10-K 1 a39372.htm INTERNATIONAL PAPER COMPANY

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



FORM 10-K

(Mark One)

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2004

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to

COMMISSION FILE NO. 1-3157

INTERNATIONAL PAPER COMPANY

(Exact name of registrant as specified in its charter)

New York
(State or other jurisdiction of incorporation or organization)

13-0872805
(I.R.S. Employer Identification No.)

400 Atlantic Street

Stamford, Connecticut

(Address of principal executive offices)

06921

(Zip Code)

Company’s telephone number, including area code: 203-541-8000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, $1 per share par value

Name of each exchange on which registered
New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 75 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

The aggregate market value of the Registrant’s outstanding common stock held by non-affiliates of the registrant, computed by reference to the closing price as reported on the New York Stock Exchange, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2004) was approximately $21,717,727,354.

The number of shares outstanding of the Company’s common stock, as of March 4, 2005 was 490,325,984.

Documents incorporated by reference:

Portions of the registrant’s proxy statement filed within 120 days of the close of the registrant’s fiscal year in connection with registrant’s 2005 annual meeting of shareholders are incorporated by reference into Parts III and IV of this Form 10-K.

INTERNATIONAL PAPER COMPANY

Index to Annual Report on Form 10-K

For the Year Ended December 31, 2004

PART I			ITEM 8.	FINANCIAL STATEMENTS AND
				SUPPLEMENTARY DATA
ITEM 1.	BUSINESS			Financial Information by Industry
	General	1		Segment and Geographic Area	33
	Financial Information Concerning			Report of Management on Financial
	Industry Segments	1		Statements, Internal Controls over
	Financial Information About			Financial Reporting & Internal
	International and Domestic			Control Environment and Board of
	Operations	1		Directors Oversight	35
	Competition and Costs	2		Reports of Deloitte & Touche LLP,
	Marketing and Distribution	2		Independent Registered Public
	Description of Principal Products	2		Accounting Firm	36
	Sales Volumes by Product	2		Consolidated Statement of Operations	38
	Research and Development	3		Consolidated Balance Sheet	39
	Environmental Protection	3		Consolidated Statement of Cash Flows	40
	Employees	3		Consolidated Statement of Changes in
	Executive Officers of the Registrant	3		Common Shareholders’ Equity	41
	Raw Materials	4		Notes to Consolidated Financial
	Forward-looking Statements	4		Statements	42
				Interim Financial Results (Unaudited)	79
ITEM 2.	PROPERTIES
	Forestlands	4	ITEM 9.	CHANGES IN AND
	Mills and Plants	5		DISAGREEMENTS WITH
	Capital Investments and Dispositions	5		ACCOUNTANTS ON
				ACCOUNTING AND FINANCIAL
ITEM 3.	LEGAL PROCEEDINGS	5		DISCLOSURE	82

ITEM 4.	SUBMISSION OF MATTERS TO A		ITEM 9A.	CONTROLS AND PROCEDURES	82
	VOTE OF SECURITY HOLDERS	5
			ITEM 9B.	OTHER INFORMATION	82
PART II.
			PART III.
ITEM 5.	MARKET FOR REGISTRANT’S
	COMMON EQUITY, RELATED		ITEM 10.	DIRECTORS AND EXECUTIVE
	STOCKHOLDER MATTERS			OFFICERS OF THE REGISTRANT	82
	AND ISSUER PURCHASES OF
	EQUITY SECURITIES	5	ITEM 11.	EXECUTIVE COMPENSATION	83

ITEM 6.	SELECTED FINANCIAL DATA	6	ITEM 12.	SECURITY OWNERSHIP OF
				CERTAIN BENEFICIAL
ITEM 7.	MANAGEMENT’S DISCUSSION			OWNERS AND MANAGEMENT	83
	AND ANALYSIS OF
	FINANCIAL CONDITION		ITEM 13.	CERTAIN RELATIONSHIPS AND
	AND RESULTS OF			RELATED TRANSACTIONS	83
	OPERATIONS

