufacturing operations in the United States, Europe, South America and Asia. We are a New York corporation, incorporated in 1941 as the successor to the New York corporation of the same name organized in 1898. Our home page on the Internet iswww.internationalpaper.com. You can learn more about us by visiting that site.
In the United States at December 31, 2005, the Company operated 23 pulp, paper and packaging mills, 93 converting and packaging plants, 25 wood products facilities and six specialty chemicals plants. Production facilities at December 31, 2005, in Europe, Asia, Latin America and South America included eight pulp, paper and packaging mills, 55 converting and packaging plants, two wood products facility, two specialty panels and laminated products plants and five specialty chemicals plants. We distribute printing, packaging, graphic arts, maintenance and industrial products principally through over 270 distribution branches located primarily in the United States. At December 31, 2005, we owned or managed approximately 6.5 million acres of forestlands in the United States, mostly in the South, approximately 1.3 million acres in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions.
For management and financial reporting purposes, our businesses are separated into six segments: Printing Papers; Industrial Packaging; Consumer Packaging; Distribution; Forest Products; and Specialty Businesses and Other. A description of these business segments can be found on pages 17 and 18 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. A discussion of the Company’s recently announced Transformation Plan to concentrate on two key global platform businesses, Uncoated Papers (including Distribution) and Packaging, can be found on page 27 of Item 7.
From 2001 through 2005, International Paper’s capital expenditures approximated $5.3 billion, excluding mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and envi
ronmental performance, lower costs and improve forestlands. Capital spending for continuing operations in 2005 was approximately $1.2 billion and is expected to be approximately $1.2 billion in 2006. This amount is below our expected annual depreciation and amortization expense of $1.4 billion. You can find more information about capital expenditures on page 24 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Discussions of acquisitions can be found on page 24 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You can find discussions of restructuring charges and other special items on page 15 and 16 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Throughout this Annual Report on Form 10-K, we “incorporate by reference” certain information in parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC permits us to disclose important information by referring to it in that manner. Please refer to such information. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with all other reports and any amendments thereto filed with or furnished to the SEC, are publicly available free of charge on the Investor Relations section of our Internet Web site atwww.internationalpaper.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information contained on or connected to our Web site is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we filed with or furnished to the SEC.
FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS
The financial information concerning segments is set forth on pages 36 and 37 of Item 8. Financial Statements and Supplementary Data.
FINANCIAL INFORMATION ABOUT INTERNATIONAL AND DOMESTIC OPERATIONS
The financial information concerning international and domestic operations and export sales is set forth on page 37 of Item 8. Financial Statements and Supplementary Data.
Despite the size of the Company’s manufacturing capacity for paper, paperboard, packaging and pulp products, the markets in all of the cited product lines are large and highly fragmented. The markets for wood and specialty products are similarly large and fragmented. There are numerous competitors, and the major mar - -
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kets, both U.S. and non-U.S., in which the Company sells its principal products are very competitive. These products are in competition with similar products produced by other forest products companies, and in some instances, with products produced by other industries from other materials.
Many factors influence the Company’s competitive position, including prices, costs, product quality and services. You can find more information about the impact of prices and costs on operating profits on pages 11 through 23 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You can find information about the Company’s manufacturing capacities on page A-4 of Appendix II.
The Company sells paper, packaging products, building materials and other products directly to end users and converters, as well as through resellers and paper distributors, including our own merchant distribution network, and agents. We own a large merchant distribution business that sells products made both by International Paper and by other companies making paper, packaging and supplies. Sales offices are located throughout the United States as well as internationally. We market our U.S. production of lumber and plywood through independent distribution centers, as well as direct to the retail and industrial market. Specialty products are marketed through various channels of distribution.
DESCRIPTION OF PRINCIPAL PRODUCTS
The Company’s principal products are described on pages 17 through 18 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Sales volumes of major products for 2005, 2004 and 2003 were as follows:
Sales Volumes by Product (1) (2)
| 2005 | 2004 | 2003 | ||||
Printing Papers(In thousands of tons) | ||||||
Brazil Uncoated Papers | 447 | 461 | 447 | |||
Europe & Russia Uncoated Papers and Bristols | 1,419 | 1,409 | 1,352 | |||
U.S. Uncoated Papers and Bristols | 4,261 | 4,614 | 4,439 | |||
Uncoated Papers and Bristols | 6,127 | 6,484 | 6,238 | |||
Coated Papers | 2,109 | 2,173 | 2,113 | |||
Market Pulp (3) | 1,588 | 1,422 | 1,379 | |||
Packaging(In thousands of tons) | ||||||
Container of the Americas | 3,061 | 2,821 | 2,264 | |||
European Container (Boxes) | 1,073 | 1,049 | 1,031 | |||
Other Industrial and Consumer Packaging | 1,041 | 1,064 | 1,088 | |||
Industrial and Consumer Packaging | 5,175 | 4,934 | 4,383 | |||
Containerboard | 1,937 | 2,090 | 1,946 | |||
Bleached Packaging Board | 1,412 | 1,495 | 1,348 | |||
Kraft | 608 | 605 | 606 | |||
Forest Products(In millions) | ||||||
Panels (sq. ft. 3/8” – basis) | 1,606 | 1,563 | 1,580 | |||
Lumber (board feet) | 2,596 | 2,456 | 2,345 | |||
| (1) | Includes third-party and |
| (2) | Sales volumes for divested businesses are included
| sale, except for discontinued operations. |
| (3) | Includes internal sales to mills. |
The Company operates its primary research and development center at Loveland, Ohio, with smaller facilities in Savannah, Georgia, a regional center for applied forest research in Bainbridge, Georgia, and several product laboratories. Additionally, the Company has approximately a 1/3 interest in ArborGen, LLC, a joint venture with certain other forest products and biotechnology companies formed for the purpose of developing and commercializing improvements to increase growth rates and improve wood and pulp quality. We direct research and development activities to short-term, long-term and technical assistance needs of customers and operating divisions; to process, equipment and product innovations; and to improve profits through tree generation and propagation research. Activities include studies on improved forest species and management; innovation and improvement of pulping, bleaching, chemical recovery, papermaking and coating
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processes; packaging design and materials development; reduction of environmental discharges; re-use of raw materials in manufacturing processes; recycling of consumer and packaging paper products; energy conservation; applications of computer controls to manufacturing operations; innovations and improvement of products; and development of various new products. Our development efforts specifically address product safety as well as the minimization of solid waste. The cost to the Company of its research and development operations was $63 million in 2005, $67 million in 2004, and $71 million in 2003.
We own numerous patents, copyrights, trademarks and trade secrets relating to our products and to the processes for their production. We also license intellectual property rights to and from others where necessary. Many of the manufacturing processes are among our trade secrets. Some of our products are covered by U.S. and non-U.S. patents and are sold under well known trademarks. We derive a competitive advantage by protecting our trade secrets, patents, trademarks and other intellectual property rights, and by using them as required to support our businesses.
Information concerning the effects of the Company’s compliance with federal, state and local provisions enacted or adopted relating to environmental protection matters is set forth on pages 32 and 33 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As of December 31, 2005, we had approximately 68,700 employees, 47,200 of whom were located in the United States. Of the U.S. employees, approximately 30,100 are hourly, with unions representing approximately 18,000 employees. Approximately 14,000 of the union employees are represented by the United Steel Workers (USW), the successor union to PACE, under individual location contracts.
During 2005, new labor agreements were ratified at three paper mills, with one paper mill contract carrying over and settling in early 2006. During 2006, labor agreements are scheduled to be negotiated at four paper mill operations including Franklin, Virginia; Riegelwood, North Carolina; Roanoke Rapids, North Carolina; and Terre Haute, Indiana.
During 2005, 19 labor agreements were settled in non-paper mill operations. Settlements included paper converting, chemical, distribution, consumer packaging and woodlands operations. During 2006, 35 labor agreements are scheduled to be negotiated in 33 non-paper mill operations, five of which are carry-overs from past years.
EXECUTIVE OFFICERS OF THE REGISTRANT
John V. Faraci, 56, chairman and chief executive officer since 2003. Prior to this, Mr. Faraci was president since 2003, and executive vice president and chief financial officer from 2000 to 2003. Mr. Faraci joined International Paper in 1974.
Robert M. Amen, 56, president since 2003. Previously, Mr. Amen served as executive vice president responsible for the Company’s paper business, technology and corporate marketing from 2000 to 2003. Mr. Amen will retire from the Company on March 31, 2006.
Newland A. Lesko, 60, executive vice president-manufacturing and technology since 2003. Mr. Lesko previously served as senior vice president-industrial packaging from 1998 to 2003. Mr. Lesko joined International Paper in 1967.
Marianne M. Parrs, 61, executive vice president since 1999 and chief financial officer since 2005. Ms. Parrs previously served as executive vice president-administration since 1999 responsible for information technology, investor relations and global sourcing. She continues to oversee those areas in her current role. Ms. Parrs joined International Paper in 1974.
John N. Balboni, 58, senior vice president and chief information officer since 2005. He previously served as vice president and chief information officer from 2003 to 2005, and vice president-ebusiness from 2000 to 2003. Mr. Balboni joined the Company in 1988.
Michael J. Balduino, 55, senior vice president of the Company and president of our Shorewood subsidiary since 2000. Mr. Balduino joined International Paper in 1992.
H. Wayne Brafford, 54, senior vice president-printing and communications papers since 2005. Previously, Mr. Brafford served as senior vice president-industrial packaging from 2003, and as vice president and general manager-converting, specialty and pulp from 1999 to 2003. Mr. Brafford joined International Paper in 1975.
Jerome N. Carter, 57, senior vice president-human resources since 1999. Since 2005, he also is responsible for overseeing the communications function of the Company. Mr. Carter joined International Paper in 1999.
C. Cato Ealy, 49, senior vice president-corporate development since 2003. He previously served as vice president-corporate development from 1996 to 2003. Mr. Ealy joined International Paper in 1992.
Thomas E. Gestrich, 59, senior vice president and president-IP Asia since 2005. Previously, Mr. Gestrich served as senior vice president-consumer packaging since 2001. Prior to that, he served as vice president and general manager-beverage packaging from 1999 to 2001. Mr. Gestrich joined International Paper in 1990.
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Paul Herbert, 56, senior vice president-strategic initiatives since 2005. He previously served as senior vice president-printing and communication papers from 2000 to 2005. Mr. Herbert joined International Paper in 1992.
Thomas G. Kadien, 49, senior vice president and president-xpedx since 2005. Previously, Mr. Kadien served as senior vice president-Europe from 2003 to 2005, and as vice president-commercial printing and imaging papers from 2001 to 2003. Additionally, from 2000 to 2001, Mr. Kadien served as vice president-fine papers. He joined International Paper in 1978.
Andrew R. Lessin, 63, senior vice president-internal audit since 2002. Mr. Lessin previously served as vice president-finance from 2000 to 2002. He joined International Paper in 1977.
Maximo Pacheco, 53, senior vice president since 2005 and president-IP do Brasil since 2004. Previously, Mr. Pacheco served as senior vice president of IP do Brasil from 2003 to 2004. Prior to that, he was president-IP Latin America from 2000 to 2003. Mr. Pacheco joined International Paper in 1994.
Carol L. Roberts, 46, senior vice president-IP packaging solutions since 2005. She previously served as vice president-container of the Americas from 2000. Ms. Roberts joined International Paper in 1981.
Maura A. Smith, 50, senior vice president, general counsel and corporate secretary since 2003. Since 2005, Ms. Smith is also responsible for overseeing public affairs for the Company. From 1998 to 2003, she served as senior vice president, general counsel and corporate secretary of Owens Corning and in addition, from 2000 to 2003, as chief restructuring officer of Owens Corning. Ms. Smith joined International Paper in 2003.
Robert J. Grillet, 50, vice president-finance and controller since 2003. He previously served as group senior vice president-xpedx from 2000 to 2003. Mr. Grillet joined International Paper in 1976.
Mary A. Laschinger, 45, vice president and president-IP Europe since 2005. Ms. Laschinger previously served as vice president-wood products from 2004 to 2005 and as vice president-pulp from 2001 to 2004. Prior to that, she served as the general manager-industrial papers from 1999 to 2001. Ms. Laschinger joined International Paper in 1992.
For information on the sources and availability of raw materials essential to our business, see Item 2. Properties.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, and in particular, statements found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not historical in nature, may constitute forward-looking statements. These statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar nature. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Below, we have listed specific risks and uncertainties that you should carefully read and consider. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
In addition to the risks and uncertainties discussed elsewhere in this Annual Report on Form 10-K (particularly in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations), or in the Company’s other filings with the Securities and Exchange Commission, the following are some important factors that could cause the Company’s actual results to differ materially from those projected in any forward-looking statement.
RISKS RELATING TO INDUSTRY CONDITIONS
Changes in the cost or availability of raw material and energy. We rely heavily on certain raw materials (principally wood fiber, caustic soda and polyethylene) and energy sources (principally natural gas, coal and fuel oil) in our manufacturing process. Our ability to increase earnings has been, and will continue to be, affected by changes in the costs and availability of such raw materials and energy sources. We may not be able to fully offset the effects of higher raw material or energy costs through hedging arrangements, price increases, productivity improvements or cost reduction programs.
Changes in transportation costs.Our business depends on the transportation of a large number of products, both domestically and internationally. In the United States, an increase in transportation rates or fuel surcharges and/or a reduction in transport availability in truck and rail could negatively impact our ability to provide products to our customers in a timely manner. While we have benefited from supply chain initiatives that provide adequate transportation availability, there is no assurance that such availability can continue to be effectively managed in the future.
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(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
| Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||
March 1, 2005 – March 31, 2005 | 3,494 (a) | $38.86 | 0 | 0 |
Period |
| Total Number |
| Average Price Paid per Share (or Unit) |
| Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
| Maximum Number | |
January 1, 2004 - December 31, 2004 |
| 56,024(a) |
| $41.44 |
| 0 |
| 0 |
| (a) | Represents shares tendered in connection with stock option exercises. |
No activity occurred in months not presented above.
(a)7
Represents shares tendered in connection with stock option exercises.
International Paper Company Five-Year Financial Summary (a) Dollar amounts in millions, except per share amounts and stock prices 2004 2003 2002 2001 2000 Results of Operations Net sales $ 25,548 $ 23,955 $ 23,899 $ 25,385 $ 27,656 Costs and expenses, excluding interest 24,059 22,891 22,808 25,783 26,186 Earnings (loss) from continuing operations before income taxes and minority interest 746 (b) 292 (e) 306 (h) (1,330 )(k) 652 (m) Minority interest expense, net of taxes 62 (b) 111 (e) 118 (h) 140 (k) 228 (m) Discontinued operations (c) (513 ) 21 35 40 41 Extraordinary items – – – (46 )(l) (226 )(n) Cumulative effect of accounting changes – (13 )(f) (1,175 )(i) (16 )(l) – Net earnings (loss) (35 )(b-d) 302 (e-g) (880 )(h-j) (1,204 )(k,l) 142 (m,n) Earnings (loss) applicable to common shares (35 )(b-d) 302 (e-g) (880 )(h-j) (1,204 )(k,l) 142 (m,n) Financial Position Working capital $ 4,447 $ 3,826 $ 4,386 $ 3,875 $ 3,990 Plants, properties and equipment, net 13,432 13,260 13,292 14,115 15,459 Forestlands 3,936 3,979 3,765 4,107 5,870 Total assets 34,217 35,525 33,792 37,177 42,109 Notes payable and current maturities of long-term debt 506 2,087 – 957 2,115 Long-term debt 14,132 13,450 13,042 12,457 12,647 Common shareholders’ equity 8,254 8,237 7,374 10,291 12,034 Basic Per Share of Common Stock - Earnings (loss) from continuing operations $ 0.98 $ 0.62 $ 0.54 $ (2.45 ) $ 0.73 Discontinued operations (c) (1.05 ) 0.04 0.07 0.08 0.09 Extraordinary items – – – (0.10 ) (0.50 ) Cumulative effect of accounting changes – (0.03 ) (2.44 ) (0.03 ) – Net earnings (loss) (0.07 ) 0.63 (1.83 ) (2.50 ) 0.32 Diluted Per Share of Common Stock - Earnings (loss) from continuing operations $ 0.98 $ 0.61 $ 0.54 $ (2.45 ) $ 0.73 Discontinued operations (c) (1.05 ) 0.04 0.07 0.08 0.09 Extraordinary items – – – (0.10 ) (0.50 ) Cumulative effect of accounting changes – (0.03 ) (2.43 ) (0.03 ) – Net earnings (loss) (0.07 ) 0.63 (1.82 ) (2.50 ) 0.32 Cash dividends Common shareholders’ equity 16.93 16.97 15.21 21.25 24.85 Common Stock Prices High $ 45.01 $ 43.32 $ 46.19 $ 43.25 $ 60.00 Low 37.12 33.09 31.35 30.70 26.31 Year-end 42.00 43.11 34.97 40.35 40.81 Financial Ratios Current ratio 1.9 1.5 1.9 1.7 1.5 Total debt to capital ratio 59.9 61.2 55.4 50.1 49.5 Return on equity (0.4 )(b-d) 3.9 (e-g) (8.8 )(h-j) (10.6 )(k,l) 1.2 (m,n) Return on investment from continuing operations 3.9 (b,d) 2.9 (e,g) 2.6 (h,j) (0.8 )(k) 3.2 (m) Capital Expenditures $ 1,328 $ 1,166 $ 1,009 $ 1,049 $ 1,352 Number of Employees 79,400 82,800 91,000 100,100 112,900 FIVE-YEAR FINANCIAL SUMMARY (a) RESULTS OF OPERATIONS Net sales Costs and expenses, excluding interest Earnings (loss) from continuing operations before income taxes and minority interest Minority interest expense, net of taxes Discontinued operations Extraordinary items Cumulative effect of accounting changes Net earnings (loss) Earnings (loss) applicable to common shares FINANCIAL POSITION Working capital Plants, properties and equipment, net Forestlands Total assets Notes payable and current maturities of long-term debt Long-term debt Common shareholders’ equity BASIC PER SHARE OF COMMON STOCK – Earnings (loss) from continuing operations Discontinued operations (c) Extraordinary items Cumulative effect of accounting changes Net earnings (loss) DILUTED PER SHARE OF COMMON STOCK – Earnings (loss) from continuing operations Discontinued operations (c) Extraordinary items Cumulative effect of accounting changes Net earnings (loss) Cash dividends Common shareholders’ equity COMMON STOCK PRICES High Low Year-end FINANCIAL RATIOS Current ratio Total debt to capital ratio Return on equity Return on investment from continuing operations CAPITAL EXPENDITURES NUMBER OF EMPLOYEES 85SELECTED FINANCIAL DATA 1.00 1.00 1.00 1.00 1.00 6ITEM 6. SELECTED FINANCIAL DATADollar amounts in millions, except per share amounts and stock prices 2005 2004 2003 2002 2001 $ 24,097 $ 23,359 $ 22,138 $ 22,359 $ 24,010 22,918 21,925 21,148 21,306 24,373 586 (b) 724 (e) 285 (h) 340 (k) (1,226 )(n) 12 26 83 47 144 241 (c) (491 )(f) 57 (247 ) (8 ) – – – – (46 )(o) – – (13 )(i) (893 )(l) (17 )(o) 1,100 (b-d) (35 )(e-g) 302 (h-j) (880 )(k-m) (1,204 )(n,o) 1,100 (b-d) (35 )(e-g) 302 (h-j) (880 )(k-m) (1,204 )(n,o) $ 2,565 $ 5,252 $ 4,908 $ 4,850 $ 4,691 11,801 12,216 12,138 12,319 13,129 2,190 2,157 2,332 2,402 2,923 28,771 34,217 35,525 33,792 37,177 1,181 222 1,776 – 832 11,023 13,632 13,127 12,329 11,751 8,351 8,254 8,237 7,374 10,291 $ 1.77 $ 0.94 $ 0.54 $ 0.54 $ (2.35 ) 0.49 (1.01 ) 0.12 (0.51 ) (0.02 ) – – – – (0.09 ) – – (0.03 ) (1.86 ) (0.04 ) 2.26 (0.07 ) 0.63 (1.83 ) (2.50 ) $ 1.74 $ 0.93 $ 0.53 $ 0.54 $ (2.35 ) 0.47 (1.00 ) 0.13 0.51 (0.02 ) – – – – (0.09 ) – – (0.03 ) (1.85 ) (0.04 ) 2.21 (0.07 ) 0.63 (1.82 ) (2.50 ) 1.00 1.00 1.00 1.00 1.00 17.03 16.93 16.97 15.21 21.25 $ 42.59 $ 45.01 $ 43.32 $ 46.19 $ 43.25 26.97 37.12 33.09 31.35 30.70 33.61 42.00 43.11 34.97 40.35 1.5 1.7 1.5 1.7 1.6 58.8 62.1 63.0 61.2 54.1 13.2 (b-d) (0.4 )(e-g) 3.9 (h-j) (8.8 )(k-l) (10.6 )(n,o) 5.2 (b-d) 3.7 (e-g) 2.9 (h-j) 2.7 (k,l) (1.6 )(n) $ 1,172 $ 1,213 $ 1,031 $ 913 $ 937 68,700 79,400 82,800 91,000 100,100
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL GLOSSARY
Current ratio –
current assets divided by current liabilities.
Total debt to capital ratio –
long-term debt plus notes payable and current maturities of long-term debt divided by long-term debt, notes payable and current maturities of long-term debt, minority interest and total common shareholders’ equity.
Return on equity –
net earnings divided by average common shareholders’ equity (computed monthly).
Return on investment –
the after-tax amount of earnings from continuing operations before interest and minority interest divided by the average of total assets minus accounts payable and accrued liabilities (computed monthly).
FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY
(a) | All periods presented have been restated to reflect the Carter Holt Harvey |
2005:
2004:
| (b) | Includes restructuring and other charges of |
| (c) | Includes a gain of $29 million before taxes ($361 million after taxes and minority interest) from the 2005 sale of Carter Holt Harvey Limited. |
| (d) | Includes a $446 million reduction in the income tax provision, including a reduction of $627 million from a settlement reached with the U.S. Internal Revenue Service concerning the 1997 through 2000 U.S. federal income tax audit, a charge of $142 million for deferred taxes related to earnings repatriations under the American Jobs Creation Act of 2004, and $39 million of other tax charges. |
2004:
| (e) | Includes restructuring and other charges of $166 million before taxes ($103 million after taxes), including a |
(c)
| (f) | Includes | Harvey Tissue business, and a pre-tax charge of $323 million ($711 million after taxes) |
(d)
| (g) | Includes a |
2003:
| (h) |
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taxes) for the net reversal of restructuring reserves no longer required.
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| (i) | Includes a charge of $10 million after taxes for the cumulative effect of an accounting change for the adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations,” and a charge of $3 million after taxes for the cumulative effect of an accounting change related to the adoption of FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” |
(g)
| (j) | Includes a |
2002:
2002:
(h)
| (k) | Includes restructuring and other charges of | ||
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(i)
| (l) | Includes |
(j)
| (m) | Reflects a decrease of $46 million in income tax provision for a reduction of deferred state income tax liabilities. |
2001:
2001:
(k)
| (n) | Includes restructuring and other charges of $1.1 billion before taxes |
| (o) |
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810
EXECUTIVE SUMMARY |
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| energy, wood, caustic soda and other raw materials which reduced operating profits compared with 2004 |
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Looking forward to However, we see favorable signs of positive momentum for the remainder of 2006. We anticipate that demand in In connection with our overall strategic direction, we are evaluating options for the possible sale or spin-off of certain of our businesses as previously announced in our Transformation Plan, with decisions on certain businesses anticipated during 2006. We also will Results of Operations Industry segment operating profits are used by International Paper’s management to measure the earnings performance of its businesses. Management believes that this measure allows a better understanding of trends in costs, operating efficiencies, prices and volumes. Industry segment operating profits are defined as earnings before taxes and minority interest, interest expense, corporate items and corporate special items. Industry segment operating profits are defined by the Securities and Exchange Commission as a non-GAAP financial measure, and are not GAAP alternatives to net income or any other operating measure prescribed by accounting principles generally accepted in the United States. International Paper operates in six segments: Printing Papers, Industrial The following table shows the components of net earnings (loss) for each of the last three years: |
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*Special items include restructuring and other charges, net losses Industry segment operating profits were Segment Operating Profit (in millions)
11 The principal changes in operating profit by segment were as follows:Printing Papers’ profits were $29 million lower as the
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9in 2005 than in 2004.
Corporate items of Corporate special items, including restructuring and other charges, Interest expense, net, of $593 million in 2005 includes a pre-tax credit of $43 million related to an agreement reached with the Internal Revenue Service concerning the Company’s 1997 through 2000 federal income tax audits, and a pre-tax credit of $11 million related to the collection of a note receivable from the 2001 sale of the Flexible Packaging business. Excluding these items, interest expense, net, of $647 million decreased The 2005 income tax special items. The tax benefit of $56 million in 2003 included During the 2005 third quarter, International Paper completed the sale of the Carter Holt Harvey Limited business. During 2004, International Paper completed the sale of its Weldwood of Canada Limited business in the fourth Accounting changes included a charge of $13 million in 2003 for the adoption of new accounting pronouncements regarding asset retirement obligations and Liquidity and Capital Resources For the year ended December 31, |
Our focus in Transformation Plan In July 2005, International Paper announced a Transformation Plan to focus on two key global platform businesses: Uncoated Papers (including Distribution) and Packaging. In connection with this plan, the Company is exploring strategic alternatives for other businesses including Coated and Supercalendered Papers, Beverage Packaging, Kraft Papers, Arizona Chemical, Wood Products, and segments or potentially all of its 6.5 million acres of U.S. forestlands. This evaluation process is underway, with decisions anticipated for some of these businesses in 2006. While the exact use of any proceeds from potential future 12 Critical Accounting Policies and Significant Accounting Estimates Accounting policies that may have a significant effect on our reported results of operations and financial position, and that can require judgments by management in their application, include accounting for contingent liabilities, impairments of long-lived assets and goodwill, pensions and postretirement benefit obligations and income taxes. In recent years, the assumption estimates used for pensions have resulted in increases in reported pension charges. Pension expenses for our U.S. plans increased to $243 million in 2005 from $111 million in 2004
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Legal The following table presents a reconciliation of International Paper’s net earnings (loss) to its operating profit: operations charge. In the 2004 second quarter, a $90 million after-tax and minority interest discontinued operations gain was recorded from the sale of the Carter Holt Harvey Tissue business. As a result, prior periods operating results have been restated to present the operating results of these businesses as earnings from discontinued operations, including earnings of $108 million in 2004, $21 million in 2003, and $35 million in 2002. Net earnings for 2003 included after-tax charges of $3 million and $10 million for the cumulative effect of accounting changes for the adoption of the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,” and Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations, respectively.” Results for 2002 included a charge of $1.2 billion after minority interest for the cumulative effect of an accounting change to record the transitional impairment charge for the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.” Income Taxes The income tax provision for 2004 was $206 million, or 28% of pretax earnings from continuing operations before minority interest. This included a $41 million tax benefit related to special items. Excluding the impact of special items, the tax provision was $247 million, or 26% of pre-tax earnings before minority interest. While the Company reported pre-tax income in 2003, a net income tax benefit was recorded reflecting decreases totaling $231 million in the provision for income taxes for special items. These included a $13 million reduction in the fourth quarter ($26 million before minority interest) for a favorable settlement with Australian tax authorities of net operating loss carryforwards, a $60 million reduction in the third quarter reflecting a favorable revision of estimated tax accruals upon filing the 2002 Federal income tax return and increased research and development credits, and a $50 million reduction in the second quarter reflecting a favorable tax audit settlement and benefits from a government sponsored overseas tax program in Italy. Excluding the year-to-date tax effects of special items, the effective tax rate for 2003 was 20%. The net tax benefit in 2002 reflects the reversal of the assumed stock-sale tax treatment of the 2001 fourth-quarter write-down to net realizable value of the assets of Arizona Chemical upon the decision to discontinue sale efforts and to hold and operate this business in the future, and a $46 million fourth-quarter adjustment of deferred income tax liabilities for the effects of state tax credits and the taxability of the Company’s operations in various state tax jurisdictions. In millions 2004 2003 2002 Net Earnings (Loss) $ (35 ) $ 302 $ (880 ) Add back (deduct): Discontinued operations: Earnings from operations (108 ) (21 ) (35 ) Loss on sales or impairments 621 – – Cumulative effect of accounting changes – 13 1,175 Earnings From Continuing Operations 478 294 260 Add back (deduct): Income tax provision (benefit) 206 (113 ) (72 ) Add back: Minority interest expense, net of taxes 62 111 118 Earnings From Continuing Operations Before Income Taxes and Minority Interest 746 292 306 Interest expense, net 743 772 785 Minority interest included in operations (59 ) (48 ) (43 ) Corporate items 469 466 253 Special items: Restructuring and other charges 211 298 695 Insurance recoveries (123 ) – – Net losses (gains) on sales and impairments of businesses held for sale 135 32 (41 ) Reversals of reserves no longer required, net (35 ) (40 ) (68 ) $ 2,087 $ 1,772 $ 1,887 Industry Segment Operating Profit Printing Papers $ 579 $ 460 $ 545 Industrial and Consumer Packaging 543 451 551 Distribution 87 80 91 Forest Products 793 720 641 Carter Holt Harvey 47 38 41 Specialty Businesses and Other 38 23 18 Total Industry Segment Operating Profit $ 2,087 $ 1,772 $ 1,887 Discontinued Operations and Cumulative Effect of Accounting Changes In the third quarter of 2004, International Paper entered into an agreement to sell its Weldwood of Canada Limited (Weldwood) business. The Company completed the sale in the fourth quarter for approximately $1.1 billion. As a result of the sale, a $323 million pre-tax loss on the sale was recorded ($711 million after taxes) as a discontinued 14 items, the tax provision was $226 million, or 26% of pre-tax earnings before minority interest. While the Company reported pre-tax income in 2003, a net income tax benefit of $56 million was recorded reflecting decreases totaling $110 million in the provision for income taxes for special items. These included a $60 million reduction in the third quarter reflecting a favorable revision of estimated tax accruals upon filing the 2002 federal income tax return and increased research and development credits, and a $50 million reduction in the second quarter reflecting a favorable tax audit settlement and benefits from a government sponsored overseas tax program. Excluding the year-to-date tax effects of special items, the effective tax rate for 2003 was 26%. Corporate Items and Interest Expense Minority interest expense, net of taxes, decreased to Interest expense, net, of $593 million includes a pre-tax credit of $43 million for interest related to the agreement reached with the U.S. Internal Revenue Service concerning the Company’s 1997 through 2000 U.S. federal income tax audits, and a pre-tax credit of $11 million related to the collection of a note receivable from the 2001 sale of the Flexible Packaging business. Excluding these items, interest expense, net, of $647 million decreased For the twelve months ended December 31, Our supply chain Restructuring and Other Charges International Paper continually evaluates its operations for improvement opportunities to (a) invest additional capital to upgrade the facility, (b) shut down the facility and record the corresponding charge, or (c) evaluate the expected recovery of the carrying value of the facility to determine if an impairment of the asset value of the facility has occurred under SFAS No. 144. In recent years, this policy has led to the shutdown of a number of facilities and the recording of significant asset impairment charges and severance costs. 2005: During 2005, total restructuring and other charges of $358 million before taxes ($225 million after taxes) were recorded. These charges included a $274 million charge before taxes ($174 million after taxes) for organizational restructuring programs, principally costs associated with the Company’s previously announced Transformation Plan, a $57 million charge before taxes ($35 million after taxes) for early debt extinguishment costs and a $27 million charge before taxes ($16 million after taxes) for litigation settlements. Charges of $298 million relating to Corporate programs are included as Corporate items, with $60 million of business-specific charges included in the respective business’s operating results. Earnings also included a $258 million pre-tax credit ($151 million after taxes) for net insurance recoveries related to the hardboard siding and roofing litigation, and a $4 million credit before taxes ($3 million after taxes) for the net reversal of restructuring reserves no longer required. Additionally, included in interest income was a credit of $54 million before taxes ($33 million after taxes), which included $43 million before taxes ($26 million after taxes) related to a settlement with the U.S. Internal Revenue Service, and $11 million before taxes ($7 million after taxes) related to the collection of a note from the 2001 Flexible Packaging business sale. 2004:During 2004, restructuring and other charges before taxes 15 charge before taxes 2003:During 2003, restructuring and other charges before taxes A further discussion of restructuring, business improvement and other charges can be found in Note 6 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. Net Losses Net losses 2005: In the 2005 fourth quarter, a pre-tax charge of $46 million ($30 million after taxes) was recorded to write down the assets of the Polyrey business to estimated fair value and to adjust losses on businesses previously sold. 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, a net pre-tax credit of $19 million ($12 million after taxes) was recorded 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, and final charges related to the sale of Fine Papers and Industrial Papers. 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. During the first quarter of 2005, International Paper announced an agreement to sell its Fine Papers and In dustrial Papers businesses. As a result, a $73 million pre-tax loss ($48 million after taxes) was recorded in the first quarter to write down the net assets of these businesses to their estimated net realizable value. 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 December 2004, International Paper committed to plans for the sale in 2005 of its Fine Papers business and its Maresquel mill and Papeteries de France distribution business in Europe, resulting in charges of $56 million before taxes ($54 million after taxes) to write down the assets of these entities to their estimated fair values less costs to sell. In October 2004, International Paper sold two box plants located in China, resulting in a pre-tax loss of $14 million ($4 million after taxes). In the 2004 third quarter, a charge of $38 million before and after taxes was recorded for losses associated with the sale of Scaldia Papier B.V. and its subsidiary Recom B.V. ($34 million) and to adjust the estimated loss on sale of Papeteries de Souche L.C. ($4 million). In the 2004 second quarter, a charge of $27 million before and after taxes was recorded to write down the assets of Papeteries de Souche L.C. to their estimated realizable value. In 2003:In the fourth quarter of 2003, International Paper recorded a $34 million pre-tax charge ($34 million after taxes) to write down the assets of its Polyrey business to estimated fair value. In addition, a $13 million pre-tax gain Industry Segment Operating Profit Industry segment operating profits of 16 perboard capacity ($ International Paper’s industry segments discussed below are consistent with the internal structure used to manage these businesses. All segments Printing Papers International Paper is one of the world’s leading producers of printing and writing papers. Products in this segment include uncoated and coated papers, market pulp and bristols. Uncoated Papers:This business produces papers for use in desktop and laser copiers and digital imaging printing as well as in advertising and promotional materials such as brochures, pamphlets, greeting cards, books, annual reports and direct mail publications. Uncoated Papers also produces a variety of grades that are converted by our customers into envelopes, tablets, business forms and file folders. quality text, cover, business correspondence and artist papers and sold under brand namesStrathmore andBeckett. Coated Papers:This business produces coated papers used in a variety of printing and publication end uses such as catalogs, direct mailings, magazines, inserts and commercial printing. Products include coated free sheet, coated groundwood and supercalendered groundwood papers. Production capacity in the United States amounts to approximately Market Pulp:Market pulp is used in the manufacture of printing, writing and specialty papers, towel and tissue products and filtration products. Pulp is also converted into products such as diapers and sanitary napkins. Pulp products include fluff, southern softwood pulp, as well as northern, southern and birch hardwood paper pulps. These products are produced in the United States, France, Poland and Russia, and are sold around the world. International Paper facilities have annual dried pulp capacity of about 1.6 million tons. Brazilian Paper:Brazilian operations function through International Paper do Brasil, Ltda and subsidiaries, that own or manage Industrial Industrial Packaging:With production capacity of about products in four domestic facilities and one in the Consumer Packaging Consumer Packaging:International Paper is the world’s largest producer of solid bleached sulfate packaging 17 board with annual U.S. production capacity of about 1.8 million tons. On a global basis, across our businesses we work closely with our customers to understand their needs and create profitable business opportunities sourced from our broad base of packaging solutions: substrates and barrier board technologies combined with our printing expertise, graphics and structural design, filling equipment and service,ASURYS technologies (formerly called Smart Distribution Throughxpedx, our North American merchant distribution business, we service the commercial printing market with printing papers and graphic art supplies and equipment, high traffic/ Forest Products Forest Resources:International Paper owns or manages approximately forestlands supplied about generating activities include the sale of trees for harvest, the sale of forestlands to investment funds and other buyers for various uses, real estate development and the leasing of our properties for third-party recreational and commercial uses. The mix of these activities varies based on the fiber requirements of our mills and wood products plants, prevailing stumpage prices, supply and demand for forestlands, and market preferences for timber and forestlands. When stumpage prices are depressed relative to land values, forestland sales tend to comprise a larger part of our portfolio mix. Conversely, when stumpage prices are high, stumpage sales may be the best alternative to maximize the value of our forestland holdings. Wood Products:International Paper owns and operates 25 plants producing lumber, plywood, engineered wood products and utility poles in the southern United States. Through these, we produce approximately 2.5 billion board feet of lumber and 1.6 billion square feet of plywood annually. Specialty Businesses and Other Chemicals: Arizona Chemical is a leading producer of specialty resins based on crude tall oil, a byproduct of the wood pulping process. These products, used in adhesives and inks, are made at 11 plants in the United States and Europe. European Distribution: International Paper exited the European Distribution business with the sale of Papeteries de France in the second quarter of 2005. Products and brand designations appearing in italics are trademarks of International Paper or a related company. Printing Papers Demand for Printing Papers products is closely correlated with changes in commercial printing and advertising activity, direct mail volumes and, for uncoated cut-size products, with changes in white-collar employment levels that affect the usage of copy and laser printer paper. Market pulp is further affected by changes in currency rates that can enhance or disadvantage producers in different geographic regions. Principal cost drivers include manufacturing efficiency and raw material and energy costs. Printing Papers net sales for 2005 increased 2% from 2004 and 8% from 2003. Operating profits in 2005 were 5% lower than in 2004 but 19% higher than in 2003. Compared with 2004, U.S. coated paper and market pulp earnings improved, but this was offset by earnings declines in U.S. uncoated papers, European Papers and Brazilian Papers. Benefits from improved mill operations and lower overhead costs ($129 million) and higher average sales prices in the United States ($371 million), 18 were more than offset by higher raw material and energy costs ($312 million), increased market related downtime ($187 million) and other items ($30 million). Compared with 2003, higher 2005 earnings in the Brazilian Papers, U.S. coated papers and U.S. market pulp businesses were offset by lower earnings in the U.S. uncoated papers and the European Papers businesses. The Printing Papers segment took 995,000 tons of downtime in 2005, including 540,000 tons of lack-of-order downtime to align production with customer demand. This compared with 525,000 tons of downtime in 2004, of which 65,000 tons related to lack-of-orders. Sales Operating Profit Uncoated Papers sales totaled $4.8 billion in 2005 compared with $5.0 billion in 2004 and 2003. Sales price realizations in the United States averaged 4.4% higher in 2005 than in 2004, and 4.6% higher than 2003. Favorable pricing momentum which began in 2004 carried over into the beginning of 2005. Demand, however, began to weaken across all grades as the year progressed, resulting in lower price realizations in the second and third quarters. However, prices stabilized as the year ended. Total shipments for the year were 7.2% lower than in 2004 and 4.2% lower than in 2003. To continue matching our productive capacity with customer demand, the business announced the permanent closure of three uncoated freesheet machines and took significant lack-of-order downtime during the period. Demand showed some improvement toward the end of the year, bolstered by the introduction our new line of vision innovation paper products (VIP TechnologiesTM), with improved brightness and whiteness. Mill operations were favorable compared to last year, and the rebuild of the No. 1 machine at the Eastover, South Carolina mill was completed as planned in the fourth quarter. However, the favorable impacts of improved mill operations and lower overhead costs were more than offset by record high input costs for energy and wood and higher transportation costs compared to 2004. The earnings decline in 2005 compared with 2003 was principally due to lower shipments, higher downtime and increased costs for wood, energy and transportation, partially offset by lower overhead costs and favorable mill operations. Average sales price realizations for our European operations remained relatively stable during 2005, but averaged 1% lower than in 2004, and 6% below 2003 levels. Sales volumes rose slightly, up 1% in 2005 compared with 2004 and 5% compared to 2003. Earnings were lower than in 2004, reflecting higher wood and energy costs and a compression of margins due to unfavorable foreign currency exchange movements. Earnings were also adversely affected by downtime related to the rebuild of three paper machines during the year. Coated Paperssales in the United States were $1.6 billion in 2005, compared with $1.4 billion in 2004 and $1.3 billion in 2003. The business reported an operating profit in 2005 versus a small operating loss in 2004. The earnings improvement was driven by higher average sales prices and improved mill operations. Price realizations in 2005 averaged 13% higher than 2004. Higher input costs for raw materials and energy partially offset the benefits from improved prices and operations. Sales volumes were about 1% lower in 2005 versus 2004. Market Pulp sales from our U.S. and European facilities totaled $757 million in 2005 compared with $661 million and $571 million in 2004 and 2003, respectively. Operating profits in 2005 were up 86% from 2004. An operating loss had been reported in 2003. Higher average prices and sales volumes, lower overhead costs and improved mill operations in 2005 more than offset increases in raw material, energy and chemical costs. U.S. softwood and hardwood pulp prices improved through the 2005 first and second quarters, then declined during the third quarter, but recovered somewhat toward year end. Softwood pulp prices ended the year about 2% lower than 2004, but were 15% higher than 2003, while hardwood pulp prices ended the year about 15% higher than 2004 and 10% higher than 2003. U.S. pulp sales volumes were 12% higher than in 2004 and 19% higher than in 2003, reflecting increased global demand. European pulp volumes increased 15% and 2% compared with 2004 and 2003, respectively, while average sales prices increased 4% and 11% compared with 2004 and 2003, respectively. Brazilian Paper sales were $684 million in 2005 compared with $592 million in 2004 and $540 million in 2003. Sales volumes for uncoated freesheet paper, coated paper and wood chips were down from 2004, but average price realizations improved for exported uncoated freesheet and coated groundwood paper grades. Favorable currency translation, as yearly average Real exchange rates versus the U.S. dollar were 17% higher in 2005 than in 2004, positively impacted reported sales in U.S. dollars. Average sales prices for domestic uncoated paper declined 4% in local currency versus 2004, while domestic coated paper prices were down 3%. Operating profits in 2005 were down 9% from 2004, but were up 2% from 2003. Earnings in 2005 were negatively impacted by a weaker product and geographic sales mix for both uncoated and coated papers, reflecting increased competition and softer demand, particularly in the printing, commercial and editorial market segments. 19 Entering 2006, earnings in the first quarter are expected to improve compared with the 2005 fourth quarter due principally to higher average price realizations, reflecting announced price increases. Product demand for the first quarter should be seasonally slow, but is expected to strengthen as the year progresses, supported by continued economic growth in North America, Asia and Eastern Europe. Average prices should also improve in 2006 as price increases announced in late 2005 and early 2006 for uncoated freesheet paper and pulp continue to be realized. Operating rates are expected to improve as a result of industry-wide capacity reductions in 2005. Although energy and raw material costs remain high, there has been some decline in both natural gas and delivered wood costs, with further moderation expected later in 2006. We will continue to focus on further improvements in our global manufacturing operations, implementation of supply chain enhancements and reductions in overhead costs during 2006. Industrial Packaging Demand for Industrial Packaging products is closely correlated with non-durable industrial goods production in the United States, as well as with demand for processed foods, poultry, meat and agricultural products. In addition to prices and volumes, major factors affecting the profitability of Industrial Packaging are raw material and energy costs, manufacturing efficiency and product mix. Industrial Packaging’s net sales for 2005 increased 2% compared with 2004, and were 18% higher than in 2003, reflecting the inclusion of International Paper Distribution Limited (formerly International Paper Pacific Millennium Limited) beginning in August 2005. Operating profits in 2005 were 39% lower than in 2004 and 13% lower than in 2003. Sales volume increases ($24 million), improved price realizations ($66 million), and strong mill operating performance ($27 million) were not enough to offset the effects of increased raw material costs ($103 million), higher market related downtime costs ($50 million), higher converting operating costs ($22 million), and unfavorable mix and other costs ($67 million). Additionally, the May 2005 sale of our Industrial Papers business resulted in a $25 million lower earnings contribution from this business in 2005. The segment took 370,000 tons of downtime in 2005, including 230,000 tons of lack-of-order downtime to balance internal supply with customer demand, compared to a total of 170,000 tons in 2004, which included 5,000 tons of lack-of-order downtime. Industrial Packaging Sales Operating Profit Containerboard’s net sales totaled $895 million in 2005, $951 million in 2004 and $815 million in 2003. Soft market conditions and declining customer demand at the end of the first quarter led to lower average sales prices during the second and third quarters. Beginning in the fourth quarter, prices recovered as a result of increased customer demand and a rationalization of supply. Full year sales volumes trailed 2004 levels early in the year, reflecting the weak market conditions in the first half of 2005. However, volumes rebounded in the second half of the year, and finished the year ahead of 2004 levels. Operating profits decreased 38% from 2004, but were flat with 2003. The favorable impacts of increased sales volumes, higher average sales prices and improved mill operating performance were not enough to offset the impact of higher wood, energy and other raw material costs and increased lack-of-order downtime. Implementation of the new supply chain operating model in our containerboard mills during 2005 resulted in increased operating efficiency and cost savings. Specialty Papersin 2005 included the Kraft Paper business for the full year and the Industrial Papers business for five months prior to its sale in May 2005. Net sales totaled $468 million in 2005, $723 million in 2004 and $690 million in 2003. Operating profits in 2005 were down 23% compared with 2004 and 54% compared with 2003, reflecting the lower contribution from Industrial Papers. U.S. Converting Operationsnet sales for 2005 were $2.6 billion compared with $2.3 billion in 2004 and $1.9 billion in 2003. Sales volumes were up 10% in 2005 compared with 2004, mainly due to the acquisition of Box USA in July 2004. Average sales prices in 2005 began the year above 2004 levels, but softened in the second half of the year. Operating profits in 2005 decreased 46% and 4% from 2004 and 2003 levels, respectively, primarily due to increased linerboard, freight and energy costs. European Containersales for 2005 were $883 million compared with $865 million in 2004 and $801 million in 2003. Operating profits declined 19% and 13% compared with 2004 and 2003, respectively. The increase in sales in 2005 reflected a slight increase in demand over 2004, but this was not sufficient to offset the negative earnings effect of increased operating costs, unfavorable foreign exchange rates and a reduction in average sales prices. The Moroccan box plant acquisition, which was completed in October 2005, favorably impacted fourth-quarter results. Industrial Packaging’s sales in 2005 included $104 million from International Paper Distribution Limited, our Asian box and containerboard business, subsequent to the acquisition of an additional 50% interest in August 2005. 