# International Paper Co: Form 10-Q for the period ended Sep 30, 2012

- Company: [International Paper Co](/companies/ip.md) (CIK 51434)
- Form: 10-Q
- Filed: 2012-11-07
- Accepted by EDGAR: Nov 7, 2012, 15:07 ET
- Period: 2012-09-30
- Accession: 0000051434-12-000004
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/51434/000005143412000004/ip-9302012xform10xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/51434/000005143412000004/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-01 to 2012-09-30 | $7.03bn | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2012-01-01 to 2012-09-30 | $20.76bn | us-gaap:SalesRevenueNet |
| Selling, general and administrative | 3 months, 2012-07-01 to 2012-09-30 | $527.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2012-01-01 to 2012-09-30 | $1.51bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-07-01 to 2012-09-30 | $539.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2012-01-01 to 2012-09-30 | $1.43bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-07-01 to 2012-09-30 | $197.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2012-01-01 to 2012-09-30 | $559.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-07-01 to 2012-09-30 | $130.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-01-01 to 2012-09-30 | $257.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-07-01 to 2012-09-30 | $237.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2012-01-01 to 2012-09-30 | $559.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-07-01 to 2012-09-30 | $0.54 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2012-01-01 to 2012-09-30 | $1.27 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-07-01 to 2012-09-30 | $0.54 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2012-01-01 to 2012-09-30 | $1.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-07-01 to 2012-09-30 | 439,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2012-01-01 to 2012-09-30 | 439,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2012-01-01 to 2012-09-30 | $2.25bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2012-01-01 to 2012-09-30 | $1.00bn | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2012-01-01 to 2012-09-30 | $344.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2012-01-01 to 2012-09-30 | $35.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2012-09-30 | $1.27bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-09-30 | $8.99bn | us-gaap:AssetsCurrent |
| Total assets | at 2012-09-30 | $32.56bn | us-gaap:Assets |
| Current liabilities | at 2012-09-30 | $5.00bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2012-09-30 | $10.05bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2012-09-30 | $413.0m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2012-09-30 | $7.01bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 78,372 characters.

### EXECUTIVE SUMMARY

International Paper generated diluted earnings per share attributable to International Paper common shareholders before special items of $0.75 in the third quarter of 2012, compared with 2012 second quarter earnings of $0.46 and 2011 third quarter earnings of $0.81. Diluted earnings per share attributable to International Paper common shareholders were $0.54 in the third quarter of 2012, compared with $0.31 in the second quarter of 2012 and $1.08 in the third quarter of 2011.

We delivered strong results in the 2012 third quarter, despite continued global economic headwinds and the absence of three containerboard mills divested as required for regulatory approval for the Temple-Inland acquisition. We also generated excellent cash from operations, reduced balance sheet debt by $800 million, and increased our dividend 14%. Within our North America Industrial Packaging business, we implemented a $50 per ton containerboard price increase and achieved our original run rate target of $300 million in Temple-Inland synergies, fifteen months ahead of our original plan. While maintenance outages were lower in the third quarter across our mill businesses, seasonally softer box demand and continued slow overall growth in our North American packaging businesses resulted in higher sequential market-related downtime in the quarter as we matched our production to our customer's demand. On the strategic project front, our Franklin mill continued its accelerated successful production ramp-up and qualification process for fluff pulp, and the Sun joint venture in China started up their new coated paperboard machine late in the quarter. Subsequent to the end of the third quarter, we also announced our entrance into the Brazilian corrugated packaging market with an agreement to purchase 75% of a newly-formed joint venture containing Grupo Orsa's industrial packaging assets, including three mills and four box plants.

The primary headwind we faced during the 2012 third quarter, besides the expected loss of operating profit associated with the divested mills, was volume, which was down compared to the 2012 second quarter largely due to seasonally lower box sales, continued overall slow growth across our North American packaging businesses and weaker Asian demand. Unfavorable LIFO inventory valuation adjustments and purchase accounting true-ups impacted operating costs during the quarter, but were more than offset by favorable operations, incremental Temple-Inland synergies and improved results after Franklin's startup. Finally, the quarter was favorably impacted by an increase in equity earnings from our Ilim joint venture in Russia, mainly due to a positive foreign currency adjustment.

