international paper Q3 2005 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to

Commission File Number 1-3157

INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)

New York 13-0872805
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)

400 Atlantic Street, Stamford, CT 06921
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (203) 541-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ⌧ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes ⌧ No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
No ⌧
Act). Yes

The number of shares outstanding of the registrant’s common stock as of October 31, 2005 was 490,498,543.

1


INDEX
PAGE NO.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations - Three Months and Nine Months Ended September 30,
2005 and 2004 1
Consolidated Balance Sheet - September 30, 2005 and December 31, 2004 2
Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2005 and 2004 3
Consolidated Statement of Changes in Common Shareholders’ Equity - Nine Months Ended
September 30, 2005 and 2004 4
Condensed Notes to Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Financial Information by Industry Segment 38
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
Item 4. Controls and Procedures 42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 43
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits 44
Signatures
.................. 45

* Omitted since no answer is called for, answer is in the negative or inapplicable.

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Statement of Operations
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
$ 6,016 $ 17,342
Net Sales........................................................................................................................ $ 6,036 $ 17,963
Costs and Expenses
Cost of products sold ............................................................................................ 4,412 12,811
4,532 13,413
Selling and administrative expenses ..................................................................... 471 1,423
463 1,420
Depreciation, amortization and cost of timber harvested ..................................... 346 1,003
342 1,015
Distribution expenses ........................................................................................... 260 764
264 782
Taxes other than payroll and income taxes........................................................... 59 179
59 176
Restructuring and other charges ........................................................................... 26 153
70 125
Insurance recoveries ............................................................................................. (103) (103)
(188) (223)
Net losses on sales and impairments of businesses held for sale.......................... 38 60
5 65
Reversal of reserves no longer required, net......................................................... (6) (19)
(3) (3)
Interest expense, net ............................................................................................. 180 541
120 442
Earnings From Continuing Operations Before Income Taxes and Minority
333 530
Interest 372 751
Income tax (benefit) provision.............................................................................. 113 209
(373) (198)
Minority interest expense, net of taxes ................................................................. 5 21
3 8
215 300
Earnings From Continuing Operations ..................................................................... 742 941
Discontinued operations, net of taxes and minority interest................................. (685) (504)
281 236
$ (470) $ $ (204)
Net Earnings (Loss)...................................................................................................... $ 1,023 1,177
Basic Earnings Per Common Share
Earnings from continuing operations.................................................................... $ $ 0.44 $ $ 0.62
1.53 1.94
Discontinued operations ....................................................................................... (1.41) (1.04)
0.58 0.48
Net earnings (loss) ................................................................................................ $ $ (0.97) $ $ (0.42)
2.11 2.42
Diluted Earnings Per Common Share
Earnings from continuing operations.................................................................... $ $ 0.44 $ $ 0.61
1.48 1.90
Discontinued operations ....................................................................................... (1.35) (1.03)
0.55 0.46
Net earnings (loss) ................................................................................................ $ $ (0.91) $ $ (0.42)
2.03 2.36
509.0 488.2
Average Shares of Common Stock Outstanding - Assuming dilution ..................... 507.1 507.5
$ 0.25 $ 0.75
Cash Dividends Per Common Share .......................................................................... $ 0.25 $ 0.75

The accompanying notes are an integral part of these financial statements.