20 Entering 2006, Industrial Packaging earnings are expected to improve significantly in the first quarter compared with the fourth quarter 2005. Average price realizations should continue to benefit from price increases announced in late 2005 and early 2006 for linerboard and domestic boxes. Containerboard sales volumes are expected to drop slightly in the 2006 first quarter due to fewer shipping days, but growth is anticipated for U.S. converted products due to stronger demand. Costs for wood, freight and energy are expected to remain stable during the 2006 first quarter, approaching fourth quarter 2005 levels. The continued implementation of the new supply chain model at our mills during 2006 will bring additional efficiency improvements and cost savings. On a global basis, the European Container operating results are expected to improve as a result of targeted market growth and cost reduction initiatives, and we will begin seeing further contributions from our recent Moroccan box plant acquisition and from International Paper Distribution Limited. Consumer Packaging Demand and pricing for Consumer Packaging products correlate closely with consumer spending and general economic activity. In addition to prices and volumes, major factors affecting the profitability of Consumer Packaging are raw material and energy costs, manufacturing efficiency and product mix. Consumer Packaging’s2005 net sales of $2.6 billion were flat compared with 2004 and 5% higher compared with 2003. Operating profits in 2005 declined 22% from 2004 and 31% from 2003 as improved price realizations ($46 million) and favorable operations in the mills and converting operations ($60 million) could not overcome the impact of cost increases in energy, wood, polyethylene and other raw materials ($120 million), lack-of-order downtime ($13 million) and other costs ($8 million). Consumer Packaging Sales Operating Profit Bleached Board net sales of $864 million in 2005 were up from $842 million in 2004 and $751 million in 2003. The effects in 2005 of improved average price realizations and mill operating improvements were not enough to offset increased energy, wood, polyethylene and other raw material costs, a slight decrease in volume and increased lack-of-order downtime. Bleached board mills took 100,000 tons of downtime in 2005, including 65,000 tons of lack-of-order downtime, compared with 40,000 tons of downtime in 2004, none of which was market related. During 2005, restructuring and manufacturing improvement plans were implemented to reduce costs and improve market alignment. Foodservicenet sales were $437 million in 2005 compared with $480 million in 2004 and $460 million in 2003. Average sales prices in 2005 were up 3%; however, domestic cup and lid sales volumes were 5% lower than in 2004 as a result of a rationalization of our customer base early in 2005. Operating profits in 2005 increased 147% compared with 2004, largely due to the settlement of a lawsuit and a favorable adjustment on the sale of the Jackson, Tennessee bag plant. Excluding unusual items, operating profits were flat as improved price realizations offset increased costs for bleached board and resin. Shorewoodnet sales of $691 million in 2005 were essentially flat with net sales in 2004 of $687 million, but were up compared with $665 million in 2003. Operating profits in 2005 were 17% above 2004 levels and about equal to 2003 levels. Improved margins resulting from a rationalization of the customer mix and the effects of improved manufacturing operations, including the successful start up of our South Korean tobacco operations, more than offset cost increases for board and paper and the impact of unfavorable foreign exchange rates in Canada. Beverage Packaging net sales were $597 million in 2005, $595 million in 2004 and $589 million in 2003. Average sale price realizations increased 2% compared with 2004, principally the result of the pass-through of higher raw material costs, although the implementation of price increases continues to be impacted by competitive pressures. Operating profits were down 14% compared with 2004 and 19% compared with 2003, due principally to increases in board and resin costs. In 2006, the bleached board market is expected to remain strong, with sales volumes increasing in the first quarter compared with the fourth quarter of 2005 for both folding carton and cup products. Improved price realizations are also expected for bleached board and in our foodservice and beverage packaging businesses, although continued high costs for energy, wood and resin will continue to negatively impact earnings. Shorewood should continue to benefit from strong Asian operations and from targeted sales volume growth in 2006. Capital improvements and operational excellence initiatives undertaken in 2005 should benefit operating results in 2006 for all businesses. Distribution Our Distribution business, principally represented by ourxpedxbusiness, markets a diverse array of products and supply chain services to customers in many business segments. Customer demand is generally sensitive to changes in general economic conditions, although the 21 commercial printing segment is also dependent on corporate advertising and promotional spending. Distribution earnings and cash flows are generally stable. Providing customers with the best choice and value in both products and supply chain services is a key competitive factor. Additionally, efficient customer service, cost-effective logistics, and focused working capital management are key factors in this segment’s profitability. Distribution Sales Operating Profit Distribution’s 2005 net sales increased 5% from 2004 and 9% from 2003. Operating profits in 2005 were 3% lower than 2004, but were 5% higher than 2003. Sales rose, in part, as a result of higher average sales prices for paper, tissue and packaging products. Sales volumes for packaging and facility supplies increased due to xpedx’s increasing success in positioning itself as a national service provider to other distributors, manufacturers and retailers. While revenues increased in 2005, operating profits decreased, reflecting increased expenses associated with initiatives targeting further penetration of faster-growing market segments and costs of facility realignments to improve the ongoing efficiency of the xpedx distribution system. The outlook for Distribution for 2006 is favorable. Average sales prices and margins are expected to remain at or above 2005 levels, and additional market penetration is targeted in the printing, manufacturing, redistribution and retail segments. Additional benefits are also expected from prior-year programs to further reduce operating costs. Forest Products Forest Products manages approximately 6.5 million acres of forestlands in the United States, and operates wood products plants in the United States that produce lumber, plywood, engineered wood products and utility poles. Forest Resources operating results are largely driven by demand and pricing for softwood sawtimber, and to a lesser extent for softwood pulpwood, by the volume of merchantable timber available to be harvested from Company forestlands, and by demand and pricing for specific forestland tracts offered for sale. Wood Products operating results are driven by new housing starts and repair and remodeling activity. Fiber costs are a major factor in Wood Products profitability. Forest Products net sales for 2005 were up 7% compared with both 2004 and 2003. Operating profits in 2005 were 17% and 29% higher than in 2004 and 2003, respectively. Earnings in 2005 compared with 2004 reflected higher earnings from forestland and real estate sales ($159 million) and decreased forestland operating expenses ($32 million); partially offset by reduced harvest and recreational income ($12 million), and lower Wood Products earnings ($45 million) due principally to higher raw material costs. Forest Products Sales Operating Profit: Forest Resources – Sales of Forestlands Harvest & Recreational Income Forestland Expenses Real Estate Operations Wood Products Operating Profit Forest Resourcessales in 2005 were $1.0 billion compared with $900 million in 2004 and $1.1 billion in 2003. Operating profits in 2005 were 33% higher than in 2004 and 12% higher than in 2003, primarily due to higher forestland sales. Operating profits from stumpage sales and recreational income were $269 million in 2005, compared with $281 million in 2004 and $268 million in 2003. Harvest volumes declined 13% in 2005 compared with 2004, and 20% from 2003, reflecting a lower inventory of mature sawtimber in 2005. Sawtimber prices were up 9% compared to both 2003 and 2004. Operating profits from forestland sales were $400 million in 2005 compared with $315 million in 2004 and $462 million in 2003, reflecting fewer acres sold but higher sales prices per acre. Operating expenses decreased to $146 million in 2005 from $178 million in 2004 and $157 million in 2003, reflecting the effects of restructuring efforts and cost reduction initiatives. Operating profits for the Real Estate division, which principally sells higher-and-better use properties, were $198 million, $124 million and $71 million in 2005, 2004 and 2003, respectively. International Paper monetizes its forest assets in various ways, including sales of short- and long-term harvest rights, on a pay-as-cut or lump-sum, bulk-sale basis, as well as through the sales of timberlands. For 2006, our harvest is projected to decline 14% due to a lower inventory of mature timber. However, in future years, the harvest profile is expected to improve as timber tracts mature and the benefits of higher yield-per-acre initiatives are realized. Average first-quarter 2006 southern pine pulpwood, pine sawtimber and hardwood pulpwood prices are expected to remain close to fourth-quarter 2005 levels. Forestland sales will continue to be dependent upon various factors including tract location and the level of investor interest. 22 Wood Products sales in the United States in 2005 of $1.6 billion were up 3% from $1.5 billion in 2004 and 18% from $1.3 billion in 2003. Average price realizations for lumber were up 6% and 21% in 2005 compared with 2004 and 2003, respectively. Lumber sales volumes in 2005 were up 5% versus 2004 and 10% versus 2003. Average sales prices for plywood were down 4% from 2004, but were 15% higher than in 2003. Plywood sales volumes in 2005 were slightly higher than 2004 and 2003. Operating profits in 2005 were 18% lower than 2004, but nearly three times higher than 2003. Lower average plywood prices and higher raw material costs more than offset the effects of higher average lumber prices, volume increases and a positive sales mix. In 2005, log costs were up 9% versus 2004, negatively impacting both plywood and lumber profits. Lumber and plywood operating costs also reflected substantially higher glue and natural gas costs versus both 2004 and 2003. Looking forward to the first quarter of 2006, a continued strong housing market, combined with low product inventory in the distribution chain, should translate into continued strong lumber and plywood demand. However, a possible softening of housing starts and higher interest rates later in the year could put downward pressure on pricing in the second half of 2006. Specialty Businesses and Other The Specialty Businesses and Other segment includes the operating results of Arizona Chemical, European Distribution and, prior to its closure in 2003, our Natchez, Mississippi chemical cellulose pulp mill. Also included are certain divested businesses whose results are included in this segment for periods prior to their sale or closure. This segment’s 2005 net sales declined 18% and 26% from 2004 and 2003, respectively. Operating profits in 2005 were down substantially from both 2004 and 2003. The decline in sales principally reflects declining contributions from businesses sold or closed. Operating profits were also affected by higher energy and raw material costs in our Chemical business. Specialty Businesses and Other Sales Operating Profit Chemicals sales were $692 million in 2005, compared with $672 million in 2004 and $625 million in 2003. Although demand was strong for most Arizona Chemical product lines, operating profits in 2005 were 84% and 83% lower than in 2004 and 2003, respectively, due to higher energy costs in the U.S, and higher prices and reduced availability for crude tall oil (CTO). In the United States, energy costs increased 41% compared to 2004 due to higher natural gas prices and supply interruption costs. CTO prices increased 26% compared to 2004, as certain energy users turned to CTO as a substitute fuel for high-cost alternative energy sources such as natural gas and fuel oil. European CTO receipts decreased 30% compared to 2004 due to lower yields following the Finnish paper industry strike and a Swedish storm that limited CTO throughput and corresponding sales volumes. Other businesses in this operating segment include operations that have been sold, closed, or are held for sale, principally the European Distribution business, the oil and gas and mineral royalty business, Decorative Products, Retail Packaging, and the Natchez chemical cellulose pulp mill. Sales for these businesses were approximately $223 million in 2005 (mainly European Distribution and Decorative Products) compared with $448 million in 2004 (mainly European Distribution and Decorative Products), and $610 million in 2003. LIQUIDITY AND CAPITAL RESOURCES Overview A major factor in International Paper’s liquidity and capital resource planning is its generation of operating cash flow, which is highly sensitive to changes in the pricing and demand for our major products. While changes in key cash operating costs, such as energy and raw material costs, do have an effect on operating cash generation, we believe that our strong focus on cost controls has improved our cash flow generation over an operating cycle. As a result, we believe that we are well positioned for improvements in operating cash flow should prices and worldwide economic conditions improve in the future. As part of our continuing focus on improving our return on investment, we have focused our capital spending on improving our key platform businesses in North America and in geographic areas with strong growth opportunities. Spending levels have been kept below the level of depreciation and amortization charges for each of the last three years, and we anticipate continuing this approach in 2006. With the low interest rate environment in 2005, financing activities have focused largely on the repayment or refinancing of higher coupon debt, resulting in a net reduction in debt of approximately $1.7 billion in 2005. We plan to continue this program, with additional reductions anticipated as our previously announced Transformation Plan progresses in 2006. Our liquidity position continues to be strong, with approximately $3.2 billion of committed liquidity to cover future short-term cash flow requirements not met by operating cash flows. 23 Management believes it is important for International Paper to maintain an investment-grade credit rating to facilitate access to capital markets on favorable terms. At December 31, 2005, the Company held long-term credit ratings of BBB (negative outlook) and Baa3 (stable outlook) from Standard & Poor’s and Moody’s Investor Services, respectively. Cash Provided By Operations Cash provided by continuing operations totaled $1.5 billion for 2005, compared with $2.1 billion in 2004 and $1.5 billion in 2003. The major components of cash provided by continuing operations are earnings from continuing operations adjusted for non-cash income and expense items and changes in working capital. Earnings from continuing operations adjusted for non-cash items declined by $83 million in 2005 versus 2004. This compared with an increase of $612 million for 2004 over 2003. Working capital, representing International Paper’s investments in accounts receivable and inventory less accounts payable and accrued liabilities, was $2.6 billion at December 31, 2005. Cash used for working capital components increased by $591 million in 2005, compared with a $86 million increase in 2004 and an $11 million increase in 2003. The increase in 2005 was principally due to a decline in accrued liabilities at December 31, 2005. Investment Activities Capital spending from continuing operations was $1.2 billion in 2005, or 84% of depreciation and amortization, comparable to the $1.2 billion, or 87% of depreciation and amortization in 2004, and $1.0 billion, or 74% of depreciation and amortization in 2003. The following table presents capital spending from continuing operations by each of our business segments for the years ended December 31, 2005, 2004 and 2003. Printing Papers Industrial Packaging Consumer Packaging Distribution Forest Products Specialty Businesses and Other Subtotal Corporate and other Total from continuing operations We expect capital expenditures in 2006 to be about $1.2 billion, or about 80% of depreciation and amortization. We will continue to focus our future capital spending on improving our key platform businesses in North America and on investments in geographic areas with strong growth opportunities. Acquisitions In October 2005, International Paper acquired approximately 65% of Compagnie Marocaine des Cartons et des Papiers (CMCP), a leading Moroccan corrugated packaging company, for approximately $80 million in cash plus assumed debt of approximately $40 million. In August 2005, pursuant to an existing agreement, International Paper purchased a 50% third-party interest in IPPM (subsequently renamed International Paper Distribution Limited) for $46 million to facilitate possible further growth in Asian markets. In 2001, International Paper had acquired a 25% interest in this business. The accompanying consolidated balance sheet as of December 31, 2005 includes preliminary estimates of the fair values of the assets and liabilities acquired, including approximately $50 million of goodwill. In July 2004, International Paper Each of the above acquisitions was accounted for using the purchase method. The operating results of these acquisitions have been included in the consolidated statement of operations from the dates of acquisition. Financing Activities 2005:Financing activities during 2005 included debt issuances of $1.0 billion and retirements of $2.7 billion, for a net debt and preferred securities reduction of $1.7 billion. In November and December 2005, International Paper Investments (Luxembourg) S.ar.l., a wholly-owned subsidiary In December 2005, International Paper used proceeds from the above borrowings, and from the sale of CHH in the third quarter of 2005, to repay approximately $190 million of notes with coupon rates ranging from 3.8% to 10% and original maturities from 2008 to 2029. The remaining proceeds from the borrowings and the CHH sale will be used for further debt reductions in the first quarter of 2006. 24 Other activities in the fourth quarter of 2005 included the repatriation of $900 million of cash from certain of International Paper’s European and Canadian In September 2005, International Paper used some of the proceeds from the CHH sale to repay the remaining $250 million portion of a subsidiary’s $650 million long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007, and $312 million of commercial paper that had been issued in the In the second quarter of 2005, International Paper repatriated approximately $1.2 billion in In February 2005, the Company redeemed the outstanding $464 million aggregate principal amount of International Paper Capital Trust 5.25% convertible subordinated debentures at 100.5% of par plus accrued interest, and made early payments of approximately Other financing activity in 2004:Financing activities during 2004 included debt issuances of $2.5 billion and retirements of $4.2 billion, including repayments of $193 million of debt assumed in In December 2004, Timberlands Capital Corp. II, a former wholly-owned consolidated subsidiary of International Paper, redeemed $170 million of 4.5% preferred securities. In August 2004, International Paper repurchased $168 million of limited partnership interests in Georgetown Equipment Leasing Associates, L.P. and Current maturities of long-term debt prior to their repayment. In June 2004, an International Paper wholly-owned subsidiary issued $650 million of Pulp, Paper and Packaging, with overall capacity of more than 1.1 million tons of annual linerboard and pulp capacity at four mills, Carter Holt Harvey is New Zealand’s largest manufacturer and marketer of pulp and paper products. These supply 65% of the needs of their packaging plants which produce corrugated boxes, cartons and paper bags, with a focus on horticulture and primary produce. Specialty Businesses and Other Chemicals: Arizona Chemical is a leading producer of oleo chemicals and specialty resins based on crude tall oil, byproducts of the wood pulping process. These products, used in adhesives and inks, are made at 13 plants in the United States and Europe. European Distribution: International Paper sold Scaldia on August 31, 2004. Prior to the sale, European Distribution consisted of Papeteries de France and Scaldia and served markets in France, Belgium and the Netherlands. Products and brand designations appearing in italics are trademarks of International Paper or a related company. Printing Papers Demand for Printing Papers products is closely correlated with changes in commercial printing and advertising activity, direct mail volumes and, for uncoated free sheet products, with changes in white-collar employment levels that affect the usage of copy and laser printer paper. These products are further affected by changes in currency rates that can enhance or disadvantage producers in different geographic regions. Principal cost drivers include manufacturing efficiency and raw material, transportation and energy costs. Printing Papers net sales for 2004 increased 5% from 2003 and 2002. Operating profits in 2004 were 26% higher than in 2003 and 6% higher than in 2002. Earnings in 2004 compared with 2003 improved across all Printing Papers businesses. Higher sales volumes ($130 million), improved mill operations and lower overhead costs ($90 million) and a more profitable product mix ($20 million) contributed to the earnings increase, although these effects were partially offset by higher raw material and energy costs ($90 million) and lower average prices in Europe which more than offset higher average prices in the United States ($30 million). Compared with 2002, higher 2004 earnings in the Brazilian Papers and Market Pulp businesses were partially offset by lower earnings in both the Uncoated and Coated Papers businesses. The Printing Papers segment took 525,000 tons of downtime in 2004, including 65,000 tons of lack-of-order downtime to align production with customer demand. This compared with 750,000 tons of downtime in 2003, of which 335,000 tons related to lack of orders. Printing Papers In millions 2004 2003 2002 Sales $ 7,635 $ 7,245 $ 7,265 Operating Profit $ 579 $ 460 $ 545 Uncoated Papers sales were $4.9 billion in 2004, up 4% from 2003 and 2% from 2002. Operating profits rose 11% compared with 2003, but were 18% lower than 2002. In the United States, our average price realizations improved steadily during 2004 compared with 2003 and ended the year higher than in either 2003 or 2002. On average, prices were up 1% in 2004 compared with 2003 and 2002. The improving economic environment in 2004 resulted in stronger demand, particularly in the commercial printing and converting markets, as sales volumes rose 4% and 2% compared with 2003 and 2002, respectively. In addition to higher average sales prices and improved shipments, improved mill operations also had a positive impact on 2004 earnings. These positive factors were partially offset by higher input costs, particularly for wood and energy costs. The business was also adversely impacted by higher transportation costs in 2004 compared with 2003 and the impact of hurricanes in the South. The earnings decline in 2004 compared with 2002 was due principally to higher wood and energy costs offset somewhat by an increase in shipments and lower overhead costs as a result of our cost reduction initiatives. Average prices in our European operations declined throughout most of 2004 as a strong Euro made Western Europe a more attractive market for imports, putting pressure on prices. Average prices were down 8% and 17% as compared with 2003 and 2002, respectively. European sales volumes rose 5% in 2004 compared with 2003 and 6% versus 2002. Earnings in Eastern Europe in 2004 were higher than in 2003, but were more than offset by the earnings decline in the West. Overall, lower average prices and higher wood and energy costs offset the favorable effects of higher sales volumes, a better mix of products sold and improved mill operations. Coated Papers sales were $1.5 billion in 2004, compared with $1.4 billion in 2003 and $1.5 billion in 2002. Although the business reported an operating loss for the year, a profit was recorded for the second half of 2004. The improvement in earnings in 2004 compared with 2003 was driven by lower overhead costs, improved mill operations and higher sales prices for our products. These positive factors, combined with improved product sales mix, more than offset the impact of higher energy and wood costs. Average prices in 2004 were up versus 2003 and 2002 due to price increases effective in the second half of 2004. Sales volume was up about 4% in 2004 versus 2003 but down about 2% from 2002. Market Pulp sales from our U.S. and European facilities totaled $661 million in 2004 compared with $571 million and $520 million in 2003 and 2002, respectively. In 2004, the business reported an operating profit, after incurring losses in 2003 and 2002, as higher average price realizations and sales volumes, lower overhead costs, and improved mill operations more than offset increases in raw material costs. Our U.S. pulp prices improved steadily through the 2004 third quarter, then declined slightly during the fourth quarter, but ended the year about 6% higher than 2003 and 21% higher than 2002. U.S. pulp volumes were strong in the fourth quarter and ended the year 5% higher than in 2003 and 4% higher than in 2002 reflecting increased global demand, primarily in Asia. European pulp volumes decreased 12% and 3% compared with 2003 and 2002, respectively. The negative effects of these lower volumes and higher wood costs were partially offset by the benefits from average price realizations, which were 3% and 18% higher than in 2003 and 2002, respectively. Brazilian Paper sales were $592 million in 2004 compared with $540 million in 2003 and $440 million in 2002. The increase compared with 2003 reflects increased sales volume for uncoated papers and a doubling of wood chip operations in the North. The effect of currency translation, as the Real appreciated 8% versus the U.S. dollar, was another factor in the increased reported U.S. dollar sales. Uncoated paper pricing in Reals in 2004 declined 9% versus 2003, while coated paper prices were down 3%. Operating profits in 2004 were up 13% and 28% from 2003 and 2002, respectively. The earnings improvement in 2004 reflected the increased shipments and operational improvements, partially offset by higher transportation, energy and chemical costs and lower average prices. As 2005 begins, the outlook for Printing Papers is positive as our previously announced price increases have been fully implemented. Demand for both coated papers and pulp is strong. Uncoated papers’ backlogs were below prior year levels, but are improving as the first quarter progresses. Further strengthening is expected in customer demand as improving economic conditions lead to increased employment and higher demand. We expect continued high costs for wood fiber and raw materials such as caustic soda, although energy prices should stabilize. We will continue our focus on further improvements in manufacturing efficiency and overall cost structure. Industrial and Consumer Packaging Demand for Industrial Packaging products is closely correlated with non-durable industrial goods production in the United States, as well as with demand for processed foods, poultry, meat and agricultural products. Demand and pricing for Consumer Packaging products correlate closely with consumer spending and general economic activity. In addition to prices and volumes, major factors affecting the profitability of both Industrial and Consumer Packaging are raw material and energy costs, manufacturing efficiency and product mix. Industrial and Consumer Packaging net sales for 2004 were 12% and 14% higher than 2003 and 2002, respectively. Operating profits in 2004 were 20% higher than 2003 but were down 1% from 2002. Increased volume ($95 million), higher price realizations ($40 million), improved mill operations and reduced overhead costs ($35 million), and a more favorable mix of products sold ($20 million) contributed to the improved earnings in 2004 compared with 2003. These benefits were partially offset by increased raw material and transportation costs ($100 million). The segment took 210,000 tons of downtime in 2004, including only 5,000 tons of lack-of-order downtime to balance internal supply with customer demand, compared to a total of 400,000 tons in 2003, of which 255,000 tons were market related. Industrial and Consumer Packaging In millions 2004 2003 2002 Sales $ 7,470 $ 6,670 $ 6,530 Operating Profit $ 543 $ 451 $ 551 Entering 2005, additional favorable price effects are expected to continue. Synergies associated with the Box USA acquisition will benefit 2005 through both volume improvements and cost reductions. The implementation of a new operating model at our mills, representing the first phase of our supply chain project, will result in some efficiency improvements and cost savings in 2005. The European operating results are expected to improve as a result of targeted market growth and cost reduction initiatives. Consumer Packaging 2004 net sales of $2.6 billion were up compared to the 2003 and 2002 sales of $2.5 billion each. Our average prices in 2004 increased about 1% for bleached board over 2003, and were up about 4% for the beverage and foodservice converting businesses. The higher prices reflect the pass-through of higher raw material costs, although this continues to be tempered by competitive pressures. Our bleached board mills operated with no market-related downtime in 2004, with shipments up 10% over the prior year. Operating profits in 2004 declined 12% from 2003 and 34% from 2002 as improved pricing and favorable operations in the mills did not overcome the impact of cost increases in raw materials, especially wood, energy and resin. During 2004, manufacturing improvement, rationalization and organizational restructuring plans were implemented throughout this business to reduce costs and improve market alignment. Improved price realizations are expected to continue into 2005 as the market remains strong; however, raw material costs for wood and resin are expected to be negative factors. Capital improvements and cost reduction efforts made in 2004 will benefit operating results in 2005. Distribution Our Distribution business, including xpedx, markets a diverse array of products and services to customers in many business segments, including commercial printing, manufacturing and building services. Distribution’s customer demand is sensitive to changes in general economic conditions. Sales to commercial printers are heavily dependent on the levels of corporate advertising and promotional spending. In addition, efficient customer service, cost-effective logistics, and controlled working capital management are key factors in this segment’s profitability. and cost containment initiatives drove the 2004 earnings improvement. The sales growth reflects rising prices for paper and tissue products and for packaging products. Also contributing to the sales growth were the addition of new national retail accounts to Distribution’s customer portfolio and brisk demand from commercial printers. Reduction in operating costs continued in 2004 as the business consolidated facilities and rationalized its information systems. Since 2002, Distribution has reduced its work force 38% through actions related to consolidations and system efficiencies. The outlook for 2005 is favorable. Our average prices are expected to remain at or above 2004 levels, and additional market penetration is planned through new initiatives in the printing and manufacturing segments. Additional improvement is expected from programs to further reduce operating costs. Forest Products Forest Products manages approximately 6.8 million acres of forestlands in the United States, and operates wood products plants in the United States that produce lumber, plywood, engineered wood products and utility poles. Forest Resources’ operating results are largely driven by demand and pricing for softwood sawtimber, and to a lesser extent for softwood pulpwood, by the volume of merchantable timber on Company forestlands, and by demand and pricing for specific forestland tracts offered for sale. Wood Products operating results are driven by new housing starts and repair and remodeling activity. Fiber costs are a major factor in Wood Products’ profitability. Forest Products net sales for 2004 were about even with 2003, but were 5% lower than in 2002. Operating profits in 2004 were 10% and 24% higher than in 2003 and 2002, respectively. Earnings in 2004 reflected continued strong contributions from the U.S. Wood Products business, primarily as a result of higher average plywood and lumber prices ($180 million) and improved mix of products sold ($20 million). Lower earnings from forestland and real estate sales ($95 million) and from reduced Forest Resources' harvest volumes ($15 million), combined with higher raw material costs ($15 million) to partially offset the impact of these higher prices. Distribution In millions 2004 2003 2002 In millions 2004 2003 2002 Sales $ 6,065 $ 5,860 $ 5,990 Sales $ 2,395 $ 2,390 $ 2,525 Operating Profit $ 87 $ 80 $ 91 Operating Profit $ 793 $ 720 $ 641 Distribution’s 2004 net sales increased 3% from 2003 and 1% from 2002. Operating profits in 2004 were 9% higher than 2003, but were 4% lower than 2002. Sales revenue increases Forest Resources sales in 2004 were $900 million compared with $1.1 billion in 2003 and $1.2 billion in 2002. Operating profits in 2004 were 16% lower than in 2003 and 19% lower than in 2002 principally due to lower stumpage and forestland sales. Gross margins from stumpage sales and recreational income were $281 million in 2004 compared with $268 million in 2003 and $324 million in 2002. Harvest volumes declined 8% in 2004, compared with 2003, and 14% from 2002, reflecting a lower inventory of mature sawtimber in 2004. Sawtimber prices were flat compared to 2003 and down 11% compared to 2002. Gross margins from forestland sales were $315 million in 2004 as compared with $462 million in 2003 and $461 million in 2002, reflecting a lower number of acres sold, partially offset by higher average per-acre sales realizations. Operating expenses increased to $178 million in 2004 from $157 million in 2003 due primarily to higher information systems costs. Operating expenses for 2004 decreased from $190 million in 2002 reflecting the impact of restructuring and cost reduction actions. Operating profits for the Real Estate division, which sells higher-use properties, were $124 million, $71 million and $75 million in 2004, 2003 and 2002, respectively. International Paper monetizes its forest assets in various ways, including sales of short- and long-term harvest rights, on a pay-as-cut or lump-sum bulk-sale basis, as well as sales of timberlands. For 2005, our harvest is projected to decline due to a lower inventory of mature timber. In future years, harvests are expected to increase as timber tracts mature and the benefits of higher yield-per-acre initiatives are realized. Average first quarter 2005 southern pine pulpwood, pine sawtimber, and hardwood pulpwood prices are expected to remain close to fourth quarter 2004 levels. Forestland sales will continue to be dependent upon various factors including tract location and the level of investor interest. Wood Products sales in the United States in 2004 of $1.5 billion were up about 15% from both 2003 and 2002. Operating profits in 2004 were about three times higher than in 2003. The business had recorded a net operating loss in 2002. Substantially higher average prices more than offset the effects of increased raw material costs. Average plywood prices rose 22% above 2003 levels and were 43% higher than 2002. Plywood sales volumes in 2004 were slightly higher than 2003 and 2002. Average prices for lumber were up 11% and 13% in 2004 compared with 2003 and 2002, respectively. Lumber sales volumes were up 5% in 2004 versus 2003 and about even with 2002. In 2004, log costs were up 2.5% versus 2003, negatively impacting both plywood and lumber profits. Lumber and plywood operating costs were also negatively impacted by substantially higher raw material and natural gas costs versus both 2003 and 2002. Looking ahead to 2005, robust housing starts in the fourth quarter of 2004, combined with low inventory in the distribution chain, should translate into continued strong lumber and plywood demand in the first half of 2005. However, an expected slowing in housing starts and higher interest rates in the second half of 2005 could put downward pressure on pricing in the second half of 2005. The lower tariff rate on Canadian lumber imports announced in December may result in higher lumber imports and increased pressure on pricing. However, a weaker U.S. dollar could partially offset this impact. Carter Holt Harvey Carter Holt Harvey, International Paper’s approximately 50.5% owned subsidiary operating principally in New Zealand and Australia, is in many of the same businesses as International Paper, and is thus affected by many of the same economic factors as our other segments. Additionally, Carter Holt Harvey’s reported operating results are sensitive to changes in currency exchange rates, especially changes in the New Zealand dollar versus the U.S. dollar since most operating costs are New Zealand dollar denominated while a large portion of its export sales are denominated in U.S. dollars. Demand for its wood products is largely driven by housing and remodeling activity in Australia and New Zealand. Carter Holt Harvey In millions 2004 2003 2002 Sales $2,190 $1,820 $1,540 Operating Profit $ 47 $ 38 $ 41 Carter Holt Harvey’s 2004 U.S. dollar net sales and operating profits were about 20% higher than 2003, due mainly to favorable U.S. dollar translation rates. Net sales for 2004 in New Zealand dollars were up 3% compared with 2003. Operating profit for 2004 in New Zealand dollars was down 5% versus 2003, principally due to higher pension and benefit-related costs. Earnings for Forests in 2004 were down compared with 2003 as the strong New Zealand dollar and increased freight costs negatively impacted price realizations. As a result of the lower realizations, harvest volumes were reduced by 13%. Wood Products earnings were down in 2004 versus 2003, largely due to an unfavorable mix of products sold and higher input costs, somewhat mitigated by improved sales volumes in New Zealand building distribution and the laminated veneer lumber businesses. Pulp and Papers’ 2004 earnings were ahead of 2003, which was impacted by a three-month labor strike at the Kinleith mill, reflecting record production by two key mills in 2004. Packaging’s 2004 earnings were up versus 2003. Lower production costs and benefits from productivity and business restructuring programs contributed to the improved results. During 2004, Carter Holt Harvey sold its Tissue business. Accordingly, all periods presented have been restated to separately present the operating results of the Tissue business as a discontinued operation excluded from segment operating results. Market conditions are expected to be challenging in 2005. The New Zealand dollar closed 2004 at its highest ever month-end rate, and should continue to adversely impact New Zealand dollar realizations and shipments into export markets. The log export market is expected to remain difficult, while the housing markets in Australia and New Zealand are expected to remain robust, although down somewhat from 2004 levels. The Company’s total productivity program will continue to contribute to earnings, as will contributions from recently acquired Plantation Timber Products. The planned 2005 acquisitions of the Australian carton business of Wadepack Limited and the structural lumber business of New Zealand based Tenon Limited should also benefit future operating results. Specialty Businesses and Other The Specialty Businesses and Other segment includes the operating results of Arizona Chemical, European Distribution and, prior to its closure in 2003, our Natchez, Mississippi Chemical Cellulose Pulp mill. Also included are certain divested businesses whose results are included in this segment for periods prior to their sale (excluding Weldwood and the Carter Holt Harvey Tissue business that are included in discontinued operations). This segment’s 2004 net sales declined 9% and 23% from 2003 and 2002, respectively. Operating profits in 2004 improved substantially from 2003 and 2002. Both the decline in sales and improved earnings are principally due to lost contributions from businesses previously sold. Specialty Businesses and Other businesses were approximately $450 million in 2004 (mainly European Distribution and Decorative Products) compared with $610 million in 2003 (mainly European Distribution, Decorative Products and the Chemical Cellulose Pulp mill), and $860 million in 2002. Liquidity and Capital Resources Overview A major factor in International Paper’s liquidity and capital resource planning is its generation of operating cash flow, which is highly sensitive to changes in the pricing and demand for our major products. While changes in key cash operating costs, such as energy and raw material costs, do have an effect on operating cash generation, we believe that our strong focus on cost controls has improved our cash flow generation over an operating cycle. As a result, we believe that we are well positioned for continued strong operating cash flow generation as prices and worldwide economic conditions improve. As part of our continuing focus on improving our return on investment, we have focused our capital spending on those businesses with the best returns and in geographic areas with strong growth opportunities. Spending levels have been kept well below the level of depreciation and amortization charges for each of the last three years, and we anticipate continuing this approach in 2005. With the low interest rate environment in 2004, financing activities have focused largely on the repayment or refinancing of higher coupon debt, resulting in a net reduction in debt of approximately $900 million in 2004. An additional $750 million was subsequently repaid as of February 2005. We plan to continue this program, with a target of reducing consolidated debt balances to approximately $12 billion by the end of 2006. Our liquidity position continues to be strong, with approximately $3.2 billion of committed liquidity to cover future cash flow requirements not met by operating cash flows. Management believes it is important for International Paper to maintain an investment-grade credit rating to facilitate access to capital markets on favorable terms. Cash Provided by Operations Cash provided by operations totaled $2.4 billion for 2004, compared with $1.8 billion in 2003 and $2.1 billion in 2002. The major components of cash provided by operations are net income adjusted for primarily non-cash income and expense items and changes in working capital. Also included in 2004 was $242 million representing cash proceeds from the Maine and New Hampshire forestlands transaction (see In millions 2004 2003 2002 Sales $ 1,120 $ 1,235 $ 1,455 Operating Profit $ 38 $ 23 $ 18 Chemicals sales were $670 million in 2004, compared with $625 million in 2003 and $595 million in 2002. Operating profits in 2004 were flat with 2003 and 27% higher than in 2002 as the impact of increased volumes and manufacturing and overhead cost reduction efforts more than offset increased raw material costs and lower average prices compared with 2003. Other businesses in the above totals include operations that have been sold, closed, or are held for sale, principally the European Distribution business, the oil and gas and mineral royalty business, Decorative Products, Retail Packaging, and the Natchez Chemical Cellulose Pulp mill. Sales for these Note 11 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data). Net income adjusted for non-cash items increased $817 million in 2004 compared with 2003. The increase for 2003 over 2002 was $126 million. Working capital, representing International Paper’s investments in accounts receivable and inventory less accounts payable and accrued liabilities, was $4.4 billion at December 31, 2004. Cash used for working capital components totaled $305 million in 2004, compared with $54 million in 2003 and a $344 million decrease in 2002. The increase in 2004 was principally due to an increase in accounts receivable reflecting higher fourth-quarter sales. Investment Activities Capital spending from continuing operations was $1.3 billion in 2004, or 81% of depreciation and amortization as compared to $1.1 billion, or 71% of depreciation and amortization in 2003, and $0.9 billion, or 63% of depreciation and amortization in 2002. The following table presents capital spending from continuing operations by each of our business segments for the years ended December 31, 2004, 2003 and 2002. manufacturer, Plantation Timber Products (PTP), for $134 million. PTP is a manufacturer of special medium density fiberboard and flooring products. On July 1, 2004, International Paper acquired Box USA, one of America’s leading corrugated packaging companies, for approximately $400 million, including the assumption of approximately $197 million of debt. In December 2002, Carter Holt Harvey acquired Starwood Australia’s Bell Bay medium density fiberboard plant in Tasmania, for $28 million in cash. Each of the above acquisitions was accounted for using the purchase method. The operating results of these mergers and acquisitions have been included in the consolidated statement of operations from the dates of acquisition. Financing Activities 2004: Financing activities during 2004 included debt issuances of $3 billion and retirements of $4.5 billion, including repayments of $193 million of debt assumed in the Box USA acquisition in July and $340 million of debt that was reclassified from Minority interest in 2004 prior to repayment. Excluding these repayments, and currency translation effects, the net reduction in debt during 2004 was approximately $900 million. In December 2004, Timberlands Capital Corp. II, a wholly-owned consolidated subsidiary of International Paper, redeemed $170 million of 4.5% preferred securities. In August 2004, International Paper repurchased $168 million of limited partnership interests in Georgetown Equipment Leasing Associates, L.P. and Trout Creek Equipment Leasing, L.P. Both of these securities had been reclassified from Minority interest to Current maturities of long-term debt prior to their repayment. Also in August 2004, an International Paper wholly-owned subsidiary issued 500 million of Euro-denominated long-term debt (equivalent to approximately $619 million at issuance) with an initial interest rate of EURIBOR plus 55 basis points and a maturity in August 2009. In June 2004, an International Paper wholly-owned subsidiary issued $650 million of long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007, which refinanced $650 million of long- term debt having an interest rate of LIBOR plus 100 basis points and a maturity date in August 2004. In April 2004, $1.0 billion of 8.125% coupon rate debt was retired using the proceeds from the March 2004 issuance of $400 million of 5.25% notes due in April 2016 and $600 million of 4.00% notes due in April 2010. In millions 2004 2003 2002 Printing Papers $ 590 $ 482 $ 393 Industrial and Consumer Packaging 384 293 254 Distribution 5 12 5 Forest Products 126 121 100 Carter Holt Harvey 86 101 69 Specialty Businesses and Other 39 31 36 Subtotal 1,230 1,040 857 Corporate and other 32 54 79 Total from continuing operations $ 1,262 $ 1,094 $ 936 In addition, capital spending related to businesses sold and held for sale was $66 million, $72 million and $73 million in 2004, 2003 and 2002, respectively. We expect capital expenditures in 2005 to be about $1.4 billion, or about 83% of depreciation and amortization. Capital allocations will focus on businesses with the best returns, including an upgrade to our Eastover, South Carolina mill, and growth opportunities in Eastern Europe and Brazil where we are conducting a study to evaluate the potential construction of a new mill in Tres Lagoas in the 2007 to 2008 time frame. Mergers and Acquisitions On July 2, 2004, Carter Holt Harvey completed the purchase of an 85% interest in a Chinese premium panels In January 2004, approximately $1.0 billion of debt with an 8.05% blended coupon rate was retired, including all of the outstanding $805 million principal amount of International Paper Capital Trust III 7.875% preferred securities, using the proceeds from the two December 2003 issuances of $500 million each of notes discussed below. In addition to the preceding repayments, various other International Paper borrowings totaling approximately $1.0 billion were repaid in 2004. Other financing activity in 2004 included the issuance of approximately 3,652,000 treasury shares and 2,333,000 common shares under various incentive plans, including stock option exercises that generated $164 million of cash. 2003:Financing activities during 2003 included debt and preferred security issuances of In December 2003, $500 million of 4.25% Senior Unsecured Notes due January 25 In March 2003, $300 million of 3.80% notes due in April 2008, and $700 million of 5.30% notes due in April 2015, were issued. The proceeds from these notes were used to repay approximately $450 million of commercial paper and long-term debt and to redeem $550 million of preferred securities of IP Finance (Barbados) Limited, a non-U.S. consolidated subsidiary of International Paper. In the same period, International Paper sold a minority interest in Southeast Timber, Inc., a consolidated subsidiary of International Paper, to a private investor for $150 million with future dividend payments based on LIBOR. Other financing activity included $26 million for the repurchase of approximately 713,000 shares of International Paper common stock, and the issuance of 2,725,000 treasury shares under various incentive plans, including stock option exercises that generated $80 million of cash. Refinancing of high coupon rate debt in the last three years is one means the Company uses to manage interest expense. Another method is the use of interest rate swaps to change the mix between fixed and variable rate debt. At December 31, Dividend payments totaled $490 million in 2005, $485 million in 2004 and $480 million in At December 31, Capital Resources Outlook for 2006 International Paper expects to be able to meet projected capital expenditures, service existing debt and December 31, 2005, there were no outstanding borrowings under these agreements. The Company is currently in the process of refinancing the $750 million bank credit agreement maturing in March 2006 and the $1.25 billion bank credit agreement maturing in March 2009. The new bank credit agreements are expected to consist of a $500 million bank credit agreement with a maturity in March 2007 and a $1.5 billion bank credit agreement with a maturity in March 2011. Additionally, International Paper Kwidzyn S.A., a wholly-owned foreign subsidiary of International Paper, has a PLN 400 million (approximately $123 million) bank credit agreement that expires in May 2006 with no outstanding borrowings as of December 31, 2005, and International Paper Investments (Luxembourg) S.ar.l., a wholly-owned subsidiary of International Paper, has a $100 million bank credit agreement that expires in November 2006 with $70 million in associated borrowings outstanding as of December 31, 2005. The Company will continue to rely upon debt and capital markets for the majority of any necessary long-term funding not provided by operating cash flow or divestiture proceeds. Funding decisions will be guided by our capital structure planning and liability management practices. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors. The Company was well within the requirements for compliance with all its debt covenants at December 31, 2005. Principal financial covenants include maintenance of a minimum net worth of $9 billion, defined as the sum of common stock, paid-in capital and retained earnings, less treasury stock, plus any goodwill impairment charges, and a maximum total debt to capital ratio, defined as total debt divided by total debt plus net worth, of 60%. Maintaining an investment grade credit rating is an important element of International Paper’s financing strategy. At December 31, 2005, the Company held long-term credit ratings of BBB (negative outlook) and Baa3 (stable outlook) by Standard & Poor’s and Moody’s Investor Services, respectively. 26 Contractual obligations for future payments under existing debt and lease commitments and purchase obligations at December 31, 2005, were Total debt Lease obligations Purchase obligations (a) Total In July 2005, the Company announced a plan to focus its business portfolio on two key global platform businesses: Uncoated Papers (including Distribution) and Packaging. The plan also focuses on improving shareholder return through mill realignments in those two businesses, additional cost improvements and exploring strategic options for other businesses, including possible sale or spin-off. In connection with this process, in the third quarter of 2005, the Company completed the sale of its 50.5% interest in Carter Holt Harvey Limited. Other businesses currently under review include: Consistent with this evaluation process, the Company has distributed bid package information for some of these businesses. The exact timing of this evaluation process will vary by business; however, it is anticipated that decisions will be made for some of these businesses during 2006. While the exact use of any proceeds from potential future sales is dependent upon various factors affecting future cash flows, such as the The preparation of Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include SFAS No. 5, “Accounting for Contingencies,” SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” SFAS No. 142, “Goodwill and Other Intangible Assets,” SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” as amended by SFAS Nos. 132 and 132R, “Employers’ Disclosures About Pension and Other Postretirement Benefits,” and SFAS No. 109, “Accounting for Income Taxes.” The following is a discussion of the impact of these accounting policies on International Paper: Contingent Liabilities.Accruals for contingent liabilities, including legal and environmental matters, are recorded when it is probable that a liability has been incurred or an asset impaired and the Impairment of Long-Lived Assets and Goodwill. An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that 27 may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and intangible asset balances is required annually. The amount and timing of impairment charges for these assets require the estimation of future cash flows and the fair market value of the related assets. Pension and Postretirement Benefit Obligations. The charges recorded for pension and other postretirement benefit obligations are determined annually in conjunction with International Paper’s consulting actuary, and are dependent upon various assumptions including the expected long-term rate of return on plan assets, discount rates, projected future compensation increases, health care cost trend rates and mortality rates. Income Taxes. International Paper records its global tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where the Company believes that the deduction of an item is supportable for income tax purposes, the item is deducted in its income tax returns. However, where treatment of an item is uncertain, tax accruals are recorded based upon the expected most probable outcome taking into consideration the specific tax regulations and facts of each matter, the results of historical negotiated settlements, and the results of consultations with outside specialists. These accruals are recorded in the accompanying consolidated balance sheet in Other liabilities. Changes to the reserves are only made when an identifiable event occurs that changes the probable outcome, such as settlement with relevant tax authority, the expiration of statutes of limitation for the subject tax year, change in tax laws, or a recent court case that addresses the matter. While International Paper believes that these judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts. SIGNIFICANT ACCOUNTING ESTIMATES Pension and Postretirement Benefit Accounting. The calculations of pension and postretirement benefit obligations and expenses require decisions about a number of key assumptions that can significantly affect liability and expense amounts, including the expected long-term rate of return on plan assets, the discount rate used to calculate plan liabilities, the projected rate of future compensation increases and health care cost trend rates. Benefit obligations and fair values of plan assets as of December 31, 2005, for International Paper’s pension and postretirement plans are as follows: U.S. qualified pension U.S. nonqualified pension U.S. postretirement Non-U.S. pension Non-U.S. postretirement The table below shows the assumptions used by International Paper to calculate U.S. pension expenses for the years shown: Discount rate Expected long-term return on plan assets Rate of compensation increase Additionally, the health care cost trend rates used in Health care cost trend rate assumed for next year Rate that the cost trend rate gradually declines to Year that the rate reaches the rate it is assumed to remain International Paper determines these actuarial assumptions, after consultation with our actuaries, on December 31 of The expected long-term rate of return on plan assets reflects projected returns for an investment mix determined upon completion of a detailed asset/liability study that meets the plans’ investment objectives. Increasing (decreasing) the expected long-term rate of return on U.S. plan assets by an additional 0.25% would decrease (increase) 2006 pension expense by approximately $16 million, while a (decrease) increase of .25% in the discount rate would (increase) decrease pension expense by approximately $27 million. The effect on net postretirement benefit cost from a 1% increase or decrease in the annual trend rate would be approximately $2 million. Capital Resources Outlook for 2005 International Paper can meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2005 through cash from operations, supplemented as required by its various existing credit facilities. International Paper has approximately $3.2 billion of committed liquidity, which we believe is adequate to cover expected operating cash flow variability during our industry’s economic cycles. This includes $2 billion available under contractually committed bank credit agreements and up to $1.2 billion of available commercial paper-based financings under a receivables securitization program. At December 31, 2004, there were no outstanding borrowings under these agreements. Additionally, multi-currency credit facilities equivalent to NZ$725 million are available for liquidity requirements of our Carter Holt Harvey subsidiary in New Zealand. At December 31, 2004, CHH had approximately NZ$381 million of borrowings under these facilities. Liquidity could also be enhanced by possible future earnings repatriation decisions associated with the American Jobs Creation Act of 2004. See Note 9 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, for additional information. The Company will continue to rely upon debt capital markets for the majority of any necessary funding not provided by operating cash flow or repatriated cash. Funding decisions will be guided by our capital structure planning and liability management practices. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. In 2005, the Company will continue to access the capital markets where there are opportunities to replace high coupon debt with new financing instruments at lower interest rates, with a target of reducing consolidated debt to approximately $12 billion by the end of 2006. Accordingly, an additional $750 million of debt was subsequently repaid as of February 2005. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors. The Company was well within the requirements for compliance with all its debt covenants at December 31, 2004. Principal financial covenants include maintenance of a minimum net worth of $9 billion, defined as the sum of common stock, paid-in capital and retained earnings, less treasury stock, plus any goodwill impairment charges, and a maximum total debt to capital ratio, defined as total debt divided by total debt plus net worth plus the minority interest in CHH, of 60%. Maintaining an investment grade credit rating is an important element of International Paper’s financing strategy. At December 31, 2004, the Company held long-term credit ratings of BBB (negative outlook) and Baa2 (negative outlook) by Standard & Poor’s and Moody’s Investor Services, respectively. The Company currently has short-term credit ratings by Standard & Poor’s and Moody’s Investor Services of A-3 and P-2, respectively . Contractual obligations for future payments under existing debt and lease commitments and purchase obligations at December 31, 2004 were as follows: In millions 2005 2006 2007 2008 2009 Thereafter Total debt $ 506 $ 882 $ 1,244 $ 326 $ 1,326 $ 10,354 Lease obligations 211 170 141 115 67 214 Purchase obligations (a) 2,723 447 354 337 292 2,700 Total $ 3,440 $ 1,499 $ 1,739 $ 778 $ 1,685 $ 13,268 (a) The 2005 amount includes $2.1 billion for contracts made in the ordinary course of business to purchase pulpwood, logs and wood chips by Forest Resources and Carter Holt Harvey. The majority of our other purchase obligations are take-or-pay or purchase commitments made in the ordinary course of business related to raw material purchases and energy contracts. Other significant items include purchase obligations related to contracted services. The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain. Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include SFAS No. 5, “Accounting for Contingencies,” SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” SFAS No. 142, “Goodwill and Other Intangible Assets,” SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” as amended by SFAS No. 132 and 132R, “Employers’ Disclosures About Pension and Other Postretirement Benefits,” and SFAS No. 109, “Accounting for Income Taxes.” The following is a discussion of the impact of these accounting policies on International Paper: Contingent Liabilities. Accruals for contingent liabilities, including legal and environmental matters, are recorded when it is probable that a liability has been incurred or an asset impaired and the amount of the loss can be reasonably estimated. Liabilities accrued for legal matters require judgments regarding projected outcomes and range of loss based on historical experience and recommendations of legal counsel. Additionally, as discussed in Note 10 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, reserves for projected future claims settlements relating to exterior siding products previously manufactured by Masonite require judgments regarding projections of future claims rates and amounts. International Paper utilizes independent third parties to assist in developing these estimates. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs. International Paper determines these estimates after a detailed evaluation of each site. Impairment of Long-Lived Assets and Goodwill. An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and intangible asset balances is required annually. The amount and timing of impairment charges for these assets require the estimation of future cash flows and the fair market value of the related assets. Pension and Postretirement Benefit Obligations. The charges recorded for pension and other postretirement benefit obligations are determined annually in conjunction with International Paper’s consulting actuary, and are dependent upon various assumptions including the expected long-term rate of return on plan assets, discount rates, projected future compensation increases, health care cost trend rates and mortality rates. Income Taxes. International Paper records its world-wide tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where the Company believes that the deduction of an item is supportable for income tax purposes, the item is deducted in its income tax returns. However, where treatment of an item is uncertain, tax accruals are recorded based upon the expected most probable outcome taking into consideration the specific tax regulations and facts of each matter, the results of historical negotiated settlements, and the results of consultations with outside specialists. These accruals are recorded in the accompanying consolidated balance sheet in Other liabilities. Changes to the reserves are only made when an identifiable event occurs that changes the probable outcome, such as settlement with relevant tax authority, the expiration of statutes of limitation for the subject tax year, change in tax laws, or a recent court case that addresses the matter. While International Paper believes that these judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts. Pension and Postretirement Benefit Accounting. The calculations of pension and postretirement benefit obligations and expenses require decisions about a number of key assumptions that can significantly affect liability and expense amounts, including the expected long-term rate of return on plan assets, the discount rate used to calculate plan liabilities, the projected rate of future compensation increases and health care cost trend rates. Benefit obligations and fair values of plan assets as of December 31, 2004, for International Paper’s pension and postretirement plans are as follows: In millions Benefit Fair Value of U.S. qualified pension $8,015 $6,745 U.S. nonqualified pension 279 – U.S. postretirement 838 – Non-U.S. pension 365 255 Non-U.S. postretirement 20 – The table below shows the assumptions used by International Paper to calculate U.S. pension expenses for the years shown: 2005 2004 2003 2002 Discount rate 5.75 % 6.00 % 6.50 % 7.25 % Expected long-term return on plan assets 8.50 % 8.75 % 8.75 % 9.25 % Rate of compensation increase 3.25 % 3.25 % 3.75 % 4.50 % Additionally, the health care cost trend rates used in the calculation of U.S. postretirement obligations for the years shown were: 100% Pension Fund 1998 1999 2000 2001 2002 2003 2004 Percentile Ranking (100% = Best) 75% 50% 25% 0% 2004 2003 2002 Health care cost trend rate assumed for next year 10.00% 10.00% 10.00% Rate that the cost trend rate gradually declines to 5.00% 5.00% 5.00% Year that the rate reaches the rate it is assumed to remain 2009 2008 2007 International Paper determines these actuarial assumptions, after consultation with our actuaries, on December 31 of each year to calculate liability information as of that date and pension and postretirement expense for the following year. The discount rate assumption is determined based on a yield curve that incorporates approximately 570 Aa-graded bonds. The plan’s projected cash flows are then matched to this yield curve to develop the discount rate. The expected long-term rate of return on plan assets reflects projected returns for an investment mix, determined upon completion of a detailed asset/liability study that meets the plans’ investment objectives. Increasing (decreasing) the expected long-term rate of return on U.S. plan assets by an additional 0.25% would decrease (increase) 2005 pension expense by approximately $16 million, while a (decrease) increase of .25% in the discount rate would (increase) decrease pension expense by approximately $22 million. The effect on net postretirement benefit cost from a 1% increase or decrease in the annual trend rate would be approximately $4 million. Actual rates of return earned on U.S. pension plan assets for each of the last 10 years were: SFAS No. 87, “Employers’ Accounting for Pensions,” provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets, and other assumption changes. These net gains and losses are recognized in pension expense prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans (approximately 13 years) to the extent that they are not offset by gains and losses in subsequent years. At December 31, 2004, unrecognized net actuarial losses for International Paper’s U.S. pension plans totaled approximately $2.6 billion. While actual future amortization charges will be affected by future gains/losses, amortization of cumulative unrecognized losses as of December 31, 2004 is expected to increase U.S. pension expense by approximately $53 million in 2005, an additional $41 million in 2006, then decreasing expense by $14 million in 2007. Net periodic pension and postretirement plan expense (income), calculated for all of International Paper’s plans were as follows: Year Return Year Return In millions 2004 2003 2002 2004 14.1 % 1999 21.4% Pension expense (income) - U.S. plans (non-cash) (a) $111 $ 60 $(75) 2003 26.0 % 1998 10.0% 2002 (6.7 )% 1997 17.2% Pension expense - non-U.S. plans (b) 44 39 26 2001 (2.4 )% 1996 13.3% Postretirement benefit cost - U.S. plans (a) 53 55 59 2000 (1.4 )% 1995 19.9% The following chart, prepared by International Paper, illustrates the quarterly performance ranking of our pension fund investments compared with approximately 100 other corporate and public pension funds. The peer group, of which International Paper is one, is the “State Street Corporate and Public Master Trusts Universe.” Postretirement benefit cost - non-U.S. plans (b) 5 5 2 Net expense $213 $159 $ 12 (a) Excludes $4.8 million, $10.9 million and $1.0 million of expense in 2004, 2003 and 2002, respectively, for curtailments, settlements and special termination benefits related to divestitures and restructurings that were recorded in Restructuring and other charges and Net losses (gains) on sales and impairments of businesses held for sale in the consolidated statement of operations. (b) Excludes $42.7 million of income in 2004 for curtailments and settlements related to divestitures that were recorded in Net losses (gains) on sales and impairments of businesses held for sale in the consolidated statement of operations. 28101112$62$12 million in 2005 compared with $26 million in 2004 compared with $111and $83 million in 2003 and $118 million in 2002.2003. The decreases in 20042005 and 20032004 reflect a reduction in minority interest related to preferred securities that were replaced by debt obligations in the second half of2004 and 2003. This decrease was partially offset in 2004 by higher earnings at Carter Holt Harvey.to $743from $710 million compared with $772in 2004 and $705 million in 2003 reflecting lower average debt balances and $785 million in 2002. The decline reflects lower interest rates from thedebt refinancing of high coupon debt, the impact of interest rate swaps, and repayments in 2004, higher interest income from Carter Holt Harvey, net of the additional expense of $36 million for the preferred debt securities discussed above.2005 and 2004.2004,2005, corporate items totaled $469 million compared with $466$597 million of expense in 2003 and $253compared with $469 million in 2002.2004 and $466 million in 2003. The increased expenseexpenses in 20042005 compared with both 2004 and 2003 isare due to higher pension, inventory-related and supply chain initiative costs, and lower gains on energy hedging transactions,inventory-related costs, offset in part by reducedlower overhead administrative overhead costs. Higher pension, inventory-related and supply chain costsLower gains from energy hedging transactions were also factorsa factor in 2003 as compared with 2002, which also included income from an insurance company demutualization2005 and foreign exchange gains.2004.project,initiative, begun in late 2002, is a corporate- wide initiativecorporate-wide project to improve customer service capabilities and implement “best practice” supply chain business processes for order management, supply and demand planning, product scheduling and tracking, transportation and warehousing, and procurement. Expenses related to this program in 2005,2006 should be approximately $100$50 million above the 2004 level of $84 million.2005 levels. The associated benefits are reflected in business earnings as the programs are implemented.Special ItemsSPECIAL ITEMS for improvement. These evaluations are targeted to (a) focus our portfolio on our core businesses, of paper, packaging and forest products, (b) rationalize and realign capacity to operate fewer facilities with the same revenue capability and close high cost facilities, and (c) reduce costs. Annually, strategic operating plans are developed by each of our businesses to demonstrate that they will achieve a return at least equal to their cost of capital over an economic cycle. If it subsequently becomes apparent that a facility’s plan will not be achieved, a decision is then madeAs this profit improvement initiative is ongoing, itIt is possible that additional charges and costs will be incurred in future periods in our core businesses should such triggering events occur.and minority interest of $211$166 million ($124103 million after taxes and minority interest)taxes) were recorded. These charges included a $74$64 millionand minority interest ($4340 million after taxes and minority interest)taxes) for organizational restructuring programs, a $92 million charge before taxes ($57 million after taxes) for early debt retirement costs, a $35 million charge before minority interest ($18 million after minority interest) for a goodwill impairment charge, and a $10 million charge before taxes ($6 million after taxes) for a litigation settlement. Also in 2004, a $123 million credit before taxes ($76 million after taxes) was recorded for insurance recoveries related to the hardboard siding and roofing litigation, and a $35$36 million credit before taxes and minority interest ($22 million after taxes and minority interest)taxes) was recorded for the net reversal of restructuring reserves no longer required.and minority interest of $298$286 million ($184180 million after taxes and minority interest)taxes) were recorded. These charges included a $236$224 million charge before taxes and minority interest ($144140 million after taxes and minority interest)taxes) for asset shutdowns of excess internal capacity and cost reduction actions, a $63 million charge before taxes ($39 million after taxes) for legal reserves, and a $1 million credit before taxes ($1 million charge after taxes) for early debt retirement costs. In addition, a $40$39 million credit before taxes and minority interest ($2524 million after taxes and minority interest)taxes) was recorded for the net reversal of restructuring reserves no longer required.2002: During 2002, restructuring and other charges before taxes and minority interest of $695 million ($435 million after taxes and minority interest) were recorded. These charges included a $199 million charge before taxes and minority interest ($130 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $450 million pre-tax charge ($278 million after taxes) for additional exterior siding legal reserves, and a charge of $46 million before taxes and minority interest ($27 million after taxes and minority interest) for early debt13retirement costs. In addition, a $68 million pre-tax credit ($43 million after taxes) was recorded in 2002 for the reversal of 2001 and 2000 reserves no longer required. (Gains) on Sales and Impairments of Businesses Held for Sale (gains) on sales and impairments of businesses held for sale totaled $111 million in 2005, $135 million in 2004 $32and $34 million in 2003 and ($41) million in 2002 before taxes and minority interest.2003. The principal components of these gains/losses were: Also in the fourth quarter, a $9 million loss before taxes ($6 million after taxes) was recorded to adjust gains/losses of businesses previously sold.the 2004 first quarter, a pre-tax gain of $9 million ($6 million after taxes) was recorded to adjust previously estimated gains/losses of businesses previously sold.In addition, the 2004 second quarter included a loss of $9$4 million before taxes and minority interest ($52 million after taxes and minority interest)taxes) to write down the assets of Food Pack S.A. to their estimated realizable value, of which $4 million was included in the Consumer Packaging segment, $3 million was included in the Carter Holt Harvey segment and $2 million was included in Minority interest.segment.($ ($8 million after taxes) was recorded to adjust estimated gains/losses of businesses previously sold.A pre-tax chargePre-tax charges of $1$13 million ($17 million after taxes) waswere recorded in the first three quarters of 2003 third quarter to adjust previously estimated gains/losses of businesses previously sold.In the second quarter of 2003, a $10 million pre-tax charge ($6 million after taxes) was recorded to adjust estimated gains/losses of businesses previously sold.2002: In the fourth and third quarters of 2002, International Paper recorded $10 million and $3 million of pre-tax credits ($4 million and $1 million after taxes, respectively), to adjust estimated accrued costs of businesses previously sold.During the second quarter of 2002, a net gain on sales of businesses held for sale of $28 million before taxes and minority interest ($96 million after taxes and minority interest) was recorded, including a pre-tax gain of $63 million ($40 million after taxes) from the sale in April 2002 of International Paper’s oriented strand board facilities to Nexfor Inc. for $250 million, and a net charge of $35 million before taxes and minority interest (a gain of $56 million after taxes and minority interest) relating to other sales and adjustments of previously recorded estimated costs of businesses held for sale.The impairment charge recorded for Arizona Chemical in the fourth quarter of 2001 included a tax expense based on the form of sale being negotiated at that time. As a result of the decision in the second quarter of 2002 to discontinue sale efforts and to hold and operate Arizona Chemical in the future, this provision was no longer required. Consequently, special items for the second quarter of 2002 include a gain of $28 million before taxes and minority interest, with an associated $96 million benefit after taxes and minority interest.$2.1 billion were higher than the $1.8 billion in 2003 and the $1.9 billion in 2002. The higher profit2005 were slightly lower than $2.0 billion in 2004, was principally due to improved sales volumes ($263 million), higher average sales prices ($201 million), and cost reduction initiatives and a more favorable product mix ($186 million), all partially offset bybut above the $1.7 billion reported in 2003. Significantly higher energy, wood, caustic soda and other raw material costs ($192586 million), lower earnings from land sales volumes including lack-of-order downtime in our U.S. uncoated paper and containerboard mills and downtime in our Eastern European operations to rebuild paper machines in Poland and Russia to add needed uncoated paper and pa - -95251 million), and the impacteffect of hurricanes in the South ($18 million) and unfavorable foreign currency exchange rates ($3027 million). In 2003, industry segment operating profits declined slightly as compared with 2002 principally due to more than offset the favorable effects of higher energy and raw material costs ($275 million) and lower average prices ($85478 million), partially offset by the effect of cost reduction initiatives, improved operating performance and a more favorable product mix ($245235 million), and higher earnings from forestland and real estate sales ($158 million).14The rationalizationLack-of-order downtime in 2005 increased to approximately 830,000 tons, compared with only 70,000 tons in 2004 and realignment program announced585,000 tons in 2003, was completed during 2004.as the Company adjusted production in line with customer demand. The program announced2005 total included approximately 290,000 tons related to uncoated paper machines at our mills in July 2003 targeted significant additional reductions in overhead costsPensacola, Florida; Jay, Maine; and included the elimination of approximately 3,000 salaried positionsBastrop, Louisiana; that were permanently closed in the United States. We are currently engaged in a customer-driven, company-wide supply chain initiative that will enhance International Paper’s customer relationships and standardize processes while improving overall company profitability. Ultimately, the initiative will provide the foundation upon which to build improved customer value propositions while enabling International Paper to become increasingly competitive.fourth quarter.International Paper experienced an improving business environment during 2004 as higher sales volume and average prices reflected a steadily improving economy. Demand for our paper and packaging products was stronger resulting in only about 70,000 tons of market related downtime in our mill system compared with 590,000 tons in 2003. Our focus on operational performance and improvements to our internal cost structure and product mix helped mitigate the impact of increased raw material and energy costs. Looking forward to 2005, we anticipate a seasonally slow start in the first quarter of 2006, we expect operating profits to be about flat with the 2005 fourth quarter. Sales volumes should be seasonally slow in the quarter, but should show some improvement as the quarter progresses. Price realizations should also improve as previously announced price increases are implemented. While energy, wood and chemical costs continueraw material price movements are mixed, their impact for the quarter is expected to be high with further increases expected early in the year. Earnings in 2005 should benefit from increased price realizations and improved demand for our products. We believe that the actions taken over the last few years to restructure our operations and eliminate excess manufacturing capacity, to reduce overhead costs, and to focus on our customer relationships will favorably position International Paper as market conditions continue to improve.flat.Description of Industry SegmentsDESCRIPTION OF INDUSTRY SEGMENTS except for Carter Holt Harvey, are differentiated on a common product, common customer basis consistent with the business segmentation generally used in the Forest Products industry. The Carter Holt Harvey business includes the results of multiple Forest Products businesses. Fine papers are used in high-quality text, cover, business correspondence and artist papers. Uncoated papers are sold under private label and International Paper brand names that includeHammermill, Springhill, Great White, Strathmore, Ballet Beckett andRey. Rey. The mills producing uncoated papers are located in the United States, Scotland, France, Poland and Russia. These mills have uncoated paper production capacity of approximately 5.35.4 million tons annually. International Paper sold the Fine Papers business on April 30, 2005. Prior to its sale, they produced papers used in high-2.01.9 million tons annually.1.21.3 million acres of forestlands in Brazil. Our annual production capacity in Brazil is approximately 685,000680,000 tons of coated and uncoated papers. Our uncoated papers are primarily sold under the brand nameChamex. The Company also operates a wood chip business that sells eucalyptus and pine chips and pine timber on a global basis.basis with eucalyptus and pine lumber sold in Brazilian markets.and Consumer Packaging4.74.8 million tons annually, International Paper is the third largest manufacturer of containerboard in the United States. Over one-third of our production consists of specialty grades, such asBriteTop. About 70% of our production is converted domestically into corrugated boxes and other packaging by our 7067 U.S. container plants. In Europe, our operations include oneAdditionally, we operate two recycled containerboard mill in Francemills and 2333 container plants in France, Ireland, Italy, Spain andoutside the United Kingdom. Global operations also include facilities in Chile, Turkey and China.States. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives. We have the capacity to produce approximately 600,000around 515,000 tons of kraft paper each year for use in multi-wall, retail bags and saturated kraft. We manufactureThe Industrial Papers business, which was sold on May 31, 2005, manufactured lightweight and pressure sensitive papers and converted15Netherlands with an annual capacity of 375,000 tons. These products are used in applications such as pressure sensitive labels, food and industrial packaging, industrial sealants and tapes, and consumer hygiene products.Netherlands.PackagingPackaging) and marketing services. All are tailored to create packaging that appeals to consumers while building customer brand equity. OurEverest, FortressandStarcotebrands are used in packaging applications for everyday products such as juice, milk, food, cosmetics, pharmaceuticals, computer software and tobacco products. Approximately 33%32% of our bleached board production is converted into packaging products in our own plants. Our Beverage Packaging business, made up of 17 facilities worldwide, offers complete packaging systems. From paper to filling machines, using proprietary technologies includingTru-Tastebrand barrier board technology for premium long-life juices, our expertise is utilized to produce creative customer solutions and value. Shorewood Packaging Corporation utilizes emerging technologies in its 1718 facilities worldwide to produce world-class packaging with high-impact graphics for a variety of markets, including home entertainment, tobacco, cosmetics, general consumer and pharmaceuticals. The Foodservice business offers cups, lids, bags, food containers and plates through fourthree domestic plants and foursix international facilities.away- from-homeaway-from-home markets with facility supplies and equipment, and various manufacturers and processors with packaging supplies and equipment.xpedx is the leading wholesale distribution marketer in these customer and product segments in North America, operating 136125 warehouse locations and 148145 retail stores in the United States and Mexico.Mexico, andxpedx.com, a leading business to business e-commerce site.6.86.5 million acres of forestlands in the United States, mostly in the South. All lands are independently third- partythird-party certified under the operating standards of the Sustainable Forestry Initiative (SFI®(SFITM).In 2004,2005, these23%20% of the wood fiber requirements of our other businesses. Our forestlands are managed as a portfolio to optimize the economic value to our shareholders. Principal revenue-generatingrevenue-Printing Papers In millions 2005 2004 2003 $7,860 $7,670 $7,280 $552 $581 $464 In millions 2005 2004 2003 $4,935 $4,830 $4,170 $230 $380 $264 In millions 2005 2004 2003 $2,590 $2,605 $2,465 $126 $161 $183 In millions 2005 2004 2003 $6,380 $6,065 $5,860 $84 $87 $80 In millions 2005 2004 2003 $2,575 $2,395 $2,390 $400 $315 $462 269 281 268 (146 ) (178 ) (157 ) 198 124 71 206 251 76 $927 $793 $720 In millions 2005 2004 2003 $915 $1,120 $1,235 $4 $38 $23 In millions 2005 2004 2003 $658 $590 $482 187 179 165 131 205 128 9 5 12 121 126 121 31 39 31 1,137 1,144 939 18 32 54 $1,155 $1,176 $993 sold itsacquired Box USA Holdings, Inc. (Box USA) for approximately $400 million, including the assumption of approximately $197 million of debt, of which approximately $193 million was repaid by July 31, 2004.Weldwood of Canada Limited (Weldwood) to West Fraser TimberInternational Paper, issued $700 million of long-term debt with an initial interest rate of LIBOR plus 40 basis points that can vary depending upon the credit rating of the Company, Limited. During our ownership, Weldwood operated 10 plantsand a maturity date in November 2010. Additionally, the subsidiary borrowed $70 million under a bank credit agreement with an initial interest rate of LIBOR plus 40 basis points that can vary depending upon the credit rating of the Company, and a maturity date in November 2006.provincessubsidiaries under the American Jobs Creation Act of British Columbia and Alberta, which produced about 1.3 billion board feet of lumber and 495 million square feet of plywood annually. Prior to the sale, we had harvesting rights on 10.2 million acres of government-owned forestlands in Canada through licenses and forest management agreements.Carter Holt HarveyCarter Holt Harvey is approximately 50.5% owned by International Paper. It is one2004. Most of the largest forest products companiescash from the repatriation is intended for further debt reduction in 2006.Southern Hemisphere,same quarter. Other reductions in the third quarter of 2005 included $662 million of notes with operationscoupon rates ranging from 4% to 7.35% and original maturities from 2009 to 2029, and the repayment of $150 million of 7.10% notes with a maturity date of September 2005.New Zealand, Australiacash from certain of its foreign subsidiaries, including amounts under the American Jobs Creation Act of 2004. In June 2005, International Paper repaid approximately $400 million of a subsidiary’s long-term debt with an interest rate of LIBOR plus 62.5 basis points and Asia. Sales consista maturity date of June 2007.46%$295 million on notes with coupon rates ranging from 4% to 7.875% and original maturities from 2006 to 2015.New Zealand, 36%2005 included the issuance of approximately 3,006,000 common shares under various incentive plans, including stock option exercises that generated $23 million of cash.Australiathe Box USA acquisition in July and 18%approximately $340 million of debt that was reclassified from Minority interest in Asia2004 prior to repayment. Excluding these repayments, the net reduction in debt during 2004 was approximately $1.0 billion.elsewhere. Carter Holt Harvey’s major businesses include:Trout Creek Equipment Leasing, L.P. Both of these securities had been reclassified from Minority interest toForests, including ownershipAlso in August 2004, an International Paper wholly-owned subsidiary issued 500 million euro-denominated long-term debt (equivalent to approximately $619 million at issuance) with an initial interest rate of 785,000 acresEURIBOR plus 55 basis points and a maturity in August 2009.predominantly radiata pine plantations that currently yield 5.5long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007, which refinanced $650 million tons of logs annually. Long term sustainable yieldlong-term debt having an interest rate of LIBOR plus 100 basis points and a maturity date in August 2004. In April 2004, $1.0 billion of 8.125% coupon rate debt was retired using the estate is about 8.5proceeds from the March 2004 issuance of $400 million tons of logs annually.Wood Products, including about 4675.25% notes due in April 2016 and $600 million board feet of lumber capacity, 90 million square feet of laminated veneer lumber production and about 1,072 million square feet of plywood and panel production, including approximately 205 million square feet from Plantation Timber Products4.00% notes due in China acquired in 2004. Carter Holt Harvey is the largest Australasian producer of lumber, plywood, panels and laminated veneer lumber.April 2010.1617
Industrial Packaging net sales for 2004 totaled $4.9 billion, compared with $4.2 billion in 2003 and $4.1 billion in 2002. Our average containerboard prices were up about 9%, specialty papers prices were up about 5% and U.S. box prices were up about 2% compared to 2003; however, container prices in Europe were down about 3% on a constant dollar basis. Operating profits increased 43% from 2003 and 25% from 2002. Increased prices, higher containerboard and U.S. converting shipments, a more favorable mix, mill operating improvements, and lower overhead costs were partially offset by raw material and transportation cost increases. U.S. converting shipments were up about 7% from 2003 for the Company’s ongoing operations, and were up about 19% including the additional contributions from the acquisition of Box USA in July 2004. A slight increase in demand for International Container coupled with operational cost reduction efforts more than offset the decrease in price so that operating results improved 4%. In 2004, the Industrial Packaging business took 5,000 tons of market related downtime compared to 245,000 tons in 2003, reflecting the improved market conditions.18 Forest Products 19 2021 22During 2004, Carter Holt Harvey borrowed $425 million under its multi-currency and commercial paper credit facilities at interest rates ranging from 5.5% to 6.8% to be repaid during 2005. Proceeds from the borrowing were used to repay approximately $305 million of 8.875% notes and cross-currency and interest rate swap settlements with a maturity date of December 2004.$2.4$2.2 billion and retirements totaling $1.4$1.2 billion for a net increase of $1.0 billion, before non-cash adjustments under FIN 46 (see Recent Accounting Developments).billion. The increase reflects the timing of $1 billion of borrowings in December 2003 used to retire approximately $1 billion of debt in early 2004 as discussed above.below. Other 2003 financing activity included the redemption of $550 million and the issuance of $150 million of preferred securities of International Paper subsidiaries.15, 2009, and $500 million of 5.50% Senior Unsecured Notes due January 15, 2014, were issued. In January 2004, the proceeds from these issuances were used to redeem $805 million of 7.875% preferred securities of International Paper Capital Trust III that, prior to July 1, 2003, was a subsidiary of International Paper (see Notes 4 and 8 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data).Paper. The remaining proceeds were used for the repayment or early retirement of other debt.2002: Financing activities during 2002 included debt issuances of $2.0 billion and retirements of $3.0 billion, for a net debt reduction of $1.0 billion. Debt issuances in 2002 included $1.2 billion of 5.85% Senior Unsecured Notes due in October 2012, the proceeds of which were used to retire most of International Paper’s $1.2 billion of 8.0% notes due July 2003 that were issued in connection with the Champion acquisition. Other financing activity included $169 million for the repurchase of approximately 4,390,000 shares of International Paper common stock, and the issuance of 1,403,000 shares for various incentive plans, including stock option exercises that generated $53 million of cash.2004,2005, International Paper had entered into interest rate swaps with a total notional amount of $2.2$1.7 billion. These swaps reduced 20042005 interest expense by $52$10 million before taxes and minority interest, or 23660 basis points, on $2.2$1.7 billion of related debt. At December 31, 2004,2005, the swaps reduced the weighted average fixed rate on the debt of 5%5.5% to an effective rate of 2.6%4.9% with maturities ranging from one1 to 11 years.2003 and $482 million in 2002.2003. The International Paper common stock dividend remained at $1.00 per share during the three-year period.In August 2004, CHH used a portion of the funds generated in connection with the second quarter sale of its Tissue business to repurchase shares from its shareholders, including approximately $158 million that was paid to minority shareholders.20042005 and 2003,2004, cash and temporary investments totaled $1.6 billion and $2.6 billion, respectively.$2.4meet working capital and dividend requirements during 2006 through cash from operations and divestiture proceeds, supplemented as required by its various existing credit facilities. International Paper has approximately $3.2 billion of committed liquidity, which we believe is adequate to cover expected operating cash flow variability during our industry’s economic cycles. This includes a $750 million fully committed bank credit agreement that expires in March 2006, a $1.25 billion fully committed bank credit agreement that expires in March 2009, and up to $1.2 billion of available commercial paper-based financings under a receivables securitization program that expires November 2007. AtBoth balancesThe Company currently has short-term credit ratings by Standard & Poor’s and Moody’s Investor Services of A-3 and P-3, respectively.higher than normal as they included cashfollows:In millions 2006 2007 2008 2009 2010 Thereafter $1,181 $570 $308 $2,330 $1,534 $6,281 172 144 119 76 63 138 3,264 393 280 240 204 1,238 $4,617 $1,107 $707 $2,646 $1,801 $7,657 (a) The 2006 amount includes $2.4 billion for contracts made in the ordinary course of business to purchase pulpwood, logs and wood chips. The majority of our other purchase obligations are take-or-pay or purchase commitments made in the ordinary course of business related to raw material purchases and energy contracts. Other significant items include purchase obligations related to contracted services. salesamount of Weldwoodany proceeds received and changes in market conditions, input costs and capital spending, the Company remains committed to using its free cash flow in 2006 to pay down debt, to return value to shareholders, and for selective high-return investments.Canada Limitedfinancial statements in conformity with generally accepted accounting principles in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.Maineamount of the loss can be reasonably estimated. Liabilities accrued for legal matters require judgments regarding projected outcomes and New Hampshire forestlands (2004)range of loss based on historical experience and $1 billionrecommendations of borrowings (2003)legal counsel. Additionally, as discussed in Note 10 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, reserves for projected future claims settlements relating to exterior siding and roofing products previously manufactured by Masonite require judgments regarding projections of future claims rates and amounts. International Paper utilizes an independent third party consultant to assist in developing these estimates. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs. International Paper determines these estimates after a detailed evaluation of each site.werethe carrying value of the assetIn millions Benefit
Obligation Fair Value of
Plan Assets $8,958 $6,944 320 — 703 — 276 173 21 — 2006 2005 2004 2003 5.50 % 5.75 % 6.00 % 6.50 % 8.50 % 8.50 % 8.75 % 8.75 % 3.25 % 3.25 % 3.25 % 3.75 % partthe calculation of U.S. postretirement obligations for the retirementyears shown were: 2006 2005 2004 10.00 % 10.00 % 10.00 % 5.00 % 5.00 % 5.00 % 2011 2010 2009 debt in Januaryeach year to calculate liability information as of that date and pension and postretirement expense for the following year. The discount rate assumption is determined based on a yield curve that incorporates approximately 500-550 Aa-graded bonds. The plan’s projected cash flows are then matched to this yield curve to develop the discount rate.2324
Obligation
Plan Assets25
Rolling Three-Year Performance vs. Peers 26
Actual rates of return earned on U.S. pension plan assets for each of the last 10 years were:
The following chart, prepared by International Paper, illustrates the quarterly performance ranking of our pension fund investments compared with approximately 100 other corporate and public pension funds. The peer group, of which International Paper is one, is the “State Street Corporate and Public Master Trusts Universe.” Pension Fund Rolling Three-Year Performance vs. Peers Percentile Ranking (100%=Best)
SFAS No. 87, “Employers’ Accounting for Pensions,” provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets, and other assumption changes. These net gains and losses are recognized in pension expense prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans (approximately 11 years) to the extent that they are not offset by gains and losses in subsequent years. At December 31, 2005, unrecognized net actuarial losses for International Paper’s U.S. pension plans totaled approximately $3.2 billion. While actual future amortization charges will be affected by future gains/losses, the amortization of cumulative unrecognized losses as of December 31, 2005 is expected to increase U.S. pension expense by approximately $68 million in 2006, while decreasing expense by $24 million and $38 million in 2007 and 2008, respectively. Net periodic pension and postretirement plan expenses, calculated for all of International Paper’s plans were as follows:
Assuming that discount rates, expected long-term returns on plan assets and rates of future compensation increases remain the same as in 2005, projected future net periodic pension and postretirement plan expenses would be as follows:
The increases in 2005 and 2004 U.S. pension expense For The market value of plan assets for International Paper’s U.S. pension plan at December 31, 29 International Paper makes contributions that are sufficient to fully fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). While International Paper may elect to make voluntary contributions to its U.S. qualified plan up to the maximum deductible amount per IRS tax regulations in the coming years, it is unlikely that any contributions to the plan will be required Accounting for Stock Options.International Paper accounts for stock options using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Under this method, compensation expense is recorded over the related service period when the market price exceeds the option price at the measurement date, which is the grant date for International Paper’s options. No compensation expense is recorded as options are issued with an exercise price equal to the market price of International Paper stock on the grant date. | During each reporting period, fully diluted earnings per share is calculated by assuming that “in-the-money” options are exercised and the exercise proceeds are used to repurchase shares in the marketplace. When options are actually exercised, option proceeds are credited to equity and issued shares are included in the computation of earnings per common share, with no effect on reported earnings. Equity is also increased by the tax benefit that International Paper will receive in its tax return for income reported by the optionees in their individual tax returns. Under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” expense for stock options is measured at the grant date based on a computed fair value of options granted, and then charged to expense over the related service period. Had this method of accounting been applied, additional expense of $57 million in 2005, $38 million in 2004, and $44 million in 2003 During 2003, the Company decided to
At December 31, 2005, 41.6 million exercise prices ranging from $29.31 to $66.81 per share. At December 31, 2004, 45.4 million options were outstanding with exercise prices ranging from $29.31 to $66.81 per share. On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” using the modified prospective method. No unvested stock options were outstanding Before minority interest, discontinued operations, extraordinary items and the cumulative effect of accounting changes, the Company’s effective income tax rates were | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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compared with
RECENT ACCOUNTING DEVELOPMENTS The following represent recently issued accounting pronouncements that will affect reporting and disclosures in future periods. See Note 4 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for a further discussion of each item. Accounting Changes and Error Corrections: In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for the accounting and reporting of a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. This Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of the Statement. Accounting for Conditional Asset Retirement Obligations: In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” This Interpretation clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143 refers to the fact that a legal obligation to perform an asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists to make a reasonable estimate of the fair value of the obligation. International Paper adopted the provisions of this Interpretation in the fourth quarter of 2005 with no material effect on its consolidated financial statements. The Company’s principal conditional asset retirement obligations relate to the potential future closure or redesign of certain of its production facilities. In connection with any such activity, it is possible that the Company may be required to take steps to remove certain materials from the facilities, or to remediate in accordance with federal and state laws that govern the handling of certain hazardous or potentially hazardous materials. Applicable regulations and standards provide that the removal of certain materials would only be required if the facility were to be demolished or underwent major renovations. At this time, any such obligations have an indeterminate settlement date, and the Company believes that adequate information does not exist to apply an expected-present-value technique to estimate any such potential obligations. Accordingly, the Company does not record a liability for such remediation until a decision is made that allows reasonable estimation of the timing of such remediation. Implicit Variable Interests: In March 2005, the FASB issued FASB Staff Position (FSP) FIN 46(R)-5, “Implicit Variable Interests Under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities.” This FSP states that implicit variable interests are implied financial interests in an entity that change with changes in the fair value of the entity’s net assets exclusive of variable interests. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing and (or) receiving of variability indirectly from the entity (rather than directly). The identification of an implicit variable interest is a matter of judgment that depends on the relevant facts and circumstances. International Paper applied the provisions of FSP FIN 46(R)-5 in the second quarter of 2005, with no material impact on its consolidated financial statements. Accounting for Income Taxes: In December 2004, the FASB issued FSP Financial Accounting Standards 109-1 and 109-2 relating to the American Jobs Creation Act of 2004 (the Act). The Act provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated. In 2005, International Paper repatriated approximately $2.1 billion in cash from certain of its foreign subsidiaries, including amounts eligible for this special deduction. The Company recorded income tax expenses associated with these cash repatriations totaling approximately $142 million for the year ended December 31, 2005. Share-Based Payment Transactions: In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” 31 solidated Financial Statements in Exchanges of Nonmonetary Assets: In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an
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Inventory Costs: In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Accounting for Medicare Benefits: In May 2004, the FASB issued FSP FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” that provides guidance on the accounting and required disclosures for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. International Paper adopted FSP FAS 106-2 prospectively in the third quarter of 2004.
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Consolidation of Variable Interest Entities: In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” This Interpretation changed existing consolidation rules for certain entities, those in which equity investors do not have the characteristics of a controlling financial interest, or do not have sufficient equity at risk for the entity to finance the entity’s activities without additional subordinated financial support.
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Environmental Matters International Paper is subject to extensive federal and state environmental regulation as well as similar regulations in all other jurisdictions in which we operate. Our continuing objectives are to: (1) control emissions and discharges from our facilities into the air, water and groundwater to avoid adverse impacts on the environment, (2) make continual improvements in environmental performance, and (3) maintain 100% compliance with applicable laws and regulations. A total of On April 15, 1998, the EPA issued final Cluster Rule regulations that established new requirements regarding air emissions and wastewater discharges from pulp and paper mills to be met by 2006. The projected costs included in our spending estimate related to the Cluster Rule regulations for the year 32 projected Cluster Rule costs for The EPA is continuing the development of new programs and standards such as additional wastewater discharge allocations, water intake structure requirements and national ambient air quality standards. When regulatory requirements for new and changing standards are finalized, we will add any resulting future cost requirements to our expenditure forecast. International Paper has been named as a potentially responsible party in | Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Most of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under CERCLA and equivalent state laws, as a practical matter, liability for CERCLA cleanups is allocated among the many potential responsible parties. In addition to the above
International Paper is involved in other contractual disputes, administrative and legal proceedings and investigations of various types. While any litigation, proceeding or investigation has an element of uncertainty, we believe that the outcome of any proceeding, lawsuit or claim that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial statements. Litigation
unexpected developments. Analysis of our significant litigation activity is discussed below, and further details of these and other litigation matters are discussed in Note 10 of the Notes to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary
In recent years, several antitrust class action lawsuits have been filed against |
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In light of the With respect to our one pending antitrust certified
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While inflationary increases in certain input costs, such as energy, wood fiber and chemical costs, have an impact on the Company’s operating results, changes in general inflation have had minimal impact on our operating results in each of the last three years. Sales prices and volumes are more strongly influenced by supply and demand factors in specific markets and by exchange rate fluctuations than by inflationary factors. FOREIGN CURRENCY EFFECTS International Paper has operations in a number of countries. Its operations in those countries also export to, and compete with imports from, other regions. As such, currency movements can have a number of direct and indirect impacts on the Company’s financial statements. Direct impacts include the translation of international operations’ local currency financial statements into U.S. dollars. Indirect impacts include the change in competitiveness of imports into, and exports out of, the United States (and the impact on local currency pricing of products that are traded internationally). In general, a lower U.S. dollar and stronger local currency is beneficial to International Paper. The currencies that have the most impact are the Euro, the We use financial instruments, including fixed and variable rate debt, to finance operations, for capital spending programs and for general corporate purposes. Additionally, financial instruments, including various derivative contracts, are used to hedge exposures to interest rate, commodity and foreign currency risks. We do not use financial instruments for trading purposes. Information related to International Paper’s debt obligations is included in Note 12 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. A discussion of derivatives and hedging activities is included in Note 13 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. The fair value of our debt and financial instruments varies due to changes in market interest and foreign currency rates and commodity prices since the inception of the related instruments. We assess this market risk utilizing a sensitivity analysis. The sensitivity analysis measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in interest and currency rates and commodity prices. |
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Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to short- and long-term debt obligations and investments in marketable securities. We invest in investment grade securities of financial institutions and industrial companies and limit exposure to any one issuer. Our investments in marketable securities at December 31, We issue fixed and floating rate debt in a proportion consistent with International Paper’s optimal capital structure, while at the same time taking advantage of market opportunities to reduce interest expense as appropriate. Derivative instruments, such as interest rate swaps, may be used to implement the optimal capital structure. At December 31, Commodity Price Risk The objective of our commodity exposure management is to minimize volatility in earnings due to large fluctuations in the price of commodities. Commodity swap and option contracts have been used to manage risks associated with market fluctuations in energy prices. Foreign Currency Risk International Paper transacts business in many currencies and is also subject to currency exchange rate risk through investments and businesses owned and operated in foreign countries. Our objective in managing the associated foreign currency risks is to minimize the effect of adverse exchange rate fluctuations on our after-tax cash flows. We address these risks on a limited basis through financing a portion of our investments in overseas operations with borrowings denominated in the same currency as the operation’s functional currency, or by entering into | such financial instruments from a 10% adverse change in quoted foreign currency exchange rates would 34 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations on |
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35 ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information about our industry segments, see the “Description of Industry Segments” included on pages For management purposes, we report the operating performance of each business based on earnings before interest and income taxes (“EBIT”) excluding special and extraordinary items, gains or losses on sales of businesses and cumulative effects of accounting changes. External Sales by Major Product is determined by aggregating sales from each segment based on similar products or services. External sales are defined as those that are made to parties outside International Paper’s consolidated group, whereas sales by segment in the Net Sales table are determined by the management approach and include intersegment sales. Capital Spending by Industry Segment is reported on page Prior-year industry segment information has been restated to conform to the |
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INFORMATION BY GEOGRAPHIC AREA NET SALES (i)
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33
Restructuring and Other Charges |
| INFORMATION BY GEOGRAPHIC AREA | ||||||||||||||||||||||||||||||
In millions |
| 2004 |
|
| 2003 |
|
| 2002 | Net Sales (f) |
|
|
|
|
|
|
|
|
| ||||||||||||||
| ||||||||||||||||||||||||||||||||
Printing Papers | $ | –– |
| $ | 26 |
| $ | 85 |
| In millions |
|
| 2004 |
|
| 2003 |
|
| 2002 | |||||||||||||
Industrial and Consumer Packaging |
| –– |
|
| 30 |
|
| 31 |
| |||||||||||||||||||||||
Distribution |
| –– |
|
| 7 |
|
| 13 |
| United States (g) |
| $ | 19,167 |
| $ | 18,138 |
| $ | 18,772 | |||||||||||||
Forest Products |
| –– |
|
| 31 |
|
| 12 |
| Europe |
|
| 3,056 |
|
| 2,928 |
|
| 2,636 | |||||||||||||
Carter Holt Harvey |
| 35 |
|
| 12 |
|
| 28 |
| Pacific Rim (h) |
|
| 2,405 |
|
| 2,025 |
|
| 1,735 | |||||||||||||
Specialty Businesses and Other (a) |
| –– |
|
| 69 |
|
| 19 |
| Americas, other than U.S. |
|
| 920 |
|
| 864 |
|
| 756 | |||||||||||||
Corporate |
| 176 |
|
| 123 |
|
| 507 |
|
|
|
|
| |||||||||||||||||||
|
|
|
| Net Sales |
| $ | 25,548 |
| $ | 23,955 |
| $ | 23,899 | |||||||||||||||||||
Restructuring and Other Charges | $ | 211 |
| $ | 298 |
| $ | 695 |
|
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| |||||||||||||||||||||||||||||
| European Sales by Industry Segment | |||||||||||||||||||||||||||||||
Depreciation and Amortization (d) |
| |||||||||||||||||||||||||||||||
| In millions |
|
| 2004 |
|
| 2003 |
|
| 2002 | ||||||||||||||||||||||
In millions |
| 2004 |
|
| 2003 |
|
| 2002 |
| |||||||||||||||||||||||
| Printing Papers |
| $ | 1,370 |
| $ | 1,291 |
| $ | 1,152 | ||||||||||||||||||||||
Printing Papers | $ | 700 |
| $ | 682 |
| $ | 665 |
| Industrial and Consumer | ||||||||||||||||||||||
Industrial and Consumer Packaging |
| 405 |
|
| 396 |
| 391 | Packaging |
|
| 891 |
|
| 822 |
|
| 703 | |||||||||||||||
Distribution |
| 17 |
|
| 14 |
| 15 |
| Distribution |
| 2 |
|
| 9 |
|
| 15 | |||||||||||||||
Forest Products |
| 111 |
|
| 119 |
| 115 | Specialty Businesses and | ||||||||||||||||||||||||
Carter Holt Harvey |
| 208 |
|
| 190 |
| 181 | Other (a) |
|
| 793 |
|
| 806 |
|
| 766 | |||||||||||||||
Specialty Businesses and Other (a) |
| 27 |
|
| 25 |
| 19 |
|
|
|
|
| ||||||||||||||||||||
Corporate |
| 97 |
|
| 112 |
| 111 |
| European Sales |
| $ | 3,056 |
| $ | 2,928 |
| $ | 2,636 | ||||||||||||||
Depreciation and Amortization | $ | 1,565 |
| $ | 1,538 |
| $ | 1,497 |
| |||||||||||||||||||||||
|
|
|
| Long-Lived Assets (i) | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
External Sales by Major Product |
| In millions |
|
| 2004 |
|
| 2003 |
|
| 2002 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
In millions |
| 2004 |
|
| 2003 |
|
| 2002 |
| United States |
| $ | 11,764 |
| $ | 12,102 |
| $ | 12,630 | |||||||||||||
| Europe |
|
| 1,489 |
|
| 1,334 |
|
| 1,206 | ||||||||||||||||||||||
Printing Papers | $ | 6,973 |
| $ | 6,395 |
| $ | 6,109 |
| Pacific Rim (h) |
|
| 3,109 |
|
| 2,867 |
|
| 2,436 | |||||||||||||
Industrial and Consumer Packaging |
| 7,640 |
|
| 6,895 |
|
| 6,852 |
| Americas, other than U.S. |
|
| 718 |
|
| 629 |
|
| 477 | |||||||||||||
Distribution |
| 6,306 |
|
| 6,191 |
|
| 6,519 |
| Corporate |
|
| 288 |
|
| 307 |
|
| 308 | |||||||||||||
Forest Products |
| 3,953 |
|
| 3,738 |
|
| 3,642 |
|
|
|
|
| |||||||||||||||||||
Other (e) |
| 676 |
|
| 736 |
|
| 777 |
| Long-Lived Assets |
| $ | 17,368 |
| $ | 17,239 |
| $ | 17,057 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net Sales | $ | 25,548 |
| $ | 23,955 |
| $ | 23,899 |
| |||||||||||||||||||||||
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34
As can be expected in a complex and dynamic business environment, some financial statement amounts are based on estimates and judgments. The accompanying consolidated financial statements have been audited by the independent registered public accounting firm, Deloitte & Touche LLP. During their audits,
The management of International Paper Company is also responsible for establishing and maintaining adequate internal controls over financial reporting including the safeguarding of assets against unauthorized acquisition, use or disposition. These controls are designed to provide reasonable assurance to management and the board of directors regarding preparation of reliable published financial statements and such asset safeguarding. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore can provide only reasonable assurance as to such financial statement preparation and asset safeguarding. The system is supported by written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, International Paper completed the acquisition of a majority share of Compagnie Marocaine des Cartons et des Papiers (CMCP), a leading Moroccan corrugated packaging company, on October 14, 2005. Due to the timing of the acquisition, we have excluded CMCP from our evaluation of the effectiveness of internal controls over financial reporting. For the period ended December 31, 2005, sales and assets of CMCP represented less than 1% of total revenues and less than 1% of total assets. The Company’s independent registered public accounting firm, Deloitte & Touche LLP, |
INTERNAL CONTROL ENVIRONMENT AND BOARD OF DIRECTORS OVERSIGHT Our internal control environment includes an enterprise-wide attitude of integrity and control consciousness that establishes a positive “tone at the top.” This is exemplified by our ethics program that includes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in the conduct of International Paper business, The Board of Directors, assisted by the Audit and Finance Committee (Committee), monitors the integrity of the Company’s financial statements and financial reporting procedures, the performance of the Company’s internal audit function and independent auditors, and other matters set forth in its charter. The Committee, which currently consists of four independent directors, meets regularly with representatives of management, and with the independent auditors 38 and the Internal Auditor, with and without management representatives in attendance, to review their activities. The Committee’s Charter takes into account the New York Stock Exchange rules relating to Audit Committees and the SEC rules and regulations promulgated as a result of the Sarbanes-Oxley Act of 2002. A copy of the charter will be included in the Company’s such financial statements in this Annual Report on Form 10-K will be set forth in our
JOHN V. FARACI CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MARIANNE M. PARRS EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
|
35
To the Shareholders of International Paper Company: We have audited the accompanying consolidated balance sheets of International Paper Company and subsidiaries (the “Company”) as of December 31, We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of International Paper Company and subsidiaries as of December 31, We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31,
|
36
March 2, 2006 – TENTATIVE
To the Shareholders of International Paper Company: We have audited management’s assessment, included in the accompanying Report of Management on Internal Controls over Financial Reporting, that International Paper Company and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally 40 accepted in the United States. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable | assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31,
New York, New York March 2, 2006 – TENTATIVE
| |
| In millions, except per share amounts, for the years ended December 31 | 2005 | 2004 | 2003 | |||||||||
NET SALES | $ | 24,097 | $ | 23,359 | $ | 22,138 | ||||||
COSTS AND EXPENSES | ||||||||||||
Cost of products sold | 18,139 | 17,225 | 16,443 | |||||||||
Selling and administrative expenses | 1,876 | 1,935 | 1,888 | |||||||||
Depreciation, amortization and cost of timber harvested | 1,376 | 1,357 | 1,347 | |||||||||
Distribution expenses | 1,087 | 1,026 | 954 | |||||||||
Taxes other than payroll and income taxes | 233 | 236 | 235 | |||||||||
Restructuring and other charges | 358 | 166 | 286 | |||||||||
Insurance recoveries | (258 | ) | (123 | ) | – | |||||||
Net losses on sales and impairments of businesses | 111 | 139 | 34 | |||||||||
Reversals of reserves no longer required, net | (4 | ) | (36 | ) | (39 | ) | ||||||
Interest expense, net | 593 | 710 | 705 | |||||||||
EARNINGS FROM CONTINUING OPERATIONS | 586 | 724 | 285 | |||||||||
Income tax provision (benefit) | (285 | ) | 242 | (56 | ) | |||||||
Minority interest expense, net of taxes | 12 | 26 | 83 | |||||||||
EARNINGS FROM CONTINUING OPERATIONS | 859 | 456 | 258 | |||||||||
Discontinued operations, net of taxes and minority interest | 241 | (491 | ) | 57 | ||||||||
Cumulative effect of accounting changes, net of taxes: | ||||||||||||
Asset retirement obligations | – | – | (10 | ) | ||||||||
Variable interest entities | – | – | (3 | ) | ||||||||
NET EARNINGS (LOSS) | $ | 1,100 | $ | (35 | ) | $ | 302 | |||||
BASIC EARNINGS (LOSS) PER COMMON SHARE | ||||||||||||
Earnings from continuing operations | $ | 1.77 | $ | 0.94 | $ | 0.54 | ||||||
Discontinued operations, net of taxes and minority interest | 0.49 | (1.01 | ) | 0.12 | ||||||||
Cumulative effect of accounting changes, net of taxes: | ||||||||||||
Asset retirement obligations | – | – | (0.02 | ) | ||||||||
Variable interest entities | – | – | (0.01 | ) | ||||||||
Net earnings (loss) | $ | 2.26 | $ | (0.07 | ) | $ | 0.63 | |||||
DILUTED EARNINGS (LOSS) PER COMMON SHARE | ||||||||||||
Earnings from continuing operations | $ | 1.74 | $ | 0.93 | $ | 0.53 | ||||||
Discontinued operations, net of taxes and minority interest | 0.47 | (1.00 | ) | 0.13 | ||||||||
Cumulative effect of accounting changes, net of taxes: | ||||||||||||
Asset retirement obligations | – | – | (0.02 | ) | ||||||||
Variable interest entities | – | – | (0.01 | ) | ||||||||
Net earnings (loss) | $ | 2.21 | $ | (0.07 | ) | $ | 0.63 | |||||
The accompanying notes are an integral part of these financial statements.