Looking ahead to the fourth quarter, we expect seasonally stronger volume in our EMEA box business and our Brazilian papers business to offset normal seasonal declines in packaging in North America. Box price realizations associated with the pass through of the North American containerboard increase and mix improvement from higher domestic sales in Brazil are expected to more than offset negative North American papers mix due to price leakage and higher volumes in export markets. Operations are expected to be relatively stable quarter over quarter. As to input costs, we expect higher wood, recycled fiber and energy costs, and we are moving from our lightest maintenance outage quarter to a more average quarter, so our expenses will increase as we move to a normalized level. Fourth-quarter earnings will also be impacted due to business interruptions at our box plants and distribution centers throughout the Northeast caused by Hurricane Sandy. Finally, the contribution from our Ilim joint venture is expected to decrease as we are not expecting another large positive currency adjustment like that experienced in the third quarter.

Earnings per share attributable to International Paper shareholders before special items is a non-GAAP measure. Diluted earnings (loss) per share attributable to International Paper shareholders is the most direct comparable GAAP measure. The Company calculates earnings per share before special items by excluding the after-tax effect of items considered by management to be unusual from the earnings reported under GAAP. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. The Company believes that using this information, along with diluted earnings (loss) per share, provides for a more complete analysis of the results of operations by quarter. The following is a reconciliation of earnings per share attributable to International Paper shareholders before special items to diluted earnings (loss) per share attributable to International Paper shareholders.

|  | Three Months Ended September 30, 2012 | 2011 | Three Months Ended June 30, 2012 |
| --- | ---: | ---: | ---: |
| Earnings Per Share Before Special Items | $0.75 | $0.81 | $0.46 |
| Restructuring and other charges | (0.13) | (0.07) | (0.08) |
| Net gains (losses) on sales and impairments of businesses | (0.11) | 0.34 | (0.11) |
| Earnings Per Common Share from Continuing Operations | 0.51 | 1.08 | 0.27 |
| Discontinued operations | 0.03 | — | 0.04 |
| Diluted Earnings (Loss) Per Common Share as Reported | $0.54 | $1.08 | $0.31 |

In the first quarter of 2012, we eliminated the one-quarter lag in reporting our share of equity earnings from the Ilim joint venture in Russia. Prior year results have been adjusted to reflect the amounts that would have been reported had the one-quarter lag not existed.

### RESULTS OF OPERATIONS

For the third quarter of 2012, International Paper Company reported net sales of $7.0 billion, compared with $7.1 billion in the second quarter of 2012 and $6.6 billion in the third quarter of 2011. The results of operations of Temple-Inland are included since the acquisition in February 2012.

Net earnings attributable to International Paper totaled $237 million, or $0.54 per share, in the 2012 third quarter. This compared with $468 million, or $1.08 per share, in the third quarter of 2011 and $134 million, or $0.31 per share, in the second quarter of 2012.

Earnings from continuing operations attributable to International Paper Company were $223 million in the third quarter of 2012 compared with $468 million in the third quarter of 2011 and $118 million in the second quarter of 2012. Compared with the third quarter of 2011, earnings in the 2012 third quarter benefited from higher sales volumes ($26 million), lower mill outage costs ($19 million), lower raw material and freight costs ($43 million), and Temple-Inland synergies ($52 million). These benefits were offset by lower average sales price realizations ($66 million), the net impact of a more favorable mix of products sold and higher operating costs ($78 million), higher corporate and other costs ($24 million), higher interest expense ($23 million) and higher tax expense ($2 million). Equity earnings, net of taxes, relating to International Paper’s investment in Ilim Holding S.A. were $31 million higher in the 2012 third quarter than in the 2011 third quarter. Net special items were a loss of $107 million in the 2012 third quarter, compared with a gain of $116 million in the 2011 third quarter.

Compared with the second quarter of 2012, earnings benefited from higher average sales price realizations ($4 million), lower mill outage costs ($96 million), lower raw material and freight costs ($5 million), lower interest expense ($6 million), and lower tax expense ($5 million). These benefits were offset by lower sales volumes ($21 million), the net impact of a less favorable mix of products sold and lower operating costs ($2 million), the impact of the divestiture of three containerboard mills ($22 million), and higher corporate and other costs ($2 million). Equity earnings, net of taxes, for Ilim Holding, S.A. increased by $58 million versus the 2012 second quarter. Net special items were a loss of $107 million in the 2012 third quarter, compared with a loss of $85 million in the 2012 second quarter.