3

Consolidated Balance Sheet
(Unaudited)
(In millions)
September 30, December 31,
2005 2004
Assets ...................................................................................................................................................
Current Assets
Cash and temporary investments ................................................................................................ $ $ 2,180
1,092
Accounts and notes receivable, net ............................................................................................. 2,743
2,918
Inventories .................................................................................................................................. 2,371
2,427
Assets of businesses held for sale ............................................................................................... 4,729
57
Deferred income tax assets ......................................................................................................... 410
389
Other current assets..................................................................................................................... 153
180
Total Current Assets............................................................................................................................. 12,586
7,063
Plants, Properties and Equipment, net .................................................................................................. 12,216
11,850
Forestlands ........................................................................................................................................... 2,157
2,207
Investments........................................................................................................................................... 655
597
Goodwill............................................................................................................................................... 4,994
5,043
Deferred Charges and Other Assets...................................................................................................... 1,609
1,691
$ 34,217
Total Assets ......................................................................................................................................... $ 28,451
Liabilities and Common Shareholders’ Equity
Current Liabilities
Notes payable and current maturities of long-term debt ............................................................. $ $ 222
796
Accounts payable........................................................................................................................ 2,026
2,038
Accrued payroll and benefits ...................................................................................................... 425
387
Liabilities of businesses held for sale ......................................................................................... 3,165
51
Other accrued liabilities .............................................................................................................. 1,496
1,091
Total Current Liabilities ....................................................................................................................... 7,334
4,363
Long-Term Debt................................................................................................................................... 13,632
10,772
Deferred Income Taxes ........................................................................................................................ 1,118
1,287
Other Liabilities.................................................................................................................................... 3,691
2,959
Minority Interest................................................................................................................................... 188
203
Common Shareholders’ Equity
Common stock, $1 par value, 490.5 shares in 2005 and 487.5 shares in 2004 ........................... 487
490
Paid-in capital ............................................................................................................................. 6,562
6,604
Retained earnings........................................................................................................................ 2,562
3,371
Accumulated other comprehensive loss...................................................................................... (1,357)
(1,595)
8,254
8,870
Less: Common stock held in treasury, at cost, 2005 - 0.1 shares................................................ —
3
Total Common Shareholders’ Equity ................................................................................................... 8,254
8,867
$ 34,217
Total Liabilities and Common Shareholders’ Equity ..................................................................... $ 28,451


4

Consolidated Statement of Cash Flows
(Unaudited)
(In millions)

Nine Months Ended
September 30,
2005 2004
Operating Activities...................................................................................................................................................
Net earnings (loss)............................................................................................................................................. $ 1,177 $ (204)
Discontinued operations, net of taxes and minority interest .............................................................................. 504
(236)
Earnings from continuing operations ...................................................................................................... 300
941
Depreciation and amortization .......................................................................................................................... 1,003
1,015
Deferred income tax expense (benefit), net ....................................................................................................... (2)
143
Tax benefit - non-cash settlement of IRS audits................................................................................................ —
(553)
Restructuring and other charges ........................................................................................................................ 153
125
Payments related to restructuring and legal reserves ......................................................................................... (179)
(133)
Insurance recoveries .......................................................................................................................................... (103)
(223)
Reversal of reserves no longer required, net...................................................................................................... (19)
(3)
Net losses on sales and impairments of businesses held for sale ....................................................................... 60
65
Other, net........................................................................................................................................................... 225
277
Changes in current assets and liabilities ............................................................................................................
Accounts and notes receivable................................................................................................................ (378)
(106)
Inventories .............................................................................................................................................. (28)
(44)
Accounts payable and accrued liabilities ................................................................................................ (72)
(609)
Other ....................................................................................................................................................... 106
320
1,066
Cash provided by operations - continuing operations ............................................................................................ 1,215
(129)
Cash provided by (used for) operations - discontinued operations........................................................................ 157
937
Cash Provided by Operations ................................................................................................................................... 1,372
Investment Activities
Invested in capital projects ................................................................................................................................ (743)
(771)
Acquisitions, net of cash acquired..................................................................................................................... (186)
(39)
Proceeds from divestitures ................................................................................................................................ 44
1,440
Other ................................................................................................................................................................. 261
77
(624)
Cash provided by (used for) investment activities - continuing operations........................................................... 707
427
Cash (used for) provided by investment activities - discontinued operations ....................................................... (218)
(197)
Cash Provided by (Used for) Investment Activities ................................................................................................ 489
Financing Activities ...................................................................................................................................................
Issuance of common stock ................................................................................................................................ 132
20
Issuance of debt................................................................................................................................................. 2,136
278
Reduction of debt .............................................................................................................................................. (3,104)
(2,543)
Change in book overdrafts................................................................................................................................. (122)
(30)
Dividends paid .................................................................................................................................................. (364)
(368)
Other ................................................................................................................................................................. (121)
(44)
(1,443)
Cash used for financing activities - continuing operations ..................................................................................... (2,687)
(166)
Cash used for financing activities - discontinued operations.................................................................................. (172)
(1,609)
Cash Used for Financing Activities .......................................................................................................................... (2,859)
(10)
Effect of Exchange Rate Changes on Cash - Continuing Operations .................................................................... (85)
73
Effect of Exchange Rate Changes on Cash - Discontinued Operations................................................................. (5)
(806)
Change in Cash and Temporary Investments ......................................................................................................... (1,088)