42
International Paper Company
CONSOLIDATED BALANCE SHEET
| In millions at December 31 | 2005 | 2004 | ||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and temporary investments | $ | 1,641 | $ | 2,180 | ||||
Accounts and notes receivable, less allowances of $110 in 2005 and $124 in 2004 | 2,926 | 2,743 | ||||||
Inventories | 2,434 | 2,371 | ||||||
Assets of businesses held for sale | 14 | 4,729 | ||||||
Deferred income tax assets | 279 | 410 | ||||||
Other current assets | 115 | 153 | ||||||
Total Current Assets | 7,409 | 12,586 | ||||||
Plants, Properties and Equipment, net | 11,801 | 12,216 | ||||||
Forestlands | 2,190 | 2,157 | ||||||
Investments | 625 | 655 | ||||||
Goodwill | 5,043 | 4,994 | ||||||
Deferred Charges and Other Assets | 1,703 | 1,609 | ||||||
Total Assets | $ | 28,771 | $ | 34,217 | ||||
LIABILITIES AND COMMON SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Notes payable and current maturities of long-term debt | $ | 1,181 | $ | 222 | ||||
Accounts payable | 2,085 | 2,026 | ||||||
Accrued payroll and benefits | 425 | 425 | ||||||
Liabilities of businesses held for sale | 36 | 3,165 | ||||||
Other accrued liabilities | 1,117 | 1,496 | ||||||
Total Current Liabilities | 4,844 | 7,334 | ||||||
Long-Term Debt | 11,023 | 13,632 | ||||||
Deferred Income Taxes | 726 | 1,118 | ||||||
Other Liabilities | 3,616 | 3,691 | ||||||
Minority Interest | 211 | 188 | ||||||
Commitments and Contingent Liabilities – Note 10 | ||||||||
Common Shareholders’ Equity | ||||||||
Common stock, $1 par value, 2005 – 490.5 shares, 2004 – 487.5 shares | 491 | 487 | ||||||
Paid-in capital | 6,627 | 6,562 | ||||||
Retained earnings | 3,172 | 2,562 | ||||||
Accumulated other comprehensive loss | (1,935 | ) | (1,357 | ) | ||||
| 8,355 | 8,254 | |||||||
Less: Common stock held in treasury, at cost, 2005 – 0.1 shares | 4 | – | ||||||
Total Common Shareholders’ Equity | 8,351 | 8,254 | ||||||
Total Liabilities and Common Shareholders’ Equity | $ | 28,771 | $ | 34,217 | ||||
The accompanying notes are an integral part of these financial statements.
43
International Paper Company
CONSOLIDATED STATEMENT OF CASH FLOWS
| In millions for the years ended December 31 | 2005 | 2004 | 2003 | |||||||||
OPERATING ACTIVITIES | ||||||||||||
Net earnings (loss) | $ | 1,100 | $ | (35 | ) | $ | 302 | |||||
Cumulative effect of accounting changes, net of taxes | – | – | 13 | |||||||||
Discontinued operations, net of taxes and minority interest | (241 | ) | 491 | (57 | ) | |||||||
Earnings from continuing operations | 859 | 456 | 258 | |||||||||
Depreciation, amortization and cost of timber harvested | 1,376 | 1,357 | 1,347 | |||||||||
Tax benefit—non-cash settlement of tax audits | (627 | ) | – | – | ||||||||
Deferred income tax benefit, net | (38 | ) | (78 | ) | (336 | ) | ||||||
Restructuring and other charges | 358 | 166 | 286 | |||||||||
Insurance recoveries | (258 | ) | (123 | ) | – | |||||||
Payments related to restructuring and legal reserves | (185 | ) | (220 | ) | (252 | ) | ||||||
Reversals of reserves no longer required, net | (4 | ) | (36 | ) | (39 | ) | ||||||
Periodic pension expense, net | 243 | 111 | 60 | |||||||||
Proceeds on Maine timberlands transaction | – | 242 | – | |||||||||
Net losses on sales and impairments of businesses held for sale | 111 | 139 | 34 | |||||||||
Other, net | 234 | 138 | 182 | |||||||||
Changes in current assets and liabilities | ||||||||||||
Accounts and notes receivable | 17 | (62 | ) | 87 | ||||||||
Inventories | (16 | ) | (69 | ) | 51 | |||||||
Accounts payable and accrued liabilities | (629 | ) | 49 | (117 | ) | |||||||
Other | 37 | (4 | ) | (32 | ) | |||||||
Cash provided by operations – continuing operations | 1,478 | 2,066 | 1,529 | |||||||||
Cash provided by operations – discontinued operations | 32 | 322 | 293 | |||||||||
Cash Provided by Operations | 1,510 | 2,388 | 1,822 | |||||||||
INVESTMENT ACTIVITIES | ||||||||||||
Invested in capital projects | ||||||||||||
Continuing operations | (1,155 | ) | (1,176 | ) | (993 | ) | ||||||
Businesses sold and held for sale | (17 | ) | (37 | ) | (38 | ) | ||||||
Acquisitions, net of cash acquired | (116 | ) | (186 | ) | – | |||||||
Proceeds from divestitures | 1,440 | 867 | 71 | |||||||||
Other | 73 | 300 | (184 | ) | ||||||||
Cash provided by (used for) investment activities – continuing operations | 225 | (232 | ) | (1,144 | ) | |||||||
Cash (used for) provided by investment activities – discontinued operations | (218 | ) | 287 | (123 | ) | |||||||
Cash Provided by (Used for) Investment Activities | 7 | 55 | (1,267 | ) | ||||||||
FINANCING ACTIVITIES | ||||||||||||
Issuance of common stock | 23 | 164 | 80 | |||||||||
Issuance of debt | 968 | 2,536 | 2,116 | |||||||||
Reduction of debt | (2,670 | ) | (4,219 | ) | (641 | ) | ||||||
Redemption of preferred securities of a subsidiary | – | – | (550 | ) | ||||||||
Change in book overdrafts | 4 | (145 | ) | 104 | ||||||||
Dividends paid | (490 | ) | (485 | ) | (480 | ) | ||||||
Sale of minority interest | – | – | 150 | |||||||||
Other | (40 | ) | (68 | ) | 7 | |||||||
Cash (used for) provided by financing activities – continuing operations | (2,205 | ) | (2,217 | ) | 786 | |||||||
Cash used for financing activities – discontinued operations | (172 | ) | (218 | ) | (195 | ) | ||||||
Cash (Used For) Provided By Financing Activities | (2,377 | ) | (2,435 | ) | 591 | |||||||
Effect of Exchange Rate Changes on Cash – Continuing Operations | (90 | ) | 111 | 74 | ||||||||
Effect of Exchange Rate Changes on Cash – Discontinued Operations | (5 | ) | 114 | 69 | ||||||||
Change in Cash and Temporary Investments | (955 | ) | 233 | 1,289 | ||||||||
Cash and Temporary Investments | ||||||||||||
Beginning of the year | 2,596 | 2,363 | 1,074 | |||||||||
End of the year | 1,641 | 2,596 | 2,363 | |||||||||
Less – Cash, End of Year – Discontinued Operations | – | (416 | ) | (105 | ) | |||||||
Cash, End of Year – Continuing Operations | $ | 1,641 | $ | 2,180 | $ | 2,258 | ||||||
Certain prior-year amounts have been reclassified to separately disclose the operating, investing and financing portions of cash flows attributable to discontinued operations.
The accompanying notes are an integral part of these financial statements.
44
International Paper Company
CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
| In millions, except share and per share amounts in thousands | |||||||||||||||||||||||||||
| Common Stock Issued | Paid-in Capital | Retained Earnings | Accumulated Income | Treasury Stock | Total Equity | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||
BALANCE, JANUARY 1, 2003 | 484,760 | $ | 485 | $ | 6,493 | $ | 3,260 | $ | (2,645 | ) | 5,680 | $ | 219 | $ | 7,374 | ||||||||||||
Issuance of stock for various plans, net | 402 | – | 7 | – | – | (2,725 | ) | (105 | ) | 112 | |||||||||||||||||
Repurchase of stock | – | – | – | – | – | 713 | 26 | (26 | ) | ||||||||||||||||||
Cash dividends – Common stock ($1.00 per share) | – | – | – | (480 | ) | – | – | – | (480 | ) | |||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||
Net earnings | – | – | – | 302 | – | – | – | 302 | |||||||||||||||||||
Minimum pension liability adjustment: | |||||||||||||||||||||||||||
U.S. plans (less tax of $94) | – | – | – | – | 150 | – | – | 150 | |||||||||||||||||||
Non-U.S. plans (less tax of $2) | – | – | – | – | (4 | ) | – | – | (4 | ) | |||||||||||||||||
Change in cumulative foreign currency translation adjustment (less tax of $51) | – | – | – | – | 808 | – | – | 808 | |||||||||||||||||||
Net gains on cash flow hedging derivatives: | |||||||||||||||||||||||||||
Net gain arising during the period (less tax of $38) | – | – | – | – | 66 | – | – | 66 | |||||||||||||||||||
Less: Reclassificaton adjustment for gains included in net income (less tax of $36) | – | – | – | – | (65 | ) | – | – | (65 | ) | |||||||||||||||||
Total comprehensive income | 1,257 | ||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2003 | 485,162 | 485 | 6,500 | 3,082 | (1,690 | ) | 3,668 | 140 | 8,237 | ||||||||||||||||||
Issuance of stock for various plans, net | 2,333 | 2 | 62 | – | – | (3,652 | ) | (140 | ) | 204 | |||||||||||||||||
Cash dividends – Common stock ($1.00 per share) | – | – | – | (485 | ) | – | – | – | (485 | ) | |||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||
Net loss | – | – | – | (35 | ) | – | – | – | (35 | ) | |||||||||||||||||
Minimum pension liability adjustment: | |||||||||||||||||||||||||||
U.S. plans (less tax of $20) | – | – | – | – | 33 | – | – | 33 | |||||||||||||||||||
Non-U.S. plans (less tax of $5) | – | – | – | – | 1 | – | – | 1 | |||||||||||||||||||
Change in cumulative foreign currency translation adjustment (less tax of $17) | – | – | – | – | 255 | – | – | 255 | |||||||||||||||||||
Net gains on cash flow hedging derivatives: | |||||||||||||||||||||||||||
Net gain arising during the period (less tax of $19) | – | – | – | – | 70 | – | – | 70 | |||||||||||||||||||
Less: Reclassificaton adjustment for gains included in net income (less tax of $13) | – | – | – | – | (26 | ) | – | – | (26 | ) | |||||||||||||||||
Total comprehensive income | 298 | ||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2004 | 487,495 | 487 | 6,562 | 2,562 | (1,357 | ) | 16 | – | 8,254 | ||||||||||||||||||
Issuance of stock for various plans, net | 3,006 | 4 | 65 | – | – | 96 | 4 | 65 | |||||||||||||||||||
Cash dividends – Common stock ($1.00 per share) | – | – | – | (490 | ) | – | – | – | (490 | ) | |||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||
Net earnings | – | – | – | 1,100 | – | – | – | 1,100 | |||||||||||||||||||
Minimum pension liability adjustment: | |||||||||||||||||||||||||||
U.S. plans (less tax of $189) | – | – | – | – | (304 | ) | – | – | (304 | ) | |||||||||||||||||
Non-U.S. plans (less tax of $5) | – | – | – | – | (1 | ) | – | – | (1 | ) | |||||||||||||||||
Change in cumulative foreign currency translation adjustment (less tax of $22) | – | – | – | – | (251 | ) | – | – | (251 | ) | |||||||||||||||||
Net gains on cash flow hedging derivatives: | |||||||||||||||||||||||||||
Net gain arising during the period (less tax of $14) | – | – | – | – | 46 | – | – | 46 | |||||||||||||||||||
Less: Reclassificaton adjustment for gains included in net income (less tax of $30) | – | – | – | – | (68 | ) | – | – | (68 | ) | |||||||||||||||||
Total comprehensive income | 522 | ||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2005 | 490,501 | $ | 491 | $ | 6,627 | $ | 3,172 | $ | (1,935 | ) | 112 | $ | 4 | $ | 8,351 | ||||||||||||
| (1) | The cumulative foreign currency translation adjustment (in millions) was $(280), $(29) and $(284) at December 31, 2005, 2004 and 2003, respectively, and is included as a component of accumulated other comprehensive income (loss). |
37
International Paper Company
|
|
|
|
|
|
|
|
|
| |
In millions, except per share amounts, for the years ended December 31 |
| 2004 |
| 2003 |
| 2002 |
| |||
Net Sales |
| $ | 25,548 |
| $ | 23,955 |
| $ | 23,899 |
|
|
|
|
|
| ||||||
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
| 18,996 |
|
| 17,878 |
|
| 17,468 |
|
Selling and administrative expenses |
|
| 2,005 |
|
| 1,952 |
|
| 2,022 |
|
Depreciation, amortization and cost of timber harvested |
|
| 1,565 |
|
| 1,538 |
|
| 1,497 |
|
Distribution expenses |
|
| 1,054 |
|
| 992 |
|
| 993 |
|
Taxes other than payroll and income taxes |
|
| 242 |
|
| 241 |
|
| 242 |
|
Restructuring and other charges |
|
| 211 |
|
| 298 |
|
| 695 |
|
Insurance recoveries |
|
| (123 | ) |
| — |
|
| — |
|
Net losses (gains) on sales and impairments of businesses |
|
| 144 |
|
| 32 |
|
| (41 | ) |
Reversals of reserves no longer required, net |
|
| (35 | ) |
| (40 | ) |
| (68 | ) |
Interest expense, net |
|
| 743 |
|
| 772 |
|
| 785 |
|
|
|
|
|
| ||||||
Earnings From Continuing Operations Before Income Taxes and |
|
| 746 |
|
| 292 |
|
| 306 |
|
Income tax provision (benefit) |
|
| 206 |
|
| (113 | ) |
| (72 | ) |
Minority interest expense, net of taxes |
|
| 62 |
|
| 111 |
|
| 118 |
|
|
|
|
|
| ||||||
Earnings From Continuing Operations |
|
| 478 |
|
| 294 |
|
| 260 |
|
Discontinued operations, net of taxes and minority interest |
|
| (513 | ) |
| 21 |
|
| 35 |
|
Cumulative effect of accounting changes, net of taxes and |
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations |
|
| — |
|
| (10 | ) |
| — |
|
Variable interest entities |
|
| — |
|
| (3 | ) |
| — |
|
Transitional goodwill impairment charge |
|
| — |
|
| — |
|
| (1,175 | ) |
|
|
|
|
| ||||||
Net Earnings (Loss) |
| $ | (35 | ) | $ | 302 |
| $ | (880 | ) |
|
|
|
|
| ||||||
Basic Earnings (Loss) Per Common Share |
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
| $ | 0.98 |
| $ | 0.62 |
| $ | 0.54 |
|
Discontinued operations, net of taxes and minority interest |
|
| (1.05 | ) |
| 0.04 |
|
| 0.07 |
|
Cumulative effect of accounting changes, net of taxes and |
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations |
|
| — |
|
| (0.02 | ) |
| — |
|
Variable interest entities |
|
| — |
|
| (0.01 | ) |
| — |
|
Transitional goodwill impairment charge |
|
| — |
|
| — |
|
| (2.44 | ) |
|
|
|
|
| ||||||
Net earnings (loss) |
| $ | (0.07 | ) | $ | 0.63 |
| $ | (1.83 | ) |
|
|
|
|
| ||||||
Diluted Earnings (Loss) Per Common Share |
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
| $ | 0.98 |
| $ | 0.61 |
| $ | 0.54 |
|
Discontinued operations, net of taxes and minority interest |
|
| (1.05 | ) |
| 0.04 |
|
| 0.07 |
|
Cumulative effect of accounting changes, net of taxes and |
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations |
|
| — |
|
| (0.02 | ) |
| — |
|
Variable interest entities |
|
| — |
|
| (0.01 | ) |
| — |
|
Transitional goodwill impairment charge |
|
| — |
|
| — |
|
| (2.43 | ) |
|
|
|
|
| ||||||
Net earnings (loss) |
| $ | (0.07 | ) | $ | 0.63 |
| $ | (1.82 | ) |
|
|
|
|
| ||||||
The accompanying notes are an integral part of these financial statements.
38
International Paper Company
|
|
|
|
| |||
In millions at December 31 |
| 2004 |
| 2003 |
| ||
Assets |
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
Cash and temporary investments |
| $ | 2,596 |
| $ | 2,363 |
|
Accounts and notes receivable, less allowances of |
|
| 2,994 |
|
| 2,765 |
|
Inventories |
|
| 2,718 |
|
| 2,767 |
|
Assets of businesses held for sale |
|
| 229 |
|
| 2,104 |
|
Deferred income tax assets |
|
| 470 |
|
| 581 |
|
Other current assets |
|
| 312 |
|
| 516 |
|
|
|
|
| ||||
Total Current Assets |
|
| 9,319 |
|
| 11,096 |
|
|
|
|
| ||||
Plants, Properties and Equipment, net |
|
| 13,432 |
|
| 13,260 |
|
Forestlands |
|
| 3,936 |
|
| 3,979 |
|
Investments |
|
| 679 |
|
| 678 |
|
Goodwill |
|
| 4,994 |
|
| 4,793 |
|
Deferred Charges and Other Assets |
|
| 1,857 |
|
| 1,719 |
|
|
|
|
| ||||
Total Assets |
| $ | 34,217 |
| $ | 35,525 |
|
|
|
|
| ||||
Liabilities and Common Shareholders’ Equity |
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt |
| $ | 506 |
| $ | 2,087 |
|
Accounts payable |
|
| 2,279 |
|
| 2,188 |
|
Accrued payroll and benefits |
|
| 492 |
|
| 445 |
|
Liabilities of businesses held for sale |
|
| 82 |
|
| 645 |
|
Other accrued liabilities |
|
| 1,513 |
|
| 1,905 |
|
|
|
|
| ||||
Total Current Liabilities |
|
| 4,872 |
|
| 7,270 |
|
|
|
|
| ||||
Long-Term Debt |
|
| 14,132 |
|
| 13,450 |
|
Deferred Income Taxes |
|
| 1,697 |
|
| 1,387 |
|
Other Liabilities |
|
| 3,714 |
|
| 3,559 |
|
Minority Interest |
|
| 1,548 |
|
| 1,622 |
|
Commitments and Contingent Liabilities - Note 10 |
|
|
|
|
|
|
|
Common Shareholders’ Equity |
|
|
|
|
|
|
|
Common stock, $1 par value, 2004 - 487.5 shares, 2003 - 485.2 shares |
|
| 487 |
|
| 485 |
|
Paid-in capital |
|
| 6,562 |
|
| 6,500 |
|
Retained earnings |
|
| 2,562 |
|
| 3,082 |
|
Accumulated other comprehensive loss |
|
| (1,357 | ) |
| (1,690 | ) |
|
|
|
| ||||
|
| 8,254 |
|
| 8,377 |
| |
Less: Common stock held in treasury, at cost, 2003 - 3.7 shares |
|
| — |
|
| 140 |
|
|
|
|
| ||||
Total Common Shareholders’ Equity |
|
| 8,254 |
|
| 8,237 |
|
|
|
|
| ||||
Total Liabilities and Common Shareholders’ Equity |
| $ | 34,217 |
| $ | 35,525 |
|
|
|
|
| ||||
The accompanying notes are an integral part of these financial statements.
39
International Paper Company
|
|
|
|
|
|
| ||||
In millions for the years ended December 31 |
| 2004 |
| 2003 |
| 2002 |
| |||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
| $ | (35 | ) | $ | 302 |
| $ | (880 | ) |
Discontinued operations, net of taxes and minority interest |
|
| 513 |
|
| (21 | ) |
| (35 | ) |
Cumulative effect of accounting changes, net of taxes and minority interest |
|
| — |
|
| 13 |
|
| 1,175 |
|
Depreciation, amortization and cost of timber harvested |
|
| 1,565 |
|
| 1,538 |
|
| 1,497 |
|
Deferred income tax benefit, net |
|
| (114 | ) |
| (397 | ) |
| (389 | ) |
Restructuring and other charges |
|
| 211 |
|
| 298 |
|
| 695 |
|
Payments related to restructuring and legal reserves |
|
| (236 | ) |
| (270 | ) |
| (340 | ) |
Reversals of reserves no longer required, net |
|
| (35 | ) |
| (40 | ) |
| (68 | ) |
Net losses (gains) on sales and impairments of businesses held for sale |
|
| 144 |
| 32 |
|
| (41 | ) | |
Proceeds on Maine timberlands transaction |
|
| 242 |
|
| — |
|
| — |
|
Other, net |
|
| 438 |
|
| 421 |
|
| 136 |
|
Changes in current assets and liabilities |
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
| (186 | ) |
| 74 |
|
| 98 |
|
Inventories |
|
| (66 | ) |
| (21 | ) |
| 53 |
|
Accounts payable |
|
| 93 |
|
| (55 | ) |
| 247 |
|
Accrued liabilities |
|
| (23 | ) |
| (39 | ) |
| (47 | ) |
Other |
|
| (123 | ) |
| (13 | ) |
| (7 | ) |
|
|
|
|
| ||||||
Cash Provided By Operations |
|
| 2,388 |
|
| 1,822 |
|
| 2,094 |
|
|
|
|
|
| ||||||
Investment Activities |
|
|
|
|
|
|
|
|
|
|
Invested in capital projects |
|
| ||||||||
Continuing operations |
|
| (1,262 | ) |
| (1,094 | ) |
| (936 | ) |
Businesses sold and held for sale |
|
| (66 | ) |
| (72 | ) |
| (73 | ) |
Mergers and acquisitions, net of cash acquired |
|
| (305 | ) |
| — |
|
| (28 | ) |
Proceeds from divestitures |
|
| 1,471 |
|
| 78 |
|
| 535 |
|
Other |
|
| 217 |
|
| (179 | ) |
| 22 |
|
|
|
|
|
| ||||||
Cash Provided By (Used For) Investment Activities |
|
| 55 |
|
| (1,267 | ) |
| (480 | ) |
|
|
|
|
| ||||||
Financing Activities |
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
| 164 |
|
| 80 |
|
| 53 |
|
Issuance of debt |
|
| 2,962 |
|
| 2,254 |
|
| 2,011 |
|
Reduction of debt |
|
| (4,533 | ) |
| (839 | ) |
| (3,017 | ) |
Redemption of preferred securities of a subsidiary |
|
| — |
|
| (550 | ) |
| — |
|
CHH share repurchase |
|
| (158 | ) |
| — |
|
| — |
|
Change in book overdrafts |
|
| (145 | ) |
| 104 |
|
| (33 | ) |
Purchases of treasury stock |
|
| — |
|
| (26 | ) |
| (169 | ) |
Dividends paid |
|
| (485 | ) |
| (480 | ) |
| (482 | ) |
Sale of minority interest |
|
| — |
|
| 150 |
|
| 50 |
|
Other |
|
| (240 | ) |
| (102 | ) |
| (145 | ) |
|
|
|
|
| ||||||
Cash (Used For) Provided By Financing Activities |
|
| (2,435 | ) |
| 591 |
|
| (1,732 | ) |
|
|
|
|
| ||||||
Effect of Exchange Rate Changes on Cash |
|
| 225 |
|
| 143 |
|
| (32 | ) |
|
|
|
|
| ||||||
Change In Cash and Temporary Investments |
|
| 233 |
|
| 1,289 |
|
| (150 | ) |
Cash and Temporary Investments |
|
|
|
|
|
|
|
|
|
|
Beginning of the year |
|
| 2,363 |
|
| 1,074 |
|
| 1,224 |
|
|
|
|
|
| ||||||
End of the year |
| $ | 2,596 |
| $ | 2,363 |
| $ | 1,074 |
|
|
|
|
|
| ||||||
The accompanying notes are an integral part of these financial statements.
40
International Paper Company
CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS’ EQUITY
|
| ||||||||||||||||||||||
In millions, except share amounts in thousands |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
| Accumulated |
|
|
| Total |
| ||||||||||
|
| Common Stock Issued |
| Paid-in |
| Retained |
|
| Treasury Stock |
|
| ||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Shares |
| Amount |
|
|
|
| Shares |
| Amount |
|
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Balance, January 1, 2002 |
| 484,281 |
| $ | 484 |
| $ | 6,465 |
| $ | 4,622 |
| $ | (1,175 | ) | 2,693 |
| $ | 105 |
| $ | 10,291 |
|
Issuance of stock for various plans |
| 479 |
|
| 1 |
|
| 28 |
|
| — |
|
| — |
| (1,403 | ) |
| (55 | ) |
| 84 |
|
Repurchase of stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 4,390 |
|
| 169 |
|
| (169 | ) |
Cash dividends - Common stock |
| — |
|
| — |
|
| — |
|
| (482 | ) |
| — |
| — |
|
| — |
|
| (482 | ) |
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| — |
|
| — |
|
| — |
|
| (880 | ) |
| — |
| — |
|
| — |
|
| (880 | ) |
Minimum pension liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. plans (less tax of $964) |
| — |
|
| — |
|
| — |
|
| — |
|
| (1,543 | ) | — |
|
| — |
|
| (1,543 | ) |
Non-U.S. plans (less tax of $9) |
| — |
|
| — |
|
| — |
|
| — |
|
| (21 | ) | — |
|
| — |
|
| (21 | ) |
Change in cumulative foreign currency translation adjustment |
| — |
|
| — |
|
| — |
|
| — |
|
| 27 |
| — |
|
| — |
|
| 27 |
|
Net gains on cash flow hedging derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain arising during the period (less tax of $33) |
| — |
|
| — |
|
| — |
|
| — |
|
| 71 |
| — |
|
| — |
|
| 71 |
|
Less: Reclassification adjustment for |
| — |
|
| — |
|
| — |
|
| — |
|
| (4 | ) | — |
|
| — |
|
| (4 | ) |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,350 | ) |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Balance, December 31, 2002 |
| 484,760 |
|
| 485 |
|
| 6,493 |
|
| 3,260 |
|
| (2,645 | ) | 5,680 |
|
| 219 |
|
| 7,374 |
|
Issuance of stock for various plans |
| 402 |
|
| — |
|
| 7 |
|
| — |
|
| — |
| (2,725 | ) |
| (105 | ) |
| 112 |
|
Repurchase of stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 713 |
|
| 26 |
|
| (26 | ) |
Cash dividends - Common stock |
| — |
|
| — |
|
| — |
|
| (480 | ) |
| — |
| — |
|
| — |
|
| (480 | ) |
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| — |
|
| — |
|
| — |
|
| 302 |
|
| — |
| — |
|
| — |
|
| 302 |
|
Minimum pension liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. plans (less tax of $94) |
| — |
|
| — |
|
| — |
|
| — |
|
| 150 |
| — |
|
| — |
|
| 150 |
|
Non-U.S. plans (less tax of $2) |
| — |
|
| — |
|
| — |
|
| — |
|
| (4 | ) | — |
|
| — |
|
| (4 | ) |
Change in cumulative foreign currency translation adjustment (less tax of $51) |
| — |
|
| — |
|
| — |
|
| — |
|
| 808 |
| — |
|
| — |
|
| 808 |
|
Net gains on cash flow hedging derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain arising during the period (less tax of $38) |
| — |
|
| — |
|
| — |
|
| — |
|
| 66 |
| — |
|
| — |
|
| 66 |
|
Less: Reclassification adjustment for |
| — |
|
| — |
|
| — |
|
| — |
|
| (65 | ) | — |
|
| — |
|
| (65 | ) |
|
|
|
| ||||||||||||||||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,257 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Balance, December 31, 2003 |
| 485,162 |
|
| 485 |
|
| 6,500 |
|
| 3,082 |
|
| (1,690 | ) | 3,668 |
|
| 140 |
|
| 8,237 |
|
Issuance of stock for various plans |
| 2,333 |
|
| 2 |
|
| 62 |
|
| — |
|
| — |
| (3,652 | ) |
| (140 | ) |
| 204 | |
Cash dividends - Common stock |
| — |
|
| — |
|
| — |
|
| (485 | ) |
| — |
| — |
|
| — |
|
| (485 | ) |
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| — |
|
| — |
|
| — |
|
| (35 | ) |
| — |
| — |
|
| — |
|
| (35 | ) |
Minimum pension liability adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. plans (less tax of $20) |
| — |
|
| — |
|
| — |
|
| — |
|
| 33 | — |
|
| — |
|
| 33 | ||
Non-U.S. plans (less tax of $5) |
| — |
|
| — |
|
| — |
|
| — |
|
| 1 | — |
|
| — |
|
| 1 | ||
Change in cumulative foreign currency translation adjustment (less tax of $17) |
| — |
|
| — |
|
| — |
|
| — |
|
| 255 | — |
|
| — |
|
| 255 | ||
Net gains on cash flow hedging derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain arising during the period (less tax of $19) |
| — |
|
| — |
|
| — |
|
| — |
|
| 70 | — |
|
| — |
|
| 70 | ||
Less: Reclassification adjustment for |
| — |
|
| — |
|
| — |
|
| — |
|
| (26 | ) | — |
|
| — |
|
| (26 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 298 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Balance, December 31, 2004 |
| 487,495 |
| $ | 487 |
| $ | 6,562 |
| $ | 2,562 | $ | (1,357 | ) | 16 | $ | — |
| $ | 8,254 | |||
|
|
|
|
|
|
|
|
|
| ||||||||||||||
| The |
The accompanying notes are an integral part of these financial statements.
41
45
NOTE 1SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
International Paper is a global forest products, paper and packaging company that is complemented by an extensive North American merchant distribution system, with primary markets and manufacturing operations in the United States, Europe,
These financial statements have been prepared in conformity with accounting principles generally accepted in the United States that require the use of management’s estimates. Actual
The consolidated financial statements include the accounts of International Paper and its wholly-owned, controlled majority-owned and financially controlled subsidiaries. Investments in affiliated companies are accounted for by the equity method, including companies owned 20% to 50%. International Paper’s share of affiliates’ earnings
Revenue is recognized when the customer takes title and assumes the risks and rewards of ownership. Revenue is recorded at the time of shipment for terms designated f.o.b. (free on board) shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to the customer’s delivery site, when title and risk of loss are transferred. Timber and timberland sales revenue is generally recognized when title and risk of loss pass to the buyer.
Shipping and handling costs, such as freight to our customers’ destinations, are included in distribution expenses | in the consolidated statement of operations.
Annual maintenance costs for major planned maintenance shutdowns (in excess of $1 million) are expensed ratably over the year in which the maintenance shutdowns occur since the Company believes that operations benefit throughout the year from the maintenance work performed. These costs, including manufacturing variances and
Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost, which approximates market.
Plants, properties and equipment are stated at cost, less accumulated depreciation. Expenditures for betterments are capitalized, whereas normal repairs and maintenance are expensed as incurred. The units-of-production method of depreciation is used for major pulp and paper mills and certain wood products facilities, and the straight-line method is used for other plants and equipment. Annual straight-line depreciation rates are, for buildings – 2
At December 31, |
46
GOODWILL
Goodwill relating to a single business reporting unit is included as an asset of the applicable segment, while goodwill arising from major acquisitions that involve multiple business segments is classified as a corporate asset for segment reporting purposes. For goodwill impairment testing, this goodwill is allocated to business segments. Annual testing for possible goodwill impairment is performed as of the end of the third quarter of each year. No impairment charges were recorded in 2005 or 2004.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable, as measured by comparing their net book value to the projected undiscounted future cash flows generated by their use. Impaired assets are recorded at their estimated fair value.
INCOME TAXES
International Paper uses the asset and liability method of accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are revalued to reflect new tax rates in the periods rate changes are enacted.
International Paper records its worldwide tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where the Company believes that the deduction of an item is supportable for income tax purposes, the item is deducted in its income tax returns. However, where treatment of an item is uncertain, tax accruals are recorded based upon the expected most probable outcome taking into consideration the specific tax regulations and facts of each matter, the results of historical negotiated settlements, and the results of consultations with outside specialists. These accruals are recorded in the accompanying consolidated balance sheet in Other liabilities. Changes to the reserves are only made when an identifiable event occurs that changes the probable outcome, such as a settlement with the relevant tax authority, the expiration of statutes of limitation for the subject tax year, a change in tax laws, or a recent court case that addresses the matter.
While the Company believes that these judgments and estimates are appropriate and reasonable under current circumstances, actual resolution of these matters may differ from recorded estimated amounts.
STOCK-BASED COMPENSATION
Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.
Had compensation cost for International Paper’s stock-based compensation programs been determined consistent with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, its net earnings, earnings per common share and earnings per common share – assuming dilution would have been reduced to the pro forma amounts indicated in the following table:
| In millions, except per share amounts | 2005 | 2004 | 2003 | |||||||
Net Earnings (Loss) | ||||||||||
As reported | $ | 1,100 | $ | (35 | ) | $ | 302 | |||
Pro forma | 1,043 | (73 | ) | 258 | ||||||
Earnings (Loss) Per Common Share | ||||||||||
As reported | $ | 2.26 | $ | (0.07 | ) | $ | 0.63 | |||
Pro forma | 2.15 | (0.15 | ) | 0.54 | ||||||
Earnings (Loss) Per Common Share assuming dilution | ||||||||||
As reported | $ | 2.21 | $ | (0.07 | ) | $ | 0.63 | |||
Pro forma | 2.10 | (0.15 | ) | 0.54 | ||||||
The effect on 2005, 2004 and 2003 pro forma net earnings, earnings per common share and earnings per common share – assuming dilution of expensing the estimated fair market value of stock options is not necessarily representative of the effect on reported earnings for future years due to the vesting period of stock options and decreases in the number of options outstanding due to the elimination of the Company’s stock option program for all U.S. employees in 2005.
ENVIRONMENTAL REMEDIATION COSTS
Costs associated with environmental remediation obligations are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are discounted to their present value when the amount and timing of expected cash payments are reliably determinable.
47
ASSET RETIREMENT OBLIGATIONS
In accordance with the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations”, a liability and an asset are recorded equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists and the liability can be reasonably estimated. The liability is accreted over time and the asset is depreciated over the life of the related equipment or facility. International Paper’s asset retirement obligations under this standard relate to closure costs for landfills. Revisions to the liability could occur due to changes in the estimated costs or timing of closures, or possible new federal or state regulations affecting these closures.
TRANSLATION OF FINANCIAL STATEMENTS
Balance sheets of international operations are translated into U.S. dollars at year-end exchange rates, while statements of operations are translated at average rates. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in Accumulated other comprehensive income (loss) (OCI). See Note 13 related to derivatives and hedging activities.
RECLASSIFICATIONS
Certain reclassifications have been made to prior-year amounts to conform to the current year presentation. Certain prior-year amounts in the Consolidated Statement of Cash Flows have been reclassified to separately disclose the operating, investing and financing portions of cash flows attributable to discontinued operations.
42
with terms of one or more years, and are stated at cost, less cost of timber harvested (COTH). Costs attributable to timber are charged against income as trees are cut. The rate charged is determined annually based on the relationship of incurred costs to estimated current merchantable volume. Effective January 1, 2002, International Paper prospectively changed its method of accounting for mid-rotation fertilization expenditures to include such expenditures in the capitalized cost of forestlands. Accordingly, these costs are included as part of the COTH as trees are sold. Goodwill Effective January 1, 2002, International Paper adopted Statement of Financial Accounting Standards (SFAS) No. 142. As required by SFAS No. 142, an initial assessment of recorded goodwill for possible impairment was conducted as of January 1, 2002. Annual testing for possible goodwill impairment is performed as of the end of the third quarter of each year. A transitional impairment charge of $1.2 billion, including all of the goodwill associated with CHH, was recorded upon the initial adoption of this standard in 2002. In addition, CHH recorded $35 million of goodwill upon its acquisition of Plantation Timber Products which was written off by International Paper following an impairment evaluation in 2004 (see Note 5). No impairment charges were recorded in 2003. Goodwill relating to a single business reporting unit is included as an asset of the applicable segment while goodwill arising from major acquisitions that involve multiple business segments is classified as a corporate asset for segment reporting purposes. For goodwill impairment testing, this goodwill is allocated to business segments. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable, as measured by comparing their net book value to their projected undiscounted future cash flows generated by their use. Impaired assets are recorded at their estimated fair value. Income Taxes International Paper uses the asset and liability method of accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are revalued to reflect new tax rates in the periods rate changes are enacted. |
| International Paper records its worldwide tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where the Company believes that the deduction of an item is supportable for income tax purposes, the item is deducted in its income tax returns. However, where treatment of an item is uncertain, tax accruals are recorded based upon the expected most probable outcome taking into consideration the specific tax regulations and facts of each matter, the results of historical negotiated settlements, and the results of consultations with outside tax advisors. These accruals for tax contingencies are recorded in the accompanying consolidated balance sheet in Other liabilities. Changes to the reserves are only made when an identifiable event occurs that changes the probable outcome, such as a settlement with relevant tax authority, the expiration of statutes of limitation for the subject tax year, change in tax laws, or a relevant court decision that addresses the matter. While the Company believes that these judgments and estimates are appropriate and reasonable under current circumstances, actual resolution of these matters may differ from recorded estimated amounts. Stock-Based Compensation Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Had compensation cost for International Paper’s stock-based compensation programs been determined consistent with the provisions of SFAS No. 123, its net earnings, earnings per common share and earnings per common share - assuming dilution would have been reduced to the pro forma amounts indicated in the following table:
| |||||||||
In millions, except per share amounts |
| 2004 |
| 2003 |
| 2002 | |||||
Net Earnings (Loss) |
|
|
|
|
|
|
|
|
| ||
As reported |
| $ | (35 | ) |
| $ 302 |
| $(880 | ) | ||
Pro forma |
|
| (73 | ) |
| 258 |
| (921 | ) | ||
Earnings (Loss) Per |
|
|
|
|
|
|
|
|
| ||
Common Share |
|
|
|
|
|
|
|
|
| ||
As reported |
| $ | (0.07 | ) |
| $0.63 |
| $(1.83 | ) | ||
Pro forma |
|
| (0.15 | ) |
| 0.54 |
| (1.92 | ) | ||
Earnings (Loss) Per |
|
|
|
|
|
|
|
|
| ||
As reported |
| $ | (0.07 | ) |
| $0.63 |
| $(1.82 | ) | ||
Pro forma |
|
| (0.15 | ) |
| 0.54 |
| (1.91 | ) | ||
| The effect on 2004, 2003 and 2002 pro forma net earnings, earnings per common share and earnings per common share | ||||||||||
43
- assuming dilution of expensing the estimated fair market value of stock options is not necessarily representative of the effect on reported earnings for future years due to the vesting period of stock options and the potential for issuance of additional stock-based compensation. Environmental Remediation Costs Costs associated with environmental remediation obligations are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are discounted to their present value when the amount and timing of expected cash payments are reliably determinable. Asset Retirement Obligations In accordance with the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations,” adopted effective January 1, 2003 (see Note 4), a liability and an asset are recorded equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists. The liability is accreted over time and the asset is depreciated over the life of the related equipment or facility. International Paper’s asset retirement obligations under this standard relate to closure costs for landfills. Revisions to the liability could occur due to changes in the estimated costs or timing of closures, or possible new federal or state regulations affecting these closures. Translation of Financial Statements Balance sheets of international operations are translated into U.S. dollars at year-end exchange rates, while statements of operations are translated at average rates. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in Accumulated other comprehensive income (loss) (OCI). See Note 13 related to derivatives and hedging activities. Reclassifications Certain reclassifications have been made to prior-year amounts to conform to the current year presentation. NOTE 2 EARNINGS PER COMMON SHARE Earnings per common share from continuing operations before the cumulative effect of accounting changes are computed by dividing earnings from continuing operations before the cumulative effect of accounting changes by the weighted average number of common shares outstanding. Earnings per common share from continuing operations | before the cumulative effect of accounting changes, assuming dilution, A reconciliation of the amounts included in the computation of earnings per common share from continuing operations before the cumulative effect of accounting changes, and earnings per common share from continuing operations before the cumulative effect of accounting changes, assuming dilution, is as follows: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
44
NOTE 3 INDUSTRY SEGMENT INFORMATION Financial information by industry segment and geographic area for 2005, 2004 NOTE 4 RECENT ACCOUNTING DEVELOPMENTS
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for the accounting and reporting of a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. This Statement does not change the transition 48 provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of the Statement. ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS: In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” This Interpretation clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143 refers to the fact that a legal obligation to perform an asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists to make a reasonable estimate of the fair value of the obligation. International Paper adopted the provisions of this Interpretation in the fourth quarter of 2005 with no material affect on its consolidated financial statements. The Company’s principal conditional asset retirement obligations relate to the potential future closure or redesign of certain of its production facilities. In connection with any such activity, it is possible that the Company may be required to take steps to remove certain materials from the facilities, or to remediate in accordance with federal and state laws that govern the handling of certain hazardous or potentially hazardous materials. Applicable regulations and standards provide that the removal of certain materials would only be required if the facility were to be demolished or underwent major renovations. At this time, any such obligations have an indeterminate settlement date, and the Company believes that adequate information does not exist to apply an expected-present-value technique to estimate any such potential obligations. Accordingly, the Company does not record a liability for such remediation until a decision is made that allows reasonable estimation of the timing of such remediation. IMPLICIT VARIABLE INTERESTS: In March 2005, the FASB issued FASB Staff Position (FSP) FIN 46(R)-5, “Implicit Variable Interests Under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities.” This FSP states that implicit variable interests are implied financial interests in an entity that change with changes in the fair value of the entity’s net assets exclusive of variable interests. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing and (or) receiving of variability indirectly from the entity (rather than directly). The identification of an implicit variable interest is a matter of judgment that depends on the relevant facts and circumstances. International Paper applied the provisions of FSP FIN 46(R)-5 in the second quarter of 2005, with no material affect on its consolidated financial statements. ACCOUNTING FOR INCOME TAXES: In December 2004, the FASB issued FSP Financial Accounting Standards 109-1 and 109-2 relating to the American Jobs Creation Act of 2004 (the Act). The Act provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated. In 2005, International Paper repatriated $2.1 billion in cash from certain of its foreign subsidiaries, including amounts eligible for this special deduction. International Paper recorded income tax expenses associated with these cash repatriations totaling approximately $142 million for the year ended December 31, 2005. SHARE-BASED PAYMENT TRANSACTIONS: In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,”
EXCHANGES OF NONMONETARY ASSETS: In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an 49 International Paper believes that the adoption of SFAS No. 153 in 2006 will not have a material impact on its consolidated financial statements. |
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an
In May 2004, the FASB issued FSP FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” that provides guidance on the accounting and required disclosures for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. International Paper adopted FSP FAS 106-2 prospectively in the third quarter of 2004. |
45
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” This
| applied FIN 46(R) to its variable interest entities
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 The note payable is required to be paid unless claims for indemnification are offset against the note. 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 table summarizes the assets and liabilities assumed at the date of the Box USA acquisition:
The following unaudited pro forma information for the years ended December 31, 2004 and 2003, presents the combined results of the continuing operations of International Paper and Box USA as if the acquisition had occurred as of January 1, 2003. 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, 2003, nor is it necessarily indicative of future results.
OTHER ACQUISITIONS: In October 2005, International Paper acquired approximately 65% of Compagnie Marocaine des Cartons et des Papiers (CMCP), a 50 packaging company, for approximately $80 million in cash plus assumed debt of approximately $40 million. In 2001, International Paper The financial position and
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46
(c) In a similar transaction completed in June 2002, approximately $400 million of installment notes received in connection with the sale of forestlands in various states were transferred to a consolidated entity in exchange for a preferred interest in the entity. In the same period, the entity acquired International Paper debt obligations of $450 million for cash. Under the provisions of FIN 46(R), International Paper is not the primary beneficiary of this entity, resulting in its deconsolidation as of December 31, 2003. The deconsolidation increased Investments by $465 million, Long-term debt by $100 million, and decreased notes receivable (included in Deferred charges and other assets) by $415 million and Minority interest by $50 million. (d) In the third quarter of 2003, International Paper Capital Trust and International Paper Capital Trust III (the Trusts), were determined to be VIE’s for which International Paper is not the primary beneficiary. Prior to July 1, 2003, the Trusts had been consolidated in the Company’s financial statements, and the preferred securities of the Trusts of approximately $1.3 billion were presented in the consolidated balance sheet as International Paper – Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries Holding International Paper Debentures. Effective July 1, 2003, the Trusts were deconsolidated and the previously consolidated Mandatorily Redeemable Securities were replaced with International Paper’s obligations to the Trusts of approximately $1.3 billion that were classified as Long-term debt. In addition, interest on the International Paper debt obligations totaling approximately $44 million was recorded as Interest expense in the last half of 2003, replacing preferred dividends on the Mandatorily Redeemable Securities of the Trusts that, prior to the deconsolidation, would have been recorded as Minority interest expense. Preferred dividends for periods prior to the July 1, 2003 deconsolidation continue to be reported as Minority interest expense. A further discussion of the Company’s obligations to the Trusts is presented in Note 8. In December 2003, International Paper exercised its option to redeem the securities of one of the Trusts effective January 14, 2004, and, consequently, reclassified $830 million to Current maturities of long-term debt. In February 2005, International Paper redeemed the preferred securities of the remaining Trust which were classified in Long-term debt at December 31, 2004. See Notes 8 and 12 for additional information. The following table summarizes increases (decreases) in 2003 Consolidated Balance Sheet captions resulting from the application of FIN 46(R) to the entities described above. |
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| VIE |
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| In millions |
| (a) |
| (b) |
| (c) |
| (d) |
| (d) |
| Total |
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| Assets |
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| |
| Plants, Properties and Equipment, net |
| $ | 50 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 50 |
| |
| Investments |
|
| — |
|
| — |
|
| 465 |
|
| 25 |
|
| 15 |
|
| 505 |
| |
| Deferred Charges |
|
| — |
|
| (480 | ) |
| (415 | ) |
| — |
|
| — |
|
| (895 | ) | |
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| Total Assets |
| $ | 50 |
| $ | (480 | ) | $ | 50 |
| $ | 25 |
| $ | 15 |
| $ | (340 | ) | |
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| Liabilities |
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| Current Maturities of Long-Term Debt |
| $ | — |
| $ | — |
| $ | — |
| $ | 830 |
| $ | — |
| $ | 830 |
| |
| Long-Term Debt |
|
| 50 |
|
| (460 | ) |
| 100 |
|
| — |
|
| 465 |
|
| 155 |
| |
| Minority Interest |
|
| — |
|
| (20 | ) |
| (50 | ) |
| — |
|
| — |
|
| (70 | ) | |
| Mandatorily Redeemable Preferred Securities |
|
| — |
|
| — |
|
| — |
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| (805 | ) |
| (450 | ) |
| (1,255 | ) | |
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| Total Liabilities |
| $ | 50 |
| $ | (480 | ) | $ | 50 |
| $ | 25 |
| $ | 15 |
| $ | (340 | ) | |
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| The pro forma effects on earnings (loss) before extraordinary items and cumulative effect of accounting changes, and net earnings, for the year ended December 31, 2002, assuming the adoption of FIN 46(R) as of January 1, 2002, were not material to net earnings or earnings per share. Financial Instruments with Characteristics of Both Liabilities and Equity: In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” It established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This standard was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. International Paper adopted this standard during the third quarter ended September 30, 2003, with no material effect on the Company’s consolidated financial statements. Costs Associated with Exit or Disposal Activities: In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The statement changed the measurement and timing of recognition for exit costs, including restructuring charges, and was effective for activities initiated after December 31, 2002. It requires that a liability for costs associated with an exit or disposal activity, such as one-time termination | ||||||||||||||||||||
47
benefits, be recognized when the liability is incurred, rather than at the date of a company’s commitment to an exit plan. It had no effect on charges recorded for exit activities begun prior to December 31, 2002. International Paper adopted this standard effective January 1, 2003, with no material effect on the Company’s consolidated financial statements. Impairment and Disposal of Long-Lived Assets: In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” It established a single accounting model for the impairment of long-lived assets to be held and used or to be disposed of by sale or abandonment, and broadened the definition of discontinued operations. International Paper adopted SFAS No. 144 in 2002, with no significant change in the accounting for the impairment and disposal of long-lived assets. Asset Retirement Obligations: In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” It requires the recording of an asset and a liability equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists. The asset is required to be depreciated over the life of the related equipment or facility, and the liability accreted each year using a credit-adjusted risk-free rate. International Paper adopted SFAS No. 143 effective January 1, 2003, recording a discounted liability of $22 million, an increase in Property, plant and equipment, net, of $7 million, and a one-time cumulative effect of accounting change charge of $10 million (net of a deferred tax benefit of $5 million). The pro forma effects on earnings (loss) before extraordinary items and cumulative effect of accounting changes, and net earnings, for the year ended December 31, 2002, assuming the adoption of SFAS No. 143 as of January 1, 2002, were not material to net earnings or earnings per share. NOTE 5 ACQUISITIONS On July 2, 2004, Carter Holt Harvey (CHH) completed the purchase of an 85% interest in Plantation Timber Products (PTP), a Chinese premium panels manufacturer, for $134 million. PTP is a manufacturer of special medium density fiberboard and flooring products. In connection with this acquisition, CHH recorded $35 million of goodwill. However, in 2002, International Paper wrote off all CHH goodwill under newly adopted U.S. accounting standards. The goodwill arising in subsequent CHH acquisitions must be evaluated for impairment in International Paper’s consolidated financial statements and, in this case, was written off. This acquisition was accounted for using the purchase method with operating
|
| results included in the consolidated statement of operations from the date of acquisition. On July 1, 2004, International Paper completed the previously announced acquisition of Box USA Holdings, Inc. (Box USA). Prior to its acquisition by International Paper, Box USA was America’s largest independent packaging producer with 23 industrial packaging converting facilities across the country. The acquisition of Box USA, which is now included in the Industrial and Consumer Packaging segment, provides improved access to markets, better integration between International Paper mills and converting plants and other operating synergies. 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 within two years from the July 1, 2004 acquisition date provided that no claims for indemnification are offset against the note. This acquisition was accounted for using the purchase method with the operating results of Box USA included in the accompanying consolidated statement of operations from the acquisition date. The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of the Box USA acquisition, subject to adjustment upon completion of purchase accounting activities in 2005:
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| in millions |
| July 1, 2004 |
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| Current assets |
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| $ | 98 |
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| |
| Property, plant and equipment, net |
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| 104 |
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| Goodwill |
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| 238 |
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| Other assets |
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| 40 |
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| |
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| Total assets acquired |
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| 480 |
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| |
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| |||
| Current liabilities |
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| 72 |
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| Debt |
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| 197 |
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| Other liabilities |
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| 7 |
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| Total liabilities assumed |
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| 276 |
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| Net assets acquired |
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| $ | 204 |
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| The following unaudited pro forma information for the years ended December 31, 2004, 2003 and 2002, presents the combined results of the continuing operations of International Paper and Box USA as if the acquisition had occurred as of January 1, 2002. 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, 2002, nor is it necessarily indicative of future results. | |||||||
48
| tax balances and a $27 million credit from the reduction of valuation reserves for capital loss carryovers. The following table presents a detail of the $74 million corporate-wide organizational restructuring program charge in 2004, by business: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In millions, except per share amounts, |
| 2004 |
| 2003 |
| 2002 |
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Net sales |
| $25,802 |
| $24,448 |
| $24,385 |
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Earnings from continuing operations |
| 483 |
| 299 |
| 273 |
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Net earnings (loss) |
| (30 | ) | 307 |
| (867) |
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Earnings from continuing operations per common share |
| 0.99 |
| 0.62 |
| 0.57 |
| In millions | First | Second | Third | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net earnings (loss) per common share |
| (0.06 | ) | 0.64 |
| (1.80) |
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| Printing Papers |
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| $ | 1 |
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| $ | 1 |
| $ | 5 |
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| $ | 7 |
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In December 2002, CHH acquired Starwood Australia’s Bell Bay medium density fiberboard plant in Tasmania for $28 million in cash. This acquisition was accounted for using the purchase method with operating results included in the consolidated statement of operations from the date of acquisition. NOTE 6 RESTRUCTURING, BUSINESS IMPROVEMENT AND OTHER CHARGES This footnote discusses restructuring, business improvement and other charges recorded for each of the three years included in the period ended December 31, 2005: During 2005, restructuring and to cash repatriations from non-U.S. subsidiaries, and $39 million of other tax charges. Interest expense, net, also includes a $43 million pre-tax credit ($26 million after taxes) relating to the tax audit agreement. The following table presents a detail of the $274 million corporate-wide organizational restructuring charge by business:
51 The following table presents the components of the organizational restructuring charge discussed above:
The following table presents a roll forward of the severance and other costs included in the 2005 restructuring plans:
The severance charges recorded in 2005 related to 855 employees. As of December 31, 2005, 661 employees had been terminated. 2004:During 2004, restructuring and other charges before taxes
| The following table presents a detail of the $64 million corporate-wide organizational restructuring program charge in 2004, by business:
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| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following table presents a roll forward of the severance and other costs included in the 2004 restructuring plans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
The severance charges recorded in 2004 related to 2003:During 2003, restructuring and other charges of $286 million before taxes | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
52 The $224 million charge in 2003 for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $80 million charge in the fourth quarter, a $71 million charge in the third quarter, a $51 million charge in the second quarter, and a $22 million charge in the first quarter. The fourth-quarter charge included $45 million of asset write-downs and $35 million of severance and other charges.The third-quarter charge included $9 million of asset write-downs and $62 million of severance and other charges. The second-quarter charge consisted of $16 million of asset write-downs and $35 million of severance and other charges. The first-quarter charge included $2 million of asset write-downs and $20 million of severance and other charges. The following table and discussion present details related to the 2003 fourth-quarter charge:
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following table and discussion present details related to the 2003 third-quarter charge:
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following table and discussion present details related to the 2003 second-quarter charge:
|
53
The following table and discussion present details related to the 2003 first-quarter charge:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following table presents a roll forward of the severance and other costs included in the 2003 restructuring plans:
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
and
Other
Opening Balance (first quarter 2003)
Additions (second quarter 2003)
Additions (third quarter 2003)
Additions (fourth quarter 2003)
2003 Activity
Cash charges
Reclassifications:
Pension and postretirement curtailments and special termination benefits
Reversals of reserves no longer required
2004 Activity
Cash charges
Reclassifications:
Pension and postretirement curtailments and special termination benefits
Environmental
Reversals of reserves no longer required
Balance, December 31, 2004
The severance charges recorded in the first, second, third and fourth quarters of 2003 related to 2,966 employees. As of December 31, 2004, 2,955 employees had been terminated and 11 employees retained.