To measure the performance of the Company’s business segments from period to period without variations caused by special or unusual items, International Paper’s management focuses on industry segment operating profit. This is defined as earnings from continuing operations before taxes, equity earnings and noncontrolling interests net of taxes, excluding interest expense, corporate charges and corporate special items which may include restructuring charges and (gains) losses on sales and impairments of businesses.

The following table presents a reconciliation of net earnings attributable to International Paper Company to its operating profit:

*In millions*

|  | Three Months Ended September 30, 2012 | 2011 | June 30, 2012 |
| --- | ---: | ---: | ---: |
| Earnings (Loss) From Continuing Operations Attributable to International Paper Company | $223 | $468 | $118 |
| Add back (deduct): |  |  |  |
| Income tax provision (benefit) | 130 | (84) | 57 |
| Equity (earnings) loss, net of taxes | (34) | — | 26 |
| Noncontrolling interests, net of taxes | 1 | (3) | 3 |
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 320 | 381 | 204 |
| Interest expense, net | 163 | 130 | 172 |
| Noncontrolling interests / equity earnings included in operations | — | 1 | (4) |
| Corporate items | 41 | 34 | 45 |
| Special items: |  |  |  |
| Restructuring and other charges | 15 | 25 | 9 |
|  | $539 | $571 | $426 |
| Industry Segment Operating Profit: |  |  |  |
| Industrial Packaging | $255 | $293 | $260 |
| Printing Papers | 202 | 239 | 104 |
| Consumer Packaging | 67 | 30 | 57 |
| Distribution | 15 | 9 | 5 |
| Total Industry Segment Operating Profit | $539 | $571 | $426 |

34

### Industry Segment Operating Profit

Total industry segment operating profits of $539 million in the 2012 third quarter were lower than the $571 million in the 2011 third quarter, but higher than the $426 million in the 2012 second quarter. Compared with the third quarter of 2011, operating profits in the current quarter benefited from higher sales volumes ($37 million), lower mill outage costs ($27 million), lower raw material and freight costs ($61 million), and Temple-Inland synergies ($75 million). These benefits were offset by lower average sales price realizations ($95 million), the net impact of a more favorable mix of products sold and higher operating costs ($112 million) and lower corporate and other items ($28 million). Special items were a loss of $95 million in the 2012 third quarter, compared with a loss of $98 million in the 2011 third quarter.

Compared with the second quarter of 2012, operating profits benefited from higher average sales price realizations ($6 million), lower mill outage costs ($141 million), and lower raw material and freight costs ($7 million). These benefits were offset by lower sales volumes ($32 million), the net impact of a more favorable product mix and higher operating costs ($4 million), the impact of the divestiture of three containerboard mills ($33 million), and higher other costs ($4 million). Special items were a loss of $95 million in the 2012 third quarter, compared with a special item loss of $127 million in the 2012 second quarter.

During the 2012 third quarter, International Paper took approximately 399,000 tons of downtime of which approximately 353,000 tons were market-related compared with approximately 140,000 tons of downtime, which included about 68,000 tons that were market-related, in the 2011 third quarter. During the 2012 second quarter, International Paper took approximately 390,000 tons of downtime of which approximately 161,000 tons were market-related. Market-related downtime is taken to balance internal supply with our customer demand to help manage inventory levels, while maintenance downtime, which makes up the majority of the difference between total downtime and market-related downtime, is taken periodically during the year.

### Sales Volumes by Product (1)

Sales volumes of major products for the three months and nine months September 30, 2012 and 2011 were as follows:

*In thousands of short tons*

| Industrial Packaging | Three Months Ended September 30, 2012 | 2011 | Nine Months Ended September 30, 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: |
| Corrugated Packaging (2) | 2,665 | 1,895 | 7,922 | 5,618 |
| Containerboard (2) | 823 | 614 | 2,400 | 1,789 |
| Recycling | 620 | 608 | 1,754 | 1,860 |
| Saturated Kraft | 47 | 38 | 130 | 122 |
| Bleached Kraft | 30 | 27 | 85 | 75 |
| European Industrial Packaging | 244 | 244 | 770 | 783 |
| Asian Box | 108 | 118 | 306 | 337 |
| Industrial Packaging | 4,537 | 3,544 | 13,367 | 10,584 |
| Printing Papers |  |  |  |  |
| U.S. Uncoated Papers | 668 | 657 | 1,990 | 1,975 |
| European and Russian Uncoated Papers | 326 | 289 | 948 | 907 |
| Brazilian Uncoated Papers | 290 | 283 | 859 | 826 |
| Indian Uncoated Papers (3) | 59 | — | 185 | — |
| Uncoated Papers | 1,343 | 1,229 | 3,982 | 3,708 |
| Market Pulp (4) | 414 | 347 | 1,155 | 1,052 |
| Consumer Packaging |  |  |  |  |
| North American Consumer Packaging | 378 | 388 | 1,139 | 1,208 |
| European Coated Paperboard | 93 | 80 | 278 | 244 |
| Asian Coated Paperboard | 242 | 257 | 719 | 737 |
| Consumer Packaging | 713 | 725 | 2,136 | 2,189 |

(1) Sales volumes include third party and inter-segment sales and exclude sales of equity investees.

(2) Includes Temple-Inland volumes from date of acquisition in February 2012.

(3) Includes APPM volumes from date of acquisition in October 2011.

(4) Includes internal sales to mills.

### Discontinued Operations

***2012:*** Upon the acquisition of Temple-Inland, management committed to a plan to sell the Temple-Inland Building Products business and is currently marketing the sale, which is probable of being closed. The operating results of this business are included in Discontinued operations from the date of acquisition. The assets of this business, totaling $613 million at September 30, 2012, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet at September 30, 2012. The liabilities of this business, totaling $63 million at September 30, 2012, are included in Liabilities of businesses held for sale in the accompanying consolidated balance sheet at September 30, 2012.

***2011:*** The sale of the Company’s Kraft Papers business that closed in January 2007 contained an earnout provision that could require KapStone to make an additional payment to International Paper in 2012. Based on the results through the first four years of the earnout period, KapStone concluded that the threshold would be attained and the full earnout payment would be due to International Paper in 2012. On January 3, 2011, International Paper signed an agreement with KapStone to allow KapStone to pay the Company on January 4, 2011, the discounted amount of $50 million before taxes ($30 million after taxes) that otherwise would have been owed in full under the agreement in 2012. This amount has been included in Discontinued operations in the accompanying consolidated statement of operations.

In the third quarter of 2006, the Company completed the sale of its Brazilian Coated Papers business and restated its financial statements to reflect this business as a discontinued operation. Included in the results for this business in 2005 and 2006 were local country tax contingency reserves for which the related statute of limitations has now expired. A $15 million tax benefit for the reversal of these reserves plus associated interest income of $6 million ($4 million after taxes) was recorded during the three months ended March 31, 2011, and is included in Discontinued operations in the accompanying consolidated statement of operations.

### Income Taxes

The income tax provision was $130 million for the 2012 third quarter. Excluding a benefit of $3 million related to the tax effects of special items, the effective income tax rate for continuing operations was 31% for the quarter.

The income tax provision was $57 million for the 2012 second quarter. Excluding a benefit of $51 million related to the tax effects of special items, the effective income tax rate for continuing operations was 32% for the quarter.

An income tax benefit of $84 million was recorded for the 2011 third quarter. Excluding a benefit of $239 million related to the tax effects of special items, the effective income tax rate for continuing operations was 30% for the quarter.

### Interest Expense and Corporate Items

Net interest expense for the 2012 third quarter was $163 million compared with $172 million in the 2012 second quarter and $130 million in the 2011 third quarter. The higher net expense compared with prior year is due to interest expense associated with the Temple-Inland acquisition.

Corporate items, net, of $41 million in the 2012 third quarter were lower than the $45 million of net expense in the 2012 second quarter, but higher than the $34 million of net expense in the 2011 third quarter. The decrease compared with the prior quarter reflects lower supply chain project costs. The increase compared with the 2011 third quarter reflects higher pension costs partially offset by lower supply chain project costs.