			ITEM 14.	PRINCIPAL ACCOUNTANT FEES
	Executive Summary	9			AND SERVICES	83
	Corporate Overview	11
	Results of Operations	11	PART IV.
	Description of Industry Segments	15
	Industry Segment Results	17	ITEM 15.		EXHIBITS, FINANCIAL
	Liquidity and Capital Resources	21			STATEMENT SCHEDULES
	Critical Accounting Policies	24			Additional Financial Data	83
	Significant Accounting Estimates	25			Report of Independent Registered Public
	Income Taxes	27			Accounting Firm on Financial
	Recent Accounting Developments	28			Statement Schedule	86
	Legal Proceedings	30			Schedule II - Valuation and Qualifying
	Effect of Inflation	31			Accounts	87
	Foreign Currency Effects	31
	Market Risk	31			SIGNATURES	88

ITEM 7A.	QUANTITATIVE AND		APPENDIX I 2004 LISTING OF FACILITIES			A-1
	QUALITATIVE DISCLOSURES
	ABOUT MARKET RISK	32	APPENDIX II 2004 CAPACITY INFORMATION			A-5

PART I

and Analysis of Financial Condition and Results of Operations.

From 2000 through 2004, International Paper’s capital expenditures approximated $5.9 billion, excluding mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and environmental performance, lower costs, and improve forestlands. Capital spending for continuing operations in 2004 was $1.3 billion and is expected to be approximately $1.4 billion in 2005. This amount is below our expected annual depreciation and amortization expense of $1.7 billion. You can find more information about capital expenditures on page 22 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Discussions of mergers and acquisitions can be found on page 22 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 pages 13 and 14 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 at www.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 33 and 34 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 34 of Item 8. Financial Statements and Supplementary Data.

ITEM 1. BUSINESS

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, the Pacific Rim and South America. We are a New York corporation and were incorporated in 1941 as the successor to the New York corporation of the same name organized in 1898. Our home page on the Internet is www.internationalpaper.com. You can learn more about us by visiting that site.

In the United States at December 31, 2004, the Company operated 27 pulp, paper and packaging mills, 103 converting and packaging plants, 25 wood products facilities, and seven specialty chemicals plants. Production facilities at December 31, 2004 in Europe, Asia, Latin America and South America included seven pulp, paper and packaging mills, 42 converting and packaging plants, one wood products facility, two specialty panels and laminated products plants and six specialty chemicals plants. We distribute printing, packaging, graphic arts, maintenance and industrial products principally through over 286 distribution branches located primarily in the United States. At December 31, 2004, we owned or managed approximately 6.8 million acres of forestlands in the United States, mostly in the South, approximately 1.2 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 available industry capacity and general economic conditions.

Carter Holt Harvey Limited, a New Zealand company that is listed on the New Zealand and Australian stock exchanges and is approximately 50.5% owned by International Paper, operates four mills producing pulp, paper and packaging products, 17 converting and packaging plants and 82 wood products manufacturing and distribution facilities, primarily in New Zealand, Australia and, through the 2004 acquisition of Plantation Timber Products, in China. In New Zealand, Carter Holt Harvey owns approximately 785,000 acres of forestlands.

For management and financial reporting purposes, our businesses are separated into six segments: Printing Papers; Industrial and Consumer Packaging; Distribution; Forest Products; Carter Holt Harvey; and Specialty Businesses and Other. A description of these business segments can be found on pages 15 through 17 of Item 7. Management’s Discussion

Competition and Costs 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 markets, both domestic and international, in which the Company sells its principal products are very competitive. These products are in competition with similar products produced by others, 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 9 through 21 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-5 of Appendix II. Marketing and Distribution The Company sells paper, packaging products, building materials and other products directly to end users and converters, as well as through resellers. 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 also sell significant volumes of products through paper distributors, including our own merchant distribution network, and agents. We market our U.S. production of lumber and plywood through independent distribution centers. Description of Principal Products The Company’s principal products are described on pages 15 through 17 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	Sales Volumes by Product
	Sales volumes of major products for 2004, 2003, and 2002 were as follows:
	Sales Volumes by Product (1) (2) (Unaudited)
	International Paper Consolidated (excluding Carter Holt Harvey)