Cash and Temporary Investments
Beginning of the period..................................................................................................................................... 2,258
2,180
End of the period ............................................................................................................................................... $ $ 1,452
1,092


5

Consolidated Statement of Changes in Common Shareholders’ Equity
(Unaudited)
(In millions, except share amounts in thousands)

Nine Months Ended September 30, 2005

Common Stock Issued Accumulated Treasury Stock Total
Other Common
Paid-in Retained Comprehensive Shareholders’
Capital Earnings
Shares Amount Income (Loss) Shares Amount Equity
487,495 $ 487 $ 6,562 $ 2,562 $ (1,357) 16 $ — $ 8,254
Balance, December 31, 2004 ..............
Net issuance of stock for various plans 3,004 3 42 — — 78 3 42
Cash dividends - Common stock
($0.75 per share) ............................ — — — (368) — — — (368)
Comprehensive income (loss):
Net earnings............................. — — — 1,177 — — — 1,177
Minimum pension liability
adjustment (less tax of $1) 3 3
Change in cumulative foreign
currency translation
adjustment (less tax of $1) — — — — (215) — — (215)
Net gains (losses) on cash
flow hedging derivatives:..
Net gain arising
during the period
(less tax of $13) .... — — — — 38 — — 38
Less: Reclassification
adjustment for
gains included in
net income (less
tax of $29) ............ — — — — (64) — — (64)
Total comprehensive
income .................. 939
Balance, September 30, 2005 490,499 $ 490 $ 6,604 $ 3,371 $ (1,595) 94 $ 3 $ 8,867

Nine Months Ended September 30, 2004

Common Stock Issued Accumulated Treasury Stock Total
Other Common
Paid-in Retained Comprehensive Shareholders’
Capital Earnings Income (Loss) Equity
Shares Amount Shares Amount
485,162 $ 485 $ 6,500 $ 3,082 $ (1,690) 3,668 $ 140 $ 8,237
Balance, December 31, 2003 .............
Net issuance of stock for various
plans............................................... 142
1,331 1 1 — — (3,634) (140)
Cash dividends - Common stock
($0.75 per share)............................ — — — (364) — — — (364)
Comprehensive income (loss):
Net loss ................................... — — — (204) — — — (204)
Change in cumulative foreign
currency translation
adjustment (less tax of
$0)..................................... — — — — 44 — — 44
Net gains (losses) on cash
flow hedging derivatives:.
Net gain arising
during the period
— — — — 18 — —
(less tax of $6) ..... 18
Less: Reclassification
adjustment for
gains included in
net loss (less tax
of $10) ................. — — — — (20) — — (20)
Total comprehensive
loss....................... (162)

486,493 $ 486 $ 6,501 $ 2,514 $ (1,648) 34 $— $ 7,853
Balance, September 30, 2004 ............