### Special Items

#### Restructuring and Other Charges

***2012:*** During the three months ended September 30, 2012, restructuring and other charges totaling $33 million before taxes ($24 million after taxes) were recorded. Details of these charges were as follows:

*In millions*

|  | Three Months Ended September 30, 2012 Before-Tax Charges | After-Tax Charges |
| --- | ---: | ---: |
| Early debt extinguishment costs | $13 | $8 |
| xpedx restructuring | 8 | 4 |
| EMEA packaging restructuring | 16 | 11 |
| Other | (4) | 1 |
| Total | $33 | $24 |

During the three months ended June 30, 2012, restructuring and other charges totaling $21 million before taxes ($13 million after taxes) were recorded. Details of these charges were as follows:

*In millions*

|  | Three Months Ended June 30, 2012 Before-Tax Charges | After-Tax Charges |
| --- | ---: | ---: |
| Early debt extinguishment costs | $10 | $6 |
| xpedx restructuring | 10 | 6 |
| Other | 1 | 1 |
| Total | $21 | $13 |

37

During the three months ended March 31, 2012, restructuring and other charges totaling $34 million before taxes ($23 million after taxes) were recorded. Details of these charges were as follows:

*In millions*

|  | Three Months Ended March 31, 2012 Before-Tax Charges | After-Tax Charges |
| --- | ---: | ---: |
| Early debt extinguishment costs | $16 | $10 |
| xpedx restructuring | 19 | 14 |
| Other | (1) | (1) |
| Total | $34 | $23 |

***2011:*** During the three months ended September 30, 2011, restructuring and other charges totaling $49 million before taxes ($32 million after taxes) were recorded. Details of these charges were as follows:

*In millions*

|  | Three Months Ended September 30, 2011 Before-Tax Charges | After-Tax Charges |
| --- | ---: | ---: |
| xpedx restructuring | $18 | $13 |
| APPM acquisition | 16 | 10 |
| Temple-Inland merger agreement | 8 | 5 |
| Shorewood | 6 | 4 |
| Other | 1 | — |
| Total | $49 | $32 |

During the three months ended June 30, 2011, restructuring and other charges totaling a gain of $10 million before taxes (a gain of $7 million after taxes) were recorded. Details of these charges were as follows:

*In millions*

|  | Three Months Ended June 30, 2011 Before-Tax Charges | After-Tax Charges |
| --- | ---: | ---: |
| xpedx restructuring | $10 | $6 |
| Franklin, Virginia mill closure costs | (21) | (13) |
| Other | 1 | — |
| Total | $(10) | $(7) |

The 2011 second-quarter change in estimate of closure costs related to the Franklin, Virginia mill is the result of the Company’s decision to repurpose a portion of the mill to produce fluff pulp.

Additionally, a $5 million after-tax charge was recorded for tax adjustments related to state legislative changes and audit settlements (see Note 10).

During the three months ended March 31, 2011, restructuring and other charges totaling $45 million before taxes ($28 million after taxes) were recorded. Details of these charges were as follows:

*In millions*

|  | Three Months Ended March 31, 2011 Before-Tax Charges | After-Tax Charges |
| --- | ---: | ---: |
| Early debt extinguishment costs | $32 | $19 |
| xpedx restructuring | 7 | 4 |
| Other | 6 | 5 |
| Total | $45 | $28 |

38

### Net (Gains) Losses on Sales and Impairments of Businesses

***2012:*** As referenced in Note 6, on July 2, 2012, International Paper finalized the sales of its Ontario and Oxnard (Hueneme), California containerboard mills to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee containerboard mill to Hood Container Corporation. During the three months ended September 30, 2012, the Company recorded a pre-tax charge of $19 million ($49 million after taxes) for additional costs associated with the divestiture of its Ontario and Oxnard (Hueneme), California containerboard mills and its New Johnsonville, Tennessee containerboard mill. Also during the three months ended September 30, 2012, a gain of $1 million, before and after taxes, was recorded for other items.

A pre-tax charge of $9 million ($5 million after taxes) was recorded during the three months ended June 30, 2012 for costs associated with the divestiture of these three containerboard mills. Also, in anticipation of the divestiture of the Hueneme mill in Oxnard, California, a pre-tax charge of $62 million ($38 million after taxes) was recorded during the three months ended June 30, 2012 to adjust the long-lived assets of the mill to their fair value.