		2004				2003		2002

	Printing Papers (In thousands of tons)
	Brazil Uncoated Papers and Bristols	461				447		441
	Europe & Russia Uncoated Papers and Bristols	1,409				1,352		1,364
	U.S. Uncoated Papers and Bristols	4,570				4,439		4,527

	Uncoated Papers and Bristols	6,440				6,238		6,332
	Coated Papers	2,173				2,113		2,212
	Market Pulp (3)	1,422				1,379		1,378

	Packaging (In thousands of tons)
	U.S. Container (Boxes)	2,668				2,204		2,610
	European Container (Boxes)	1,049				1,031		1,020
	Other Industrial and Consumer Packaging	1,222				1,148		742

	Industrial and Consumer Packaging	4,939				4,383		4,372
	Containerboard	2,090				1,946		1,862
	Bleached Packaging Board	1,495				1,348		1,247
	Kraft	605				606		626

	Forest Products (In millions)
	Panels (sq. ft. 3/8” - basis)	1,563				1,580		1,798
	Lumber (board feet)	2,456				2,345		2,464
	MDF and Particleboard (sq. ft. 3/4” - basis)	-				-		129
	Carter Holt Harvey (4)

				2004			2003			2002

	Printing Papers (In thousands of tons)
	Market Pulp (3)			568			499			512
	Packaging (In thousands of tons)
	Containerboard			459			361			400
	Bleached Packaging Board			83			84			89
	Industrial and Consumer Packaging			147			153			154


	Forest Products (In millions)
	Panels (sq. ft. 3/8” - basis)		183		179				200
	Lumber (board feet)		497		503				546
	MDF and Particleboard (sq. ft. 3/4” - basis)		580		582				494

	(1) Includes third party and inter-segment sales.
	(2) Sales volumes for divested businesses are included through the date of sale, except for discontinued operations.
	(3) Includes internal sales to mills.
	(4) Includes 100% of volumes sold.

Research and Development		Of the domestic employees, approximately 34,000 are hourly, with unions representing approximately 20,000. Approximately 16,000 of the union employees are represented by the Paper, Allied-Industrial, Chemical and Energy International Union (PACE) under individual location contracts. During 2004, new labor agreements were ratified at four paper mills with one paper mill contract carrying over to early 2005. During 2005, labor agreements are scheduled to be negotiated at four paper mill operations including Kaukauna, Wisconsin; Ticonderoga, New York; Savannah, Georgia and Roanoke Rapids, North Carolina. During 2004, 13 labor agreements were settled in non-paper mill operations. Settlements included paper converting, wood products, chemical, distribution and woodlands operations. During 2005, new labor agreements are scheduled to be negotiated in 21 non-paper mill operations. In January 2005, the Company’s principal union, PACE, announced that it was merging with the United Steelworkers Union. The merger is subject to a vote of the memberships of both unions in April 2005. The name of the resulting union will be United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union. Executive Officers of the Registrant John V. Faraci, 55, chairman and chief executive officer since November 2003. Prior to this, he was president since February 2003, and executive vice president and chief financial officer from 2000 to 2003. From 1999 to 2000, he was senior vice president-finance and chief financial officer. From 1995 until 1999, he was chief executive officer and managing director of Carter Holt Harvey Limited of New Zealand. Robert M. Amen, 55, president since November 2003. Previously, he served as executive vice president responsible for the Company’s paper business, technology and corporate marketing from 2000 through 2003. He also served as senior vice president-president of International Paper-Europe from 1996 to 2000. Newland A. Lesko, 59, executive vice president-manufacturing and technology since June 2003. He previously served as senior vice president-industrial packaging group from 1998 to 2003. Marianne M. Parrs, 60, executive vice president-administration since 1999 responsible for information technology, investor relations, and global sourcing. H. Wayne Brafford, 53, senior vice president-industrial packaging group since June 2003. He previously served as vice president and general manager-converting, specialty and pulp from 1999 to 2003.
The Company operates research and development centers at Loveland, Ohio; Sterling Forest, New York; Kaukauna, Wisconsin; Savannah, Georgia; Almere, the Netherlands; a regional center for applied forest research in Bainbridge, Georgia; a forest biotechnology center in Rotorua, New Zealand; 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 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 in 2004 was $68 million; $73 million in 2003; and $77 million in 2002. 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 competitive advantage by protecting our trade secrets, patents, trademarks and other intellectual property rights, and by using them as required to support our businesses. Environmental Protection 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 page 30 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Employees As of December 31, 2004, we had approximately 80,000 employees, 52,000 of whom were located in the United States.