6

Condensed Notes to Consolidated Financial Statements
(Unaudited)

NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to
Form 10-Q and, in the opinion of Management, include all adjustments (consisting only of normal recurring accruals) that are
necessary for the fair presentation of results for the interim periods. Results for the first nine months of the year may not
necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction
with the audited financial statements and the notes thereto included in International Paper’s (the Company) Annual Report on
Form 10-K for the year ended December 31, 2004, which has previously been filed with the Securities and Exchange
Commission.

Financial information by industry segment is presented on page 38. Beginning with the 2005 first quarter, Industrial
Packaging and Consumer Packaging are reported as separate industry segments. Prior period segment information has been
restated to reflect this presentation.

See Note 13 for required pro forma and additional disclosures related to stock-based compensation awards.

Prior year amounts have been restated to present Carter Holt Harvey Limited (CHH) as a discontinued operation. See Note 5
for additional disclosures.

NOTE 2 - EARNINGS PER COMMON SHARE

Earnings per common share from continuing operations are computed by dividing earnings from continuing operations by the
weighted average number of common shares outstanding. Earnings per common share from continuing operations, assuming
dilution, are computed assuming that all potentially dilutive securities, including “in-the-money” stock options, are converted
into common shares at the beginning of each period. In addition, the computation of diluted earnings per share reflects the
inclusion of contingently convertible securities in periods when dilutive. Furthermore, as required by the Emerging Issues
Task Force of the Financial Accounting Standards Board (FASB), the computations of diluted earnings per share for all prior
periods have been restated on this basis. A reconciliation of the amounts included in the computation of earnings per common
share from continuing operations, and earnings per common share from continuing operations, assuming dilution, is as
follows:
In millions, except per share amounts 2005 2004 2005 2004

742 $ 215 $ 941 $ 300
Earnings from continuing operations ............................................................... $
Effect of dilutive securities ................................................................................... 7 —
7 20
749 $ 222 $ 961 $ 300
Earnings from continuing operations - assuming dilution.............................. $
486.4 485.5
Average common shares outstanding................................................................ 486.0 486.0
Effect of dilutive securities
Performance share plan ............................................................................... — —
1.0 1.1
Stock options............................................................................................... 2.6 2.7
0.1 0.4
Zero coupon convertible debentures ........................................................... 20.0 —
20.0 20.0
509.0 488.2
Average common shares outstanding - assuming dilution .............................. 507.1 507.5
1.53 $ 0.44 $ 1.94 $ 0.62
Earnings per common share from continuing operations............................... $
Earnings per common share from continuing operations - assuming
1.48 $ 0.44 $ 1.90 $ 0.61
dilution ............................................................................................................ $

Note: If an amount does not appear in the above table, the security was antidilutive for the period presented.

7

NOTE 3 - RESTRUCTURING AND OTHER CHARGES
During the third quarter of 2005, restructuring and other charges totaling $70 million before taxes ($48 million after taxes)
were recorded. Included in this charge were a pre-tax charge of $44 million ($32 million after taxes) for organizational
restructuring charges and a pre-tax charge of $26 million ($16 million after taxes) for losses on early extinguishment of debt.
Also recorded in the third quarter were a pre-tax credit of $188 million ($109 million after taxes) for insurance recoveries
related to the hardboard siding and roofing litigation (see Note 9) and a $3 million pre-tax credit ($2 million after taxes) for
the net adjustment of previously provided reserves. In addition, a $517 million net reduction of the income tax provision was
recorded, including a credit from an agreement reached with the U.S. Internal Revenue Service concerning the 1997 through
2000 U.S. federal income tax audits, a charge related to cash repatriations from non-U.S. subsidiaries, and a charge relating to
a change in Ohio state tax laws (see Note 8). Interest expense, net, also includes a $43 million pre-tax credit ($26 million
after taxes) relating to this agreement.

