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Consolidated Results Net sales and revenue and operating income numbers reported in our consolidated results do not include the activity of our discontinued operations, which currently include the: • Fine Paper operations (divested in March 2007); • Irish composite panel operations (sold in November 2006); • North American composite panel operations (sold in July 2006); • French composite panel operations (sold in December 2005); and • B.C. Coastal operations (sold in May 2005). We report these activities and results as discontinued operations in our Consolidated Statement of Earnings; however, the results of these operations are included in the segment discussions that follow. HOW WE DID IN 2007 Net Sales and Revenues, Operating Income, Earnings from Discontinued Operations and Net Earnings  COMPARING 2007 WITH 2006 In 2007: • Net sales and revenues decreased $2.4 billion, or 13 percent. • Net earnings increased $337 million. Net Sales and Revenues Net sales and revenues decreased primarily due to continued deterioration of the U.S. housing market. Declines in residential homebuilding throughout the nation have resulted in lower demand for residential building products such as softwood lumber, plywood, OSB and engineered lumber. Sales of these products within our Wood Products segment, excluding those of discontinued operations, were $1.6 billion, or 28 percent, lower than 2006. These difficult market conditions also affected our Real Estate segment where net sales and revenues decreased $976 million, or 29 percent, from 2006. The decreases in our Wood Products and Real Estate segments were partially offset by improved market conditions for core products in our Containerboard, Packaging and Recycling segment, which resulted in increased net sales and revenues of $256 million. Net Earnings Net earnings increased primarily due to several significant, but largely offsetting, factors. Increases to pretax net earnings included: • a $719 million reduction in pretax charges for the impairment of goodwill – $30 million recognized in our Wood Products segment during 2007 compared with $749 million recognized in our Fine Paper business during 2006; • increased contributions of $327 million from improved price realizations for pulp in our Cellulose Fibers segment and from corrugated packaging in our Containerboard, Packaging and Recycling segment; and • a $594 million increase in pretax gains on dispositions. – Pretax gains of $690 million recognized during 2007 included: • $606 million from the Domtar Transaction; and • $84 million from the disposition of property, operating facilities and our New Zealand investments. – Pretax gains of $96 million recognized in 2006 included: • $51 million on the sale of our North American composite panel operations; and • $45 million on the sale of our Irish composite panel operations. Reductions to pretax net earnings included: • a decrease of approximately $640 million earned on the sale of softwood lumber, structural panels, and engineered lumber products in our Wood Products segment – $510 million from lower price realizations and $130 million from lower volume; • decreased gross margins of $376 million on sales of single-family homes in our Real Estate segment; • a decrease of $450 million in pretax income related to legal matters – 2007 included income of $12 million compared with income of $462 million in 2006, which included a $344 million pretax refund of countervailing and anti-dumping deposits; and • increased pretax charges of $197 million for closures, restructuring and the impairment of operating assets and investments, primarily in the Wood Products and Real Estate segments. In addition, income tax expense decreased $566 million. Pretax earnings from continuing operations were substantially lower in 2007 and the significant gain recognized on the U.S. portion of the Domtar Transaction was nontaxable. COMPARING 2006 WITH 2005 In 2006: • Net sales and revenues decreased $174 million, or 1 percent. • Net earnings decreased $280 million, or 38 percent. Net Sales and Revenues Net sales and revenues decreased primarily due to lower demand for residential building products. Excluding discontinued operations, sales of softwood lumber, plywood and OSB within our Wood Products segment declined approximately $800 million due to the weakening U.S. housing market. Offsetting the decreases within our Wood Products segment were the following: • Increases in both the number of single-family homes closed and average sales prices of single-family homes within our Real Estate segment resulted in a $265 million, or 10 percent, improvement in single-family revenues compared with 2005. • Improved market conditions for pulp and paper products within our Cellulose Fibers and Fine Paper segments and for packaging products within our Containerboard, Packaging and Recycling segment resulted in increased revenues of $228 million and $221 million, respectively, as compared with 2005. Net Earnings Net earnings decreased primarily due to several significant, but largely offsetting, factors. Reductions to net earnings included: • goodwill impairment charges of $749 million in our Fine Paper business in 2006; • a decrease of $600 million related to lower average price realizations for softwood lumber and structural panels; • decreased gross margins of $101 million on sales of single-family homes in our Real Estate segment; and • a $196 million reduction in pretax gains on dispositions. – Pretax gains of $96 million recognized in 2006 included: • $51 million on the sale of our North American composite panel operations; and • $45 million on the sale of our Irish composite panel operations. – Pretax gains of $292 million recognized during 2005 included: • $115 million on the sale of our investment in MAS Capital Management; • $63 million on the sale of the B.C. Coastal operations; • $57 million on the sale of our French composite panel operations; and • $57 million related to a deferred gain from previous timberland sales. Increases to 2006 net earnings included: • a $581 million reduction in pretax charges for asset impairments and other charges associated with facility closure decisions made under our ongoing strategic review – pretax charges of $112 million were recognized in 2006 compared with pretax charges of $693 million recognized during 2005; • increased contributions of $412 million from improved price realizations for pulp, paper, liquid packaging, corrugated packaging and containerboard, net of higher manufacturing costs for these same products; • a pretax refund of $344 million in previously paid countervailing and anti-dumping deposits resulting from the settlement of the Canadian softwood lumber dispute; • pretax income of $95 million from the reversal of reserves for alder antitrust litigation; and • one-time tax benefits of $48 million related to a change in the Texas state income tax law, a reduction in the Canadian federal income tax rate and a deferred tax adjustment related to the Medicare Part D subsidy – compared with net one-time tax charges of $23 million in 2005. The 2005 items include a $44 million expense related to the accrual of taxes associated with the repatriation of foreign earnings and benefits of $21 million resulting from a change in the Ohio state and British Columbia income tax law. |