Jerome N. Carter, 56, senior vice president-human resources since 1999 when he joined the Company from Union Camp.

Thomas E. Gestrich, 58, senior vice president-consumer packaging since 2001. He previously served as vice president and general manager-beverage packaging from 1999 to 2001.

Andrew R. Lessin, 62, senior vice president-internal audit since 2002. He previously served as vice president-finance from 2000 to 2002. From 1995 to 2000, he served as vice president-controller. He is also a director of Carter Holt Harvey Limited.

Christopher P. Liddell, 46, senior vice president and chief financial officer since March 2003. Prior to this, he served as vice president-finance and controller since February 2003. From 2002 to 2003, he served as vice president-finance. From 1999 to 2002, he served as chief executive officer of Carter Holt Harvey Limited. He is also a director of Carter Holt Harvey Limited.

Richard B. Lowe, 50, senior vice president-xpedx since April 2003. He previously served as region president-xpedx from 1995 to 2003.

Maura A. Smith, 49, senior vice president, general counsel and corporate secretary since April 2003 when she joined 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.

W. Dennis Thomas, 61, senior vice president-public affairs and communications since 1998.

Robert J. Grillet, 49, vice president-finance and controller since April 2003. He previously served as region senior vice president-xpedx from 2000 to 2003. He was group vice president-xpedx from 1995 to 2000.

Raw Materials

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 similar import. 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. Factors which could cause actual results to differ include, among other things, the strength and demand for the Company’s products and changes in overall demand, the effects of competition from foreign and domestic producers, the level of housing starts, changes in the cost or availability of raw materials, unanticipated expenditures relating to the cost of compliance with environmental and other governmental regulations, the ability of the Company to continue to realize anticipated cost savings, performance of the Company’s manufacturing operations, results of legal proceedings, changes related to international economic conditions, specifically in Brazil and Russia, changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Euro, the current military action in Iraq, and the war on terrorism. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements are discussed in greater detail in the Company’s Securities and Exchange Commission filings.

ITEM 2. PROPERTIES

Forestlands

The principal raw material used by International Paper is wood in various forms. As of December 31, 2004, the Company or its subsidiaries owned or managed approximately 6.8 million acres of forestlands in the United States, 1.2 million acres in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. An additional 785,000 acres of forestlands in New Zealand were held through Carter Holt Harvey, a consolidated subsidiary of International Paper.

During 2004, the Company’s U.S. forestlands supplied 14.7 million tons of roundwood to its U.S. facilities, representing 23% of its wood fiber requirements. The balance was acquired from other private industrial and nonindustrial forestland owners, with only an insignificant amount coming from public lands of the United States government. In addition, in 2004, 3.8 million tons of wood were sold to other users.

As one of the largest private landowners in the world, International Paper employs professional foresters and wildlife biologists to manage our forestlands with great care

in compliance with the rigorous standards of the Sustainable Forestry Initiative program (SFI®). SFI® includes an independent certification system to ensure the sustainable planting, growing and harvesting of trees while protecting wildlife, plants, soil, water and air quality. All of our U.S. forestlands are certified as complying with SFI® standards by an independent third party, and most of our forestlands outside of the United States comply with similar local or regional sustainable forestry programs as well.

Mills and Plants

A listing of our production facilities, the vast majority of which we own, can be found in Appendix I hereto, which is incorporated herein by reference.