During the second quarter of 2005, a pre-tax charge of $31 million ($19 million after taxes) for organizational restructuring
charges, and a pre-tax credit of $35 million ($21 million after taxes) for insurance recoveries related to the hardboard siding
and roofing litigation were recorded. Additionally, an $82 million increase in the income tax provision was recorded,
including approximately $79 million for deferred taxes related to earnings repatriated during the quarter under the American
Jobs Creation Act of 2004.

During the first quarter of 2005, charges totaling $24 million before taxes ($15 million after taxes) were recorded for losses
on early extinguishment of high-coupon-rate debt. Also during the 2005 first quarter, a $19 million reduction in the income
tax provision was recorded reflecting the favorable settlement of a tax matter.

During the third quarter of 2004, restructuring and other charges totaling $26 million before taxes ($16 million after taxes)
were recorded. Included in this charge were $18 million before taxes ($11 million after taxes) for organizational restructuring
programs, and $8 million before taxes ($5 million after taxes) for losses on early extinguishment of debt. The $18 million
restructuring charge included $17 million of severance costs covering the termination of 351 employees and other cash costs
of $1 million. In addition, a pre-tax credit of $103 million ($64 million after taxes) was recorded for insurance recoveries
related to the hardboard siding and roofing litigation, and a $6 million credit before taxes ($4 million after taxes) was
recorded for the net reversal of restructuring and realignment reserves no longer required.

During the first two quarters of 2004, restructuring and other charges totaling $127 million before taxes ($79 million after
taxes) were recorded. Included in this charge were $46 million before taxes ($29 million after taxes) for a corporate-wide
organizational restructuring program and $81 million before taxes ($50 million after taxes) for losses on early extinguishment
of debt. In addition, a $13 million credit before taxes ($7 million after taxes) was recorded for the net reversal of restructuring
and realignment reserves no longer required. Also, a $32 million increase in the tax provision was recorded reflecting an
adjustment of deferred tax balances.

During the last quarter of 2004, restructuring and other charges totaling $13 million before taxes ($8 million after taxes) were
recorded. These charges included a $10 million charge before taxes ($6 million after taxes) for legal settlements and a $3
million charge before taxes ($2 million after taxes) for losses on early extinguishment of debt. In addition, credits of $20
million before taxes ($12 million after taxes) for net insurance recoveries related to the hardboard siding and roofing
litigation and $17 million before taxes and ($11 million after taxes) for the net reversal of reserves no longer needed were
recorded.

8

NOTE 4 – ACQUISITIONS
In 2001, International Paper and Carter Holt Harvey Limited had each acquired a 25% interest in International Paper Pacific
Millennium Limited (IPPM). International Paper recorded goodwill of $25 million in connection with its portion of this
acquisition. IPPM is a Hong Kong-based distribution and packaging company with operations in China and other Asian
countries. On August 1, 2005, pursuant to an existing agreement, International Paper purchased the 50% outside interest of
IPPM for $46.1 million to facilitate possible further growth in Asian markets. Beginning in August 2005, the financial
position and results of operations of IPPM have been included in International Paper’s consolidated financial statements. The
accompanying unaudited consolidated balance sheet as of September 30, 2005 includes preliminary estimates of the fair
values of the assets and liabilities acquired, including approximately $46 million of goodwill. It is anticipated that the
allocation of the purchase price to the assets and liabilities acquired will be completed by December 31, 2005, and could
result in a goodwill impairment charge when completed.

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 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 if no claims for indemnification were offset against the notes. 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 unaudited pro forma information for the nine months ended September 30, 2004 presents the combined results
of the continuing operations of International Paper and Box USA as if the acquisition had occurred as of January 1, 2004.
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, 2004, nor is it necessarily indicative of future results.
Nine Months Ended
September 30, 2004
In millions, except per share amounts
Net sales ..................................................................................................................................... $17,595
Earnings from continuing operations.......................................................................................... 297
Net loss ....................................................................................................................................... (207)
Earnings from continuing operations per common share – assuming dilution ........................... 0.61
Net loss per common share – assuming dilution ........................................................................ (0.42)