49
The $236 million charge in 2003 for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $91 million charge in the fourth quarter, a $71 million charge in the third quarter, a $51 million charge in the second quarter, and a $23 million charge in the first quarter. The fourth-quarter charge included $49 million of asset write-downs and $42 million of severance and other charges. The third-quarter charge included $9 million of asset write- downs and $62 million of severance and other charges. The second-quarter charge consisted of $16 million of asset write-downs and $35 million of severance and other charges. The first-quarter charge included $2 million of asset write- downs and $21 million of severance and other charges. The following table and discussion present details related to the 2003 fourth-quarter charge: |
| associated with this shutdown included $10 million of asset write-downs to salvage value and $1 million of other exit costs. (d) The Distribution business (xpedx) recorded a charge of $3 million to cover lease termination costs related to the Nationwide San Francisco, California facility that was vacated in the fourth quarter of 2003. (e) CHH recorded a charge of $7 million to shut down the Tokoroa, New Zealand sawmill. Charges associated with this shutdown included $4 million to write down assets to salvage value, $2 million for severance costs covering the termination of 115 employees and other exit costs of $1 million. CHH also implemented a cost reduction initiative recording a charge of $4 million for severance covering the termination of 229 employees. | |||||||||||||||||||||||||
|
| (f) During the fourth quarter of 2003, International Paper implemented the second phase of the previously announced Overhead Reduction Program to improve competitive performance. Charges associated with this initiative included $23 million of severance costs covering the termination of 557 employees. The $23 million charge included: Printing Papers - $6 million; Industrial and Consumer Packaging - $7 million; Forest Products - $5 million; Specialty Businesses and Other - $1 million; and Corporate - $4 million. The following table and discussion present details related to the 2003 third-quarter charge: | |||||||||||||||||||||||||
| |||||||||||||||||||||||||||
In millions | Asset |
| Severance |
| Total |
| |||||||||||||||||||||
| |||||||||||||||||||||||||||
Printing Papers |
| (a) |
| $ | 19 |
|
| $ | 2 |
|
| $ | 21 |
| |||||||||||||
Industrial and Consumer Packaging |
| (b) |
|
| 16 |
|
|
| 6 |
|
|
| 22 |
| |||||||||||||
Forest Products |
| (c) |
|
| 10 |
|
|
| 1 |
|
|
| 11 |
| |||||||||||||
Distribution |
| (d) |
|
| – |
|
|
| 3 |
|
|
| 3 |
| |||||||||||||
Carter Holt Harvey |
| (e) |
|
| 4 |
|
|
| 7 |
|
|
| 11 |
| |||||||||||||
Administrative Support Groups |
| (f) |
|
| – |
|
|
| 23 |
|
|
| 23 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
| $ | 49 |
|
| $ | 42 |
|
| $ | 91 |
|
| ||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||
(a) The Printing Papers business recorded a charge of $5 million to write off certain assets at the Courtland, Alabama and Franklin, Virginia mills. Management also approved a $14 million charge to write down the assets of the Maresquel, France mill to its net realizable value of approximately $5 million. The Printing Papers business also recorded a charge of $2 million for severance costs relating to 42 employees associated with a manufacturing excellence program. (b) The Consumer Packaging business recorded an additional charge of $22 million in conjunction with the closure of the Rolark manufacturing facility in Toronto, Canada, and a rationalization plan implemented in the second quarter of 2003. Closure costs for Rolark consisted of an $8 million charge to write down assets to their salvage value, $3 million of severance costs covering the termination of 178 employees and other exit costs of $1 million. The charge also included an additional provision for the previously implemented commercial business rationalization initiative. These charges included $8 million to write down assets to their salvage value and $2 million of severance costs covering the termination of 153 employees. (c) The Forest Products business approved plans in the fourth quarter of 2003 to shut down the Tuskalusa lumber mill in Moundville, Alabama. Operations at this mill had been temporarily ceased in the second quarter of 2003. Charges |
| In millions |
| Asset |
| Severance |
| Total | |||||||||||||||||||
| |||||||||||||||||||||||||||
| Administrative Support Groups |
| (a) | $ | – |
|
| $ | 38 |
|
| $ | 38 | ||||||||||||||
| Specialty Businesses and Other |
| (b) |
| 9 |
|
|
| 24 |
|
|
| 33 | ||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
|
|
| $ | 9 |
|
| $ | 62 |
|
| $ | 71 | ||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||||
| (a) During the third quarter of 2003, International Paper implemented the initial phase of an Overhead Reduction Program to improve competitive performance. Charges associated with this initiative included $37 million of severance costs covering the termination of 744 employees and other cash costs of $1 million. The $38 million charge included: Printing Papers - $12 million; Industrial and Consumer Packaging - $11 million; Distribution - $2 million; Forest Products - $6 million; Specialty Businesses - $2 million; and Corporate - $5 million. (b) Specialty Businesses recorded an additional charge of $33 million in connection with the July 15, 2003 shutdown of the Natchez, Mississippi mill. The charge included $9 million of asset write-downs to salvage value, $1 million of severance costs covering the termination of 20 employees, $20 million of environmental closure costs and other cash costs of $3 million. | ||||||||||||||||||||||||||
50
The following table and discussion present details related to the 2003 second-quarter charge: |
| The following table and discussion present details related to the 2003 first-quarter charge: | |||||||||||||||||||||
In millions | Asset Write-downs | Severance and Other | Total | In millions | Asset | Severance | Total | ||||||||||||||||
Printing Papers | (a) |
| $ | 3 |
| $ | 2 |
| $ | 5 | Industrial and Consumer | ||||||||||||
| Industrial and Consumer | Packaging | (a) |
| $ | – |
|
| $ | 2 |
| $ | 2 | |||||||||||
Packaging | (b) |
|
| – |
|
| 6 |
|
| 6 | Specialty Businesses | ||||||||||||
Forest Products | (c) |
|
| 13 |
|
| 7 |
|
| 20 | and Other | (b) |
|
| 2 |
|
|
| 18 |
|
| 20 | |
Distribution | (d) |
|
| – |
|
| 4 |
|
| 4 | Carter Holt Harvey | (c) |
|
| – |
|
|
| 1 |
|
| 1 | |
| Specialty Businesses |
|
|
|
|
|
| |||||||||||||||||
and Other | (e) |
|
| – |
|
| 16 |
|
| 16 |
|
|
| $ | 2 |
|
| $ | 21 |
| $ | 23 | |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
| $ | 16 |
| $ | 35 |
| $ | 51 | (a) The Industrial Packaging business implemented a plan to reorganize the Creil and Mortagne locations in France into a single complex. Charges associated with the reorganization included $1 million for severance costs covering the termination of 31 employees and other cash costs of $1 million. (b) Arizona Chemical recorded a charge of $1 million for severance costs of 51 employees associated with the Valkeakoski, Finland plant closure. Chemical Cellulose implemented a plan to shut down the Natchez, Mississippi dissolving pulp mill by mid-2003. Charges associated with this shutdown included a $1 million charge to write down assets to their salvage value and $12 million of severance costs covering the termination of 141 employees in April and other employees to be terminated upon closure. Additional shutdown charges for severance and closure costs were recorded in the second and third quarters of 2003. Additionally, Industrial Papers approved a plan to restructure converting operations at the Kaukauna, Wisconsin facility, modify its release products organization and implement division-wide productivity improvement actions. Charges associated with these plans included $1 million to write down assets to their salvage value and $5 million of severance costs covering the termination of 130 employees. (c) CHH recorded a charge of $1 million for severance costs for 33 employees associated with a headcount reduction initiative. | ||||||||||||
(a) The Printing Papers business recorded a charge of $2 million for severance costs relating to 19 employees associated with an organizational restructuring initiative. The business also recorded an additional charge of $3 million to write off obsolete equipment. (b) The Consumer Packaging business implemented a rationalization plan at the Clifton and Englewood, New Jersey plants as a result of increased competition and slowing growth rates in key market segments. Management also approved a plan to exit leased space at the Montvale, New Jersey office in connection with the realignment of the Beverage Packaging and Foodservice businesses. Additionally, the Consumer Packaging business initiated an organizational restructuring program at several of its Bleached Board facilities. Charges associated with the programs included $2 million to cover the termination of 79 employees, lease termination costs of $3 million, and other cash costs of $1 million. (c) The Forest Products business approved plans to shut down the Springhill, Louisiana lumber facility and the Slaughter Industries Distribution Center in Portland, Oregon, and to temporarily cease operations at the Tuskalusa lumber mill in Moundville, Alabama. Charges associated with the shutdowns included $12 million of asset write-downs to salvage value at Springhill and Slaughter, $5 million of severance costs covering the termination of 198 employees at all three facilities, and $1 million of other exit costs. Management also approved the closure of the Madison, New Hampshire lumber mill. Charges associated with this plan included $1 million to write down assets to their net realizable value and other cash costs of $1 million. (d) The Distribution business (xpedx) recorded a severance charge of $4 million covering the termination of 176 employees in a continuing effort to consolidate duplicative facilities and reduce ongoing operational expenses. (e) Specialty Businesses recorded a severance charge of $16 million associated with the termination of 447 employees in connection with the July 15th shutdown of the Natchez, Mississippi mill. | |||||||||||||||||||||||
51
The following table presents a roll forward of the severance and other costs included in the 2003 restructuring plans: |
| and other charges. The second-quarter charge consisted of $42 million of asset write-downs and $37 million of severance and other charges. The following table and discussion present details related to the 2002 fourth-quarter charge: |
| ||||||||||||||
|
| ||||||||||||||||
In millions | Severance |
| In millions | Asset | Severance | Total | |||||||||||
|
| ||||||||||||||||
Opening Balance (first quarter 2003) |
| $ | 21 |
|
| Printing Papers | (a) |
| $ 2 |
|
|
| $26 |
|
| $28 |
|
Additions (second quarter 2003) |
|
| 35 |
| Industrial and | ||||||||||||
Additions (third quarter 2003) |
|
| 62 |
| Consumer | ||||||||||||
Additions (fourth quarter 2003) |
|
| 42 |
|
| Packaging | (b) |
| 16 |
|
|
| 12 |
|
| 28 |
|
2003 Activity |
|
|
|
|
| Forest Products | (c) |
| 10 |
|
|
| 2 |
|
| 12 |
|
Cash charges |
|
| (72 | ) |
| Distribution | (d) |
| 1 |
|
|
| 5 |
|
| 6 |
|
Reclassifications: |
|
|
|
| Specialty Businesses and Other | (e) |
| – |
|
|
| 16 |
|
| 16 | ||
Pension and postretirement curtailments and special termination benefits |
|
|
|
|
| Carter Holt Harvey | (f) |
| – |
|
|
| 11 |
|
| 11 |
|
| (4 | ) |
|
|
|
|
|
|
|
|
|
| |||||
Reversals of reserves no longer required |
|
| (3 | ) |
|
|
|
| $29 |
|
|
| $72 |
|
| $101 |
|
2004 Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash charges |
|
| (57 | ) |
|
| |||||||||||
Reclassifications: |
|
|
|
|
|
(a) The Printing Papers business approved a restructuring plan at the Maresquel, France plant in an effort to improve efficiencies. Charges associated with the plan included $1 million of asset write-downs to salvage value, $7 million of severance costs covering the termination of 80 employees and other cash costs of $1 million. Management also implemented a reduction in force initiative at several of its Coated and SC mills resulting in severance charges of $18 million covering the termination of 245 employees. Also, an additional charge of $1 million was recorded to write down the remaining assets at the Erie, Pennsylvania mill to salvage value. (b) The Industrial Packaging business recorded a charge of $3 million for severance costs relating to the Las Palmas, Canary Islands facility in the second phase of an effort to consolidate duplicative facilities and eliminate excess internal capacity. Redundancies associated with this charge included 56 employees. The Consumer Packaging business approved a plan to shut down the Hopkinsville, Kentucky Foodservice plant due to the facility’s financial shortfalls, a continuing weak economy, reduced demand from its Quick Service Restaurant (QSR)customers and increased competition for remaining QSR volumes. Charges associated with this shutdown included $10 million to write down assets to their estimated realizable value of $4 million, $3 million of severance costs covering the termination of 327 employees, and other exit costs of $1 million. The Hopkinsville plant had revenues of $47 million, $31 million and $24 million in 2002, 2001 and 2000, respectively. This plant had operating losses of $8 million in 2002, $1 million in 2001 and zero in 2000. Management also implemented a business-reorganization plan for the Foodservice group that included $2 million to write down assets to salvage value, $3 million of severance costs covering the termination of 113 employees and other cash costs of $1 million. The Consumer Packaging charge also included $4 million of asset
| |||||||||||
Pension and postretirement curtailments and special termination benefits |
|
| (9 | ) |
| ||||||||||||
Environmental |
|
| (13 | ) |
| ||||||||||||
Reversals of reserves no longer required |
|
| (2 | ) |
| ||||||||||||
|
|
|
| ||||||||||||||
Balance, December 31, 2004 |
| $ | – |
|
| ||||||||||||
|
|
|
| ||||||||||||||
The severance charges recorded in the first, second, third and fourth quarters of 2003 related to 3,343 employees. As of December 31, 2004, 3,305 employees had been terminated and 38 employees retained. 2002: During 2002, restructuring and other charges before taxes and minority interest of $695 million ($435 million after taxes and minority interest) were recorded. These charges included a $199 million charge before taxes and minority interest ($130 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $450 million pre-tax charge ($278 million after taxes) for additional exterior siding legal reserves discussed in Note 10, and a charge of $46 million before taxes and minority interest ($27 million after taxes and minority interest) for early debt retirement costs discussed in Note 12. In addition, a $68 million pre-tax credit ($43 million after taxes) was recorded in 2002, including $45 million for the reversal of 2001 and 2000 reserves no longer required and $23 million for the reversal of excess Champion purchase accounting reserves. The $199 million charge in 2002 for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $101 million charge in the fourth quarter, a $19 million charge in the third quarter and a $79 million charge in the second quarter. The fourth-quarter charge included $29 million of asset write-downs and $72 million of severance and other charges. The third-quarter charge included $9 million of asset write-downs and $10 million of severance
|
| ||||||||||||||||
| |||||||||||||||||
| |||||||||||||||||
| |||||||||||||||||
52
write-offs and $1 million of other cash charges associated with its international joint ventures. (c) The Forest Products business charge of $12 million resulted from management’s decision to exit the development of the wood plastic composite business and shut down the Whelen Springs, Arkansas lumber mill. Charges associated with the wood plastic composite business consisted of $10 million of asset write-downs to salvage value and $1 million of other exit costs. The Whelen Springs lumber mill was closed due to the impact of the strong dollar on export sales. The Whelen Springs shut-down charge consisted of $1 million of exit costs. (d) The Distribution business (xpedx) implemented a plan to consolidate duplicative facilities and reduce ongoing operating logistics and selling and administrative expenses. Charges associated with this plan included $1 million of asset write-downs to salvage value, $2 million of severance costs covering the termination of 68 employees, and other cash costs of $3 million. (e) The Specialty Businesses approved a plan to shut down the Valkeakoski, Finland chemicals plant, as well as a management plan to implement headcount reduction programs within the Chemicals group. Charges associated with the Valkeakoski shutdown included $8 million of other cash costs not including severance. The Valkeakoski plant had revenues of $20 million, $19 million and $19 million in 2002, 2001 and 2000, respectively. This plant had operating earnings of $1 million in both 2002 and 2001, and $2 million in 2000. Charges associated with the headcount reduction programs consisted of $3 million of severance covering 11 employees to be terminated and $1 million of other related costs. The Specialty Businesses also implemented a plan to restructure manufacturing operations at the Polyrey facility in France. The plan includes consolidation of decorative high-pressure laminate production in order to optimize efficiencies and provide higher levels of quality and service. Charges associated with the restructuring included $2 million of severance costs covering the termination of 46 employees and $1 million of other exit costs. Other charges included a $1 million reserve for facility environmental costs at the Natchez, Mississippi facility. (f) CHH recorded a charge of $11 million for severance costs associated with a reduction-in-force at its Kinleith, New Zealand facility as part of a continuing program to improve the cost structure at the mill. Redundancies associated with the charge included 260 employees. | The following table and discussion present details related to the 2002 third-quarter charge: | ||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | Asset Write- downs | Severance and Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Specialty Businesses and Other | (a) |
| $ | – |
|
| $ | 3 |
| $ |
| 3 |
| ||||||||||||||||||||||||||||||||||||
Carter Holt Harvey | (b) |
|
| 5 |
|
|
| 7 |
|
| 12 |
| |||||||||||||||||||||||||||||||||||||
Other | (c) |
|
| 4 |
|
|
| – |
|
| 4 |
| |||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||
|
|
| $ | 9 |
|
| $ | 10 | $ |
| 19 |
| |||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||
(a) The Specialty Businesses charge of $3 million relates to the severance costs for 43 employees in Arizona Chemical’s U.S. operations to reduce costs. (b) The CHH severance and other charge of $7 million relates primarily to severance for job reductions at the Kinleith, New Zealand mill (102 employees) and at packaging operations in Australia (45 employees). The Kinleith reductions are part of a continuing program to improve the cost structure at the mill. In addition, CHH recorded a $5 million loss related to a write-down of non-refundable tax credits to their estimated realizable value. (c) This $4 million charge relates to the write-down to zero of International Paper’s investment in Forest Express, a joint venture engaged in electronic commerce transaction processing for the Forest Products Industry. The following table and discussion present details related to the 2002 second-quarter charge: | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
In millions |
|
| Asset Write- downs | Severance and Other | Total | ||||||||||||||||||||||||||||||||||||||||||||
Printing Papers | (a) |
| $ | 39 | $ | 18 |
| $ | 57 |
| |||||||||||||||||||||||||||||||||||||||
Industrial and Consumer Packaging | (b) |
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| 3 |
|
| – |
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| 3 |
| ||||||||||||||||||||||||||||||||||||||
Distribution | (c) |
|
| – |
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| 7 |
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| 7 |
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Administrative Support Groups | (d) |
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| – |
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| 12 |
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| 12 |
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| $ | 42 | $ | 37 |
| $ | 79 |
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(a) The Printing Papers business approved a plan to permanently shut down the Hudson River, New York mill by December 31, 2002, as many of the specialty products produced at the mill were not competitive in current markets. The assets of the mill are currently being marketed for sale. Impairment charges associated with the shutdown included $39 million to write the assets down to their estimated realizable value of approximately $5 million, $9 million of severance costs covering the termination of 294 employees, and other cash costs of $7 million. The Hudson River mill had revenues of $61 million, $80 million and $139 million in 2002, 2001 and 2000, respectively, and operating losses of $15 million in 2002 and $22 million in 2001, and operating earnings of $9 million in 2000. The Printing Papers business also recorded an additional | |||||||||||||||||||||||||||||||||||||||||||||||||
53
charge of $2 million related to the termination of 52 employees in conjunction with the business’s plan to streamline and realign administrative functions at several of its locations. (b) The Consumer Packaging business approved the first phase of a plan to consolidate duplicative facilities and eliminate excess internal capacity. The $3 million charge recorded relates to the write-down of assets to their estimated salvage value. (c) The Distribution business (xpedx) severance charge of $7 million reflects the termination of 145 employees in conjunction with the business’s plan to consolidate duplicative facilities and eliminate excess internal capacity. (d) During the second quarter of 2002, International Paper implemented the second phase of its cost reduction program to realign its administrative functions across all business and staff support groups. As a result, a $12 million severance charge was recorded covering the termination of 102 employees. The following table presents a roll forward of the severance and other costs included in the 2002 restructuring plans: | NOTE 7BUSINESSES HELD FOR SALE AND DIVESTITURES DISCONTINUED OPERATIONS: In the third quarter of 2005, International Paper completed the sale of its 50.5% interest in CHH to Rank Group Investments Ltd. for approximately U.S. $1.14 billion to be used principally to reduce debt. The pre-tax gain on the sale of $29 million ($361 million 54 after taxes and minority interest), including a $186 million pre-tax credit from cumulative translation adjustments, was included in Discontinued Earnings and earnings per share related to CHH were as follows:
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:
In the third quarter of 2004, International Paper entered into an agreement to sell its Weldwood of Canada Limited (Weldwood) business to West Fraser Timber Co., Ltd. of Vancouver, Canada (West Fraser), for approximately C$1.26 billion in cash, subject to certain adjustments at closing. Accordingly, a $323 million pre-tax loss on impairment ($711 million after taxes), including Revenues associated with this discontinued operation were 55 Earnings and earnings per share related to Weldwood were as follows: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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OTHER DIVESTITURES: 2005:In |
| final charges related to the sale of Fine Papers and Industrial Papers. In |
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Also during the first quarter of 2005, International Paper announced that it had signed an agreement to sell its Industrial Papers business to an affiliate of Kohlberg and write down the net assets of Also in 2005, pre-tax charges totaling $11 million ($7 million after taxes) were recorded to adjust previously estimated gains/losses of businesses previously sold. The net 2005 pre-tax losses totaling $111 million discussed above are included in Net losses on sales and |
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54
(a) Reflects the low historic tax basis in Weldwood that was carried over in connection with the acquisition of Champion in June 2000. Assets and liabilities of Weldwood, included in International Paper’s consolidated balance sheet at December 31, 2003 as Assets and Liabilities of businesses held for sale, were as follows: | Earnings and earnings per share related to the Tissue business were as follows: | |||||||||||||||||||
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| |||||||||||||||||||
| ||||||||||||||||||||
| In millions, |
| 2004 |
| 2003 | 2002 |
| |||||||||||||
| ||||||||||||||||||||
| Earnings from discontinued operation |
|
|
|
|
|
|
|
|
|
| |||||||||
| Earnings from operations |
| $ | 13 |
| $ | 39 |
| $ | 30 |
| |||||||||
| Income tax expense |
|
| (3 | ) |
| (15 | ) |
| (6 | ) | |||||||||
In millions | 2003 |
| Minority interest, net of taxes |
|
| (5 | ) |
| (12 | ) |
| (12 | ) | |||||||
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|
|
|
|
| |||||||||||||||
Accounts receivable, net |
| $ | 86 |
| Earnings from operations, net of taxes and minority interest |
|
| 5 |
|
| 12 |
|
| 12 |
| |||||
Inventories |
|
| 129 |
|
|
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| |||||||||||
Plants, properties and equipment, net |
|
| 738 |
| Gain on sale |
|
| 268 |
|
| – |
|
| – |
| |||||
Forestlands |
|
| 90 |
| Income tax expense |
|
| (69 | ) |
| – |
|
| – |
| |||||
Investments |
|
| 86 |
| Minority interest, net of taxes |
|
| (109 | ) |
| – |
|
| – |
|
| ||||
Goodwill |
|
| 548 |
|
|
|
|
|
|
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| |||||||||
Other assets |
|
| 3 |
| Gain on sale, net of taxes and minority interest |
|
| 90 |
|
| – |
|
| – |
| |||||
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| |||||||||||||||||||
Assets of business held for sale |
| $ | 1,680 |
|
|
|
|
|
| |||||||||||
|
|
| Earnings from discontinued operation, net of taxes and minority interest |
| $ | 95 |
| $ | 12 |
| $ | 12 |
| |||||||
Accounts payable |
| $ | 82 |
|
| |||||||||||||||
Accrued payroll and benefits |
|
| 16 | Earnings per common share from discontinued operation | ||||||||||||||||
Other accrued liabilities |
|
| 4 | Earnings from operations, net of taxes and minority interest |
| $ | 0.01 |
| $ | 0.03 |
| $ | 0.02 |
| ||||||
Deferred income taxes | 212 | |||||||||||||||||||
Other liabilities |
|
| 78 |
| ||||||||||||||||
Minority interest |
|
| 5 |
| Gain on sale, net of taxes and minority interest |
|
| 0.19 |
|
| – |
|
| – |
| |||||
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Liabilities of business held for sale | $ | 397 | Earnings per common share from discontinued operation, net of taxes and minority interest | $ | 0.20 | $ | 0.03 | $ | 0.02 | |||||||||||
| ||||||||||||||||||||
In the second quarter of 2004, CHH completed the sale of its Tissue business to Svenska Cellulosa Aktiebolaget (SCA). As a result of this sale, International Paper recognized a gain of $268 million before taxes and minority interest ($90 million after taxes and minority interest). This gain on sale is included along with the net income of the Carter Holt Harvey Tissue business prior to the sale in Discontinued operations in the accompanying consolidated statement of operations. Additionally, all periods presented have also been restated to present the operating results of the Tissue business as a discontinued operation. Revenues associated with this discontinued operation were $153 million in 2004, $433 million in 2003 and $369 million in 2002, respectively. |
| The assets and liabilities of the Tissue business, included in International Paper’s consolidated balance sheet at December 31, 2003 as a component of Assets and Liabilities of businesses held for sale, were as follows: |
| |||||||||||||||||
| In millions |
| 2003 | |||||||||||||||||
| ||||||||||||||||||||
| Accounts receivable, net |
|
| $ | 41 | |||||||||||||||
| Inventories |
|
|
| 87 | |||||||||||||||
| Plants, properties and equipment, net |
|
|
| 277 | |||||||||||||||
| Other assets |
|
|
| 19 |
| ||||||||||||||
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|
|
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| Assets of business held for sale |
|
| $ | 424 |
| ||||||||||||||
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|
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| Accounts payable |
|
| $ | 34 |
| ||||||||||||||
| Accrued payroll and benefits |
|
|
| 15 |
| ||||||||||||||
| Other accrued liabilities |
|
|
| 8 |
| ||||||||||||||
| Other liabilities |
|
|
| 18 |
| ||||||||||||||
| Minority interest |
|
|
| 173 |
| ||||||||||||||
|
|
|
|
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| Liabilities of business held for sale |
|
| $ | 248 |
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55
In December 2004, International Paper committed to plans for the sale in 2005 of its Fine Papers business and its Maresquel mill and Papeteries de France distribution business in In In the second quarter of 2004, a $27 million loss before and after taxes was recorded to write down the assets of Papeteries de Souche L.C. in France to their estimated realizable value. In addition, a
The net 2004 pre-tax losses totaling 2003:In the fourth quarter of 2003, International Paper recorded a $34 million charge ($34 million after taxes) to write down the assets of its Polyrey business in France to their estimated fair value.
|
TRANSFORMATION PLAN: On July 19, 2005, International Paper
NOTE 8 PREFERRED SECURITIES OF SUBSIDIARIES AND VARIABLE INTEREST ENTITIES PREFERRED SECURITIES OF SUBSIDIARIES: In March 2003, Southeast Timber, Inc. (Southeast Timber), a consolidated subsidiary of International Paper, issued $150 million of preferred securities to a private investor with future dividend payments based on LIBOR. Southeast Timber, which through a subsidiary initially held approximately
|
56
NOTE 8 PREFERRED SECURITIES OF In March 2003, Southeast Timber, Inc. (Southeast Timber), a consolidated subsidiary of International Paper, issued $150 million of preferred securities to a private investor with future dividend payments based on LIBOR. Southeast Timber, which through a subsidiary initially held approximately 1.5 million acres of forestlands in the southern United States, is International Paper’s primary vehicle for future sales of Southern forestlands. The preferred securities may be put back to International Paper by the private investor upon the occurrence of certain events, and have a liquidation preference that approximates their face amount. The $150 million preferred third-party interest is included in Minority interest in the accompanying consolidated balance sheet. The agreement with the private investor also places certain limitations on International Paper’s ability to sell forestlands in the Southern United States outside of Southeast Timber. In addition, because Southeast Timber is a separate legal entity, the assets of Southeast Timber and its subsidiaries, consisting principally of forestlands having a book value of approximately $280 million at December 31, 2004, will not be available to satisfy future liabilities and obligations of International Paper, although the value of International Paper’s interests in Southeast Timber and its subsidiaries will be available for these purposes. In September 1998, International Paper Capital Trust III issued $805 million of International Paper-obligated mandatorily redeemable preferred securities. Prior to July 1, 2003, International Paper Capital Trust III was a wholly-owned consolidated subsidiary of International Paper (see Note 4). Its sole assets were International Paper 7.875% debentures. The obligations of International Paper Capital Trust III related to its preferred securities were unconditionally guaranteed by International Paper. In January 2004, International Paper redeemed these securities at par plus accrued interest. In the third quarter of 1995, International Paper Capital Trust (the Trust) issued $450 million of International Paper-obligated mandatorily redeemable preferred securities. Prior to July 1, 2003, the Trust was a wholly-owned consolidated subsidiary of International Paper (see Note 4) and its sole assets were International Paper 5.25% convertible subordinated debentures. In February 2005, International Paper redeemed these securities at 100.5% of par plus accrued interest. Effective July 1, 2003, as required by FIN 46, International Paper deconsolidated International Paper Capital Trust III and International Paper Capital Trust, holding approximately $1.3 billion of mandatorily redeemable preferred securities, |
| previously classified as a separate line item on the Company’s consolidated balance sheet, and recorded approximately $1.3 billion of borrowings from these trusts as Long-term debt. In June 1998, IP Finance (Barbados) Limited, a non-U.S. wholly-owned consolidated subsidiary of International Paper, issued $550 million of preferred securities with a dividend payment based on LIBOR. These preferred securities were redeemed in June 2003 with the proceeds of debt issuances (see Note 12). Timberlands Capital Corp. II, Inc., a wholly-owned consolidated subsidiary of International Paper, issued $170 million of 4.5% preferred securities in March 2003. These securities were not mandatorily redeemable and were classified in the consolidated balance sheet as a Minority interest. In November 2004, these securities became mandatorily redeemable and were reclassified from Minority interest to Current maturities of long-term debt pursuant to SFAS No. 150 and redeemed in December 2004 (see Note 12). Distributions paid under all of the preferred securities noted above were $52 million, $111 million and $115 million in 2004, 2003 and 2002, respectively. The expense related to these preferred securities is shown in Minority interest expense in the consolidated statement of operations, except for $32 million in 2004 and $44 million in 2003 included in Interest expense subsequent to the adoption of FIN 46 and reclassifications mandated under SFAS No. 150. NOTE 9 INCOME TAXES The components of International Paper’s earnings (loss) from continuing operations before income taxes and minority interest by taxing jurisdiction were: | ||||||||||
In millions |
| 2004 |
| 2003 |
| 2002 |
| |||||
Earnings (loss) |
|
|
|
|
|
|
| |||||
U.S. |
| $ | 271 |
| $ | (249 | ) | $ | (73 | ) | ||
Non-U.S. |
|
| 475 |
|
| 541 |
|
| 379 |
| ||
|
|
|
|
| ||||||||
Earnings from continuing operations before income taxes and minority interest |
| $ | 746 |
| $ | 292 |
| $ | 306 |
| ||
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| |||||
57
The provision (benefit) for income taxes by taxing jurisdiction was:
|
| The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 2004 and 2003 were as follows: | |||||||||||||||||||||||
In millions |
| 2004 |
| 2003 |
| 2002 |
|
|
| ||||||||||||||||
| |||||||||||||||||||||||||
Current tax provision |
|
|
|
|
|
|
|
|
|
|
| In millions |
|
| 2004 |
| 2003 |
| |||||||
U.S. federal |
| $ | 161 |
| $ | 173 |
| $ | 175 |
|
| ||||||||||||||
U.S. state and local |
|
| 24 |
|
| 11 |
|
| 54 |
|
| Deferred tax assets: |
|
|
|
|
|
|
| ||||||
Non-U.S. |
|
| 135 |
|
| 100 |
|
| 88 |
|
| Postretirement benefit accruals |
| $ | 348 |
| $ | 372 |
| ||||||
|
|
|
|
|
| Prepaid pension costs |
|
| 320 |
|
| 322 |
| ||||||||||||
|
| $ | 320 |
| $ | 284 |
| $ | 317 |
|
| Alternative minimum and other tax credits |
|
| 519 |
|
| 474 |
| ||||||
|
|
|
|
|
| Net operating loss carryforwards |
|
| 1,540 |
|
| 1,767 |
| ||||||||||||
Deferred tax provision (benefit) |
|
|
|
|
|
|
|
|
|
|
| Compensation reserves |
|
| 186 |
|
| 196 |
| ||||||
U.S. federal |
| $ | (26 | ) | $ | (271 | ) | $ | (231 | ) |
| Legal reserves |
|
| 98 |
|
| 147 |
| ||||||
U.S. state and local |
|
| 5 |
|
| (72 | ) |
| (146 | ) |
| Other |
|
| 467 |
|
| 449 |
| ||||||
Non-U.S. |
|
| (93 | ) |
| (54 | ) |
| (12 | ) |
|
|
|
|
| ||||||||||
|
|
|
|
|
| Gross deferred tax assets |
|
| 3,478 |
|
| 3,727 |
| ||||||||||||
|
| $ | (114 | ) | $ | (397 | ) | $ | (389 | ) |
| Less: valuation allowance |
|
| (137 | ) |
| (179 | ) | ||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Income tax provision (benefit) |
| $ | 206 |
| $ | (113 | ) | $ | (72 | ) |
| Net deferred tax assets |
| $ | 3,341 |
| $ | 3,548 |
| ||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
International Paper made income tax payments, net of refunds, of $254 million, $253 million and $270 million in 2004, 2003 and 2002, respectively. A reconciliation of income tax expense (benefit) using the statutory U.S. income tax rate compared with actual income tax expense (benefit) follows: |
| Deferred tax liabilities: |
|
|
|
|
|
|
| ||||||||||||||||
| Plants, properties and equipment |
| $ | (2,814 | ) | $ | (2,867 | ) | |||||||||||||||||
| Forestlands |
|
| (1,215 | ) |
| (1,153 | ) | |||||||||||||||||
| Other |
| (263 | ) |
| (264 | ) | ||||||||||||||||||
| Total deferred tax liabilities |
| $ | (4,292 | ) | $ | (4,284 | ) | |||||||||||||||||
|
|
|
|
| |||||||||||||||||||||
| Net deferred tax liabilities |
| $ | (951 | ) | $ | (736 | ) | |||||||||||||||||
In millions |
| 2004 |
| 2003 |
| 2002 |
|
|
|
|
|
| |||||||||||||
|
Deferred tax assets and liabilities are recorded in the accompanying consolidated balance sheet under the captions Deferred income tax assets, Deferred charges and other assets, Other accrued liabilities and Deferred income taxes. The increase in 2004 in Deferred income taxes principally reflects the use of U.S. net operating loss carryforwards. The valuation allowance for deferred tax assets as of January 1, 2004 was $179 million. The net change in the total valuation allowance for the year ended December 31, 2004 was a decrease of $42 million. The 2004 second-quarter provision for income taxes included a $54 million credit before minority interest ($27 million after minority interest) from the reduction of valuation reserves for capital loss carryovers and a $32 million charge for the adjustment of deferred tax balances. The reduction of valuation reserves reflected capital gains generated by the sale of the CHH Tissue business. During 2003, International Paper recorded decreases totaling $123 million in the provision for income taxes for significant items occurring in 2003, including a $13 million reduction in the fourth quarter ($26 million before minority interest) for a favorable settlement with Australian tax authorities of net operating loss carryforwards, a $60 million reduction in the third quarter reflecting a favorable revision of estimated tax accruals upon filing the 2002 federal income tax return and increased research and development credits, and a $50 million | ||||||||||||||||||||||||
Earnings from continuing operations before income taxes and minority interest |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
| $ | 746 |
| $ | 292 |
| $ | 306 |
|
| |||||||||||||||
Statutory U.S. income tax rate |
|
| 35 | % |
| 35 | % |
| 35 | % |
| ||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||
Tax expense using statutory U.S. income tax rate |
|
| 261 |
|
| 102 |
|
| 107 |
|
| ||||||||||||||
State and local income taxes |
|
| 19 |
|
| (41 | ) |
| (60 | ) |
| ||||||||||||||
Tax rate and permanent differences on non-U.S. earnings |
|
| (67 | ) |
| (131 | ) |
| (47 | ) |
| ||||||||||||||
Permanent differences on sales of non-strategic assets |
|
| – |
|
| 11 |
|
| (70 | ) |
| ||||||||||||||
Non-deductible business expenses |
|
| 12 |
|
| 14 |
|
| 13 |
|
| ||||||||||||||
Retirement plan dividends |
|
| (7 | ) |
| (7 | ) |
| – |
|
| ||||||||||||||
Tax benefit on export sales |
|
| (7 | ) |
| (12 | ) |
| (4 | ) |
| ||||||||||||||
Minority interest |
|
| (35 | ) |
| (37 | ) |
| (40 | ) |
| ||||||||||||||
Net U.S. tax on non-U.S. dividends |
|
| 52 |
|
| 17 |
|
| 26 |
|
| ||||||||||||||
Tax credits |
|
| (37 | ) |
| (56 | ) |
| – |
|
| ||||||||||||||
Other, net |
|
| 15 |
|
| 27 |
|
| 3 |
|
| ||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||
Income tax expense (benefit) |
| $ | 206 |
| $ | (113 | ) | $ | (72 | ) |
| ||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||
Effective income tax rate |
|
| 28 | % |
| -39 | % |
| -24 | % |
| ||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||
|
|
|
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|
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58
VARIABLE INTEREST ENTITIES: International Paper holds variable interests in two financing entities that were used to monetize long-term notes received from the sale of forestlands in 2002 and 2001. International Paper transferred notes and cash having a value of approximately $1.0 billion to these entities in exchange for preferred interests, and accounted for the transfers as a sale of the notes with no associated gain or loss. In the same period, the entities acquired approximately $1.0 billion of International Paper debt obligations for cash. International Paper has not consolidated the entities because it is not the primary beneficiary of the entities. At December 31, 2005, International Paper’s $540 million preferred interest in one of the entities has been offset against related debt obligations since International Paper has, and intends to effect, a legal right of offset to net-settle these two amounts. NOTE 9 INCOME TAXES The components of International Paper’s earnings from continuing operations before income taxes and minority interest by taxing jurisdiction were:
The provision (benefit) for income taxes by taxing jurisdiction was:
The Company’s net deferred income tax provision (benefit) includes a $3 million benefit, a $2 million benefit and a $1 million provision for 2005, 2004 and 2003, respectively, for the effect of changes in non-U.S. and state tax rates. 57 International Paper made income tax payments, net of refunds, of $457 million, $254 million and $255 million in 2005, 2004 and 2003, respectively. A reconciliation of income tax expense using the statutory U.S. income tax rate compared with actual income tax expense (benefit) follows:
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 2005 and 2004, were as follows:
Deferred tax assets and liabilities are recorded in the accompanying consolidated balance sheet under the captions Deferred income tax assets, Deferred charges and other assets, Other accrued liabilities and Deferred income taxes. The decrease in 2005 in Deferred income taxes principally reflects the generation of U.S. net operating loss carryforwards, the utilization of income tax credits and an increase in deferred tax assets relating to pension costs. The valuation allowance for deferred tax assets as of January 1, 2005, was $129 million. The net change in the total valuation allowance for the year ended December 31, 2005, was an increase of $10 million. The 2005 income tax provision included a net $446 million reduction, including a $627 million reduction resulting from an agreement reached with the U.S. federal taxing authorities concerning the 1997 through 2000 U.S. federal income tax audits, a $142 million charge for deferred taxes related to earnings repatriated under the American Jobs Creation Act of 2004 and $39 million of other tax charges. During 2004, International Paper recorded a $32 million increase in the provision for income taxes reflecting an adjustment of deferred tax balances. During 2003, decreases totaling $110 million in the provision for income taxes were recorded for significant tax items, including a $60 million reduction for a favorable revision of estimated tax accruals upon filing the 2002 federal income tax return and increased research and development credits, and a $50 million reduction reflecting a favorable tax audit settlement and benefits from an overseas tax program.