The Company’s facilities are in good operating condition and are suited for the purposes for which they are presently being used. We continue to study the economics of modernization or adopting other alternatives for higher cost facilities.

Capital Investments and Dispositions

Given the size, scope and complexity of our business interests, we continuously examine and evaluate a wide variety of business opportunities and planning alternatives, including possible acquisitions and sales or other dispositions of properties. You can find a discussion about the level of planned capital investments for 2005 on page 24, and dispositions and restructuring activities as of December 31, 2004, on pages 12 through 14 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and on pages 49 through 56 of Item 8. Financial Statements and Supplementary Data.

ITEM 3. LEGAL PROCEEDINGS

Information concerning the Company’s legal proceedings is set forth on pages 30 and 31 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and on pages 59 through 65 of Item 8. Financial Statements and Supplementary Data.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2004.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Dividend per share data on the Company’s common stock and the high and low sales prices for the Company’s common stock for each of the four quarters in 2003 and 2004 are set forth on page 79 of Item 8. Financial Statements and Supplementary Data. Information concerning the exchanges on which the Company’s common stock is listed is set forth on the back cover. As of March 4, 2005, there were approximately 29,180 record holders of common stock of the Company.

(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) Purchased 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
January 1, 2004 - December 31, 2004		56,024^(a)			$41.44		0		0

(a)

Represents shares tendered in connection with stock option exercises.

ITEM 6.

SELECTED FINANCIAL DATA

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		1.00			1.00			1.00			1.00			1.00
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

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 on a monthly basis).

FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY

(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.

2004:

(b) Includes restructuring and other charges of $211 million before taxes and minority interest ($124 million after taxes and minority interest), including a $74 million charge before taxes and minority interest ($43 million after taxes and minority interest) 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, and a $10 million charge before taxes ($6 million after taxes) for litigation settlements. Also included are a $123 million pre-tax credit ($76 million after taxes) for net insurance recoveries related to the hardboard siding and roofing litigation, a $35 million credit before taxes and minority interest ($22 million after taxes and minority interest) for the net reversal of restructuring reserves no longer required, and a pre-tax charge of $144 million ($128 million after taxes) for net losses on sales and impairments of businesses sold or held for sale.

(c) Includes net income of Weldwood of Canada Limited and the Carter Holt Harvey Tissue business prior to their sales. Also included in 2004 is a gain of $268 million before taxes and minority interest ($90 million after taxes and minority interest) for the sale of the Carter Holt

Harvey Tissue business, and a pre-tax charge of $323 million ($711 million after taxes) for the sale of Weldwood of Canada Limited.

(d) Includes a $5 million net 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.

2003:

(e) Includes restructuring and other charges of $298 million before taxes and minority interest ($184 million after taxes and minority interest), including a $236 million charge before taxes and minority interest ($144 million after taxes and minority interest) 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. Also included are a pre-tax charge of $32 million ($33 million after taxes) for net losses on sales and impairments of businesses held for sale, and a credit of $40 million before taxes and minority interest ($25 million after taxes and minority interest) for the net reversal of restructuring reserves no longer required.

(f) 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) Includes a $123 million reduction after minority interest of the income tax provision recorded for significant tax events occurring in 2003.

2002:

(h) Includes restructuring and other charges of $695 million before taxes and minority interest ($435 million after taxes and minority interest), including 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 debt retirement costs. Also included are a credit of $41 million before taxes and minority interest ($101 million after taxes and minority interest) to adjust accrued costs of businesses sold or held for sale, and a pre-tax credit of