NOTE 5 - BUSINESSES HELD FOR SALE AND DIVESTITURES

Discontinued Operations:

On September 21, 2005, International Paper completed the sale of its 50.5% interest in Carter Holt Harvey Limited to Rank
Group Investments Ltd. for approximately U.S. $1.14 billion that will be used primarily to reduce debt. The pre-tax gain on
the sale of $29 million ($361 million after taxes), including a $186 million pre-tax credit from cumulative translation
adjustments, was included in Discontinued operations, together with CHH’s operating results prior to the sale. Additionally,
in May 2004, CHH sold its Tissue business. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets,”

9

International Paper has restated all prior periods to present the operating results of CHH as a discontinued operation.
Revenues associated with this discontinued operation were $541 million and $1.7 billion, respectively, for the three-month
and nine-month periods ended September 30, 2005. Revenues for the comparable 2004 periods were $562 million and $1.8
billion, respectively. Earnings and earnings per share related to this operation were as follows:
In millions, except per share amounts 2005 2004 2005 2004
Earnings (loss) from discontinued operation
Earnings (loss) from operation ...................................................................... $ (11) $ (1) $ (43) $ 21
Income tax (expense) benefit ........................................................................ (9) 38
(67) (90)
Minority interest (expense) benefit, net of taxes ........................................... 3 (33)
(2) 8
(7) 26
Earnings (loss) from discontinued operation, net of taxes ................................ (80) (125)
Gain on sale of CHH ..................................................................................... — —
29 29
Gain on sale of CHH Tissue business ........................................................... — 268
— —
Income tax benefit (expense) ........................................................................ — (69)
332 332
Minority interest expense, net of taxes.......................................................... — (109)
— —
— 90
Gain on sale, net of taxes and minority interest ................................................. 361 361
Earnings (loss) from discontinued operation, net of taxes and minority
$ (7) $ $ 116
interest............................................................................................................... $ 281 236
Earnings (loss) per common share from discontinued operation - assuming
dilution
Earnings (loss) from operation, net of taxes.................................................. $ (0.16) $ (0.02) $ (0.25) $ 0.05
Gain on sale, net of taxes and minority interest ............................................ — 0.19
0.71 0.71
Earnings (loss) per common share from discontinued operation, net of taxes
$ (0.02) $ $ 0.24
and minority interest - assuming dilution ...................................................... $ 0.55 0.46

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:

10

December 31,
2004
In millions
Cash and temporary investments .......................................................................................................................... $ 416
Accounts receivable, net ....................................................................................................................................... 251
Inventories ............................................................................................................................................................ 347
Plants, properties and equipment, net ................................................................................................................... 1,216
Forestlands............................................................................................................................................................ 1,779
Other assets........................................................................................................................................................... 491
Assets of business held for sale .......................................................................................................................... $ 4,500
Notes payable and current maturities of long-term debt ....................................................................................... $ 284
Accounts payable.................................................................................................................................................. 253
Accrued payroll and benefits ................................................................................................................................ 67
Other accrued liabilities ........................................................................................................................................ 17
Long-term debt ..................................................................................................................................................... 500
Other liabilities ..................................................................................................................................................... 602
Minority interest ................................................................................................................................................... 1,360
Liabilities of business held for sale .................................................................................................................... $ 3,083

In July 2004, International Paper reached an agreement to sell its Weldwood of Canada, Ltd. business. This transaction was
completed in December 2004. All periods presented have been restated to present the operating results of Weldwood as a
discontinued operation.