International Paper has federal and non-U.S. net operating loss carryforwards that expire as follows: Deferred income taxes are not provided for temporary differences of approximately $2.4 billion, $2.7 billion 58 International Paper is currently being audited by various federal, state and non-U.S. taxing authorities for In October 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law. The Act provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated. International Paper |
NOTE 10COMMITMENTS AND CONTINGENT LIABILITIES Certain property, machinery and equipment are leased under cancelable and non-cancelable agreements. At December 31, Unconditional purchase obligations have been entered into International Paper entered into an agreement in 2000 to guarantee, for a fee, an unsecured contractual credit agreement In connection with sales of businesses, property, equipment, forestlands and other assets, International Paper commonly makes representations and warranties relating to such businesses or assets, and may enter into indemnification arrangements with respect to tax and environmental liabilities, breaches of representations and warranties, and other matters. Where any liabilities for such matters are probable and subject to reasonable estimation, accrued liabilities are recorded at the time of sale as a cost of the transaction. International Paper believes that possible future unrecorded liabilities for these matters, if any, would not have a material adverse effect on its consolidated financial statements. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EXTERIOR SIDING AND ROOFING SETTLEMENTS Three nationwide class action lawsuits against the Company and Masonite Corp., a formerly wholly-owned subsidiary of the Company, relating to exterior siding and roofing products manufactured by Masonite The first suit, entitledJudy Naef v. Masonite and International Paper, was filed in December 1994 The second suit, entitledCosby, The third suit, entitledSmith, 59 1980, and December 31, 1989, the deadline for filing claims CLAIMS FILING AND EVALUATION For all of the In connection with the products involved in the Woodruf Persons who are class members under the CLAIMS PAYMENT DATA Through December 31, 2005, net settlement payments totaled approximately $1.0 billion ($831 million for the Hardboard Settlement, $128 million for the Omniwood Settlement and $52 million for the Woodruf Settlement), including $51 million of non-refundable attorneys’ advances. The average settlement cost per claim for the years ended December 31, 2005, 2004 and 2003 for the Hardboard, Omniwood and Woodruf Settlements are set forth in the table below: AVERAGE SETTLEMENT COST PER CLAIM although the warranties vary from product to product, they generally provide for a payment of up to two times the purchase price. Reserve Analysis The following table presents an analysis of the net reserve activity related to the Hardboard, Omniwood and Woodruf Lawsuits for the years ended December 31, 2004, 2003 and 2002. During 2002, tracking of the actual versus projected number of claims filed and average cost per claim indicated that although total claims costs were approximately equal to projected amounts, the number of claims filed was higher than projected, offsetting the effect of lower average claims payment amounts. Accordingly, updated projections were developed by two third-party consultants utilizing the most current claims experience data. Principal assumptions used in the development of these projections were that the number of Hardboard claims filed, which account for approximately 85% of all claims costs, would average slightly above current levels until January 2005, then would decline by about 70% in 2005 and remain flat to the end of the claims period. Average claims costs were assumed to continue to decline at the rate experienced during the last twelve months. While management believes that the assumptions used in developing these outcomes represent the most probable scenario, factors which could cause actual results to vary from these assumptions include: (1) area specific assumptions as to growth in claims rates could be incorrect, (2) locations where previously there had been little or no claims could emerge as significant geographic locations, and (3) the cost per claim could vary materially from that projected. The first consultant provided two statistical outcomes, with the higher outcome indicating a required provision of approximately $430 million. The second consultant provided a range of possible outcomes, with the most probable outcome indicating a required provision of approximately $475 million. The estimate ranged from a low (a 95% probability that future charges would exceed this amount) of $338 million to a high (5% probability that future charges would exceed this amount) of $635 million. Using these projections, management determined that a provision of $450 million should be recorded in the fourth quarter of 2002 as an estimate of the most probable outcome based on the consultants’ projections. During 2004 and 2003, claims filed and average costs per claim were in line with 2002 projections and no adjustments of reserve balances were required. Reserve Balances At December 31, 2004, net reserves for these matters totaled $259 million, including $158 million for the Hardboard Lawsuit, $97 million for the Omniwood Lawsuit and $4 million for the Woodruf Lawsuit. At December 31, 2004, there were $33 million of costs associated with claims inspected and not paid ($27 million for Hardboard, $5 million for Omniwood and $1 million for Woodruf) and $29 million of costs associated with claims in process and not yet inspected ($24 million for claims related In millions Hard- Omni- Woodruf Total Balance, December 31, 2001 $ 179 $ 20 $ 9 $ 208 Additional provision 305 134 11 450 Payments (161 ) (16 ) (8 ) (185 ) Insurance collections 34 – – 34 Balance, December 31, 2002 357 138 12 507 Payments (129 ) (21 ) (3 ) (153 ) Insurance collections 33 – – 33 Balance, December 31, 2003 261 117 9 387 Payments (111 ) (20 ) (5 ) (136 ) Insurance collections 8 – – 8 Balance, December 31, 2004 $ 158 $ 97 $ 4 $ 259 Additional Provisions In the third quarter of 2001, a determination was made that an additional provision would be required to cover an expected shortfall in the reserves that had arisen since the third quarter of 2000 due to actual claims experience exceeding projections. An additional $225 million was added to the existing reserve balance at that time. This increase was based on third party consultants’ statistical studies of future costs, which analyzed trends in the claims experience through August 31, 2001. The amount was based on a statistical outcome that assumed that Hardboard claims growth continued through mid-2002, then declined by 50% per year. Omniwood claims growth was assumed to continue through mid-2002, decline by 50% in 2003 and thereafter increase at the rate of 10% per year. Woodruf claims were assumed to decline at a rate of 50% per year. Unit costs per claim were assumed to hold at the 2001 level. The statistical model used to develop this outcome also included assumptions on the geographic patterns of claims rates and assumptions related to the cost of claims, including forecasts relating to the rate of inflation. Average claim costs were calculated from historical claims records, taking into consideration structure type, location and source of the claim. to the Hardboard Lawsuit, $4 million for claims related to the Omniwood Lawsuit and $1 million for claims related to the Woodruf Lawsuit). In addition, there were approximately $11 million of costs associated with administrative and legal fees incurred but not paid prior to year-end. The estimated claims reserve includes $187 million for unasserted claims that are probable of assertion. While additional reserve balances may be required for future payments under the Woodruf Lawsuit, International Paper believes that the aggregate reserve balance for claims arising in connection with exterior siding and roofing products, described above, are adequate, and that additional amounts will be recovered from its insurance carriers in the future relating to these claims (described below). International Paper is unable to estimate at this time the amount of additional charges, if any, which may be required for these matters in the future. Claims Statistics The average settlement cost per claim for the years ended December 31, 2004, 2003, and 2002 for the Hardboard, Omniwood and Woodruf Lawsuits is set forth in the table below: Average Settlement Cost Per Claim The above information is calculated by dividing the amount of claims paid by the number of claims paid. Through December 31, 2004, net settlement payments totaled $866 million ($713 million for claims relating to the Hardboard Lawsuit, $105 million for claims relating to the Omniwood Lawsuit and $48 million for claims relating to the Woodruf Lawsuit), including $51 million of non-refundable attorneys’ advances discussed above ($47.5 million for the Hardboard Lawsuit and $1.7 million for each of the Omniwood Lawsuit and Woodruf Lawsuit). Also, payments of $50 million have been made to the attorneys for the plaintiffs in the Hardboard, Omniwood and Woodruf Lawsuits. In addition, through December 31, 2004, International Paper had received $223 million related to the Hardboard Lawsuit from our insurance carriers. The following table shows an analysis of claims statistics related to the Hardboard, Omniwood and Woodruf Lawsuits for the years ended December 31, 2004, 2003 and 2002. The table reflects an increase in the number of claims filed in December 2004 on the eve of the January 2005 deadline for filing certain claims under the Hardboard Lawsuit settlement agreement. These increases were anticipated in prior claim projections and did not adversely affect the evaluation of the adequacy of reserve balances at December 31, 2004. Hardboard Omniwood Woodruf In thousands Single Multi- Single Multi- Single Multi- December 31, 2004 $ 2.3 $ 3.1 $ 4.3 $ 4.2 $ 4.2 $ 4.0 December 31, 2003 $ 2.2 $ 3.0 $ 3.8 $ 5.4 $ 3.9 $ 1.2 December 31, 2002 $ 2.4 $ 4.3 $ 4.4 $ 7.7 $ 4.7 $ 9.3 In thousands Hardboard Omniwood Woodruf Total Single Multi- Single Multi- Single Multi- Single Multi- Total December 31, 2001 30.0 5.4 1.4 0.3 1.5 0.2 32.9 5.9 38.8 No. of Claims Filed 48.3 10.9 3.5 0.5 1.4 0.1 53.2 11.5 64.7 No. of Claims Paid (36.0 ) (9.2 ) (2.6 ) (0.4 ) (1.3 ) – (39.9 ) (9.6 ) (49.5 ) No. of Claims Dismissed (13.7 ) (3.1 ) (0.4 ) – (0.5 ) – (14.6 ) (3.1 ) (17.7 ) December 31, 2002 28.6 4.0 1.9 0.4 1.1 0.3 31.6 4.7 36.3 No. of Claims Filed 45.0 9.2 4.9 0.3 1.0 – 50.9 9.5 60.4 No. of Claims Paid (30.9 ) (7.1 ) (4.1 ) (0.2 ) (0.9 ) – (35.9 ) (7.3 ) (43.2 ) No. of Claims Dismissed (16.3 ) (3.3 ) (0.9 ) – (0.4 ) – (17.6 ) (3.3 ) (20.9 ) December 31, 2003 26.4 2.8 1.8 0.5 0.8 0.3 29.0 3.6 32.6 No. of Claims Filed 56.0 8.0 5.2 – 0.6 – 61.8 8.0 69.8 No. of Claims Paid (28.6 ) (3.7 ) (4.0 ) (0.1 ) (0.4 ) – (33.0 ) (3.8 ) (36.8 ) No. of Claims Dismissed (14.9 ) (2.1 ) (0.6 ) – (0.1 ) – (15.6 ) (2.1 ) (17.7 ) December 31, 2004 38.9 5.0 2.4 0.4 0.9 0.3 42.2 5.7 47.9 December 31, 2005 December 31, 2004 December 31, 2003 The above information is calculated by dividing the aggregate amount of claims paid during the specified period by the number of claims paid during such period. The following table shows an analysis of claims activity related to the Hardboard, Omniwood and Woodruf Settlements for the years ended December 31, 2005, 2004 and 2003: CLAIMS ACTIVITY December 31, 2002 No. of Claims Filed No. of Claims Paid No. of Claims Dismissed December 31, 2003 No. of Claims Filed No. of Claims Paid No. of Claims Dismissed December 31, 2004 No. of Claims Filed No. of Claims Paid No. of Claims Dismissed December 31, 2005 At December 31, 2005, there were $18 million of payments due for claims that have been determined to be valid ($12 million for Hardboard, $5 million for Omniwood and $1 million for Woodruf) and an estimated $14 million of payments associated with claims currently under evaluation ($9 million for claims related to the Hardboard Settlement, $3 million for claims related to the Omniwood Settlement and $2 million for claims related to the Woodruf Settlement). In addition, there was approximately $9 million of costs associated with administrative and legal fees incurred but not paid prior to year-end. RESERVE FOR SIDING AND ROOFING SETTLEMENTS At December 31, 2005, net reserves for the settlements discussed above totaled $113 million, of which $34 million is attributable to the Hardboard Settlement, $74 million to the Omniwood Settlement and $5 million to the Woodruf Settlement. The following table presents an analysis of the net reserve activity related to the Hardboard, Omniwood and Woodruf Settlements for the years ended December 31, 2005, 2004 and 2003: Balance, December 31, 2002 Payments Insurance collections Balance, December 31, 2003 Payments Insurance collections Balance, December 31, 2004 Payments Reclassification Balance, December 31, 2005 While, for tracking purposes, the Company maintains three reserve accounts for each of the Hardboard, Omniwood and Woodruf Settlements, we evaluate the adequacy of the aggregate reserve due to their similar and related nature. In making a determination as to adequacy of the aggregate reserve, we employ a third-party consultant to conduct statistical studies of future costs utilizing recent claims experience data. In 2002, projections were prepared of the anticipated claims activity and payments through the end of the claims period for each of the settlements. These projections are updated annually using recent claims activity and other factors typically considered in projecting future claims 61 and costs. If the projections were to indicate that aggregate payments though the end of the claims period would be materially over or under the aggregate forecasted payments, the aggregate reserve would be appropriately adjusted. Since 2002, our actual claims experience has been in line with projected forecasts and therefore there have been no adjustments of the aggregate reserve balance for these settlements. A number of factors could cause actual results to vary from our projections, including a higher than projected cost per claim (due to higher construction, wood, energy and replacement costs, all of which affect the inflation factor for the Means Price Data discussed above), and increased claims from geographic locations where previously there had been few or no claims. In Despite the higher than anticipated number of valid 1980s Hardboard claims and the slightly higher cost per claim, the Company believes that, as of the end of 2005, the aggregate reserve balance for the Hardboard, Omniwood and Woodruf Settlements is adequate. However, if new claims filed for products involved in these settlements, or the average cost per claim, were to be higher than projected in 2006, the Company might increase its aggregate reserve to cover claims for these settlements. The amount of an increase, if any, could range from zero to $20 million and would depend on a number of factors, including the likelihood that, and the extent to which, our 2005 experience is indicative of future activity. The Company will continue to evaluate the relevant data through the end of the claims period in order to determine if an increase in its aggregate reserve will be warranted. HARDBOARD INSURANCE MATTERS The Company commenced a These matters (with the Insurance settlements Income recognized Cash settlements received, net Including collections received prior to 2006 for approximately $22 million. The On May 14, 1999, and May 18, 1999, two lawsuits were filed in federal court in the Eastern District of Pennsylvania against 62 period from October 1, 1993, through November 30, 1995. These lawsuits, which In 2004, the Company On September 16, 2002, Company believes it has valid defenses and PATENT MATTER In connection with its former Nevamar business, the Company retained liability for a patent dispute pending in the U.S. District Court for the District of Maryland. The case was commenced in 1988 as a declaratory judgment action by Nevamar for non-infringement and invalidity of a static dissipative laminate patent held by Charleswater Products, Inc. (Charleswater). Charleswater counterclaimed, asserting that certain Nevamar products infringed its patent and seeking damages of approximately $24 million for lost profits and royalty payments (which could be trebled if Nevamar were found to have willfully infringed the patent), plus substantial pre-judgment interest as Charleswater’s claims have existed since 1986. Because the Nevamar business is no longer owned by the Company, the outcome of the case would have no impact on the Company’s business except to the extent of monetary damages. The proceedings have 63 matter is scheduled to SUMMARY The Company is also involved in various other inquiries, administrative proceedings and litigation relating to Summary International Paper is also involved in various other inquiries, administrative proceedings and litigation relating to contracts, sales of property, environmental protection, tax, antitrust, personal injury and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, International Paper believes that the outcome of any of the lawsuits or claims that are pending or threatened, or all of them combined, including the preceding antitrust matters, will not have a material adverse effect on its consolidated financial statements. NOTE 11SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION Inventories by major category were: Raw materials Finished pulp, paper and packaging products Finished lumber and panel products Operating supplies Other Inventories The last-in, first-out inventory method is used to value most of International Paper’s U.S. inventories. Approximately 70% of total raw materials and finished products inventories were valued using this method. If the first-in, first-out method had been used, it would have increased total inventory balances by approximately Plants, properties and equipment by major classification were: Pulp, paper and packaging facilities Mills Packaging plants Wood products facilities Other plants, properties and equipment Gross cost Less: Accumulated depreciation Plants, properties and equipment, net Interest costs related to the development of certain long-term assets are capitalized and amortized over the related assets’ estimated useful lives. Capitalized net interest costs were The following tables present changes in the goodwill balances as allocated to each business segment for the years ended December 31, 2005 and 2004. Printing Papers Industrial Packaging Consumer Packaging Distribution Forest Products Corporate Total 64 In millions Balance January 1, 2004 Other(b) Additions/ Reductions Balance December 31, 2004 Printing Papers Industrial Packaging Consumer Packaging Distribution Forest Products Corporate Total The following table presents an analysis of activity related to asset retirement obligations since January 1, 2004: Asset retirement obligation at January 1 New liabilities Liabilities settled Net adjustments to existing liabilities Accretion expense Asset retirement obligation at December 31 This liability is included in Other liabilities in the accompanying consolidated balance sheet. The following table presents changes in minority interest balances for the years ended December 31, 2005 and 2004: Balance, beginning of year Reclassification of limited partnership interests to debt Interest of CHH in an IP consolidated subsidiary Dividends paid Minority interest expense Other, net Balance, end of year In December 2004, International Paper completed the sale of 1.1 million acres of forestlands in Maine and New Hampshire to a private forest investment company for $244 million. Since International Paper has some continuing interest in these forestlands through a long-term fiber supply agreement, no gain was recognized in 2004 on this transaction. However, the net cash proceeds from the transaction of approximately $242 million are included as a source of cash in the accompanying consolidated statement of cash flows. The deferred gain on the transaction totaling $112 million and $114 million at December 31, 2005 and 2004, respectively, included in Other liabilities in the accompanying consolidated balance sheet, is being amortized to earnings in future periods over the term of the fiber supply agreement. The following table presents an analysis of activity related to asset retirement obligations since January 1, 2003: NOTE 12 DEBT AND LINES OF CREDIT In November and December of 2005, International Paper Investments (Luxembourg) S.ar.l, a wholly-owned subsidiary of International Paper, issued $700 million of long-term debt with an initial interest rate of LIBOR plus 40 basis points that can vary depending upon the credit rating of the Company and a maturity date in November 2010. Additionally, the subsidiary borrowed $70 million under a bank credit agreement with an initial interest rate of LIBOR plus 40 basis points that can vary depending on the credit rating of the Company, and with a maturity date in November 2006. In December 2005, International Paper used a portion of the proceeds from the above borrowings, and from the sale of CHH in the third quarter of 2005, to repay approximately $190 million of notes with coupon rates ranging from 3.8% to 10% and original maturities from 2008 to 2029. The remaining proceeds from the borrowings and CHH sale will be used for other debt reductions in the first quarter of 2006. In September 2005, International Paper used a portion of the proceeds from the CHH sale to repay the remaining $250 million portion of a subsidiary’s $650 million long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007, and $312 million of commercial paper that had been issued in the same quarter. Other reductions in the third quarter included $662 million of notes with coupon rates ranging from 4% to 7.35% and original maturities from 2009 to 2029, and the repayment of $150 million of 7.10% notes with a maturity date of September 2005. In June 2005, International Paper repaid approximately $400 million of a subsidiary’s long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007. 65 In February 2005, International Paper redeemed the outstanding $464 million aggregate principal amount of International Paper Capital Trust 5.25% convertible subordinated debentures originally due in July 2025 at 100.5% of par plus accrued interest. Other reductions in the first quarter of 2005 included early payment of approximately $295 million of principal on notes with coupon rates ranging from 4% to 7.875% and original maturities from 2006 to 2015. Pre-tax early debt retirement expense of $57 million related to the above 2005 redemptions is included in Restructuring and other charges in the accompanying consolidated statement of operations. In December 2004, Timberlands Capital Corp. II, Inc., a former wholly-owned consolidated subsidiary of International Paper, redeemed $170 million of 4.5% preferred securities. In November 2004, these preferred securities were reclassified from Minority interest to Current maturities of long-term debt, pursuant to SFAS No. 150. Additionally during the fourth quarter of 2004, International Paper redeemed approximately $295 million of mostly domestic debt, including $108 million of 9.77% notes with a maturity date in December 2009 and $88 million of 6.9% industrial development bonds with a maturity date in August 2022. In In June 2004, an International Paper wholly-owned subsidiary issued $650 million of long-term debt with an interest rate of LIBOR plus 62.5 basis points that can vary depending upon the credit rating of the Company and a maturity date in June 2007, which refinanced $650 million of long-term debt with an interest rate of LIBOR plus 100 basis points and a maturity date in August 2004. In March 2004, International Paper issued $600 million of 4.00% notes due April 2010 and $400 million of 5.25% notes due April 2016. The proceeds from these issuances were used in April 2004 to retire approximately $1.0 billion of 8.125% coupon rate debt with an original maturity date in July 2005. In A pre-tax early debt retirement expense of $92 million related to the above 2004 redemptions is included in Restructuring and other charges in the accompanying consolidated statement of operations. 8 7/8% to 10% notes – due 2011 – 2012 9.25% debentures – due 2011 7% to 7 7/8% notes – due 2006 – 2007 6 7/8% notes – due 2023 – 2029 6.75% notes – due 2011 6.65% notes – due 2037 6.4% notes to 6.5% notes – due 2006 – 2007 6.4% to 7.75% debentures – due 2025 – 2027 5.85% notes – due 2012 5 1/4% convertible subordinated debentures 5.25% to 5.5% notes – due 2014 – 2016 5 3/8% euro notes – due 2006 5 1/8% debentures – due 2012 3.8% to 4.25% notes – due 2008 – 2010 Zero-coupon convertible debentures – due 2021 Medium-term notes – due 2006 – 2009 (a) Floating rate notes – due 2006 – 2010 (b) Environmental and industrial development bonds – due 2006 – 2033 (c,d) Commercial paper and bank notes (e) Other (f) Total (g) Less: Current maturities Long-term debt 66 Total maturities of long-term debt over the next five years are 2006—$1.2 billion; 2007—$570 million; 2008—$308 million; 2009—$2.3 billion; and 2010—$1.5 billion. At December At December 31, 2005, International The At December 31, 2005, outstanding debt included approximately Maintaining a held long-term credit ratings of A summary of long-term debt follows: Total maturities of long-term debt over the next five years are 2005 - $506 million; 2006 - $882 million; 2007 - $1.2 billion; 2008 - $326 million; and 2009 - $1.3 billion. At December 31, 2004 and 2003, International Paper classified $87 million and $1.5 billion, respectively, of tenderable bonds, commercial paper and bank notes and Current maturities of long-term debt as Long-term debt. International Paper has the intent and ability to renew or convert these obligations, as evidenced by the available bank credit agreements described below. At December 31, 2004, International Paper’s unused contractually committed bank credit agreements amounted to $3.2 billion. The agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. In March 2004, International Paper replaced its maturing $750 million bank credit agreement with a five-year, $1.25 billion bank credit facility maturing in March 2009. Concurrently, an existing three-year bank credit agreement maturing in March 2006 was reduced from $1.5 billion to $750 million. These agreements have a facility fee of 0.15% that is payable quarterly. In addition, in November 2004, International Paper amended its receivables securitization program established in December 2001 to increase the line of credit from $650 million to $1.2 billion of commercial paper-based financings, based on the amount of qualifying receivables. The program extends through November 2007 with a facility fee of 0.20%. There were no borrowings under either the bank credit agreements or receivables securitization program at December 31, 2004. In November 2004, CHH entered into a short-term multi- currency credit facility with a NZ$400 million line of credit that extends through August 2005 with a facility fee of 0.05%. Also, CHH has an existing NZ$ 325 million multi-currency credit facility that supports its commercial paper program. This facility matures in two tranches from 2006 to 2008. The facility fee ranges from 0.27% to 0.32% at current credit ratings and is payable quarterly. The unused portion of these facilities at December 31, 2004 amounted to approximately NZ$344 million. At December 31, 2004, outstanding debt included approximately $227 million of commercial paper and bank notes with interest rates that fluctuate based on market conditions and the Company’s credit rating. Maintaining a strong investment-grade rating is an important element of International Paper’s corporate finance strategy. At December 31, 2004, the Company held long-term credit ratings of BBB (negative outlook) and Baa2 (negative outlook) by Standard & Poor’s (S&P) and Moody’s Investor Services (Moody’s), respectively. The Company currently has short-term credit ratings by S&P and Moody’s of A-3 and P-2, respectively. In millions at December 31 2004 2003 8 7/8% to 10% notes - due 2011 - 2012 $ 175 $ 392 8 7/8% notes –– 305 9.25% debentures - due 2011 125 125 8 3/8% to 9 1/2% debentures - due 2015 - 2024 300 300 8 1/8% notes –– 1,000 7 7/8% subordinated debentures –– 830 7% to 7 7/8% notes - due 2005 - 2007 649 1,041 6 7/8% notes - due 2023 - 2029 394 544 6.75% notes - due 2011 1,000 1,000 6.65% notes - due 2037 97 94 6.5% notes - due 2007 149 149 6.4% to 7.75% debentures - due 2025 - 2027 797 791 5.85% notes - due 2012 1,202 1,202 5 1/4% convertible subordinated debentures - due 2025 464 464 5.25% to 5.5% notes - due 2014 - 2015 1,596 1,197 5 3/8% euro notes - due 2006 334 308 5 1/8% debentures - due 2012 102 99 3.8% to 4.25% notes - due 2008 - 2010 1,399 799 Zero-coupon convertible debentures - due 2021 1,141 1,099 Medium-term notes - due 2006 - 2009 (a) 43 52 Floating rate notes - due 2006 - 2010 (b) 1,794 1,127 Environmental and industrial development bonds - due 2005 - 2033 (c,d) 2,150 2,317 Commercial paper and bank notes (e) 227 53 Other (f) 500 249 Total (g) 14,638 15,537 Less: Current maturities 506 2,087 Long-term debt $ 14,132 $ 13,450 (a) The weighted average interest rate on these notes was 8.1% in 2004 and 2003. (b) The weighted average interest rate on these notes was 2.9% in 2004 and 2.4% in 2003. Includes $670 million of Euro borrowings with a weighted average interest rate of 2.7% in 2004. (c) The weighted average interest rate on these bonds was 5.6% in 2004 and 5.8% in 2003. (d) Includes $22 million of bonds at December 31, 2004 and $23 million of bonds at December 31, 2003, which may be tendered at various dates and/or under certain circumstances. (e) The weighted average interest rate was 6.1% in 2004 and 4.2% in 2003. Includes $162 million of New Zealand dollar commercial paper borrowings with an interest rate of 6.8% in 2004. (f) Includes $245 million of Australian dollar borrowings with a fixed interest rate of 5.5% and $29 million of New Zealand dollar borrowings with a fixed interest rate of 6.8% in 2004. Also includes $54 million at December 31, 2004 and $86 million at December 31, 2003 related to interest rate swaps treated as fair value hedges. (g) The fair market value was approximately $15.3 billion at December 31, 2004 and $16.4 billion at December 31, 2003. Contingently Convertible Securities Included in debt at December 31, These debentures may be converted into shares of the Company’s common stock at a conversion ratio of 9.5111 shares per $1,000 principal amount at maturity of debentures, which was equal to an initial conversion price of $50.01 per share of the Company’s common stock. The debenture holders may convert their debentures into the Company’s common stock prior to maturity under any of the following circumstances: (1) the closing sales price of the Company’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the day prior to the surrender date is more than 120% (declining by .256% at the end of each semi-annual period over the life of the debentures to 110%) of the then-current conversion price; (2) International Paper’s credit rating is downgraded by each of Moody’s and S&P to below Baa3 and BBB-, respectively; (3) the Company has called the notes for redemption; (4) the Company distributes to all holders of the Company’s common stock certain rights entitling them to purchase, for a period expiring within 60 days, common stock at less than the closing sales price of the Company’s common stock at the time; or (5) the Company distributes to all holders of Security holders have the right to require repurchase of these securities on June amount to the repurchase date. 67 The repurchase may be for International Paper common stock or cash, or a combination of both, at the Company’s option. International Paper also has the option to redeem the securities for cash after June 19, 2006. On or after June 20, 2006, and prior to June 20, 2008, the redemption may only occur if the closing sales price of the Company’s common stock exceeds 120% of the then-current conversion price for at least 20 trading days in the 30 consecutive trading days ending on the date redemption notice is given. On or after June 20, 2008, the redemption price will be equal to the then-accreted principal amount plus any accrued and unpaid cash interest to the redemption date. NOTE 13 DERIVATIVES AND HEDGING ACTIVITIES International Paper periodically uses derivatives and other financial instruments to hedge exposures to interest rate, commodity and currency risks. For hedges that meet the criteria under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” International Paper, at inception, formally designates and documents the instrument as a hedge of a specific underlying exposure, as well as the risk management objective and strategy for undertaking each hedge transaction. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the value or cash flows of the underlying exposures being hedged. Derivatives are recorded in the consolidated balance sheet at fair value, determined using available market information or other appropriate valuation methodologies, in Interest rate swaps may be used to manage interest rate risks associated with International Paper’s debt. Some of these instruments qualify for hedge accounting in accordance with SFAS No. 133, and others do not. Interest rate swap agreements with a total notional amount at December 31, The remainder of International Paper’s interest rate swap agreements qualify as fully effective fair value hedges under SFAS No. 133. At December 31, In 2005, interest rate swap hedges with a notional value of $313 million were terminated in connection with various early retirements of debt. The resulting gain of approximately $6 million is included in Restructuring and In 2004, International Paper cash settled interest rate swaption contracts for a loss of $10 million, which was recorded in earnings. In April 2004, interest rate swaps with a notional value of $500 million were terminated in connection with the early retirement of International Paper’s $1.0 billion notes due in July 2005. The resulting gain of approximately $14 million is included in Restructuring and other charges in the accompanying consolidated statement of operations (see Note 6). To minimize volatility in earnings due to large fluctuations in the price of commodities, International Paper commodity purchased. In 2005, there was no reclassification from OCI to earnings related to commodity hedging, and in 2004, the reclassification to earnings was immaterial. For the year ended December 31, 68 net fair value of energy hedge contracts as of December 31, International Paper’s policy has been to hedge certain investments in non-U.S. operations Foreign exchange contracts (including forward, swap and purchase option contracts) are also used to hedge certain transactions, primarily trade receipts and payments denominated in foreign currencies, to manage volatility associated with these transactions and to protect International Paper from currency fluctuations between the contract date and ultimate settlement. These contracts, most of which have been designated as cash flow hedges, had maturities of four years or less as of December 31, 2005. For the years ended December 31, 2005, 2004 and 2003, net unrealized gains after taxes and minority interest totaling $48 million, $72 million and $53 million, respectively, were recorded to OCI. Net after-tax gains of $14 million, $4 million and $10 million were reclassified to earnings. Gains relating to CHH, after taxes and minority interest, totaling $14 million, $22 million and $31 million are included in Discontinued operations for the years ended December 31, 2005, 2004 and 2003, respectively. Cumulative OCI after-tax and minority interest gains of $40 million are included in the gain on sale of CHH in Discontinued operations in 2005. As of December 31, 2005, gains of $19 million after taxes are expected to be reclassified to earnings in 2006. Other contracts are used to offset the earnings impact relating to the variability in exchange rates on certain short-term monetary assets and liabilities denominated in non-functional currencies and are not designated as hedges. Changes in the fair value of these instruments, recognized currently in earnings to offset the remeasurement of the related assets and liabilities, were not significant. International Paper does not hold or issue financial instruments for trading purposes. The counterparties to swap agreements and foreign exchange contracts consist of a number of major international financial institutions. International Paper continually monitors its positions with and the credit quality of these financial institutions and does not expect nonperformance by the counterparties. NOTE 14 CAPITAL STOCK The authorized capital stock at both December 31, 2005 and 2004, consisted of 990,850,000 shares of common stock, $1 par value; 400,000 shares of cumulative $4 preferred stock, without par value (stated value $100 per share); and 8,750,000 shares of serial preferred stock, $1 par value. The serial preferred stock is issuable in one or more series by the Board of Directors without further shareholder action. been designated as cash flow hedges, had maturities of five years or less as of December 31, 2004. For the years ended December 31, 2004, 2003 and 2002, net unrealized gains totaling $72 million, $53 million and $49 million after taxes and minority interest, respectively, were recorded to OCI. Net gains after taxes and minority interest of $26 million, $41 million and $14 million were reclassified to earnings for the years ended December 31, 2004, 2003 and 2002, respectively. Of the net gains reclassified to earnings in 2004, $6 million related to hedges that are no longer probable. As of December 31, 2004, gains of $40 million after taxes and minority interest are expected to be reclassified to earnings in 2005. Other contracts are used to offset the earnings impact relating to the variability in exchange rates on certain short-term monetary assets and liabilities denominated in non-functional currencies and are not designated as hedges. Changes in the fair value of these instruments, recognized currently in earnings to offset the remeasurement of the related assets and liabilities, were not significant. International Paper does not hold or issue financial instruments for trading purposes. The counterparties to swap agreements and foreign exchange contracts consist of a number of major international financial institutions. International Paper continually monitors its positions with and the credit quality of these financial institutions and does not expect nonperformance by the counterparties. NOTE 14 CAPITAL STOCK The authorized capital stock at both December 31, 2004 and 2003 consisted of 990,850,000 shares of common stock, $1 par value; 400,000 shares of cumulative $4 preferred stock, without par value (stated value $100 per share); and 8,750,000 shares of serial preferred stock, $1 par value. The serial preferred stock is issuable in one or more series by the Board of Directors without further shareholder action. NOTE 15 RETIREMENT PLANS U.S. International Paper maintains pension plans that provide retirement benefits to substantially all domestic employees hired prior to July 1, 2004. These employees generally are eligible to participate in the plans upon completion of one year of service and attainment of age 21. Employees hired after June 30, 2004, who are not eligible for this pension plan The plans provide defined benefits based on years of credited service and either final average earnings (salaried employees), hourly job rates or specified benefit rates (hourly and union employees). International Paper makes contributions that are sufficient to fully fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). International Paper made no 69 years. While the amount of any required contributions after 2006 will depend upon the final rules adopted and other factors, including changes in discount rates and actual plan asset returns, the Company currently estimates that a contribution in 2007 of $40 million to $200 million may be required. The nonqualified plan is only funded to the extent of benefits paid, which are expected to be Net Periodic Pension Expense Service cost is the actuarial present value of benefits attributed by the plans’ benefit formula to services rendered by employees during the year. Interest cost represents the increase in the projected benefit obligation, which is a discounted amount, due to the passage of time. The expected return on plan assets reflects the computed amount of current year earnings from the investment of plan assets using an estimated long-term rate of return. Net periodic pension expense Service cost Interest cost Expected return on plan assets Actuarial loss Amortization of prior service cost Net periodic pension expense (a) International Paper evaluates its actuarial assumptions annually as of December 31 (the measurement date) and considers changes in these long-term factors based upon market conditions and the requirements of SFAS No. 87, “Employers’ Accounting for Pensions.” These assumptions are used to calculate benefit obligations as of December 31 of the current year, and pension expense to be recorded in the following year. Weighted average assumptions used to determine net pension expense for 2005, 2004 and 2003 were as follows: Discount rate Expected long-term return on plan assets Rate of compensation increase Weighted average assumptions used to determine benefit obligations as of December 31, 2005 and 2004, were as follows: Discount rate Rate of compensation increase 70 The following illustrates the effect on pension expense for 2006 of a 25 basis point decrease in the above assumptions: Expense/(Income): Discount rate Expected long-term return on plan assets Rate of compensation increase Investment Policy / Strategy Plan assets are invested to maximize returns within prudent levels of risk. The target allocations by asset class are summarized in the following table. Investments are diversified across classes and within each class to minimize risk. The investment policy permits the use of swaps, options, forwards and futures contracts. Periodic reviews are made of investment policy objectives and investment manager performance. International Paper’s pension plan asset allocations by type of fund at December 31, 2005 and 2004, and target allocations by asset category are as follows: Equity securities Debt securities Real estate Other Total No plan assets were invested in International Paper common stock at December 31, 2005 or 2004. At December 31, 2005, projected future pension benefit payments are as follows: 2006 2007 2008 2009 2010 2011 – 2015 Strong actual returns on plan assets in the fourth quarter of 2004 increased the market value of plan assets by more than the increase in the ABO, resulting in a reduction in the required additional minimum pension liability. As a result, a credit to after-tax OCI was recognized in the amount of $41 million at December 31, 2004. At December 31, 2005, the change in the mortality assumption increased the ABO by more than plan assets requiring an after-tax charge to OCI of $290 million. International Paper also incurred adjustments to the nonqualified plan additional minimum liabilities and recorded after-tax charges to OCI of $14 million and $8 million, at December 31, 2005 and 2004, respectively. The following table summarizes the projected and accumulated benefit obligations and fair values of plan assets for the qualified and nonqualified defined benefit plans at December 31, 2005 and 2004: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Unrecognized Actuarial Losses SFAS No. 87 provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets and other assumption changes. These net gains and losses are recognized prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans (approximately 11 years as of December 31, 2005) to the extent that they are not offset by gains and losses in subsequent years. Unrecognized actuarial losses shown in the following table were $3.2 billion and $2.6 billion in 2005 and 2004, respectively. While actual future amortization charges will be affected by future gains/losses, the amortization of cumulative unrecognized losses as of December 31, 2005, is expected to increase pension expense by $68 million in 2006, while decreasing expense by $24 million in 2007 and $38 million in 2008. The following table shows the changes in the benefit obligation and plan assets for 2005 and 2004, and the plans’ funded status and amounts recognized in the consolidated balance sheet as of December 31, 2005 and 2004. The benefit obligation as of December 31, 2005, increased by $984 million, principally as a result of the change in the mortality assumption with a smaller impact from a decrease in the discount rate used in computing the estimated benefit obligation. Plan assets increased by $199 million, principally reflecting higher actual market returns. Change in projected benefit obligation: Benefit obligation, January 1 Service cost Interest cost Actuarial loss Benefits paid Acquisitions Divestitures Restructuring Special termination benefits Plan amendments Benefit obligation, December 31 Change in plan assets: Fair value of plan assets, January 1 Actual return on plan assets Company contributions Benefits paid Fair value of plan assets, December 31 Funded status Unrecognized actuarial loss Unamortized prior service cost Prepaid benefit costs Amounts recognized in the consolidated balance sheet consist of: Accrued benefit liability Intangible asset Minimum pension liability adjustment included in accumulated other comprehensive income Net amount recognized Generally, International Paper’s non-U.S. pension plans are funded using the projected benefit as a target, except in certain countries where funding of benefit plans is not required. Net periodic pension expense Service cost Interest cost Expected return on plan assets Actuarial loss Curtailment gain Estimated expenses Net periodic pension expense (a) Weighted average assumptions used to determine net pension expense for 2005, 2004 and 2003 were as follows: Discount rate Expected long-term return on plan assets Rate of compensation increase Discount rate Rate of compensation increase The difference between the assumptions used to determine benefit obligations and the assumptions used to determine net pension expense is due to Carter Holt Harvey and Weldwood divestitures being disclosed in the benefit obligation rollforward and not in the net pension expense assumptions. Change in projected benefit obligation: Benefit obligation, January 1 Obligations for additional plans Service cost Interest cost Participants’ contributions Plan amendments Divestitures Curtailment gains Actuarial loss Benefits paid Effect of foreign currency exchange rate movements Benefit obligation, December 31 Change in plan assets: Fair value of plan assets, January 1 Assets for additional plans Actual return on plan assets Administrative expenses Company contributions Benefits paid Participants’ contributions Divestitures Effect of foreign currency exchange rate movements Fair value of plan assets, December 31 Funded status Unrecognized actuarial loss Unrecognized transition asset Unamortized prior service cost Prepaid benefit costs Amounts recognized in the consolidated balance sheet consist of: Prepaid benefit cost Accrued benefit liability Intangible asset Minimum pension liability adjustment included in accumulated other comprehensive income Net amount recognized The reductions in the benefit obligation and in plan assets in 2005 are mainly due to the sale of CHH. For non-U.S. plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligations, accumulated benefit obligations and fair values of plan assets totaled $232 million, $207 million, and OTHER PLANS International Paper sponsors defined contribution plans (primarily 401(k) plans) to provide substantially all U.S. salaried and As determined by the provisions of each plan, International Paper matches the employees’ basic voluntary contributions and, for employees hired after June 30, 2004, contributes an additional percentage of pay. Such contributions to the plans totaled approximately $88 million, $87 million and $95 million for the plan years ending in 2005, 2004 and 2003, respectively. The net assets of these plans were term rate of return on plan assets and an increase in the amortization of unrecognized actuarial losses, with smaller impacts from reductions in the discount rate and the assumed rate of future compensation increase. International Paper evaluates its actuarial assumptions annually as of December 31 (the measurement date) and considers changes in these long-term factors based upon market conditions and the requirements of SFAS No. 87, “Employers’ Accounting for Pensions.” These assumptions are used to calculate benefit obligations as of December 31 of the current year and pension expense to be recorded in the following year. Weighted average assumptions used to determine net pension expense (income) for 2004, 2003 and 2002 were as follows: discount rate to 5.75% in 2005 from 6.00% in 2004, and a decrease in the expected return on assets to 8.50% in 2005 from 8.75% in 2004. The following illustrates the effect on pension expense for 2005 of a 25 basis point decrease in these assumptions: In millions 2005 Expense/(Income): Discount rate $22 Expected long-term return on plan assets 16 Rate of compensation increase (5 ) 2004 2003 2002 Investment Policy / Strategy Plan assets are invested to maximize returns within prudent levels of risk and to maintain full funding of the benefit obligations. The target allocations by asset class are summarized in the following table. Investments are diversified across classes and within each class to minimize risk. The investment policy permits the use of swaps, options, forwards and futures contracts. Periodic reviews are made of investment policy objectives and investment managers. International Paper’s pension plan asset allocation by type of fund at December 31, 2004 and 2003, and target allocations by asset category are as follows: Discount rate 6.00 % 6.50 % 7.25 % Expected long-term return on plan assets 8.75 % 8.75 % 9.25 % Rate of compensation increase 3.25 % 3.75 % 4.50 % Weighted average assumptions used to determine benefit obligations as of December 31, 2004 and 2003 were as follows: 2004 2003 at December 31, Discount rate 5.75 % 6.00 % Asset Category Target 2004 2003 Rate of compensation increase 3.25 % 3.25 % The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. Projected rates of return are developed through an asset/liability study, in which projected returns for each of the plan’s asset classes are determined after analyzing historical experience and future expectations of returns and volatility of the various asset classes. Based on the target asset allocation for each asset class, the overall expected rate of return for the portfolio is developed considering the effects of active portfolio management and expenses paid from plan assets. The discount rate assumption is determined based on a yield curve that incorporates approximately 570 Aa-graded bonds. The plan’s projected cash flows are then matched to the yield curve to develop the discount rate. To calculate pension expense for 2005, the Company will use an expected long-term rate of return on plan assets of 8.50%, a discount rate of 5.75% and an assumed rate of compensation increase of 3.25%. The Company estimates that it will record net pension expense of approximately $210 million for its U.S. defined benefit plans in 2005, principally reflecting an increase in the amortization of unrecognized actuarial losses over a shorter average remaining service period, a decrease in the assumed Equity securities 52% - 63% 62 % 62 % Debt securities 26% - 34% 27 % 27 % Real estate 5% - 10% 8 % 8 % Other 2% - 8% 3 % 3 % Total 100 % 100 % No plan assets were invested in International Paper common stock at December 31, 2004 or 2003. At December 31, 2004, total future pension benefit payments are estimated as follows: In millions 2005 $ 516 2006 511 2007 508 2008 510 2009 514 2010 - 2014 2,746 Minimum Pension Liability Adjustment At December 31, 2002, International Paper’s qualified defined benefit pension plan had a prepaid benefit cost of approximately $1.7 billion. At the same date, the market value of the plan assets was less than the accumulated benefit obligation (ABO) for this plan. In accordance with the requirements of SFAS No. 87, the prepaid asset was reversed and an additional minimum liability of $2.7 billion was established equal to the shortfall of the market value of plan assets below the ABO plus the prepaid benefit cost. This resulted in an after-tax direct charge to Accumulated other comprehensive income (OCI) of $1.5 billion, with no impact on earnings, earnings per share or cash. This reduction to Shareholders’ equity had no adverse affect on International Paper’s debt covenants. Strong actual returns on plan assets in the fourth quarters of 2004 and 2003 increased the market value of plan assets by more than the increase in the ABO, resulting in a reduction in the required additional minimum pension liability. As a result, credits to after-tax OCI were recognized in the amount of $41 million and $163 million at December 31, 2004 and 2003, respectively. International Paper also incurred adjustments to the nonqualified plan additional minimum liabilities and recorded charges to OCI of $8 million and $13 million, at December 31, 2004 and 2003, respectively. The following table summarizes the projected and accumulated benefit obligations and fair values of plan assets for the qualified and nonqualified defined benefit plans at December 31, 2004 and 2003: million in 2005 and $41 million in 2006, while decreasing expense by $14 million in 2007. The following table shows the changes in the benefit obligation and plan assets for 2004 and 2003, and the plans’ funded status and amounts recognized in the consolidated balance sheet as of December 31, 2004 and 2003. The benefit obligation as of December 31, 2004 increased by $395 million, principally as a result of a decrease in the discount rate used in computing the estimated benefit obligation. Plan assets increased by $309 million, principally reflecting higher actual market returns. In millions 2004 2003 Change in projected benefit obligation: Benefit obligation, January 1 $ 7,899 $ 7,111 Service cost 115 107 Interest cost 467 469 Actuarial loss 288 555 Benefits paid (537 ) (486 ) Acquisitions 1 – Restructuring 1 (13 ) Special termination benefits 1 6 Plan amendments 59 150 Benefit obligation, December 31 $ 8,294 $ 7,899 In millions Change in plan assets: Projected benefit obligation $ 8,294 $ 7,899 Fair value of plan assets, January 1 $ 6,436 $ 5,584 Accumulated benefit obligation 7,927 7,572 Actual return on plan assets 797 1,318 Fair value of plan assets 6,745 6,436 Company contributions 49 18 Benefits paid (537 ) (486 ) Unrecognized Actuarial Losses SFAS No. 87 provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets, and other assumption changes. These net gains and losses are recognized prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans (approximately 13 years) to the extent that they are not offset by gains and losses in subsequent years. Unrecognized actuarial losses shown in the following table were $2.6 billion in 2004 and 2003. While actual future amortization charges will be affected by future gains/losses, amortization of cumulative unrecognized losses as of December 31, 2004 is expected to increase pension expense by approximately $53 Acquisitions – 4 Divestitures – (2 ) Fair value of plan assets, $ 6,745 $ 6,436 Funded status $ (1,549 ) $ (1,463 ) Unrecognized actuarial loss 2,632 2,645 Unamortized prior service cost 330 300 Prepaid benefit costs $ 1,413 $ 1,482 Amounts recognized in the consolidated balance sheet consist of: Accrued benefit liability $ (1,182 ) $ (1,136 ) Intangible asset 330 300 Minimum pension liability adjustment included in accumulated other comprehensive income 2,265 2,318 Net amount recognized $ 1,413 $ 1,482 Non-U.S. Defined Benefit Plans Generally, International Paper’s non-U.S. pension plans are funded using the projected benefit as a target, except in certain countries where funding of benefit plans is not required. Net periodic pension expense for non-U.S. plans was as follows: and certain hourly employees of International Paper an opportunity to accumulate personal funds, and to provide additional benefits to employees hired after June 30, 2004 for their retirement. Contributions may be made on a before-tax basis to substantially all of these plans. As determined by the provisions of each plan, International Paper matches the employees’ basic voluntary contributions and, for employees hired after June 30, 2004, contributes an additional percentage of pay. Such contributions to the plans totaled approximately $87 million, $95 million and $66 million for the plan years ending in 2004, 2003 and 2002, respectively. The net assets of these plans were approximately $4.3 billion as of the 2004 plan year-end including approximately $789 million (18.5%) in International Paper common stock. NOTE 16POSTRETIREMENT BENEFITS U.S. International Paper provides certain retiree health care and life insurance benefits covering a majority of U.S. salaried and certain hourly employees. These employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. Excluded from company-provided medical benefits are salaried employees whose age plus years of employment with the Company On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. This Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. 