What drove the change from a 2004 net loss to 2005 net earnings?

The filing attributes much of the swing to special items. Net earnings of $1.10 billion in 2005 include a $446 million net income tax benefit (including a $627 million benefit from an IRS audit settlement), a $361 million after-tax gain on the sale of Carter Holt Harvey, and a $258 million pre-tax insurance recovery related to hardboard siding and roofing litigation. The 2004 net loss included a $608 million after-tax loss on Weldwood discontinued operations. Excluding the incremental benefit of $497 million from special items, earnings from continuing operations were $94 million lower than in 2004.

What are the main pressures on operating profit?

Energy, wood, caustic soda and other raw material costs rose sharply, reducing operating profit by $586 million versus 2004. Lower sales volumes, including lack-of-order downtime of about 830,000 tons in 2005 compared with 70,000 tons in 2004, reduced profit by $251 million. Unfavorable foreign currency rates cut profit by $27 million, partly offset by higher average prices of $478 million.

What is the Transformation Plan?

Announced July 19, 2005, the plan narrows the portfolio to two key global platform businesses: uncoated papers (including the xpedx distribution business) and packaging. The company has completed the sale of its 50.5% interest in Carter Holt Harvey and is evaluating possible sales or spin-offs of 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. Decisions on some businesses are anticipated during 2006.

How is the company's balance sheet and liquidity positioned?

Total debt fell as the company repaid about $1.7 billion net in 2005, reducing long-term debt to $11.02 billion from $13.63 billion. Cash and temporary investments were $1.6 billion at year-end. The company reported approximately $3.2 billion of unused committed liquidity, and its total debt to capital ratio was 58.8% at year-end 2005, compared with 62.1% in 2004. Dividends were $1.00 per share, totaling $490 million in 2005.

What pension and legal costs should investors watch for in 2006?

U.S. pension expense was $243 million in 2005 and is estimated at approximately $370 million for 2006, reflecting a mortality table change, higher amortization of actuarial losses and a lower discount rate of 5.50%. The company expects about $130 million of that increase. On legal matters, $230 million of additional insurance cash is expected to be collected in 2006 through 2008, and remaining hardboard siding claims reserves totaled $113 million at year-end 2005, with a possible increase of zero to $20 million in 2006.

IP/INPAP 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 6, 2006. Cited figures are marked; the original filing is the authoritative source.

International Paper Company, a global forest products, paper and packaging company, reported 2005 net sales of $24.10 billion^a, up from $23.36 billion in 2004, and net earnings of $1.10 billion ($2.21 per diluted share) versus a net loss of $35 million in 2004.

Earnings from continuing operations were $859 million^b, but the filing states that included an incremental benefit of $497 million versus 2004 from special items; excluding this benefit, earnings were $94 million lower than in 2004. Higher energy, wood and raw material costs ($586 million) and lower sales volumes ($251 million) were the principal headwinds, partly offset by higher average prices ($478 million) and cost reductions. The company is executing a Transformation Plan announced July 19, 2005, to focus on two platform businesses, uncoated papers (including xpedx distribution) and packaging, while evaluating sales or spin-offs of other businesses and possibly U.S. forestlands, with decisions anticipated for some in 2006.

The Carter Holt Harvey sale in the third quarter of 2005 produced a $361 million^c after-tax gain. Net debt fell by approximately $1.7 billion in 2005, and cash from continuing operations declined to $1.5 billion from $2.1 billion. Capital spending of $1.2 billion is targeted for 2006, and management expects to use free cash flow to pay down debt and return value to shareholders.

Credit and pension items to note: Moody's downgraded the company's long-term debt from Baa2 to Baa3 in 2005, S&P rates it BBB with a negative outlook, and U.S. pension expense rose to $243 million^d in 2005 from $111 million in 2004, with about $370 million expected in 2006. The company also reported $3.2 billion of unused committed credit facilities and recorded a $627 million tax benefit from an IRS audit settlement in 2005.

02—Key points

Key Highlights

Net sales of $24.10 billion in 2005, up from $23.36 billion in 2004 and $22.14 billion in 2003.
Net earnings of $1.10 billion ($2.21 per diluted share) in 2005, compared with a net loss of $35 million in 2004, including a $446 million net income tax benefit from special items.
Industry segment operating profit of $1.92 billion in 2005 versus $2.04 billion in 2004; higher energy and raw material costs of $586 million were the largest negative factor.
Transformation Plan announced July 19, 2005 to focus on uncoated papers (including xpedx) and packaging, with decisions on certain other businesses anticipated in 2006.
Net reduction in debt of approximately $1.7 billion in 2005; long-term debt stood at $11.02 billion at year-end, down from $13.63 billion.
Cash provided by continuing operations of $1.5 billion in 2005, down from $2.1 billion in 2004; 2006 capital spending targeted at $1.2 billion.
Moody's downgraded long-term debt from Baa2 to Baa3 in 2005; S&P rating is BBB with a negative outlook.

03—Questions

Frequently Asked Questions

What drove the change from a 2004 net loss to 2005 net earnings?
The filing attributes much of the swing to special items. Net earnings of $1.10 billion in 2005 include a $446 million net income tax benefit (including a $627 million benefit from an IRS audit settlement), a $361 million after-tax gain on the sale of Carter Holt Harvey, and a $258 million pre-tax insurance recovery related to hardboard siding and roofing litigation. The 2004 net loss included a $608 million after-tax loss on Weldwood discontinued operations. Excluding the incremental benefit of $497 million from special items, earnings from continuing operations were $94 million lower than in 2004.
What are the main pressures on operating profit?
Energy, wood, caustic soda and other raw material costs rose sharply, reducing operating profit by $586 million versus 2004. Lower sales volumes, including lack-of-order downtime of about 830,000 tons in 2005 compared with 70,000 tons in 2004, reduced profit by $251 million. Unfavorable foreign currency rates cut profit by $27 million, partly offset by higher average prices of $478 million.
What is the Transformation Plan?
Announced July 19, 2005, the plan narrows the portfolio to two key global platform businesses: uncoated papers (including the xpedx distribution business) and packaging. The company has completed the sale of its 50.5% interest in Carter Holt Harvey and is evaluating possible sales or spin-offs of 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. Decisions on some businesses are anticipated during 2006.
How is the company's balance sheet and liquidity positioned?
Total debt fell as the company repaid about $1.7 billion net in 2005, reducing long-term debt to $11.02 billion from $13.63 billion. Cash and temporary investments were $1.6 billion at year-end. The company reported approximately $3.2 billion of unused committed liquidity, and its total debt to capital ratio was 58.8% at year-end 2005, compared with 62.1% in 2004. Dividends were $1.00 per share, totaling $490 million in 2005.
What pension and legal costs should investors watch for in 2006?
U.S. pension expense was $243 million in 2005 and is estimated at approximately $370 million for 2006, reflecting a mortality table change, higher amortization of actuarial losses and a lower discount rate of 5.50%. The company expects about $130 million of that increase. On legal matters, $230 million of additional insurance cash is expected to be collected in 2006 through 2008, and remaining hardboard siding claims reserves totaled $113 million at year-end 2005, with a possible increase of zero to $20 million in 2006.

04—Continue

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