$68 million ($43 million after taxes) for the reversal of 2001 and 2000 reserves no longer required. (i) Includes a $1.2 billion charge for the cumulative effect of an accounting change for the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.” (j) Reflects a decrease of $46 million in income tax provision for a reduction of deferred state income tax liabilities. 2001: (k) Includes restructuring and other charges of $1.1 billion before taxes and minority interest ($752 million after taxes and minority interest), including an $892 million charge before taxes and minority interest ($606 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions and a $225 million pre-tax charge ($146 million after taxes) for additional exterior siding legal reserves. Also included are a net pre-tax charge of $629 million ($587 million after taxes) related to dispositions and asset impairments of businesses held for sale, a $42 million pre-tax charge ($28 million after taxes) for Champion merger integration costs, and a $17 million pre-tax credit ($11 million after taxes) for the reversal of excess 2000 and 1999 restructuring reserves.		share of Compania de Petroleos de Chile (COPEC), an extraordinary loss of $460 million before taxes ($310 million after taxes) related to the impairment of the Zanders and Masonite businesses, an extraordinary gain before taxes and minority interest of $368 million ($183 million after taxes and minority interest) related to the sale of Bush Boake Allen, an extraordinary loss of $5 million before taxes and minority interest ($2 million after taxes and minority interest) related to Carter Holt Harvey’s sale of its Plastics division, and an extraordinary pre-tax charge of $373 million ($231 million after taxes) related to impairments of the Argentine investments and the Chemical Cellulose Pulp and the Fine Papers businesses.
(l) Includes an extraordinary pre-tax charge of $73 million ($46 million after taxes) related to the impairment of the Masonite business and the divestiture of the Petroleum and Minerals assets, and a charge of $25 million before taxes and minority interest ($16 million after taxes and minority interest) for the cumulative effect of a change in accounting for derivatives and hedging activities.
2000: (m) Includes restructuring and other charges of $949 million before taxes and minority interest ($589 million after taxes and minority interest), including an $824 million charge before taxes and minority interest ($509 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions and a $125 million pre-tax charge ($80 million after taxes) for additional exterior siding legal reserves. Also included are a $54 million pre-tax charge ($33 million after taxes) for merger-related expenses and a $34 million pre-tax credit ($21 million after taxes) for the reversal of reserves no longer required.
(n) Includes an extraordinary gain of $385 million before taxes and minority interest ($134 million after taxes and minority interest) on the sale of International Paper’s investment in Scitex and Carter Holt Harvey’s sale of its

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	The following table shows the components of net earnings (loss) for each of the last three years:

Executive Summary	In Millions	2004			2003			2002

International Paper benefited from a strong economy in 2004 as demand for paper and packaging products was improved from 2003. Overall average price realizations were up year over year across all our major product lines except for European paper products where a strong Euro attracted imports. Our total industry segment operating profits were up from 2003 reflecting the higher average prices and improved shipments combined with benefits from cost reduction initiatives and a more favorable product mix. These positive effects were partially offset by higher input costs, including wood, energy and chemical costs. Looking forward to 2005, we expect demand in the first quarter to be somewhat positive, although this is a seasonally slow period for many of our businesses. Overall, demand remains solid in the United States and Europe, with strong order backlogs in our coated papers and bleached board businesses. Containerboard and box orders are also good. Uncoated papers’ backlogs were below prior year levels, but are improving as the first quarter progresses. Our average price realizations for most paper and packaging products began the year well above 2004 levels reflecting the realization of previously announced price increases. Raw material costs, especially wood, polyethylene and chemical costs, are expected to increase in early 2005, although energy costs should be flat compared with the fourth quarter of 2004. In addition, pension and other benefit related costs, plus supply chain expenses are expected to be higher in 2005. However, interest costs will decline due to debt repayments in 2004 and the 2005 first quarter. 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 and Consumer Packaging, Distribution, Forest Products, Carter Holt Harvey, and Specialty Businesses and Other.	Industry segment operating profits	$	2,087		$	1,772		$	1,887
	Corporate items		(469	)		(466	)		(253	)

	Corporate special items*		(188	)		(290	)		(586	)
	Interest expense, net		(743	)		(772	)		(785	)

	Minority interest		(3	)		(63	)		(75	)
	Income tax benefit (provision)		(206	)		113			72

	Discontinued operations		(513	)		21			35
	Accounting changes and extraordinary items		–			(13	)		(1,175	)

	Net earnings (loss)	$	(35	)	$	302		$	(880	)