During the three months ended June 30, 2012, the Company recorded a pre-tax charge of $6 million ($4 million after taxes) to adjust the previously estimated loss on the sale of the Company’s Shorewood business. Also during the three months ended June 30, 2012, charges of $1 million, before and after taxes, were recorded for other items.

During the three months ended March 31, 2012, the Company recorded a pre-tax gain of $7 million ($6 million after taxes) to adjust the previously estimated loss on the sale of the Company’s Shorewood business. The sale of the Shorewood non-U.S. business was completed in January 2012.

All of the charges discussed above are included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations.

***2011:*** On August 22, 2011, International Paper announced that it had signed an agreement to sell its Shorewood business to Atlas Holdings. During the three months ended September 30, 2011, a pre-tax charge of $82 million (after a $222 million tax benefit and a gain of $8 million related to a non-controlling interest, a gain of $148 million), was recorded to reduce the carrying value of the Shorewood business to fair market value. The sale of the U.S. portion of the Shorewood business to Atlas Holdings closed on December 31, 2011; however, the sale of the remainder of the Shorewood business occurred during January 2012. The assets of the remainder of the Shorewood business, totaling $196 million at December 31, 2011, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet at December 31, 2011. The liabilities of the remainder of the Shorewood business totaling $43 million at December 31, 2011 are included in Liabilities of businesses held for sale in the accompanying consolidated balance sheet at December 31, 2011.

During the three months ended June 30, 2011, the Company recorded a $129 million pre-tax charge ($104 million after taxes) to reduce the carrying value of the North American Shorewood business to fair market value.

During the three months ended March 31, 2011, the Company recorded an $8 million charge (before and after taxes) to further write down the long-lived assets of its Inverurie, Scotland mill to their estimated fair value.

All of the charges discussed above are included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations.

### BUSINESS SEGMENT OPERATING RESULTS

The following presents business segment discussions for the third quarter of 2012.

### Industrial Packaging

*In millions*

|  | 2012 3rd Quarter | 2nd Quarter | Nine Months | 2011 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $3,335 | $3,450 | $9,900 | $2,660 | $2,705 | $7,920 |
| Operating Profit | 255 | 260 | 730 | 293 | 269 | 841 |

Industrial Packaging net sales and operating profits include the results of the Temple-Inland packaging operations from the date of acquisition in February 2012. Net sales for the third quarter of 2012 were 3% lower than in the second quarter of 2012 and 25% higher than in the third quarter of 2011. Operating profits in the third quarter of 2012 included charges of $58 million for integration costs associated with the Temple-Inland acquisition, charges of $19 million for costs associated with the divestiture of three containerboard mills, charges of $16 million for restructuring costs for the Company's European packaging business, a gain of $5 million for the sale of equipment from a previously closed mill and a gain of $1 million related to the closure of the

Etienne mill in France. Operating profits in the second quarter of 2012 included a charge of $62 million to adjust the value of the long-lived assets of the Hueneme mill to their fair value in anticipation of its divestiture, charges of $35 million for integration costs associated with the Temple-Inland acquisition, charges of $9 million for costs associated with the third-quarter 2012 divestiture of the Hueneme mill and two other containerboard mills and a charge of $1 million related to the 2009 closure of the Etienne mill in France. Operating profits in the third quarter of 2011 included a charge of $8 million for costs associated with the agreement to acquire Temple-Inland. Excluding these items, operating profits in the third quarter of 2012 were 7% lower than in the second quarter of 2012 and 14% higher than in the third quarter of 2011.

***North American Industrial Packaging*** net sales were $2.9 billion in the third quarter of 2012 compared with $3.0 billion in the second quarter of 2012 and $2.2 billion in the third quarter of 2011. Operating profits were $256 million ($328 million excluding Temple-Inland integration costs, costs associated with the divestiture of three containerboard mills and the gain on the sale of equipment) in the third quarter of 2012 compared with $248 million ($354 million excluding the valuation adjustment at the Hueneme mill, Temple-Inland integration costs and mill divestiture costs) in the second quarter of 2012 and $283 million ($291 million excluding Temple-Inland acquisition costs) in the third quarter of 2011.