73 In accordance with FSP FAS 106-2, the effects of the Act on International Paper’s plans have been recorded prospectively beginning July 1, 2004. This resulted in a reduction The components of postretirement benefit expense in 2005, 2004 and 2003 were as follows: Service cost Interest cost Actuarial loss Amortization of prior service cost Net postretirement benefit cost (a) International Paper evaluates its actuarial assumptions annually as of December 31 (the measurement date) and considers changes in these long-term factors based upon market conditions and the requirements of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The discount rates used to determine net cost for the years ended December 31, 2005, 2004 and 2003, were as follows: Discount rate The weighted average assumptions used to determine the benefit obligation at December 31, 2005 and 2004, were as follows: Discount rate Health care cost trend rate assumed for next year Rate that the cost trend rate gradually declines to Year that the rate reaches the rate it is assumed to remain A 1% increase in the assumed annual health care cost trend rate would have increased the accumulated postretirement benefit obligation at December 31, 2005, by The plan Change in benefit obligation: Benefit obligation, January 1 Service cost Interest cost Participants' contributions Actuarial gain Benefits paid Plan amendments Divestitures Restructuring Special termination benefits Benefit obligation, December 31 Change in plan assets: Fair value of plan assets, January 1 Company contributions Participants' contributions Benefits paid Fair value of plan assets, December 31 Funded status Unamortized prior service cost Unrecognized actuarial loss Accrued benefit cost 74 At December 31, 2005, estimated total future postretirement benefit payments, net of participant contributions and estimated future Medicare Part D subsidy receipts are as follows: 2006 2007 2008 2009 2010 2011 – 2015 NON-U.S. POSTRETIREMENT BENEFITS In addition to the U.S. plan, certain Canadian and Brazilian employees are eligible for retiree health care and life insurance. Net postretirement benefit cost for our non-U.S. plans was $3 million for 2005 and $2 million for 2004. The benefit obligation for these plans was $21 million in 2005 and $20 million in 2004. NOTE 17 INCENTIVE PLANS International Paper currently has a Long-Term Incentive Compensation Plan (LTICP) that includes a Stock Option Program, a Restricted Performance Share Program and a Continuity Award Program, administered by a committee of nonemployee members of the Board of Directors (Committee) who are not eligible for awards. Also, stock appreciation rights (SAR’s) have been awarded to employees of a non-U.S. subsidiary, with 5,135 and 5,435 rights outstanding at December 31, 2005 and 2004, respectively. We also have other performance-based restricted share/unit programs available to senior executives and directors. International Paper applies the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” in accounting for our plans. SFAS No. 123(R) will be adopted effective January 1, 2006. As no unvested stock options were outstanding at this date, the Company believes that the adoption will not have a material impact on its consolidated financial statements. STOCK OPTION PROGRAM International Paper accounts for stock options using the intrinsic value method under APB Opinion No. 25. Under this method, compensation expense is recorded over the related service period when the market price exceeds the option price at the measurement date, which is the grant date for International Paper’s options. No compensation expense is recorded as options are issued with an exercise price equal to the market price of International Paper stock on the grant date. During each reporting period, fully diluted earnings per share is calculated by assuming that “in-the-money” options are exercised and the exercise proceeds are used to repurchase shares in the marketplace. When options are actually exercised, option proceeds are credited to equity and issued shares are included in the computation of earnings per common share, with no effect on reported earnings. Equity is also increased by the tax benefit that International Paper will receive in its tax return for income reported by the optionees in their individual tax returns. 75 For pro forma disclosure purposes (see Note 1), the fair market value of each option grant has been estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in Initial Options (a) Risk-Free Interest Rate Price Volatility Dividend Yield Expected Term in Years Replacement Options (b) Risk-Free Interest Rate Price Volatility Dividend Yield Expected Term in Years The following summarizes the status of Outstanding at December 31, 2002 Granted Exercised Forfeited Expired Outstanding at December 31, 2003 Granted Exercised Forfeited Expired Outstanding at December 31, 2004 Granted Exercised Forfeited Expired Outstanding at December 31, 2005 The following table $29.31 – $33.80 $33.81 – $39.77 $39.78 – $45.74 $45.75 – $51.71 $51.72 – $57.68 $57.69 – $63.65 $63.66 – $66.81 76 Under the The following summarizes the activity of The components of postretirement benefit expense in 2004, 2003 and 2002 were as follows: A 1% increase in the assumed annual health care cost trend rate would have increased the accumulated postretirement benefit obligation at December 31, 2004 by approximately $54 million. A 1% decrease in the annual trend rate would have decreased the accumulated postretirement benefit obligation at December 31, 2004 by approximately $50 million. The effect on net postretirement benefit cost from a 1% increase or decrease would be approximately $4 million. The plan is only funded in an amount equal to benefits paid. The following table presents the changes in benefit obligation and plan assets for 2004 and 2003: In millions 2004 2003 2002 Service cost $ 6 $ 7 $ 8 Interest cost 52 54 59 Actuarial loss 35 23 12 Amortization of prior service cost (40 ) (29 ) (20 ) In millions 2004 2003 Net postretirement benefit cost (a) $ 53 $ 55 $ 59 Change in benefit obligation: Benefit obligation, January 1 $ 1,000 $ 890 (a) Excludes $1.0 million, $5.3 million and $1.2 million of curtailment gains in 2004, 2003 and 2002, respectively, and $1.0 million and $1.3 million of special termination benefits in 2004 and 2003, respectively, related to cost reduction programs and facility rationalizations that were recorded in Restructuring and other charges in the consolidated statement of operations. Also excludes $1 million of curtailment gains in 2002 related to the divestitures of Masonite, Flexible Packaging, Decorative Products and other smaller businesses that were recorded in Net losses (gains) on sales and impairments of businesses held for sale in the consolidated statement of operations. International Paper evaluates its actuarial assumptions annually as of December 31 (the measurement date) and considers changes in these long-term factors based upon market conditions and the requirements of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The discount rate assumptions used to determine net cost for the years ended December 31, 2004, 2003 and 2002 were as follows: Service cost 6 7 Interest cost 52 54 Participants’ contributions 38 31 Actuarial (gain) loss (118 ) 292 Benefits paid (138 ) (134 ) Plan amendments (5 ) (141 ) Restructuring 2 – Special termination benefits 1 1 Benefit obligation, December 31 $ 838 $ 1,000 Change in plan assets: Fair value of plan assets, January 1 $ – $ – Company contributions 100 103 Participants’ contributions 38 31 Benefits paid (138 ) (134 ) Fair value of plan assets, December 31 2004 2003 2002 Discount rate 6.00% 6.38% 7.25% Funded status $ (838 ) $ (1,000 ) Unamortized prior service cost (229 ) (267 ) The weighted average assumptions used to determine the benefit obligation at December 31, 2004 and 2003 were as follows: Unrecognized actuarial loss 357 510 Accrued benefit cost $ (710 ) $ (757 ) At December 31, 2004, estimated total future postretirement benefit payments, net of participant contributions, and estimated future Medicare Part D subsidy receipts are as follows: 2004 2003 Discount rate 5.75% 6.00% Health care cost trend rate assumed for the next year 10.00% 10.00% In millions Benefit Subsidy Rate that the cost trend rate gradually declines to 5.00% 5.00% Year that the rate reaches the rate it is assumed to remain 2009 2008 2005 $ 95 $ – 2006 94 (11 ) 2007 92 (11 ) 2008 89 (11 ) 2009 86 (11 ) 2010 - 2014 390 (55 ) Non-U.S. Postretirement Benefits In addition to the U.S. plan, certain Canadian and Brazilian employees are eligible for retiree health care and life insurance. Net postretirement benefit costs for our non-U.S. plans were $5 million for 2004, which excludes $22.1 million of income for settlements related to the divestiture of Weldwood that were recorded in net losses on sales in Discontinued operations in the consolidated statement of operations, and $5 million for 2003. The benefit obligation for these plans was $20 million in 2004 and $43 million in 2003. The reduction in benefit obligation reflects the sale of Weldwood. NOTE 17 INCENTIVE PLANS International Paper currently has a Long-Term Incentive Compensation Plan (LTICP) that includes a Stock Option Program, a Restricted Performance Share Program and a Continuity Award Program, administered by a committee of nonemployee members of the Board of Directors (Committee) who are not eligible for awards. Also, stock appreciation rights (SAR’s) have been awarded to employees of a non-U.S. subsidiary, with 5,435 and 9,710 issued and outstanding at December 31, 2004 and 2003, respectively. We also have other performance-based restricted share/unit programs available to senior executives and directors. International Paper applies the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” in accounting for our plans. Stock Option Program International Paper accounts for stock options using the intrinsic value method under APB Opinion No. 25. Under this method, compensation expense is recorded over the related service period when the market price exceeds the option price at the measurement date, which is the grant date for International Paper’s options. No compensation expense is recorded as options are issued with an exercise price equal to the market price of International Paper stock on the grant date. Under the program, officers and certain other employees may be granted options to purchase International Paper common stock. The option price is the market price of the stock on the close of business on the day prior to the date of grant. Options must be vested before they can be exercised. Upon exercise of an option, a replacement option may be granted under certain circumstances with an exercise price equal to the market price at the time of exercise and with a term extending to the expiration date of the original option. Beginning in 2005, U.S. employees will no longer receive stock option awards. These benefits will be replaced with performance share awards or enhanced management incentive plan awards. For pro forma disclosure purposes, the fair market value of each option grant has been estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2004, 2003 and 2002, respectively: 2004 2003 2002 Initial Options (a) Risk-Free Interest Rate 3.23% 2.46% 3.29% Price Volatility 24.41% 24.06% 33.99% Dividend Yield 2.53% 2.71% 2.74% Expected Term in Years 3.50 3.50 3.50 Replacement Options (b) Risk-Free Interest Rate 2.14% 1.59% 2.92% Price Volatility 22.83% 23.70% 38.62% Dividend Yield 2.30% 2.57% 2.33% Expected Term in Years 1.60 1.75 1.80 (a) The average fair market values of initial option grants during 2004, 2003 and 2002 were $6.90, $5.86 and $8.77, respectively. (b) The average fair market values of replacement option grants during 2004, 2003 and 2002 were $4.76, $4.39 and $8.59, respectively. The following summarizes the status of the Stock Option Program and the changes during the three years ending December 31, 2004: Under the Restricted Performance Share Program, contingent awards of International Paper common stock are granted by the Committee. Shares are earned on the basis of International Paper’s financial performance over a period of consecutive calendar years as determined by the Committee. Under a Restricted Performance Share Program approved during 2001 and amended in 2004, awards vesting over a three-year period were granted in 2002, 2003 and 2004. Compensation expense for this variable plan is recorded over the applicable vesting period. The following summarizes the activity of all performance-based programs for the three years ending December 31, 2004: Weighted Outstanding at December 31, 2001 29,110,125 $ 41.28 Granted 11,927,766 37.36 Exercised (1,345,421 ) 34.62 Forfeited (1,841,489 ) 40.51 Expired (696,961 ) 51.24 Outstanding at December 31, 2002 37,154,020 40.11 Shares Granted 11,315,401 37.08 Outstanding at December 31, 2001 1,214,100 Exercised (2,778,038 ) 31.87 Granted (a) 583,690 Forfeited (1,823,244 ) 41.19 Issued (330,437 ) Expired (1,062,311 ) 51.71 Forfeited (190,013 ) Outstanding at December 31, 2003 42,805,828 39.51 Outstanding at December 31, 2002 1,277,340 Granted 9,663,303 39.70 Granted (a) 658,155 Exercised (4,726,957 ) 34.60 Issued (586,237 ) Forfeited (1,059,215 ) 40.86 Forfeited (164,803 ) Expired (1,248,052 ) 51.40 Outstanding at December 31, 2003 1,184,455 Outstanding at December 31, 2004 45,434,907 $ 39.70 Granted (a) 1,581,442 Issued (391,691 ) (a) The table does not include Continuity Award tandem stock options described below. No fair market value is assigned to these options under SFAS No. 123. The tandem restricted shares accompanying these options are expensed over their vesting period. (b) The table includes options outstanding under an acquired company plan under which options may no longer be granted. Forfeited (128,957 ) Outstanding at December 31, 2004 2,245,249 (a) The weighted average fair value of performance shares granted was $42.95, $35.34 and $40.09 in 2004, 2003 and 2002, respectively. Continuity Award Program The Continuity Award Program provides for the granting of tandem awards of restricted stock and/or nonqualified stock options to key executives. Grants are restricted and awards conditioned on attainment of specified age and years of service requirements. Awarding of a tandem stock option results in the cancellation of the related restricted shares. The Continuity Award Program also provides for awards of restricted stock to key employees. The following table summarizes information about stock options outstanding at December 31, 2004: Options Outstanding Options Exercisable Range of Options Weighted Weighted Options Weighted $29.31-$33.80 6,995,810 6.6 $31.80 6,880,025 $31.77 $33.81-$39.77 20,253,440 7.7 $37.16 6,407,275 $36.34 $39.78-$45.74 12,435,641 6.8 $41.38 7,737,871 $41.84 $45.75-$51.71 2,023,345 3.6 $47.37 2,023,345 $47.37 $51.72-$57.68 594,292 0.8 $54.52 594,292 $54.52 $57.69-$63.65 2,954,179 4.5 $59.10 2,954,179 $59.10 $63.66-$66.81 178,200 5.0 $64.70 178,200 $64.70 45,434,907 6.8 $39.70 26,775,187 $40.69 2005: Outstanding at December 31, 2002 Granted (a) Issued Forfeited Outstanding at December 31, 2003 Granted (a) Issued Forfeited Outstanding at December 31, 2004 Granted (a) Issued (b) Forfeited Outstanding at December 31, 2005 CONTINUITY AWARD PROGRAM The Continuity Award Program provides for the granting of tandem awards of restricted stock and/or nonqualified stock options to key executives. Grants are restricted and awards conditioned on attainment of specified age and years of service requirements. Awarding of a tandem stock option results in the cancellation of the related restricted shares. The Continuity Award Program also provides for awards of restricted stock to key employees. The following summarizes the activity of the Continuity Award Program for the three years ending December 31, Outstanding at December 31, 2002 Granted (a) Issued Forfeited (b) Outstanding at December 31, 2003 Granted (a) Issued Forfeited (b) Outstanding at December 31, 2004 Granted (a) Issued Forfeited (b) Outstanding at December 31, 2005 At December 31, The compensation cost charged to earnings for all the incentive plans under the LTICP was $53 million for 2005 and $29 million for both 2004 and 77 International Paper Company In millions, except per share amounts and stock prices 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year 2004 Net Sales $ 6,138 $ 6,229 $ 6,578 $ 6,603 $ 25,548 Gross Margin(b) 1,518 1,599 1,720 1,715 6,552 Earnings From Continuing Operations 96 (c) 110 (e) 332 (g) 208 (h) 746 (c,e,g,h) Earnings (Loss) From Discontinued Operations 22 (d) 131 (d) (678) (d) 12 (d) (513 )(d) Net Earnings (Loss) 73 (c,d) 193 (d,e,f) (470) (d,g) 169 (d,h) (35 )(c-h) Basic Earnings Per Share of Common Stock Earnings From Continuing Operations $ 0.10 (c) $ 0.13 (e,f) $ 0.43 (g) $ 0.32 (h) $ 0.98 (c,e,f,g,h) Earnings (Loss) From Discontinued Operations 0.05 (d) 0.27 (d) (1.40) (d) 0.03 (d) (1.05 )(d) Net Earnings (Loss) 0.15 (c,d) 0.40 (d,e,f) (0.97) (d,g) 0.35 (d,h) (0.07 )(c-h) Diluted Earnings Per Share of Common Stock Earnings From Continuing Operations $ 0.10 (c) $ 0.13 (e,f) $ 0.42 (g) $ 0.32 (h) $ 0.98 (c,e,f,g,h) Earnings (Loss) From Discontinued Operations 0.05 (d) 0.27 (d) (1.33) (d) 0.03 (d) (1.05 )(d) Net Earnings (Loss) 0.15 (c,d) 0.40 (d,e,f) (0.91) (d,g) 0.35 (d,h) (0.07 )(c-h) Dividends Per Share of Common Stock 0.25 0.25 0.25 0.25 1.00 Common Stock Prices High $ 45.01 $ 44.81 $ 44.65 $ 42.52 $ 45.01 Low 39.80 37.91 38.22 37.12 37.12 2003 Net Sales $ 5,803 $ 5,965 $ 6,053 $ 6,134 $ 23,955 Gross Margin(b) 1,508 1,540 1,536 1,493 6,077 Earnings From Continuing Operations 128 (i) 92 (k) 65 (m) 7 (o) 292 (i,k,m,o) Earnings (Loss) From Discontinued Operations 1 (d) (5) (d) 9 (d) 16 (d) 21 (d) Net Earnings 44 (d,i,j) 88 (d,k,l) 122 (d,m,n) 48 (d,o,p) 302 (d,i-p) Basic Earnings Per Share of Common Stock $ 0.11 (i) $ 0.20 (k,l) $ 0.23 (m,n) $ 0.08 (o,p) $ 0.62 (i,k-p) Earnings (Loss) From Discontinued Operations – (d) (0.01) (d) 0.02 (d) 0.03 (d) 0.04 (d) Net Earnings 0.09 (d,i,j) 0.19 (d,k,l) 0.25 (d,m,n) 0.10 (d,o-q) 0.63 (d,i-q) Diluted Earnings Per Share of Common Stock Earnings From Continuing Operations $ 0.11 (i) $ 0.19 (k,l) $ 0.23 (m,n) $ 0.07 (o,p) $ 0.61 (i,k-p) Earnings (Loss) From Discontinued Operations – (d) (0.01) (d) 0.02 (d) 0.03 (d) 0.04 (d) Net Earnings 0.09 (d,i,j) 0.18 (d,k,l) 0.25 (d,m,n) 0.10 (d,o-q) 0.63 (d,i-q) Dividends Per Share of Common Stock 0.25 0.25 0.25 0.25 1.00 Common Stock Prices High $ 38.65 $ 39.39 $ 41.50 $ 43.32 $ 43.32 Low 33.09 33.17 35.31 36.57 33.09 INTERIM FINANCIAL RESULTS (UNAUDITED) (a) 2005 Net Sales Gross Margin (b) Earnings (Loss) From Continuing Operations Before Income Taxes and Minority Interest Earnings (Loss) From Discontinued Operations Net Earnings (Loss) Basic Earnings Per Share of Common Stock Earnings (Loss) From Continuing Operations Earnings (Loss) From Discontinued Operations Net Earnings (Loss) Diluted Earnings Per Share of Common Stock Earnings (Loss) From Continuing Operations Earnings (Loss) From Discontinued Operations Net Earnings (Loss) Dividends Per Share of Common Stock Common Stock Prices High Low 2004 Net Sales Gross Margin (b) Earnings From Continuing Operations Before Income Taxes and Minority Interest Earnings (Loss) From Discontinued Operations Net Earnings (Loss) Basic Earnings Per Share of Common Stock Earnings From Continuing Operations Earnings (Loss) From Discontinued Operations Net Earnings (Loss) Diluted Earnings Per Share of Common Stock Earnings From Continuing Operations Earnings (Loss) From Discontinued Operations Net Earnings (Loss) Dividends Per Share of Common Stock Common Stock Prices High Low Note: Since basic and diluted earnings per share are computed independently for each period and category, full year per share amounts may not equal the sum of the four quarters. 78 Footnotes to Interim Financial Results 59Exterior Siding and Roofing Litigationthat were filed against International Paper have been settled in recent years.1998 and 1999. Masonite was sold to Premdor Inc. in 2001. The liability for these settlements, as well as the corresponding insurance recoveries (each as further described below), were retained by the Company.(Hardboard Lawsuit)and settled on January 15, 1998 (the Hardboard Settlement). The plaintiffs alleged that hardboard siding manufactured by Masonite failsfailed prematurely, allowing moisture intrusion that in turn causescaused damage to the structure underneath the siding. The class consisted of all U.S. property owners having Masonite hardboard siding installed on and incorporated into buildings between January 1, 1980, and January 15, 1998. The Court granted final approval of the settlement on January 15, 1998. The settlement provides for monetary compensation to class members meeting the settlement requirements on a claims-made basis, which requires a class member to individually submit proof of damage to, or caused by, Masonite product, proof of square footage involved, and proofs of various other matters in order to qualify for payment with respect to a claim. It also provides for the payment of attorneys’ fees equaling 15% of the settlement amounts paid to class members, with a non-refundable advance of $47.5 million plus $2.5 million in costs. Those amounts were paid to class counsel in 1998. For siding that was installed between January 1, 1980, and December 31, 1989, the deadline for filing claims expired January 18, 2005, and for siding installed between January 1, 1990, through January 15, 1998, claims must be made by January 15, 2008.et.et al. v. Masonite Corporation, et. al.et al., was filed in 1997 (Omniwood Lawsuit)and settled on January 6, 1999 (the Omniwood Settlement). The plaintiffs made allegations with regard to Omniwood siding manufactured by Masonite whichthat were similar to those alleged in the Hardboard Lawsuit.with respect to hardboard siding. The class consisted of all U.S. property owners having Omniwood siding installed on and incorporated into buildings from January 1, 1992, to January 6, 1999. The settlementClaims relating to the Omniwood Lawsuit provides that qualified claimssiding must be made by January 6, 2009 for Omniwood siding that was installed between January 1, 1992 and January 6, 1999.2009.et. al.et al v. Masonite Corporation, et.et al.,, was filed in 1995 (Woodruf Lawsuit)and settled on January 6, 1999 (the Woodruf Settlement). The plaintiffs alleged that Woodruf roofing manufactured by Masonite iswas defective and causescaused damage to the structure underneath the roofing. The class consisted of all U.S. property owners who had incorporated and installed Masonite Woodruf roofing from January 1, 1980, to January 6, 1999. The settlement relating to the Woodruf Lawsuit providesFor roofing that for productwas installed between January 1,must be made byexpired January 6, 2006, and for productroofing installed between January 1, 1990, and January 6, 1999, claims must be made by January 6, 2009.The Court granted final approvalAll of the settlements of the Omniwood and Woodruf Lawsuits on January 6, 1999. The settlements provide for monetary compensation to class members meeting the settlement requirements on a claims- madeclaims-made basis, which requires a class member to individually submit proof of damage to, or caused by, Masonite product, proof of square footage involved and proofs of various other matters. TheAll of the settlements also provide for payment of attorneys’ fees equaling 15% (in the case of the Hardboard Settlement) and 13% (in the case of the Omniwood and Woodruf Settlements) of the settlement amounts paid to class members with a non-refundable advance of $1.7 million plus $75,000 in costs for eachmembers.two cases. Those amounts were paid in 1999.The liability for these matters was retained after the sale of Masonite to Premdor Inc. in 2001.Claim Filing and DeterminationOncesettlements, once a claim is determined to be valid, under the respective settlement agreement covering the claim, the amount of the claim is determined by reference to a negotiated compensation formula established under the settlement agreements designed to compensate the homeowner for allproduct damage to the structure. The compensation formula is based on (1) the average cost per square foot for product replacement, including material and labor as calculated by industry standards, in the area in which the structure is located, adjusted for inflation, or (2) the cost of appropriate refinishing as determined by industry standards in such area, adjustedarea. Pursuant to the settlement agreements, these costs are determined by reference to “Mean’s Price Data,” as published by R.S. Means Company, and updated annually for inflation. Persons receiving compensation pursuant to this formula also agree to release International Paperthe Company and Masonite from all other property damage claims relating to the product in question.lawsuitssettlements described above, where there is damage, the process of degradation, once begun, continues until repairs are made. International PaperThe Company estimates that approximately 4four million structures have installed products that are the subject of the Hardboard Lawsuit,Settlement, 300,000 structures have installed products that are the subject toof the Omniwood LawsuitSettlement and 86,000 structures have installed products that are the subject of theLawsuit.Settlement. Masonite stopped selling the products involved in the Hardboard LawsuitSettlement in May 2001, the products involved in the Woodruf LawsuitSettlement in May 1996 and the products involved in the Omniwood LawsuitSettlement in September 1996.Hardboard, Omniwood and Woodruf Lawsuitssettlements who do not pursue remedies under the respective settlement agreement pertaining to such suits may have recourse to warranties, if any, in existence at the expiration of the respective terms established under the settlement agreements for making claims. The warranty period generally extends for 25 years following the installation of the product in question and, although the warranties vary from product to product, they generally provide for a payment of up to two times the purchase price.60
board
wood61
Family
Family
Family
Family
Family
FamilyClaims Activity
No. of
Claims Pending
Family
Family
Family
Family
Family
Family
Family
Family62 Hardboard Omniwood Woodruf In thousands Single
Family Multi-
Family Single
Family Multi-
Family Single
Family Multi-
Family $2.5 $2.2 $4.6 $6.1 $4.3 $0.5 2.3 3.1 4.3 4.2 4.2 4.0 2.2 3.0 3.8 5.4 3.9 1.2 Insurance Matters60In thousands Hardboard Omniwood Woodruf Total Single
Family Multi-
Family Single
Family Multi-
Family Single
Family Multi-
Family Single
Family Multi-
Family Total 28.6 4.0 1.9 0.4 1.1 0.3 31.6 4.7 36.3 45.0 9.2 4.9 0.3 1.0 – 50.9 9.5 60.4 (30.9 ) (7.1 ) (4.1 ) (0.2 ) (0.9 ) – (35.9 ) (7.3 ) (43.2 ) (16.3 ) (3.3 ) (0.9 ) – (0.4 ) – (17.6 ) (3.3 ) (20.9 ) 26.4 2.8 1.8 0.5 0.8 0.3 29.0 3.6 32.6 56.0 8.0 5.2 – 0.6 – 61.8 8.0 69.8 (28.6 ) (3.7 ) (4.0 ) (0.1 ) (0.4 ) – (33.0 ) (3.8 ) (36.8 ) (14.9 ) (2.1 ) (0.6 ) – (0.1 ) – (15.6 ) (2.1 ) (17.7 ) 38.9 5.0 2.4 0.4 0.9 0.3 42.2 5.7 47.9 27.3 5.6 4.6 0.4 0.6 – 32.5 6.0 38.5 (30.7 ) (5.3 ) (4.1 ) (0.3 ) (0.5 ) – (35.3 ) (5.6 ) (40.9 ) (15.3 ) (2.1 ) (0.5 ) – (0.2 ) – (16.0 ) (2.1 ) (18.1 ) 20.2 3.2 2.4 0.5 0.8 0.3 23.4 4.0 27.4 In millions Hard-
board Omni-
wood Woodruf Total $357 $138 $12 $507 (129 ) (21 ) (3 ) (153 ) 33 – – 33 261 117 9 387 (111 ) (20 ) (5 ) (136 ) 8 – – 8 158 97 4 259 (119 ) (23 ) (4 ) (146 ) (5 ) – 5 – $34 $74 $5 $113 November 1995, International PaperJanuary 2005, the Company received over 21,000 Hardboard claims (compared to 8,000 claims received in December 2004, and Masonite3,000 claims received in January 2004). This significant increase in claim volume coincided with the January 18, 2005 deadline for filing claims in the Hardboard Settlement for siding installed in the 1980s. Claims are processed by the Independent Claims Administrator and only those claims which meet the requirements of the Hardboard Settlement are paid. Following the January deadline, the Independent Claims Administrator could not immediately determine how many of the 21,000 claims would meet the requirements for payment as set forth in the Hardboard Settlement. In addition to this significant volume increase, the Company experienced a higher average cost per claim due, in part, to a 2005 increase in the Means Price Data compared to prior years. At the end of the third quarter, the Company’s third-party consultant advised the Company that payments relating to 1980s Hardboard siding would be largely concluded by the end of the third quarter 2005. Payments through the end of the third quarter totaled $99 million, which were approximately $30 million more than projected for the year. However, during the fourth quarter, the number of valid 1980s Hardboard claims and approved payments exceeded the third-party consultant’s projection by $12 million. As a result of these unforeseen factors, the Company made aggregate payments of $118 million in 2005 for Hardboard Settlement claims.lawsuit in the Superior Courtnumber of the State of Californialawsuits and arbitration proceedings against certain of theirvarious insurance carriers (the Indemnification Lawsuit) because ofrelating to their refusal to indemnify International Paperand/or defend the Company and Masonite for, among other things, the settlement relating toHardboard Settlement.Hardboard Lawsuit and the refusalexception of one insurer, Employer’s Insurancearbitration proceeding further discussed below) have been favorably resolved resulting in the execution of Wausau (Wausau),settlement agreements that require the insurance carriers to provide a defensepay the Company an aggregate of that lawsuit. During the fall of 2001, a trial of Masonite’s claim that Wausau breached its duty to defend (the Breach of Duty Lawsuit) was conducted in a state court in California. The jury found that Wausau had breached its duty to defend Masonite and awarded Masonite $13 million for its expense to defend the Hardboard Lawsuit; an additional $12approximately $625 million. Of this amount, approximately $603 million in attorneys’ fees and interest for Masonite’s expenseinsurance settlements were reached with carriers through December 31, 2005.In millions 2005 2004 2003 $ 334 $ 174 $ 33 258 123 – 114 96 33 prosecute the Breach2003, cumulative net cash settlements received totaled $304 million through December 31, 2005. Approximately $230 million of Duty Lawsuit based onadditional cash will be collected in 2006 through 2008 under current settlement agreements. The Company also entered into a finding that Wausau had acted in bad faith in refusing to defend the Hardboard Lawsuit and an additional $68 million in punitive damages. In a post-trial proceeding, the court awarded an additional $2 million in attorneys’ fees which Masonite had incurredsettlement in the trialfirst quarter of the Breach of Duty Lawsuit.trial of the Indemnification Lawsuit against 22 insurers (the Defendants) began in April 2003only remaining proceeding to recover $470 million paid to claimants pursuant to the settlement of the Hardboard Lawsuit through May 2003. In July 2003, the jury determinedinsurance is an arbitration that $383 million of International Paper’s payments to settle these claims are covered by its insurance policies (the Phase I Verdict). In the current phase of the case the court will determine how much of the $383 million can be allocated to the policies of the Defendants. The Company anticipates that, before a judgment is entered, the California court will also make a determination about indemnification for future claims based on the Phase I Verdict. The court will also determine whether amounts paid and to be paid to the plaintiff class counsel pursuant to the settlement of the Hardboard Lawsuit, and administrative expenses that have been and will be incurred in connection with that settlement, are covered by insurance.A judgment has not yet been entered on the verdict in the Indemnification Lawsuit. It is difficult to predict when the judgment will be entered. This judgment will be subject to appeal when entered. Because of the uncertainties inherent in the litigation, including the outcome of any appeal, International Paper is unable to estimate the amount that it ultimately may recover against its insurance carriers.The Company is presently engaged in court-ordered mediation with several of the Defendants.During 2004, International Paper reached settlements with Wausau, with respect to both the Indemnification and theBreach of Duty Lawsuits, and with four other insurance companies under which International Paper received $164 million, including approximately $118 million received in 2004, and an additional payment of $46 million in January 2005.In addition, the Company has begun arbitration proceedingscommenced against American Excess Insurance Association and ACE Insurance Company, Ltd., to recover additional insurance proceeds. That proceeding is scheduled for June 2006 in London.As of December 31,In 2004, International Paper had received an aggregate of $223 million in settlement payments from certain of its insurance carriers which had been named as defendants in the Indemnification Lawsuit or which otherwise provided International Paper with insurance coverage for hardboard siding.Under an alternative risk-transfer agreement, International Paper contractedCompany settled a dispute with a third party for payment inrelating to an amount up toalternative risk-transfer agreement. Under that agreement, the Company received $100 million for certain costs relating to the Indemnification Lawsuit if payments by International Paper with respect thereto exceeded a specified retention that was indexed to account for inflation over a several year period. The agreement with the third party was in excess of liability insurance recoveries obtained by International Paper, which are the subjectHardboard Settlement and other hardboard siding cases. As part of the separate litigation described above. Accordingly, International Paper believes thatsettlement, the obligation of the third party with respect to this agreement did not constitute “other valid and collectible insurance” that would either limit or otherwise affect the Company’s right to collect insurance available to it and Masonite under the insurance policies, which are the subject of the Indemnification Lawsuit. At December 31, 2001, International Paper had received the $100 million from the third party.A dispute between International Paper and the third party, concerning a number of issues, including the relationship of the contract funding obligation to insurance proceeds recovered in the Indemnification Lawsuit, was the subject of an arbitration commenced in 2002 by the third party in London, England and scheduled to begin in February 2004. Before the hearing started, the parties settled the dispute. Under the settlement, International PaperCompany agreed to pay the third party a portion of certain insurance proceeds recoveredrecoveries received by International Paper under its insurance policies, beginning onthe Company after January 1, 2004, and thereafter, up to a maximum of $95 million. The precise amount that International Paper will pay to the third party under the settlement will depend upon, and will be a specified portion of insurance recoveries received by International Paper after January 1, 2004. As of December 31, 2004,2005, approximately $32$48 million had been paid to the third party under this settlement.63ANTITRUST MATTERSAntitrust MattersInternational Paper,the Company, the former Union Camp Corporation (acquired by International Paperthe Company in 1999), and other manufacturers of linerboard (the Defendants). These suits allegealleged that the Defendants conspired to fix prices for corrugated sheets and containers during theseeksought injunctive relief as well as treble damages and other costs associated with the litigation, were consolidated and, on September 4, 2001, certified as a class action. On September 22, 2003, International Paper,the Company, along with Weyerhaeuser Co. and Georgia-Pacific Corp., agreed with the class plaintiffs to settle the litigation for an aggregate amount of $68 million. The settlement, of which International Paper’sthe Company’s and Union Camp’s share totaled $24.4 million, was approved by the court in an order entereddismissing the cases on December 10, 2003.TwelveWhile court approval of the class action settlements was pending in 2003, 12 new complaints each with multiple plaintiffs who opted out of the class action, described above, have beenwere filed in various federal district courts around the country. These suits allegealleged that the defendants conspired to fix prices for corrugated sheets and containers during the period from October 1, 1993, through February 28, 1997. One opt-out plaintiff voluntarily dismissed its complaint on October 10, 2003. Another opt-out plaintiffIn 2005, the Company settled its case. Allall of the claims of the remaining federal opt-out casesplaintiffs, except for one claimant who had purchased a small amount of corrugated containers from the Company, for payments which aggregated $27.5 million. As a consequence of those settlements, all but one of the lawsuits have been consolidated for pre-trial purposesdismissed. The amount involved in the federal court for the Eastern District of Pennsylvania. Discovery in the federal opt-out casesone remaining lawsuit is currently scheduled to conclude in June 2005. Additionally, one opt-out case was originally filed in Kansas state court, but has been removed to federal court and transferred to the Eastern District of Pennsylvania. The plaintiff in that case has filed a motion to remand the case to Kansas state court. The Company is vigorously defending these cases and believes it has valid defenses. However, due to the complexity of evaluating the factors upon which damages might be based (including, but not limited to, the uncertainties of the class period, defendants’ sales to various opt-out plaintiffs, and other defendants’ potential settlements),de minimus.cannot assess its potential exposure at this time.In 2000, purchasers of high-pressure laminates filedsettled a number of purported federal and state class actions under the federal antitrust laws alleging that International Paper’sprice-fixing relating to high pressure laminates by its former Nevamar divisionbusiness (which was part of the Company’s Decorative Products division) participated in a price-fixing conspiracy with competitors between January 1, 1994 and June 30, 2000. In 2000 and 2001, indirect purchasers of high-pressure laminates also filed similar purported class action cases under various state antitrust and consumer protection statutes in Arizona, California, Florida, Maine, Michigan, Minnesota, New Mexico, New York, North Carolina, North Dakota, South Dakota,Tennessee, West Virginia, Wisconsin and the District of Columbia. In the third quarter of 2002, International Paper completed the sale of the Decorative Products operations, but retained any liability for these cases. In June 2003, the federal district court certified the consolidated federal cases as a class action. In 2004, the federal and all of the state cases were settled for a total of $38.5 million. The federal settlement has been approved by the court, and the Company has been dismissed from the case. The state casessettlements have all received preliminary approval as well, and the judgments dismissing the Company from the cases are proceeding toward final approval.in all but one state (Tennessee) in which four settlement class members have appealed the trial court’s rejection of their objection to the settlement. The amount involved in the Tennessee matter is de minimus.International Paperthe Company was served in Federal District Court in Columbia, South Carolina with a class action lawsuit by a group of private landowners alleging that International Paperthe Company and certain of its fiber suppliers, known as Quality Suppliers, engaged in an unlawful conspiracy to artificially depress the prices at which International Paperthe Company procures fibers for its mills. The suit seeks injunctive relief as well as treble damages and other costs associated with the litigation. On March 31, 2004, the case was certified as a class action. International Paper then asked the U.S. Court of Appeals for the Fourth Circuit for permission to appeal the District Court’s order granting class certification, but that request was denied. Discovery and issues concerning class notice are ongoing. On January 10, 2005, with the District Court’s approval, International Paper filed motions requesting dismissal of the plaintiffs’ claim based on plaintiffs’ lack of standing to sueThedecertification of the class. The motions are scheduled for hearing on April 7, 2005.is vigorously defending this case.In May 2004, the press reported that European, U.S. and Canadian antitrust authorities were investigating possible cartel activity relating to publication papers. Following these press reports, aA number of private plaintiffs filed purported class actions on behalf of purchasers of coated publication papers in various U.S. federal and state courts. These class actions, based on investigations of possible cartel activity relating to coated publication papers that were commenced in 2004 by European, U.S. and Canadian antitrust authorities, allege that manufacturers of coated publication papers, including International Paper,the Company, participated in a price fixing consipiracyprice-fixing conspiracy from 1993 to the present. The cases filed in federal court assertasserted a violation of the federal antitrust laws, while the cases filed in the state court allegealleged violations of state antitrust and consumer protection statutes. These lawsuits seek injunctive relief as well as treble damages and other costs associated with the litigation. The federal cases were consolidated for pre-trial purposes in December 2004 in the federal court for the District of Connecticut. DiscoveryThe state cases in all states except California were removed to federal court and related pretrialtransferred to the District of Connecticut, and on November 15, 2005, a consolidated indirect purchaser class action complaint was filed in the District of Connecticut on behalf of indirect purchasers in all states except California. While discovery is in the earliest stages, the Company believes it is not a proper party defendant to this litigation and intends to vigorously defend its position.not yet begun. Discoverybeen protracted by an extended preliminary injunction hearing; a summary judgment ruling in the state casesfavor of Nevamar which was then reversed after an appeal; a claim construction proceeding; extensive fact and expert discovery; and a further summary judgment motion that is expectedpending. Trial for thisbe coordinated with the consolidated federal cases.commence on March 13, 2006. The Company believes that it has valid defenses and intendsis vigorously defending this case.vigorously defend these cases. However, at this early stagecontracts, sales of property, environmental protection, tax, antitrust, personal injury and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, the Company believes that the outcome of any of the lawsuits or claims that are pending or threatened (other than those that cannot assessbe assessed due to their preliminary nature), or all of them combined, including the preceding antitrust matters, will not have a material adverse effect on its potential exposure.consolidated financial statements.64million, $855 million and $904 million, respectively. Total interest expense was $840 million in 2004, $875 million in 2003 and $891 million in 2002. Interest income was $97 million, $103 million and $106 million in 2004, 2003, and 2002, respectively. The following tables present changes in the goodwill balances as allocated to each business segment for the years ended December 31, 2004 and 2003.In millionsBalanceJanuary 1,2004Other (b)Additions/ReductionsBalanceDecember 31,2004Printing Papers$2,878$1$(3)(c) $2,876Industrial and Consumer Packaging1,3619235(d)1,605Distribution334(35)(e) –299Forest Products190(a)––190In millions at December 3120042003Carter Holt Harvey–35(f)(35)(f)–Raw materials$371$406Corporate30(6)–24Finished pulp, paper and packagingproducts1,7961,662Total$4,793$4$197$4,994Finished lumber and panel products184127Operating supplies351506(a) Restated for the reclassification of Weldwood to Discontinued operations(b) Represents the effects of foreign currency translations and reclassifications from other long-term assets(c) Represents the reclassification of the goodwill of Fine Papers to Assets of businesses held for sale(d) Includes the effects of the acquisition of Box USA ($238 million) offset by the sale of Food Pack S.A. ($3 million)(e) Represents the effects of the sale of Scaldia Papier B.V. ($23 million) and the reclassification of the goodwill of Papeteries de France to Assets of businesses held for sale ($12 million)(f) Represents goodwill recorded by International Paper upon the acquisition of Plantation Timber Products and the subsequent write-off following an impairment evaluationOther1666Inventories$2,718$2,767In millions at December 31 2005 2004 $404 $321 1,611 1,650 33 38 317 298 69 64 $2,434 $2,371 $170$239 million and $133$170 million at December 31, 20042005 and 2003,2004, respectively.In millions at December 312004In millions at December 31 2005 2004 $19,865 $20,895 5,685 5,633 978 974 1,886 1,824 28,414 29,326 16,613 17,110 $11,801 $12,216 2003In millionsBalanceJanuary 1,2003Other (b) BalanceDecember 31,2003Pulp, paper and packaging facilitiesMills$22,165$21,234Packaging plants5,8745,826Printing Papers$2,864$14$2,878Wood products facilities1,4111,232Industrial and Consumer Packaging1,35831,361Other plants, properties and equipment1,9252,091Distribution3268334Forest Products187(a)3190Gross cost31,37530,383Corporate24630Less: Accumulated depreciation17,94317,123Total$4,759$34$4,793Plants, properties and equipment, net$13,432$13,260(a) Restated for the reclassification of Weldwood to Discontinued operations(b) Represents the effects of foreign currency translations and reclassifications from other long-term assets$11$14 million in 2005, $10 million in 2004 $9and $8 million in 2003 and $12 million in 2002.2003. Interest payments made during 2005, 2004 and 2003 were $822 million, $774 million and 2002 were $807$806 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. Total interest expense was $683 million in 2005, net of a $46 million credit related to the settlement of the tax audits discussed above, $782 million in 2004 and $804 million in 2003. Interest income was $90 million, $73 million and $100 million in 2005, 2004 and 2003, respectively.In millions Balance
January 1,
2005 Other(a) Additions /
Reductions Balance
December 31,
2005 $2,876 $3 $– $2,879 591 18 67 (b ) 676 1,014 (28 ) 1 (c ) 987 299 – – 299 190 1 – 191 24 – (13 ) (d ) 11 $4,994 $(6 ) $55 $5,043 (a) Includes reclassifications and the effects of foreign currency translations (b) Includes the effects of the completion of the accounting for the acquisition of Box USA ($23 million), the acquisition of Compagnie Marocaine des Cartons et des Papiers ($12 million) and the acquisition of a 50% interest in International Paper Distribution Limited ($38 million), offset by the effects of the sale of the Industrial Papers business ($6 million) (c) Includes the effects of the acquisitions of a 20% minority interest in Shorewood EPC Europe Ltd. ($5 million), and a 20% minority interest in IP Korea ($1 million), offset by the reclassification of IP Pty Australia Ltd. to equity method investments ($5 million) (d) Includes the effects of the sale of the Fine Papers business $2,878 $1 $(3 )(c) $2,876 345 8 238(d ) 591 1,016 1 (3 )(e) 1,014 334 1 (36 )(f) 299 190(a ) – – 190 30 (6 ) – 24 $4,793 $5 $196 $4,994 65(a) Restated for the reclassification of Weldwood to Discontinued operations (b) Represents the effects of foreign currency translations and reclassifications from other long-term assets (c) Represents the reclassification of the goodwill of Fine Papers to Assets of businesses held for sale (d) Includes the effects of the acquisition of Box USA ($238 million) offset by the sale of Food Pack S.A. ($3 million) (f) Includes the effects of the sale of Food Pack S.A. (g) Represents the effects of the sale of Scaldia Papier B.V. ($23 million) and the reclassification of the goodwill of Papeteries de France to Assets of businesses held for sale ($12 million) In millions 2005 2004 $41 $48 12 6 (6 ) (8 ) (2 ) (6 ) 2 1 $47 $41 In millions 2005 2004 $188 $528 – (338 ) 17 – (11 ) (25 ) 12 26 5 (3 ) $211 $188 November 2004, CHH borrowed $425 million under their multi-currency and commercial paper credit facilities at interest rates ranging from 5.5% to 6.8% to be repaid during 2005. The proceeds from the borrowings were used to repay approximately $305 million of 8.875% notes with a maturity date in December 2004 and to settle maturing cross-currency and interest rate swaps.In August 2004, an International Paper wholly-owned subsidiary issued 500 million of Euro-denominatedeuro-denominated long-term debt (equivalent to approximately $619 million at issuance) with an initial interest rate of EURIBOR plus 55 basis points that can vary depending upon the credit rating of the Company and a maturity date in August 2009. Also in August 2004, International Paper repurchased $168 million of limited partnership interests in Georgetown Equipment Leasing Associates, L.P. and Trout Creek Equipment Leasing, L.P. In June 2004, these partnership interests had been reclassified from Minority interest to Current maturities of long-term debt pursuant to SFAS No. 150. Additionally, during the third quarter of 2004, approximately $500 million of debt was redeemed, including $150 million of 8.125% notes with a maturity date in June 2024 and $193 million of debt assumed in connection with the Box USA acquisition.In millions20042003Asset retirement obligation at January 1$48$20Net transition adjustment–22New liabilities6–Liabilities settled(8)(4)Net adjustments to existing liabilities(6)8Accretion expense12Asset retirement obligation at December 31$41$48This liability is included in Other liabilities in the accompanying consolidated balance sheet together with tax contingency reserves and pension and postretirement liabilities.The following table presents changes in minority interest balances for the years ended December 31, 2004 and 2003:In millions20042003Balance, beginning of year$1,622$1,202Sale of preferred securities of a subsidiary–150Minority interest related to sale of CHH Tissue business307–Currency translation adjustment125250Reclassification of limited partnership interests to debt(338)–CHH share repurchase (a)(158)–Dividends paid(59)(114)Minority interest expense43109Other, net625Balance, end of year$1,548$1,622(a) In August 2004, Carter Holt Harvey used a portion of the funds generated in connection with the second quarter sale of its Tissue business to repurchase shares from its shareholders, including approximately $158 million that was paid to minority shareholders.DecemberJanuary 2004, International Paper completed the saleapproximately $1.0 billion of 1.1 million acresdebt with an 8.05% blended coupon rate was retired using $1.0 billion of forestlands in Maine and New Hampshire to a private forest investment company for $244 million. Since International Paper has some continuing interest in these forestlands through a long-term fiber supply agreement, no gain was recognized in 2004 on this transaction. However, the net cash proceeds from the transaction of approximately $242 million are included as a source of cash4.875% coupon rate debt issued in the accompanying consolidated statement of cash flows. The deferred gain on the transaction totaling $114 million at December 31, 2004, included in Other liabilities in the accompanying consolidated balance sheet, will be amortized to earnings in future periods over the term of the fiber supply agreement.2003.66InA summary of long-term debt follows:In millions at December 31 2005 2004 $136 $175 125 125 437 649 351 394 819 1,000 98 97 344 149 571 797 969 1,202 – 464 1,296 1,596 296 334 106 102 1,152 1,399 1,185 1,141 43 43 1,764 1,794 2,005 2,150 417 65 90 178 12,204 13,854 1,181 222 $11,023 $13,632 (a) The weighted average interest rate on these notes was 8.1% in 2005 and 2004. (b) The weighted average interest rate on these notes was 4.2% in 2005 and 2.9% in 2004. (c) The weighted average interest rate on these bonds was 5.5% in 2005 and 5.6% in 2004. (d) Includes $22 million of bonds at December 31, 2004, which could be tendered at various dates and/or under certain circumstances. These bonds were redeemed in 2005. (e) The weighted average interest rate was 4.9% in 2005 and 4.6% in 2004. Includes $283 million of non-U.S. denominated borrowings with a weighted average interest rate of 4.8% in 2005. (f) Includes $6 million at December 31, 2005, and $54 million at December 31, 2004, related to interest rate swaps treated as fair value hedges (see Note 13). (g) The fair market value was approximately $12.3 billion at December 31, 2005, and $14.4 billion at December 31, 2004. 2003,31, 2005 and 2004, International Paper completed a private placement with registration rightsclassified $1.25 billion and $87 million, respectively, of $500 million of 4.25%tenderable bonds, contingently convertible securities, commercial paper and bank notes, due in January 2009 and $500 million of 5.50% notes due in January 2014. The net proceeds from the notes were used in January 2004 for the redemption of all of the outstanding $805 million aggregate principal amount of International Paper Capital Trust III 7.875% preferred securities originally due in December 2038 and for the repayment or early retirement of other debt.In conjunction with the Company’s adoption of FIN 46 and FIN 46(R) (see Note 4), Long-term debt at December 31, 2003 (1) increased by $50 million due to the consolidation of an entity that was formerly treated as an operating lease arrangement; (2) decreased by $460 million due to the deconsolidation of an entity that had previously been consolidated; and (3) increased by a net $100 million upon the deconsolidation of an entity created in June 2002. The net $100 million increase included an addition to debt of $450 million representing International Paper’s obligations to the deconsolidated entity and a reduction of $350 million due to the deconsolidation of third-party debt owed by the entity.Also, related to the application of FIN 46 to certain entities, effective July 1, 2003, International Paper deconsolidated two trusts with holdings of approximately $1.3 billion of mandatorily redeemable preferred securities, previously classified as a separate line item on the Company’s balance sheet, and recorded approximately $1.3 billion of borrowings from the trusts as Long-term debt.In December 2003, International Paper exercised its option to redeem the securities of one of the trusts effective in January 2004, and consequently, reclassified $830 million to Current maturities of long-term debt as Long-term debt. In FebruaryInternational Paper has the intent and ability to renew or convert these obligations, as evidenced by the available bank credit agreements described below.Paper redeemed the preferred securitiesPaper’s unused contractually committed bank credit agreements amounted to $3.2 billion. The agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. The agreements include a $750 million fully committed bank credit agreement that expires in March 2006 and a $1.25 billion fully committed bank credit agreement that expires in March 2009. These agreements have a facility fee of the remaining trust, which were classified0.15% that is payable quarterly. These agreements also include up to $1.2 billion of available commercial paper-based financings under a receivables securitization program that expires in Long-term debt atNovember 2007 with a facility fee of 0.20%. At December 31, 2004.2005, there were no outstanding borrowings under these agreements.implementationCompany is currently in the process of FIN 46refinancing the $750 million bank credit agreement maturing in March 2006 and FIN 46(R) had no adverse affect on existing debt covenants.the $1.25 billion bank credit agreement maturing in March 2009.In March 2003,Additionally, International Paper completedKwidzyn S.A., a private placementwholly-owned foreign subsidiary of International Paper, has a PLN 400 million (approximately $123 million) bank credit agreement maturing in May 2006, with registration rightsno outstanding borrowings as of $300December 31, 2005, and International Paper Investments (Luxembourg) S.ar.l., a wholly-owned subsidiary of International Paper, has a $100 million bank credit agreement maturing in November 2006, with $70 million in borrowings outstanding as of 3.80% notes due in April 2008 and $700 million of 5.30% notes due in April 2015. Proceeds from the notes were used to repayDecember 31, 2005.