	*Special items include restructuring and other charges, net losses (gains) on sales and impairments of businesses held for sale, insurance recoveries and reversals of reserves no longer required. Industry segment operating profits were $315 million higher in 2004 due principally to improved sales volume ($263 million), higher average prices ($201 million), and the effect of cost reduction initiatives, improved operating performance and a more favorable product mix ($186 million), all partially offset by the impact of higher energy and raw material costs ($192 million), lower earnings from land sales ($95 million), the impact of hurricanes in the South ($18 million), and foreign currency translation rates and other items ($30 million). $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 $2,200 $2,400 Segment Operating Profit (in millions) $1,772 $263 $201 $186 $(192) $(95) $(18) $(30) $2,087 2003 Volume Price Cost/ Operations/ Mix Energy/ Raw Materials Land Sales Hurricanes FX/ Other 2004 The principal changes by segment were as follows: Printing Papers’ profits were $119 million higher as increased sales volume, improved sales mix and lower operating and overhead costs more than offset higher energy and raw material costs. Industrial and Consumer Packaging’s profits were up $92 million. Higher average sales prices and volumes, improved product mix, and reduced overhead costs and improved operations more than offset the effect of higher energy and raw material costs. Forest Products’ profit was $73 million higher. Higher average prices for wood products more than offset the effect of lower harvest volumes and lower earnings from land sales.

Corporate items of $469 million net expense in 2004 was slightly higher than the $466 million net expense in 2003, due to higher pension and supply chain initiative costs, increased inventory-related costs and lower gains on energy hedging transactions, offset in part by lower administrative overhead and benefit-related costs.

Corporate special items, including restructuring and other charges, gains/losses on sales and impairments of businesses held for sale, insurance recoveries and reversals of reserves no longer required, declined to $188 million from $290 million in 2003 and from $586 million in 2002. The decline in 2004 reflects lower restructuring charges that relate to excess capacity shutdowns and organizational restructuring programs, and insurance recoveries relating to hardboard siding and roofing matters.

Interest expense, net, decreased to $743 million from $772 million in 2003 and $785 million in 2002. The decline in 2004 compared with both 2003 and 2002 reflects the lower average interest rates from the refinancing of high coupon rate debt, and higher interest income at Carter Holt Harvey.

The income tax provision of $206 million includes a $41 million tax benefit related to 2004 special items. The $113 million income tax benefit in 2003 included $231 million of benefits for special items occurring in 2003. The $72 million benefit in 2002 also reflected adjustments for special tax items.

During 2004, International Paper completed the sale of its Weldwood of Canada Limited business in the fourth quarter and Carter Holt Harvey completed the sale of its Tissue business in the second quarter. As a result of these transactions, the operating results of these businesses and the gain or loss on the sales are reported in discontinued operations for all periods presented.

Accounting changes included a charge of $13 million in 2003 for the adoption of new accounting pronouncements, and a $1.2 billion charge in 2002 for the adoption of the new goodwill accounting standard.

Liquidity and Capital Resources

For the year ended December 31, 2004, International Paper generated $2.4 billion of operating cash flow, up from $1.8 billion in 2003. Capital spending from continuing operations for the year totaled $1.3 billion, or 81% of depreciation and amortization expense. We repaid approximately $900 million of debt during the year, including various higher coupon rate debt, that will result in lower interest charges in future years. Our liquidity position remains strong, supported by approximately $3.2 billion of unused, committed credit facilities that we believe are adequate to meet future short-

term liquidity requirements. Maintaining an investment grade credit rating for our long-term debt continues to be an important element in our overall financial strategy.

Our focus in 2005 will be to continue to maximize our financial flexibility and preserve liquidity while further reducing future interest expense through the repayment or refinancing of high coupon rate debt, with a target of reducing consolidated debt to approximately $12 billion by the end of 2006.

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.