Revenues associated with this discontinued operation were $282 million and $765 million, respectively, for the three-month
and nine-month periods ended September 30, 2004. Earnings and earnings per share related to the discontinued operation
were as follows:
In millions, except per share amounts 2004 2004
Earnings (loss) from discontinued operation......................................................
Earnings from operation................................................................................ $ 59 $ 140
Income tax expense ....................................................................................... (21) (44)
38 96
Earnings from discontinued operation, net of taxes ..........................................
Asset impairment .......................................................................................... (306) (306)
Income tax expense (a).................................................................................. (410) (410)
(716) (716)
Asset impairment, net of taxes.............................................................................
Loss from discontinued operation, net of taxes .................................................. $ (678) $ (620)
Earnings (loss) per common share from discontinued operation - assuming
dilution
Earnings from operation, net of taxes ........................................................... $ 0.08 $ 0.20
Asset impairment, net of taxes ...................................................................... (1.41) (1.47)
Loss per common share from discontinued operation, net of taxes -
assuming dilution ............................................................................................. $ (1.33) $ (1.27)

(a) Reflects the low historic tax basis in Weldwood that was carried over in connection with the acquisition of Champion
in June 2000.

11

Other Divestitures:
2005:

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, the Company completed the sales of its Fine Papers and Industrial Papers businesses and
Papeteries de France for approximately $61 million, $180 million and $14 million, respectively.

The accompanying consolidated statement of operations includes a net $19 million pre-tax credit ($12 million after taxes),
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, final charges related to the sale of Fine Papers and Industrial Papers, as well as net
adjustments of losses from businesses previously sold. 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.

In March 2005, International Paper announced an agreement to sell its Fine Papers business to Mohawk Paper Mills, Inc. of
Cohoes, New York. A $24 million pre-tax loss ($13 million after taxes) was recorded in the first quarter to write down the net
assets of the Fine Papers business to their estimated net realizable value. Included in the sale were the Hamilton, Ohio paper
mill with an annual production capacity of approximately 65,000 tons; the Saybrook, Ohio converting center; and the
Westfield, Massachusetts artist papers converting operation. The sale also included the Strathmore®, Brite Hue®, VIA ® and
Beckett® brands.

Also in March 2005, International Paper announced that it had signed an agreement to sell its Industrial Papers business to an
affiliate of Kohlberg and Company, LLC. A $49 million pre-tax loss ($35 million after taxes) was recorded in the first quarter
to write down the net assets of the Industrial Papers business and related corporate assets to their estimated net realizable
value. The Industrial Papers business included packaging and pressure sensitive papers and related converting assets.

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 July 2004, International Paper signed an agreement to sell Scaldia Papier B.V., and its subsidiary, Recom B.V., to Stora
Enso for approximately $36 million in cash. This sale was completed in the third quarter and resulted in a loss of $34 million
(no impact from taxes). In addition, a $4 million loss, (no impact from taxes) was recorded to adjust the estimated loss on
sale of Papeteries de Souche L.C.

In the second quarter of 2004, a $27 million pre-tax loss ($27 million after taxes) was recorded to write down the assets of the
Company’s Anould mill to their estimated net realizable value. In addition, a $4 million loss before taxes ($2 million after
taxes) was recorded to write down the assets of Food Pack S.A. in Chile to their estimated net realizable value.

In the first quarter of 2004, a $9 million pre-tax gain ($6 million after taxes) was recorded to adjust estimated gains/losses of
businesses previously sold.

At September 30, 2005, assets and liabilities of businesses held for sale totaled $57 million and $51 million, respectively,
consisting of certain smaller businesses held for sale. Assets and liabilities of businesses held for sale at December 31, 2004
totaled $4.7 billion and $3.2 billion, respectively, and included CHH and the Fine Papers business as well as certain smaller
businesses.

12

NOTE 6 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Inventories by major category were:
September 30, December 31,
In millions 2005 2004
Raw materials ........................................................................................................................................ $ 359 $ 321
Finished pulp, paper and packaging products........................................................................................ 1,650
1,639
Finished lumber and panel products ...................................................................................................... 38
28
Operating supplies ................................................................................................................................. 298
328
Other ...................................................................................................................................................... 64
73
2,427 $ 2,371
Total ............................................................................................................................................ $

Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost.
Temporary investments totaled $807 million and $1.7 billion at September 30, 2005 and December 31, 2004, respectively.