$450$417 million of commercial paper and long-term debtbank notes with interest rates that fluctuate based on market conditions and to redeem $550 million of preferred securities of IP Finance (Barbados) Limited,the Company’s credit rating.non-U.S. consolidated subsidiary of International Paper.A pre-tax early debt retirement expense of $1 million related to the 2003 redemptions discussed abovestrong investment-grade rating is included in Restructuring and other charges in the accompanying consolidated statement of operations.In October 2002, International Paper completed a private placement with registration rights of $1.0 billion aggregate principal amount of 5.85% notes due in October 2012. In November 2002, the sale of an additional $200 million principal amount of 5.85% notes due in October 2012 was completed. The net proceeds of these sales were used to refinance mostimportant element of International Paper’s $1.2 billion aggregate principal amountcorporate finance strategy. At December 31, 2005, the Company8% notes due in July 2003, that were issued in connection with the Champion acquisition.BBB (negative outlook) and Baa3 (stable outlook) by Standard & Poor’s (S&P) and Moody’s Investor Services (Moody’s), respectively. The pre- tax early debt retirement costCompany currently has short-term credit ratings by S&P and Moody’s of $41 million is included in RestructuringA-3 and other charges in the accompanying consolidated statement of operations.P-3, respectively.Also during 2002, approximately $1.8 billion of long-term debt was repaid, including about $800 million of Champion acquisition debt. Increases in 2002 included approximately $800 million from new borrowings, and non-cash increases of approximately $620 million, including $460 million relating to the consolidation of a debt obligation of a special purpose entity following the modification of the terms of the related agreement.676820042005 and 20032004 were $2.1 billion principal amount at maturity of zero-coupon convertible senior debentures with a 20-year term. This debt accretes to face value at maturity at a rate of 3.75% per annum. Beginning on June 20, 2004, and every June 20th and December 20th20th until maturity, the debentures are subject to an increased accretion rate if the closing sales price of the Company’s common stock is equal to or less than 60% of the then currentthen-current conversion price of the notes for any 20 trading days out of the last 30 consecutive trading days ending threesix business days prior to June 20, 2004, or later semiannualannual date. The conversion price of the notes was $59.11 as of December 31, 2004 was $56.96, and2005. At June 20, 2005, the bonds were not subject to an increased accretion rate; however, the adjusted rate forremained at 3.75% per the semiannual period beginning December 20, 2004.terms of the agreement.ourits common stock, the assets, debt securities or certain rights to purchase the Company’s debt securities, which distribution has a per share value exceeding 12.5% of the closing sales price of the Company’s common stock on the day preceding the declaration for such distribution.Beginning in the fourth quarter of 2004, as required by a recent FASB consensus, the dilutive effect of the convertible notes has been reflected in diluted earnings per share in periods when dilutive (see the caption “Information About Capital Structure – Contingently Convertible Securities” in Note 4), with prior periods restated.20th20th in each of the years 2006, 2011 and 2016, at a repurchase price equal to the accreted principalotherOther current or noncurrent assets or liabilities. The earnings impact resulting from the change in fair value of the derivative instruments is recorded in the same line item in the consolidated statement of operations as the underlying exposure being hedged. The financial instruments that are used in hedging transactions are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in either the fair value or cash flows of the related underlying exposures. The ineffective portion of a financial instrument’s change in fair value, if any, would be recognized currently in earnings together with the changes in fair value of any derivatives not designated as hedges.Interest Rate RiskINTEREST RATE RISK692004 2005, of approximately $500 million and maturities ranging from twoone to 1918 years do not qualify as hedges under SFAS No. 133 and, consequently, were recorded at fair value on the transition date by a pre-tax charge of approximately $20 million to earnings in 2001 upon adoption of SFAS No. 133. For the years ended December 31, 2005, 2004 2003 and 2002,2003, the change in fair value of these swaps was immaterial. The fair value of the swap contracts as of December 31, 2005, is a $7 million liability.20042005 and 2003,2004, outstanding notional amounts for its interest rate swap fair value hedges amounted to approximately $2.2$1.7 billion and $2.1$2.2 billion, respectively. The fair values of these swaps were net assets of approximately $70$7 million and $113$70 million at December 31, 2005 and 2004, respectively.2003, respectively.other charges in the accompanying consolidated statement of operations (see Note 6).In November 2002, interest rate swaps with a notional value of $550 million were terminated in connection with the early retirement of International Paper’s $1.2 billion notes due in July 2003. The resulting gain of approximately $6 million is included in Restructuring and other charges in the accompanying consolidated statement of operations (see Note 6).During 2002, International Paper entered into agreements to fix interest rates on an anticipated $1.15 billion issuance of debt. Upon issuance of the debt in the fourth quarter of 2002, these agreements generated a pre-tax loss of $2.8 million that was recorded in Accumulated other comprehensive income (OCI). This amount is being amortized to interest expense over the term of the bonds through October 30, 2012, yielding an effective interest rate of 5.94%.Commodity RiskCOMMODITY RISKhas usedmay use swap and option contracts to manage risks associated with market fluctuations in energy prices. Such cash flow hedges are accounted for by deferring the after-tax quarterly change in fair value of the outstanding contracts in OCI. On the date a contract matures, the gain or loss is reclassified into cost of products sold concurrentlyconcurrent with the recognition of the2004,2003, the reclassification from OCI to earnings was immaterial. For the years ended 2003 and 2002, the reclassifications to earnings werean after-tax gainsgain of $24 million, and after-tax losses of $10 million, respectively. These amounts representrepresenting the after-tax cash settlements on the maturing energy hedge contracts. Unrealized after-tax losses of $2 million for 2005 and 2004 and after-tax gains of $12 million and $24 millionfor 2003 were recorded to OCI during the years endedOCI. After-tax losses of approximately $2 million as of December 31, 2004, 2003 and 2002, respectively. There were no outstanding2005, are expected to be reclassified to earnings in 2006. The2004.2005, is a $1 million asset recorded in Other assets in the accompanying consolidated balance sheet.Foreign Currency RiskFOREIGN CURRENCY RISKwiththrough borrowings denominated in the same currency as the operation’s functional currency, or by entering into long-term cross- currencycross-currency and interest rate swaps or short-term foreign exchange contracts. These financial instruments are effective as a hedgehedges against fluctuations in currency exchange rates. Gains or losses from changes in the fair value of these instruments, which are offset in whole or in part by translation gains and losses on the non-U.S. operation’s net assets hedged, are recorded as translation adjustments in OCI. Upon liquidation or sale of the foreign investments, the accumulated gains or losses from the revaluation of the hedging instruments, together with the translation gains and losses on the net assets, are included in earnings. For the years ended December 31, 2005, 2004 and 2003, net gains and 2002, net losses included in the cumulative translation adjustment onrelating to derivative and debt instruments hedging foreign net investments amounted to a $19 million gain, a $74 million loss and an $89 million and $46 millionloss after taxes and minority interest, respectively. Cumulative after-tax losses ofThe 2004 loss includes $50 million onrelating to net investment hedges that were included in the loss on sale of Weldwood in Discontinued operations in 2004.Long-term cross-currency and interest rate swaps and short- term currency swaps have been used to mitigate the risk associated with changes in foreign exchange rates, affecting the fair value of debt denominated in a foreign currency. In 2004, CHH paid $180 million to settle these hedges concurrent with the repayment of the related debt. Prior to the settlement, the impact on earnings from the derivative revaluations were substantially offset by the earnings impact from remeasuring the foreign currency debt each period.70Defined Benefit PlansDEFINED BENEFIT PLANSwill receive an additional company contribution to their savings plan (see “Other Plans” on page 74)73).contributioncontributions to the qualified defined benefit plan in 20032005 or 2004, and does not expect to make any contributions in 2005 or 2006 unless International Paper changes its funding policy to make contributions above the minimum requirements. The U.S. Congress is currently considering various proposals that would change the minimum funding requirements for qualified defined benefit plan. plans in future$21$34 million in 2005.2006. (Income)(income) for qualified and nonqualified U.S. defined benefit plans comprised the following:In millions2004In millions 2005 2004 2003 $129 $115 $107 474 467 469 (556 ) (592 ) (598 ) 167 94 57 29 27 25 $243 $111 $60 20032002(a) Excludes $6.5 million, $3.4 million and $8.3 million in 2005, 2004 and 2003, respectively, in curtailment losses, and $3.6 million, $1.4 million and $6.3 million in 2005, 2004 and 2003, respectively, of special termination benefits, in connection with cost reduction programs and facility rationalizations that were recorded in Restructuring and other charges in the consolidated statement of operations. Also excludes $14.3 million and $0.3 million in 2005 and 2003, respectively, in curtailment losses, and $7.6 million of special termination benefits in 2005 related to certain divestitures recorded in Net losses on sales and impairments of businesses held for sale in the consolidated statement of operations. Service cost$115$107$96Interest cost467469466ExpectedThe increases in 2005 and 2004 U.S. pension expense were due to increases in the amortization of unrecognized actuarial losses, reductions in the discount rate and a reduction in 2005 in the expected long-term rate of return on plan assets, net of a reduction in 2004 in the assumed rate of future compensation increase. 2005 2004 2003 5.75 % 6.00 % 6.50 % 8.50 % 8.75 % 8.75 % 3.25 % 3.25 % 3.75 % 2005 2004 5.50 % 5.75 % 3.25 % 3.25 % (592The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. Projected rates of return are developed through an asset/liability study in which projected returns for each of the plan’s asset classes are determined after analyzing historical experience and future expectations of returns and volatility of the various asset classes. Based on the target asset allocation for each asset class, the overall expected rate of return for the portfolio is developed considering the effects of active portfolio management and expenses paid from plan assets. The discount rate assumption is determined based on a yield curve that incorporates approximately 500-550 Aa-graded bonds. The plan’s projected cash flows are then matched to the yield curve to develop the discount rate. To calculate pension expense for 2006, the Company will use an expected long-term rate of return on plan assets of 8.50%, a discount rate of 5.50% and an assumed rate of compensation increase of 3.25%. The Company estimates that it will record net pension expense of approximately $370 million for its U.S. defined benefit plans in 2006, with the increase from expense of $243 million in 2005 principally reflecting a change in the mortality assumption to use the Retirement Protection Act 2000 table (RP-2000) in 2006 versus the Group Annuity Mortality Table 1983 (GAM83) used in 2005, an increase in the amortization of unrecognized actuarial losses over a shorter average remaining service period, and a decrease in the assumed discount rate to 5.50% in 2006 from 5.75% in 2005.)(598)In millions 2006 $27 16 (6 ) Percentage of
Plan Assets at
December 31, Asset Category Target
Allocations 2005 2004 52% – 63% 61 % 62 % 26% – 34% 28 % 27 % 5% – 10% 9 % 8 % 2% – 8% 2 % 3 % 100 % 100 % In millions $525 515 517 523 536 2,932 (663Minimum Pension Liability Adjustment)At December 31, 2002, International Paper’s qualified defined benefit pension plan had a prepaid benefit cost of approximately $1.7 billion. At this date, the market value of the plan assets was less than the accumulated benefit obligation (ABO) for this plan. In accordance with the requirements of SFAS No. 87, the prepaid asset was reversed and an additional minimum liability of $2.7 billion was established equal to theActuarial lossshortfall of the market value of plan assets below the ABO plus the prepaid benefit cost. This resulted in an after-tax direct charge to Accumulated other comprehensive income (OCI) of $1.5 billion, with no impact on earnings, earnings per share or cash. This reduction to Shareholders’ equity had no adverse affect on International Paper’s debt covenants.In millions 2005 2004 $9,278 $8,294 8,855 7,927 6,944 6,745 9471In millions 2005 2004 $8,294 $7,899 129 115 474 467 833 288 (515 ) (537 ) – 1 (4 ) – 4 1 11 1 52 59 $9,278 $8,294 $6,745 $6,436 694 797 20 49 (515 ) (537 ) $6,944 $6,745 $(2,334 ) $(1,549 ) 3,181 2,632 310 330 $1,157 $1,413 $(1,911 ) $(1,182 ) 310 330 2,758 2,265 $1,157 $1,413 577AmortizationNON-U.S. DEFINED BENEFIT PLANSprior servicecost272519(income) (a) for non-U.S. plans was as follows:$111In millions 2005 2004 2003 $11 $10 $9 12 11 9 (10 ) (8 ) (6 ) 2 1 1 – – (1 ) – 1 – $15 $15 $12 (a) Excludes $1.7 million of curtailment gains in 2005 related to the divestiture of Maresquel recorded in Net losses on sales and impairments of businesses held for sale in the consolidated statement of operations. 2005 2004 2003 5.11 % 5.43 % 5.58 % 6.68 % 6.66 % 6.75 % 3.32 % 3.50 % 3.64 % $Weighted average assumptions used to determine benefit obligations as of December 31, 2005 and 2004, were as follows:60 2005 2004 4.86 % 5.55 % 3.39 % 3.58 % $72(75)(a) Excludes $3.4 million, $8.3 millionThe following table shows the changes in the benefit obligation and $2.6 million inplan assets for 2005 and 2004 2003 and 2002, respectively, in curtailment losses,the plans’ funded status and $1.4 million, $6.3 million and $2.4 million in 2004, 2003 and 2002, respectively, of special termination benefits, in connection with a cost reduction program and facility rationalizations that were recorded in Restructuring and other chargesamounts recognized in the consolidated statementbalance sheet as of operations. Also excludes $0.3December 31, 2005 and 2004.In millions 2005 2004 $365 $587 1 9 11 10 12 11 3 7 – (3 ) (121 ) (247 ) (2 ) – 40 10 (12 ) (41 ) (21 ) 22 $276 $365 $255 $423 – 2 30 36 – (3 ) 16 47 (12 ) (40 ) 3 7 (108 ) (230 ) (11 ) 13 $173 $255 $(103 ) $(110 ) 57 68 (1 ) (1 ) (1 ) 2 $(48 ) $(41 ) $2 $22 (93 ) (111 ) – 1 43 47 $(48 ) $(41 ) $8.8$127 million, respectively, at December 31, 2005. Plan assets consist principally of curtailment lossescommon stock and fixed income securities. Adjustments to the non-U.S. plans’ additional minimum liabilities at December 31, 2005, resulted in 2003a debit to OCI of $12 million after taxes, less a credit of $11 million after taxes and 2002, respectively, and $10.6 million of settlement gains in 2002,minority interest related to the divestituressale of Masonite, Flexible Packaging, Decorative ProductsCHH, for a net charge to OCI of $1 million. A credit of $1 million after taxes was recorded to OCI at December 31, 2004.other smaller businesses thatcertain hourly employees of International Paper an opportunity to accumulate personal funds and to provide additional benefits to employees hired after June 30, 2004, for their retirement. Contributions may be made on a before-tax basis to substantially all of these plans.recordedapproximately $4.3 billion as of the 2005 plan year-end, including approximately $666 million (15.5%) in Net losses (gains) on sales and impairments of businesses held for sale in the consolidated statement of operations.International Paper common stock.The increase in 2004 U.S. pension expense, and the change in 2003 to net pension expense from income in 2002, were principally due to a reduction in 2003 in the expected long-71 Percentage of
Plan Assets
Allocations722004 2003
December 3173Postretirement BenefitsPOSTRETIREMENT BENEFITStotaltotaled less than 60 as of January 1, 2004. International Paper does not fund these benefits prior to payment and has the right to modify or terminate certain of these plans in the future.in 2004 of net postretirement benefit cost of approximately $8 million and a reduction of the accumulated postretirement benefit obligation (APBO) of approximately $110 million in 2004, which is treated as a reduction of unrecognized actuarial losses that are amortized to expense over the average remaining service period of employees eligible for postretirement benefits. In addition,The final regulations for the implementation of the Act were released on January 21, 2005. This resulted in a remeasurement of the plan that reduced net postretirement benefit cost in 2004 was reducedcosts by $5$14 million and reduced the APBO by $59 million in 2005.In millions 2005 2004 2003 $2 $6 $7 38 52 54 20 35 23 (40 ) (40 ) (29 ) $20 $53 $55 (a) Excludes $1.8 million, $1.0 million and $5.3 million of curtailment gains in 2005, 2004 and 2003, respectively, and $0.8 million in 2005 and 2004 and $1.3 million in 2003 of special termination benefits related to cost reduction programs and facility rationalizations that were recorded in Restructuring and other charges in the consolidated statement of operations. Also excludes $4.1 million in curtailment gains in 2005 and $1 million of special termination benefits in 2005 related to certain divestitures recorded in Net losses on sales and impairments of businesses held for sale in the consolidated financial statements. 2005 2004 2003 5.50 % 6.00 % 6.38 % 2005 2004 5.50 % 5.75 % 10.00 % 10.00 % 5.00 % 5.00 % 2010 2009 $56 million, reflecting assumptions aboutapproximately $35 million. A 1% decrease in the annual trend rate would have decreased the accumulated postretirement benefit obligation at December 31, 2005, by approximately $32 million. The effect on net postretirement benefit cost from a 1% increase or decrease would be approximately $2 million.participation.is only funded in an amount equal to benefits paid. The following table presents the changes in benefit obligation and plan assets for 2005 and 2004:In millions2004In millions 2005 2004 $838 $1,000 2 6 38 52 42 38 (100 ) (118 ) (136 ) (138 ) 13 (5 ) 1 – 3 2 2 1 $703 $838 $– $– 94 100 42 38 (136 ) (138 ) $– $– $(703 ) $(838 ) (167 ) (229 ) 238 357 $(632 ) $(710 ) 2003In millions Benefit
Payments Subsidy
Receipts $87 $(13 ) 86 (14 ) 83 (15 ) 81 (16 ) 79 (17 ) 352 (90 ) 2002
Under the program, officers and certain other employees may be granted options to purchase International Paper common stock. The option price is the market price of the stock on the close of business on the day prior to the date of grant. Options must be vested before they can be exercised. Upon exercise of an option, a replacement option may be granted under certain circumstances with an exercise price equal to the market price at the time of exercise and with a term extending to the expiration date of the original option.Service cost$32$28$22Interest cost342925ExpectedThe Company discontinued its stock option program in 2004 for members of executive management, and in 2005 for all other eligible U.S. and non-U.S. employees. In the United States, the stock option program was replaced with a performance-based restricted share program for approximately 1,250 employees to more closely tie long-term incentive compensation to Company performance on two key performance drivers: return on plan assets(29)(24)(24)Actuarial loss551Amortizationinvestment (ROI) and total shareholder return (TSR). As part of prior service cost111Curtailment gain–(1)–Estimated expenses111Net periodic pension expense (a)$44$39$26(a) Excludes $19.4this shift in focus away from stock options to performance-based restricted stock, the Company accelerated the vesting of all 14 million of net settlement gains and $1.2 million of curtailment gains in 2004 relatedunvested stock options to July 12, 2005. The Company also considered the divestitures ofWeldwood, Papeteries de Souchebenefit to employees and the CHH Tissue business thatincome statement impact in making its decision to accelerate the vesting of these options. Based on the market value of the Company’s common stock on July 12, 2005, the exercise prices of all such stock options were above the market value and, accordingly, the Company recorded no expense as a result of this action.Net losses (gains) on sales2005, 2004 andimpairments 2003, respectively: 2005 2004 2003 3.82 % 3.23 % 2.46 % 22.65 % 24.41 % 24.06 % 2.53 % 2.53 % 2.71 % 3.50 3.50 3.50 2.99 % 2.14 % 1.59 % 21.78 % 22.83 % 23.70 % 2.42 % 2.30 % 2.57 % 0.32 1.60 1.75 (a) The average fair market values of initial option grants during 2005, 2004 and 2003 were $6.78, $6.90 and $5.86, respectively. (b) The average fair market values of replacement option grants during 2005, 2004 and 2003 were $2.05, $4.76 and $4.39, respectively. businesses held for sale in the consolidated statement of operations.Stock Option Program and the changes during the three years ending December 31, 2005: Options (a,b) Weighted
Average
Exercise
Price 37,154,020 $40.11 11,315,401 37.08 (2,778,038 ) 31.87 (1,823,244 ) 41.19 (1,062,311 ) 51.71 42,805,828 39.51 9,663,303 39.70 (4,726,957 ) 34.60 (1,059,215 ) 40.86 (1,248,052 ) 51.40 45,434,907 39.70 861,827 39.64 (602,746 ) 33.74 (1,607,979 ) 41.44 (2,504,411 ) 43.52 41,581,598 $39.49 (a) The table does not include Continuity Award tandem stock options described below. No fair market value is assigned to these options under SFAS No. 123. The tandem restricted shares accompanying these options are expensed over their vesting period. (b) The table includes options outstanding under an acquired company plan under which options may no longer be granted. shows the changes in the benefit obligation for 2004 and 2003.In millions20042003Change in projected benefit obligation:Benefit obligation, January 1$587$422Obligations for additional plans915Service cost3228Interest cost3429Plan participants’ contributions74Plan amendments(3)–Divestitures(292)–Settlement / curtailment gains–(1)Actuarial loss1018Benefits paid(41)(24)Effect of foreign currency exchange rate movements2296Benefit obligation, December 31$365$587The fair value of plan assets for non-U.S. plans amounted to $255 million and $423 millionsummarizes information about stock options outstanding at December 31, 2004 and2005: Options Outstanding Options Exercisable Range of Exercise Prices Options
Outstanding
as of
12/31/05 Weighted
Average
Remaining
Life Weighted
Average
Exercise
Price Options
Outstanding
as of
12/31/05 Weighted
Average
Exercise
Price 6,264,472 5.6 $ 31.77 6,264,472 $ 31.77 19,514,939 6.7 $ 37.25 19,514,939 $ 37.25 11,113,806 5.9 $ 41.34 11,113,806 $ 41.34 1,746,895 2.9 $ 47.42 1,746,895 $ 47.42 213,192 0.8 $ 54.23 213,192 $ 54.23 2,550,094 3.8 $ 59.14 2,550,094 $ 59.14 178,200 4.0 $ 64.70 178,200 $ 64.70 41,581,598 6.0 $ 39.49 41,581,598 $ 39.49 2003, respectively. The reduction in plan assets is mainly due toPERFORMANCE – BASED RESTRICTED SHARESsaleRestricted Performance Share Program, contingent awards of Weldwood. For non-U.S. plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligations, accumulated benefit obligations, and fair values of plan assets totaled $272 million, $240 million, and $164million, respectively. Plan assets consist principally ofInternational Paper common stock are granted by the Committee. Shares are earned on the basis of International Paper’s financial performance over a period of consecutive calendar years as determined by the Committee. Under a Restricted Performance Share Program approved during 2001 and fixed income securities. Adjustmentsamended in 2004, awards vesting over a three-year period were granted in 2003 and 2004. In 2005, the plan was amended to provide for segmentation in which one-fourth of the non-U.S. plans’ additional minimum liabilities resulted in a credit to OCIaward vests during each twelve-month period, with the final one-fourth segment vesting over the full three-year period. Compensation expense for this variable plan is recorded over the applicable vesting period.$1 million and a charge of $4 million after taxes andminority interest atall performance-based programs for the three years ending December 31, 2004 and 2003, respectively.Other PlansInternational Paper sponsors defined contribution plans(primarily 401(k)) to provide substantially all U.S. salaried74 $ $ –
Payments
Receipts 75
During each reporting period, fully diluted earnings per share is calculated by assuming that “in-the-money” options are exercised and the exercise proceeds are used to repurchase shares in the marketplace. When options are actually exercised, option proceeds are credited to equity and issued shares are included in the computation of earnings per common share, with no effect on reported earnings. Equity is also increased by the tax benefit that International Paper will receive in its tax return for income reported by the optionees in their individual tax returns. 76
Performance - Based Restricted SharesOptions (a,b)
Average
Exercise
Price
Exercise
Prices
Outstanding
as of
12/31/04
Average
Remaining
Life
Average
Exercise
Price
Outstanding
as of
12/31/04
Average
Exercise
Price 77Shares 1,277,340 658,155 (586,237 ) (164,803 ) 1,184,455 1,581,442 (391,691 ) (128,957 ) 2,245,249 2,831,566 (519,533 ) (361,965 ) 4,195,317 (a) The weighted average fair value of performance shares granted was $41.56, $42.95 and $35.34 in 2005, 2004 and 2003, respectively. (b) Includes 114,177 shares held for payout at the end of the performance period. 2004:2005:SharesOutstanding at December 31, 2001344,098Granted (a)14,000Issued(79,526)Forfeited (b)(40,500)Outstanding at December 31, 2002238,072Granted (a)149,500Issued(60,912)Forfeited (b)(22,500)Outstanding at December 31, 2003304,160Granted (a)31,500Issued(22,700)Forfeited (b)(26,461)Outstanding at December 31, 2004286,499(a) The weighted average fair value of restricted shares granted was $43.20, $37.20 and $43.88 in 2004, 2003 and 2002, respectively.(b) Also includes restricted shares canceled when tandem stock options were awarded. No tandem options were awarded in 2004, 2003 or 2002.Shares 238,072 149,500 (60,912 ) (22,500 ) 304,160 31,500 (22,700 ) (26,461 ) 286,499 8,000 (13,000 ) (31,124 ) 250,375 (a) The weighted average fair value of restricted shares granted was $43.10, $43.20 and $37.20 in 2005, 2004 and 2003, respectively. (b) Also includes restricted shares canceled when tandem stock options were awarded. No tandem options were awarded in 2005, 2004 or 2003. 20042005 and 2003,2004, a total of 20.321.1 million and 14.920.3 million shares, respectively, were available for grant under the LTICP. In 2004, shareholders had approved an additional 14 million shares to be used for restricted stock, including grants of performance-based restricted stock, as well as stock options, SARs and performance-based restricted stock units.grant. In 2003, shareholders had approved an additional 10 million shares to be made available for grant, with 100 thousand100,000 of these shares reserved specifically for the granting of restricted stock. No additional shares were made available during 2002. A total of 12.5 million shares, 14.9 million shares and 2.3 million shares were available for the granting of restricted stock as of December 31, 2005, 2004 and 2003, respectively.2003, and $28 million for 2002.2003.78Interim Financial Results (Unaudited) (a)
Before Income Taxes and Minority Interest
Before Income Taxes and Minority Interest
Earnings From Continuing OperationsNote: Since basic and diluted earnings per share are computed independently for each period and category, full year per share amount may not equal to the sum of the four quarters.79In millions, except per share amounts and stock prices 1st
Quarter 2nd
Quarter 3rd
Quarter 4th
Quarter Year $6,011 $5,916 $6,036 $6,134 $24,097 1,545 1,501 1,504 1,408 5,958 120 (c) 259 (e) 372 (g) (165 )(i) 586 (c,e,g,i) (31 )(d) (14 )(d) 281 (d) 5 (d) 241 (d) 77 (c,d) 77 (d,e,f) 1,023 (d,g,h) (77 )(d,i,j) 1,100 (c-j) $0.22 (c) $0.19 (e,f) $1.53 (g,h) $(0.17) (i,j) $1.77 (c,d-j) (0.06 )(d) (0.03 )(d) 0.58 (d) 0.01 (d) 0.49 (d) 0.16 (c,d) 0.16 (d,e,f) 2.11 (d,g,h) (0.16 )(d,i,j) 2.26 (c-j) $0.22 (c) $0.19 (e,f) $1.48 (g,h) $(0.17) (i,j) $1.74 (c,d-j) (0.06 )(d) (0.03 )(d) 0.55 (d) 0.01 (d) 0.47 (d) 0.16 (c,d) 0.16 (d,e,f) 2.03 (d,g,h) (0.16 )(d,i,j) 2.21 (c-j) 0.25 0.25 0.25 0.25 1.00 $42.59 $37.92 $35.05 $34.90 $42.59 35.67 30.16 29.45 26.97 26.97 $5,623 $5,703 $6,016 $6,017 $23,359 1,412 1,515 1,604 1,603 6,134 85 (k) 112 (m) 333 (o) 194 (p) 724 (k,m,o,p) 25 (l) 156 (l) (685 )(l) 13 (l) (491 )(l) 73 (k,l) 193 (l,m,n) (470 )(l,o) 169 (l,p) (35 )(k-p) $0.10 (k) $0.08 (m,n) $0.44 (o) $0.32 (p) $0.94 (k,m-p) 0.05 (l) 0.32 (l) (1.41 )(l) 0.03 (l) (1.01 )(l) 0.15 (k,l) 0.40 (l,m,n) (0.97 )(l,o) 0.35 (l,p) (0.07 )(k-p) $0.10 (k) $0.08 (m,n) $0.44 (o) $0.32 (p) $0.93 (k,m-p) 0.05 (l) 0.32 (l) (1.35 )(l) 0.03 (l) (1.00 )(l) 0.15 (k,l) 0.40 (l,m,n) (0.91 )(l,o) 0.35 (l,p) (0.07 )(k-p) 0.25 0.25 0.25 0.25 1.00 $45.01 $44.81 $44.65 $42.52 $45.01 39.80 37.91 38.22 37.12 37.12 (a) All periods presented have been restated to reflect the Carter Holt Harvey Tissue business and the Weldwood of Canada Limited business as Discontinued operations.(b) Gross margin represents net sales less cost of products sold.(c) Includes a $14 million charge before taxes ($9 million after taxes) for organizational restructuring programs, a $16 million charge before taxes ($10 million after taxes) for losses on early debt extinguishment, a credit of $9 million before taxes ($6 million after taxes) to adjust estimated gains/losses of businesses previously sold, and a credit of $7 million before taxes ($4 million after taxes) for the net reversal of restructuring and realignment reserves no longer required.(d) Includes net income of Weldwood and Carter Holt Harvey’s Tissue business prior to their sales in the fourth and second quarters of 2004, respectively. Also included in the 2004 second quarter is a gain of $268 million before taxes and minority interest ($90 million after taxes and minority interest) for sale of the Carter Holt Tissue business; in the 2004 third quarter is a charge of $306 million before taxes ($716 million after taxes) to write down the assets of Weldwood to their estimated net realizable value; and in the 2004 fourth quarter is a charge of $17 million before taxes ($5 million credit after taxes) to adjust the loss on the sale of Weldwood.(e) Includes a $42 million charge before taxes and minority interest ($23 million after taxes and minority interest) for organizational restructuring programs, a $65 million charge before taxes ($40 million after taxes) for losses on early debt extinguishment, a charge of $36 million before taxes and minority interest ($32 million after taxes and minority interest) for estimated losses of businesses held for sale, and a credit of $5 million before taxes and minority interest ($3 million after taxes and minority interest) for the net reversal of restructuring and realignment reserves no longer required.(f) Includes a $5 million increase, net of minority interest, in the income tax provision reflecting an adjustment of deferred tax balances and a reduction of valuation reserves for capital loss carryovers.(g) Includes an $18 million charge before taxes and minority interest ($11 million after taxes and minority interest) for organizational restructuring programs, a charge of $29 million before minority interest ($15 million after minority interest) for the impairment of goodwill, a charge of $8 million before taxes ($5 million after taxes)for losses on early debt extinguishment, a credit of $103 million before taxes ($64 million after taxes) for insurance recoveries, a net charge of $38 million before and after taxes for estimated losses of businesses sold or held for sale, and a credit of $6 million before taxes ($4 million after taxes) for the net reversal of restructuring and realignment reserves no longer required.(h) Includes a $10 million charge before taxes ($6 million after taxes) for litigation settlements, a $6 million charge before minority interest ($3 million after minority interest) for the impairment of goodwill, a $3 million charge before taxes ($2 million after taxes) for losses on early debt extinguishment, a credit of $20 million before taxes ($12 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, a charge of $79 million before taxes ($64 million after taxes) for estimated losses of businesses sold or held for sale, and a credit of $17 million before taxes ($11 million after taxes) for the net reversal of restructuring and realignment reserves no longer required.(i) Includes a $23 million charge before taxes and minority interest ($14 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions.(j) Includes a charge of $10 million after taxes for the cumulative effect of an accounting change to record the charge for the adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations.”(k) Includes a pre-tax charge of $51 million ($32 million after taxes) for facility shutdown costs and severance costs associated with organizational restructuring programs, a $20 million pre-tax charge ($12 million after taxes) for legal reserves, a $10 million charge before taxes ($6 million after taxes) for early debt retirement costs, a $10 million pre-tax charge ($6 million after taxes) to adjust previous estimated gains/losses of businesses previously sold, and a $9 million credit before taxes and minority interest ($5 million after taxes and minority interest) for the reversal of restructuring reserves no longer required.(l) Includes a $50 million reduction of the income tax provision resulting from settlements of prior period tax issues and benefits from an overseas tax program.(m) Includes a pre-tax charge of $71 million ($43 million after taxes) for facility closure costs and severance costs associated with organizational restructuring programs, a $14 million charge before taxes ($9 million after taxes) for legal reserves, an $8 million charge before taxes ($7 million after taxes) for early debt retirement costs, a80$1 million pre-tax charge ($1 million after taxes) to adjust estimated gains/losses of businesses previously sold, and an $8 million pre-tax credit ($5 million after taxes) for the net reversal of restructuring and realignment reserves no longer required.(n) Includes a decrease in the income tax provision of $60 million reflecting a favorable revision of estimated tax accruals upon filing the 2002 federal income tax return and increased research and development credits.(o) Includes a $91 million charge before taxes and minority interest ($55 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $29 million pre-tax charge ($18 million after taxes) for legal reserves, a credit of $19 million before taxes ($12 million after taxes) for gains on early extinguishment of debt, a $21 million charge before taxes ($26 million after taxes) for net losses on sales and impairments of businesses held for sale, and a $23 million credit before taxes ($15 million after taxes) for the reversal of restructuring reserves no longer required.(p) Includes a $13 million credit after minority interest related to a favorable settlement with Australian tax authorities of net operating loss carryforward credits.(q) Includes a charge of $3 million after taxes for the cumulative effect of an accounting change to record the transitional charge for the adoption of FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.”81(a) All periods presented have been restated to reflect the Carter Holt Harvey Limited business and the Weldwood of Canada Limited business as Discontinued operations. (b) Gross margin represents net sales less cost of products sold. (c) Includes a $24 million charge before taxes ($15 million after taxes) for losses on early extinguishment of debt and a $79 million charge before taxes ($52 million after taxes) for estimated losses of businesses held for sale. (d) Includes net income of CHH prior to its sale in the third quarter of 2005. Also included in the 2005 third quarter is a gain of $29 million before taxes ($361 million after taxes) from the sale of CHH. (e) Includes a $31 million charge before taxes ($19 million after taxes) for organizational restructuring charges, a pre-tax credit of $35 million ($21 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, a $19 million pre-tax credit ($12 million after taxes) for net adjustments of losses on businesses previously sold, and interest income of $11 million before taxes ($7 million after taxes) related to the collection of a note receivable from a 2001 sale. (f) Includes an $82 million increase in the income tax provision, including approximately $79 million for deferred taxes related to earnings repatriated during the quarter under the American Jobs Creation Act of 2004. (g) Includes a $44 million charge before taxes ($32 million after taxes) for organizational restructuring charges, a pre-tax charge of $26 million ($16 million after taxes) for losses on early extinguishment of debt, a pre-tax credit of $188 million ($109 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, a net charge of $5 million before taxes ($3 million after taxes) for adjustments of losses on businesses previously sold, a $3 million pre-tax credit ($2 million after taxes) for the net adjustment of previously provided reserves, and interest income of $43 million before taxes ($26 million after taxes) relating to a tax audit agreement. (h) Includes a $517 million net reduction of the income tax provision, including a credit of $553 million from an agreement reached with the U.S. Internal Revenue Service concerning the 1997 through 2000 U.S. federal income tax audits, a charge of $21 million related to cash repatriations from non-U.S. subsidiaries, and a charge of $15 million relating to a change in Ohio state tax laws.
| (i) | Includes a $199 million charge before taxes ($123 million after taxes) for organizational restructuring charges associated with the Company’s previously announced Transformation Plan, a $27 million charge before taxes ($16 million after taxes) for legal reserves, a $7 million charge before taxes ($4 million after taxes) for losses on early debt extinguishment, a $35 million pretax credit ($21 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, a pretax charge of $46 million ($30 million after taxes) for adjustments of estimated losses on businesses sold or held for sale, and a $1 million credit for adjustments of previously provided reserves. |
| (j) | Includes an $11 million tax benefit, 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. |
| (k) | Includes a $14 million charge before taxes ($9 million after taxes) for organizational restructuring programs, a $16 million charge before taxes ($10 million after taxes) for losses on early debt extinguishment, a credit of $9 million before taxes ($6 million after taxes) to adjust estimated gains/losses of businesses previously sold, and a credit of $7 million before taxes ($4 million after taxes) for the net reversal of restructuring and realignment reserves no longer required. |
| (l) | Includes net income of Weldwood of Canada, Limited, and CHH prior to their sales. Also included in the 2004 second quarter is a gain of $268 million before taxes and minority interest ($90 million after taxes and minority interest) from the sale of the CHH Tissue business in the 2004 third quarter, and a charge of $306 million before taxes ($716 million after taxes) to write down the assets of Weldwood to their estimated net realizable value. The 2004 fourth quarter also includes a charge of $17 million before taxes ($5 million credit after taxes) to adjust the loss on the sale of Weldwood. |
| (m) | Includes a $32 million charge before taxes ($20 million after taxes) for organizational restructuring programs, a $65 million charge before taxes ($40 million after taxes) for losses on early debt extinguishment, a charge of $31 million before taxes ($29 million after taxes) for estimated losses of businesses held for sale, and a credit of $6 million before taxes ($3 million after taxes) for the net reversal of restructuring and realignment reserves no longer required. |
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| (n) | Includes a $32 million increase in the income tax provision reflecting an adjustment of deferred tax balances. |
| (o) | Includes an $18 million charge before taxes ($11 million after taxes) for organizational restructuring programs, a charge of $8 million before taxes ($5 million after taxes) for losses on early debt extinguishment, a credit of $103 million before taxes ($64 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, a net charge of $38 million before and after taxes for estimated losses of businesses sold or held for sale, and a credit of $6 million before taxes ($4 million after taxes) for the net reversal of restructuring and realignment reserves no longer required. |
| (p) | Includes a $10 million charge before taxes ($6 million after taxes) for litigation settlements, a $3 million charge before taxes ($2 million after taxes) for losses on early debt extinguishment, a credit of $20 million before taxes ($12 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, a charge of $79 million before taxes ($64 million after taxes) for estimated losses of businesses sold or held for sale, and a credit of $17 million before taxes ($11 million after taxes) for the net reversal of restructuring and realignment reserves no longer required. |
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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NoneNone.
ITEM 9A.CONTROLS AND PROCEDURES
DisclosureEvaluation of Controls and ProceduresProcedures:
As of December 31, 2004,2005, an evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined inpursuant to Rule 13a-15 under the Securities Exchange Act (the Act). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports we file under the Act is recorded, processed, summarized, and reported by the management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Act and the SEC rules thereunder.
Management’s Report on Internal Control Over
Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over our financial reporting, including the safeguarding of assets against unauthorized acquisition, use or disposition. These controls are designed to provide reasonable assurance to management and the Board of Directors regarding preparation of reliable published financial statements and such asset safeguarding, and the preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States (GAAP). Our internal control over financial reporting includes those policies and procedures that:
could have a material effect on our consolidated financial statements; and |
All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore can provide only reasonable assurance as to such financial statement preparation and asset safeguarding. The system is supported by written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified.
As of December 31, 2004,2005, management has assessed the effectiveness of the Company’s internal control over financial reporting. In a report included on page 35,38, management concluded that, based on its assessment, the Company’s internal control over financial reporting is effective as of December 31, 2004.2005.
In making this assessment, we used the criteria described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Our independent registered public accounting firm, Deloitte & Touche LLP, with direct access to our Board of Directors through our Audit Committee, have audited the consolidated financial statements prepared by us. Their report on the consolidated financial statements is included in Part II, Item 8. Financial Statements and Supplementary Data. Our management’s assessment of our internal control over financial reporting has been audited by Deloitte & Touche LLP, as stated in their report included herein.
Management’s Process to Assess the Effectiveness of Internal Control Over Financial Reporting
To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we followed a comprehensive compliance process across the enterprise to evaluate our internal control over financial reporting, engaging employees at all levels of the organization. Our internal control environment includes an enterprise-wide attitude of integrity and control consciousness that establishes a positive “tone at the top.” This is exemplified by our ethics program that includes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in the conduct of our business, which have been distributed to all employees; a toll-free telephone helpline whereby any employee may report suspected violations of law or our policy; and an office of ethics and business practice. The internal control system further includes careful selection and training of super - -
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visory and management personnel, appropriate delegation of authority and division of responsibility, dissemination of accounting and business policies throughout the Company, and an extensive program of internal audits with management follow-up. Our Board of Directors, assisted by the Audit and Finance Committee, monitors the integrity of our financial statements and financial reporting procedures, the performance of our internal audit function and independent auditors, and other matters set forth in its charter. The Committee, which currently consists of four independent directors, meets regularly with representatives of management, and with the independent auditors and the Internal Auditor, with and without management representatives in attendance, to review their activities.
Changes in Internal Control over Financial Reporting
The Company has ongoing initiatives to standardize and upgrade its financial, operating and supply chain systems. The system upgrades will be implemented in stages, by business, over the next several years. Management believes the necessary procedures are in place to maintain effective internal controls over financial reporting as these initiatives continue.
During the fourth quarter of 2004, there were no changes2005, the Company transitioned certain support activities for selected mainframe and AS400 legacy information systems to a third-party service provider. Based on post-transition testing, management believes the necessary procedures are in the Company’splace to maintain effective internal controlcontrols over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.for these support services.
The following information is being provided in lieu of filing a Form 8-K to report our entry into a material definitive agreement under Item 1.01:None.
Consistent with the Company’s compensation philosophy and its objective to attract and retain top talent, the Management Development and Compensation Committee of the Board, composed entirely of independent non-employee directors, reviews the base salaries of senior management on an annual basis and makes adjustments, as necessary, to recognize individual performance against objectives, promotions and
competitive compensation levels. In connection with this annual review, on March 7, 2005, the Management Development and Compensation Committee and the Board of Directors made changes to the salaries of the Company’s named executive officers, effective as of April 1, 2005.82
The adjustment to Mr. Faraci’s base salary was made in recognition of both his performance against objectives as Chairmen and CEO, as well as competitive market salary levels.
The salary adjustments for each of the named executive officers are set forth in Exhibit 10.17.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Information concerning our directors is hereby incorporated by reference to our definitive proxy statement whichthat will be filed with the Securities and Exchange Commission (SEC) within 120 days of the close of our fiscal year. The Audit and Finance Committee of the Board of Directors has at least one member who is a financial expert.expert, as that term is defined in Item 401(h) of Regulation S-K. Further information concerning the composition of the Audit and Finance Committee and our audit committee financial experts is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. Information with respect to our executive officers is set forth on pages 43 and 54 in Part I of this Form 10-K under the caption, “Executive Officers of the Registrant.”
Executive officers of International Paper are elected to hold office until the next annual meeting of the Board of Directors following the annual meeting of shareholders and until the election of successors, subject to removal by the Board.
The Company’s Code of Business Ethics (Code) is applicable to all employees of the Company, including the chief executive officer and senior financial officers, as well as the Board of Directors. No amendments or waivers of the Code have occurred. We intend to disclose any amendments to our Code of Business Ethics and any waivers from a provision of our Code of Business Ethics granted to our directors, chief executive officer and senior financial officers on our Internet Web site within five business days following such amendment or waiver.
We make available free of charge on our Internet Web site atwww.internationalpaper.com, and in print to any shareholder who requests them, our Corporate Governance Principles, our Code of Business Ethics and the chartersCharters of our Audit and Finance Committee, Management Development and Compensation Committee, Governance Committee and Public Policy and Environment Committee. Requests for copies may be directed to the corporate
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secretary at our corporate headquarters. Information with respect to compliance with Section 16(a) of the Securities and Exchange Act is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 11.EXECUTIVE COMPENSATION Information with respect to the compensation of executives and directors of the Company is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS A description of the security ownership of certain beneficial owners and management and equity compensation plan information is hereby incorporated by reference to our definitive proxy statement ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS A description of certain relationships and related transactions is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 14. PRINCIPAL Information with respect to fees paid to, and services rendered by, our principal accountant, and our policies and procedures for pre-approving those services, is hereby incorporated by reference to our definitive proxy statement 83 PART |
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Additional Financial Data
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83Consolidated Schedule: II-Valuation and Qualifying Accounts. . . . . . . . . . .89
| (3) | Exhibits: |
| (3.1) | Form of Restated Certificate of Incorporation of International Paper Company (incorporated by reference to the Company’s Report on Form 8-K dated November 20, 1990, File No. 1-3157). | |
| (3.2) | Certificate of Amendment to the Certificate of Incorporation of International Paper Company (incorporated herein by reference to Exhibit (3) (i) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No. 1-3157). | |
| (3.3) | Certificate of Amendment of the Certificate of Incorporation of International Paper Company (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 1-3157). | |
| (3.4) | By-laws of the Company, as amended (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, File No. 1-3157). | |
| (4.1) | Specimen Common Stock Certificate (incorporated by reference to Exhibit 2-A to the Company’s registration statement on Form S-7, No. 2-56588, dated June 10, 1976). | |
| (4.2) | Indenture, dated as of April 12, 1999, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to International Paper’s Report on Form 8-K filed on June 29, 2000, File No. 1-3157). | |
| (4.3) | Floating Rate Notes Supplemental Indenture, dated as of June 14, 2000, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.2 to International Paper’s Report on Form 8-K filed on June 29, 2000, File No. 1-3157). | |
| (4.4) | 8% Notes Due July 8, 2003 Supplemental Indenture, dated as of June 14, 2000, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.3 to International Paper’s Report on Form 8-K filed on June 29, 2000, File No. 1-3157). | |
| (4.5) | 8 1/8% Notes Due July 8, 2005 Supplemental Indenture dated as of June 14, 2000, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.4 to International Paper’s Report on Form 8-K filed on June 29, 2000, File No. 1-3157). | |
| (4.6) | Form of new 8 1/8% Notes due July 8, 2005, (incorporated by reference to Exhibit 4.1 to International Paper Company’s Registration Statement on Form S-4 dated October 23, 2000, as amended November 15, 2000, File No. 333-48434). | |
| (4.7) | Zero Coupon Convertible Senior Debentures due June 20, 2021, (incorporated by reference to Exhibit 4.2 to International Paper Company’s Registration Statement on Form S-3 dated June 20, 2001, as amended September 7, 2001, October 31, 2001, and January 16, 2002, File No. 333-69082). | |
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SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
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Business Papers, Coated Papers, Pineville, Louisiana Bethesda, Ohioleased and Pulp Vicksburg, Mississippi Cincinnati, Ohio U.S.: International: Newark, Ohio Courtland, Alabama Hong Kong, China Solon, Ohio Selma, Alabama Arles, France Wooster, Ohio (Riverdale Mill) Kenitra, Morocco Eighty-four, Pennsylvania Pine Bluff, Arkansas Lancaster, Pennsylvania Ontario, Californialeased Mount Carmel, Pennsylvania (C & D Center) U.S.: Washington, Pennsylvania Cantonment, Florida Bay Minette, Alabama Georgetown, South Carolina (Pensacola Mill) Decatur, Alabama Laurens, South Carolina Augusta, Georgia Dothan, Alabamaleased Spartanburg, South Carolina Bastrop, Louisiana Conway, Arkansas Morristown, Tennessee (Louisiana Mill) Fordyce, Arkansasleased Murfreesboro, Tennessee Springhill, Louisiana Jonesboro, Arkansas Dallas, Texas (C & D Center) Russellville, Arkansas Edinburg, Texas (2 locations) Bucksport, Maine Carson, California El Paso, Texas Jay, Maine Hanford, California Ft. Worth, Texas (Androscoggin Mill) Modesto, California San Antonio, Texas Quinnesec, Michigan San Leandro, Californialeased Chesapeake, Virginia Sturgis, Michigan Stockton, California Richmond, Virginia (C & D Center) Vernon, California Cedarburg, Wisconsin Sartell, Minnesota Putnam, Connecticut Fond du Lac, Wisconsin Ticonderoga, New York Auburndale, Florida International: Riegelwood, North Carolina Jacksonville, Floridaleased Las Palmas, Canary Islands Hazleton, Pennsylvania Lake Wales, Florida Tenerife, Canary Islands (C & D Center) Forest Park, Georgia Rancagua, Chile Eastover, South Carolina Savannah, Georgia Beijing, China Georgetown, South Carolina Stockbridge, Georgialeased Chengdu, China Sumter, South Carolina Bedford Park, Illinoisleased Dalian, China (C & D Center) Chicago, Illinois Guangzhou, China Franklin, Virginia (2 locations) Des Plaines, Illinois Shenyang, China International: Litchfield, Illinoisleased Tianjin, China Arapoti, Parana, Brazil Northlake, Illinois Arles, France Mogi Guacu, São Paulo, Brazil Fort Wayne, Indiana Chalon-sur-Saone, France Maresquel, France Hartford City, Indiana Creil, France Saillat, France Portland, Indianaleased LePuy, France Kwidzyn, Poland Lexington, Kentucky Mortagne, France Svetogorsk, Russia Lafayette, Louisiana Guadeloupe, French West Indies Inverurie, Scotland Shreveport, Louisiana Asbourne, Ireland Springhill, Louisiana Bellusco, Italy Auburn, Maine Catania, Italy PACKAGING Brownstown, Michigan Pomezia, Italy Howell, Michigan San Felice, Italy Kalamazoo, Michigan Agadir, Morocco Minneapolis, Minnesota (2 locations) Houston, Mississippi 1 leased U.S.: Kansas City, Missouri Casablanca, Morocco Prattville, Alabama North Kansas City, Missourileased Kenitra, Morocco Savannah, Georgia Geneva, New York Alcala, Spainleased Almeria, Spain D.N. Ashrat, Israel International: Barcelona, Spain Mexico City, Mexico Mexico (20 locations) Bilbao, Spain all leased Gandia, Spain Valladolid, Spain U.S.: Chonburi, Thailand Waterbury, Connecticut Thrapston, United Kingdom Indianapolis, Indiana Winsford, United Kingdom Louisville, Kentucky U.S.: Edison, New Jersey Approximately 6.5 million acres Harrison, New Jerseyleased in the South and North Courtland, Alabama West Deptford, New Jersey International: Bastrop, Louisiana Hendersonville, North Carolina Approximately 1.3 million Roanoke Rapids, North Carolina Weaverville, North Carolina acres in Brazil Franklin, Virginia Springfield, Oregon Danville, Virginia Newport News, Virginia U.S.: Roanoke, Virginia Chapman, Alabama International: Citronelle, Alabama Pine Bluff, Arkansas Brockville, Ontario, Canada Maplesville, Alabama Augusta, Georgia Smith Falls, Ontario, Canada Opelika, Alabama Riegelwood, North Carolina Toronto, Ontario, Canada Thorsby, Alabama Prosperity, South Carolina Guangzhou, China Gurdon, Arkansas Texarkana, Texas Sacheon, South Korea Leola, Arkansas Ebbw Vale, Wales, United Kingdom McDavid, Florida Whitehouse, Florida U.S.: Augusta, Georgia Turlock, California Folkston, Georgia Plant City, Florida Meldrim, Georgia Cedar Rapids, Iowa U.S.: Springhill, Louisiana Framingham, Massachusetts Stores Group Wiggins, Mississippi Kalamazoo, Michigan Chicago, Illinois Joplin, Missouri Raleigh, North Carolina 137 locations nationwide Armour, North Carolina International: 128 leased Seaboard, North Carolina London, Ontario, Canada South Central Region Johnston, South Carolina Longueuil, Quebec, Canadaleased Greensboro, North Carolina Newberry, South Carolina Shanghai, China 34 branches in the Southeast States Sampit, South Carolina Santiago, Dominican Republic and Ohio Camden, Texas San Salvador, El Salvadorleased 21 leased Corrigan, Texas Ashrat, Israel Midwest Region Henderson, Texas Fukusaki, Japan Denver, Colorado New Boston, Texas Jeddah, Saudi Arabia 33 branches in the Great Lakes, Franklin, Virginia Seoul, South Korea Mid-America, Rocky Mountain Taipei, Taiwan and South Plain States International: Guacara, Venezuela 20 leased Santana, Amapa, Brazil West Region Arapoti, Parana, Brazil Downey, California U.S.: 25 branches in the Visalia, California Northwest and Pacific States Shelbyville, Illinois 19 leased Kenton, Ohio Northeast Region U.S.: International: Hartford, Connecticut Panama City, Florida Brisbane, Australia 21 branches in the New England Pensacola, Florida Shanghai, China and Middle Atlantic States Port St. Joe, Florida Bogota, Columbia 16 leased Savannah, Georgia Chesire, England Valdosta, Georgia Dover, Ohio International: Oulu, Finland Niort, France Sandarne, Sweden Bedlington, United Kingdom Chester-le-Street, United Kingdom Alvin, Texas Houston, Texasleased Couze, France Ussel, France Printing Papers Uncoated Freesheet (1) Bristols Uncoated Papers and Bristols Coated Freesheet Coated Groundwood Total Coated Papers Uncoated Groundwood (SC Paper) Total Coated & SC Papers Dried Pulp Newsprint Total Printing Papers Industrial Packaging Containerboard Kraft Paper Consumer Packaging Bleached Board Total Packaging Forest Products U.S. Wood Business 21 Lumber mills (bd. ft.) 5 Plywood mills (sq. ft. 3/8" basis) 1 Laminated Veneer Lumber mill (cubic ft.) 2 Pole plants (cubic ft.) Forest Resources We own, manage or have an interest in more than 8 million acres of forestlands worldwide. These forestlands and associated acres are located in the following regions: South North Total U.S. Brazil Total We have harvesting rights in: Russia Total (in thousands of short tons) Americas, Other U.S. Europe Than U.S. Total Printing Papers Uncoated Freesheet 4,000 1,286 463 5,749 Bristols 820 – – 820 Uncoated Papers and Bristols 4,820 1,286 463 6,569 Coated Freesheet 700 44 – 744 Coated Groundwood 1,200 – 224 1,424 Total Coated Papers 1,900 44 224 2,168 Uncoated Groundwood (SC Paper) 100 – – 100 Total Coated and SC Papers 2,000 44 224 2,268 Dried Pulp* 1,325 231 23 1,579 Newsprint – 124 – 124 Total Printing Papers 8,145 1,685 710 10,540 Industrial and Consumer Packaging Containerboard 4,500 170 – 4,670 Kraft Paper 600 – – 600 Bleached Board 1,800 280 – 2,080 Specialty Papers 360 15 – 375 Total Industrial and Consumer Packaging 7,260 465 – 7,725 Carter Holt Harvey (CHH) (Pacific Rim) Forest Products owned 50.5% by International Paper U.S. Wood Business (Units - MM) Pulp & Paper (in thousands of short tons) 21 Lumber mills (board. ft.) 2,500 Containerboard 441 5 Plywood mills (sq. ft. 3/8” basis) 1,600 Dried Pulp 579 Bleached Board 120 (cubic ft.) 3 2 Pole plants (cubic ft.) 4 Wood Products (Units - MM) Medium Density Fiberboard Forest Resources (M Acres) (sq. ft. 3/4” basis) 565 We own, manage or have an interest in more than 9 million acres of forestlands worldwide. These forestlands and associated acres are located in the following regions: Particle Board (sq. ft. 3/4” basis) 318 South 5,985 Plywood (sq. ft. 3/8” basis) 189 North 840 Laminated Veneer Lumber (sq. ft.) 90 Lumber (board ft.) 467 Total U.S. 6,825 CHH 785 Forestlands (M Acres) Brazil 1,220 785 * International Paper has a net surplus pulp position of 0.6 million tons. This is the difference between the 1.6 million tons of dried pulp capacity and 1.0 million tons of dried pulp purchased and consumed. Total 8,830 We have harvesting rights in: Russia 502 Total 502 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||