Pension expenses for our U.S. plans increased to $111 million in 2004 from $60 million in 2003 due principally to increased amortization of unrecognized actuarial losses and a reduction in the assumed discount rate. A further increase of approximately $100 million is expected in 2005, also due to an increase in the amortization of unrecognized actuarial losses, a further reduction in the assumed discount rate, and a decrease in the expected return on plan assets to 8.50% from 8.75% in 2004. Our pension funding policy continues to be to fully fund actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). Unless investment performance is negative or changes are made to our funding policy, it is unlikely that any contributions to our U.S. qualified plan will be required before 2007.

Recent Accounting Developments

Several new accounting standards and interpretations were released that are effective in either 2004 or 2005. The revised standard on share-based payment that will be effective in the third quarter of 2005 will require recognition of compensation cost for any outstanding option grants that are unvested at June 30, 2005, as well as reload grants. While the exact impact will depend upon the number of unvested options at that time, this standard could increase compensation expense by approximately $20 million in both 2005 and 2006, with no significant impact in subsequent years. Accounting guidance was also issued addressing accounting and disclosure for the foreign earnings repatriation provision within the American Jobs Creation Act of 2004. We have started an evaluation of the effects of this provision, but do not expect to complete this evaluation until the second quarter of 2005.

Legal

Payments relating to exterior siding and roofing class action settlements continue to be in line with projections made in 2002. Federal and state court antitrust cases relating to alleged price fixing in the sale of high-pressure laminates were settled in 2004 for a total of $38.5 million. The Company is defending opt-out cases related to a settled class action brought by purchasers of corrugated sheets and containers. Additional information on these matters is included in Note 10 of the Notes to Consolidated Financial Statements in Item 8.

Corporate Overview

While the operating results for International Paper’s various business segments are driven by a number of business-specific factors, changes in International Paper’s operating results are closely tied to changes in general economic conditions in the United States, Europe and Asia. Factors that impact the demand for our products include industrial non-durable goods production, consumer spending, commercial printing and advertising activity, white-collar employment levels, new home construction and repair and remodeling activity, and movements in currency exchange rates. Product prices also tend to follow general economic trends, and are also affected by inventory levels, currency movements and changes in worldwide operating rates. In addition to these revenue-related factors, net earnings are impacted by various cost drivers, the more significant of which include changes in raw material costs, principally wood fiber and chemical costs, energy costs, salary and benefits costs, including pensions, and manufacturing conversion costs.

The following is a discussion of International Paper’s results of operations for the year ended December 31, 2004, and the major factors affecting these results compared to 2003 and 2002.

Results of Operations

For the year ended December 31, 2004, International Paper reported net sales of $25.5 billion, compared with $24.0 billion in 2003 and $23.9 billion in 2002. International net sales (including U.S. exports) totaled $7.9 billion, or 31% of total sales in 2004. This compares to international net sales of $7.2 billion in 2003 and $6.4 billion in 2002.

Full year 2004 results totaled a net loss of $35 million ($0.07 per share basic and diluted), compared with net income of $302 million ($0.63 per share basic and diluted) in 2003 and a net loss of $880 million ($1.83 per share basic, $1.82 per share diluted) in 2002 and amounts include results of discontinued operations and the cumulative effect of accounting changes.

Earnings from continuing operations in 2004 were $478 million compared with $294 million in 2003 and $260 million in 2002. Earnings in 2004 benefited from higher sales volumes, higher average sales prices, cost reduction initiatives, improved mill operations and lower interest expense. These factors more than offset the negative impacts of increased energy and wood fiber costs, lower earnings from land sales, a higher effective tax rate, increased special charges and the impact of the hurricanes in the South. See Industry Segment Results on pages 17 through 21 for a discussion of the impact of these factors by segment.

$100

$200

$300

$400

$500

$600

$700

$800

Earnings From Continuing Operations
(after taxes, in millions)

$294

$194

$148

$154

$(142)

$(70)

$(35)

$(90)

$(13)

2003

Volume

Price

Costs/
Operations/
Mix

Energy/
Raw
Materials

Land
Sales

Tax

Special
Items

2004

$21

$17

$478

Hurri-
canes

Interest

Minority
Interest/
Other

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			–			–