Interest payments made during the nine-month periods ended September 30, 2005 and 2004 were $630 million and $601
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. Capitalized net interest costs were $8 million and $6
million for the nine months ended September 30, 2005 and 2004, respectively. Total interest expense was $507 million for
the first nine months of 2005, net of a $43 million credit related to the settlement of the tax audits described above, and $592
million for the first nine months of 2004. Distributions paid under all of International Paper’s preferred securities of
subsidiaries were $11 million and $38 million during the first nine months of 2005 and 2004, respectively. The decrease in
2005 was due to preferred securities redeemed in February 2005 and in 2004. The expense related to these preferred
securities was included in minority interest expense in the consolidated statement of operations, except for $3 million in 2005
and $25 million in 2004 related to the Trust preferred securities that were deconsolidated in the last half of 2003 and
redeemed in February 2005. Income tax payments of $374 million and $173 million were made during the first nine months
of 2005 and 2004, respectively.

Accumulated depreciation was $17.5 billion at September 30, 2005 and $17.3 billion at December 31, 2004. The allowance
for doubtful accounts was $110 million at September 30, 2005 and $124 million at December 31, 2004.

13

The following tables present changes in the goodwill balances as allocated to each business segment for the nine-month
periods ended September 30, 2005 and 2004:
Balance Reclassifications Balance
December 31, and September 30,
Additions/
In millions 2004 Other (Reductions) 2005
Printing Papers .............................................................................. $ 2,876 $ 3$ — $ 2,879
Industrial Packaging ...................................................................... 591 (5) 16 (a) 602
Consumer Packaging ..................................................................... 1,014 (4) 51 (b) 1,061
Distribution.................................................................................... 299 — — 299
Forest Products .............................................................................. 190 1 — 191
Corporate and Other Businesses.................................................... 24 — (13)(c) 11
Total..................................................................................... $ 4,994 $ $ 5,043
(5) $ 54

(a) Completion of the accounting for the acquisition of Box USA, $22 million, and the sale of the Industrial Papers
business, $(6) million
(b) Acquisition of minority interest in Shorewood EPC Europe Ltd, $5 million. Acquisition of 50% interest in International
Paper Pacific Millennium, $46 million
(c) Sale of Fine Papers business
Balance Reclassifications Balance
December 31, and Additions/ September 30,
In millions 2003 Other 2004
(Reductions)
Printing Papers .............................................................................. $ 2,878 $ (1) $ — $ 2,877
Industrial Packaging ...................................................................... 345 5 263 (a) 613
Consumer Packaging ..................................................................... 1,016 — (3)(b) 1,013
Distribution.................................................................................... 334 — (23)(c) 311
Forest Products .............................................................................. 190 1 — 191
Corporate and Other Businesses.................................................... 30 (6) 1 25
Total ..................................................................................... $ 4,793 $ (1) $ 238 $ 5,030

(a) Acquisition of Box USA, $264 million, and the sale of Asian box plants, $(1) million
(b) Food Pack S.A. reclassified to assets held for sale
(c) Sale of Scaldia Papier B.V.

The following table presents an analysis of activity related to asset retirement obligations:
Nine Months Ended
September 30,
In millions 2005 2004
Asset retirement obligations, January 1 .................................................................................................. $ 41 $ 48
New liabilities......................................................................................................................................... 3
10
Liabilities settled..................................................................................................................................... (6)
(5)
Net adjustments to existing liabilities ..................................................................................................... (2)
(4)
Accretion expense................................................................................................................................... 1
1
$ 44
Asset retirement obligations, September 30 ....................................................................................... $ 43

This obligation is included in Other liabilities in the accompanying consolidated balance sheet.

14

international paper Q3 2005 10-Q

international paper Q3 2005 10-Q

More Related Content

international paper Q3 2005 10-Q