Sales volumes in the third quarter of 2012 were lower than in the second quarter of 2012, reflecting a seasonal decrease in demand for boxes in the agricultural market segment while containerboard shipments were about flat. Total maintenance and market related downtime increased 83,000 tons or 2% of capacity. Maintenance downtime decreased 75,000 tons whereas market related downtime increased 158,000 tons versus the second quarter of 2012. Average sales price realizations increased for domestic and exported containerboard, while box sales price realizations were slightly lower due to a seasonally less favorable mix. Major input costs, primarily recycled fiber, decreased. Planned maintenance downtime costs were $52 million lower in the 2012 third quarter with outages at the Springfield and Orange mills compared with outages at the Mansfield, Prattville, Red River and Rome mills in the 2012 second quarter. Manufacturing costs at the mills were favorable. Operating results in the third quarter of 2012 also reflected a $33 million unfavorable impact due to the divestiture of three containerboard mills.

Compared with the third quarter of 2011, the net impact of the change in sales volumes for the legacy International Paper facilities and the earnings impact of the Temple-Inland business in the third quarter of 2012 was favorable. Average export containerboard sales prices were $65/ton lower, and sales prices for boxes were slightly lower. Input costs for recycled fiber and natural gas decreased, but were partially offset by higher wood costs. Planned maintenance downtime costs for the legacy mills were $5 million lower in the third quarter of 2012. The business took about 52,000 tons of market-related downtime production in the third quarter of 2011.

Entering the fourth quarter of 2012, sales volumes are expected to be seasonally lower for boxes with two fewer shipping days in the quarter. Containerboard sales volumes are also expected to be lower. We expect seasonally higher energy costs. Planned maintenance downtime costs should be about $52 million higher.

***European Industrial Packaging*** net sales were $230 million in the third quarter of 2012 compared with $255 million in the second quarter of 2012 and $275 million in the third quarter of 2011. Operating results were a loss of $3 million (a gain of $12 million excluding restructuring costs and closure costs) in the third quarter of 2012 compared with gains of $11 million ($12 million excluding closure costs) in the second quarter of 2012 and $9 million in the third quarter of 2011.

Sales volumes in the third quarter of 2012 were lower than in the second quarter of 2012 reflecting a seasonal decrease in demand for both agricultural and industrial packaging. Average sales margins improved due to lower board costs combined with stable box prices. Other input costs were slightly higher, primarily for energy. Included in operating costs were costs related to the earthquakes in Northern Italy in May which affected our San Felice box plant by about $3 million in the third quarter of 2012 compared with about $4 million in the second quarter of 2012.

Compared with the third quarter of 2011, sales volumes in the third quarter of 2012 were slightly lower reflecting decreased demand for industrial packaging and containerboard, largely offset by higher shipments of boxes to the agricultural market. Average sales margins were significantly higher due to sales price increases implemented during 2011 and lower board costs. Input costs for energy were slightly higher. Operating costs were higher due to the impact of the Italian earthquakes.

Looking ahead to the fourth quarter of 2012, sales volumes are expected to be higher reflecting a seasonal increase in the fruit and vegetable packaging market, mainly in Morocco. Demand for packaging in the industrial market is also expected to increase. Average sales margins are expected to decrease as box prices remain stable, but costs for board and starch increase. Input costs for energy should be about flat. Expenses associated with the earthquake will be lower in the fourth quarter.

***Asian Industrial Packaging*** net sales for the packaging operations were $105 million in the third quarter of 2012 compared with $100 million in the second quarter of 2012 and $110 million in the third quarter of 2011. Operating profits for the packaging operations were $1 million in the third quarter of 2012 compared with $1 million in the second quarter of 2012 and about breakeven in the third quarter of 2011.

Net sales for the distribution operations were $65 million in the third quarter of 2012 compared with $60 million in the second quarter of 2012 and $65 million in the third quarter of 2011. Operating profits for the distribution operations were $1 million in the third quarter of 2012, about breakeven in the second quarter of 2012 and $1 million in the third quarter of 2011.

Compared with the second quarter of 2012, sales volumes for the packaging business increased reflecting solid market demand while average sales margins were lower reflecting an unfavorable sales mix. Operating profits in the fourth quarter of 2012 are expected to decrease from the third quarter of 2012 reflecting seasonally lower sales volumes.

### Printing Papers

*In millions*

|  | 2012 3rd Quarter | 2nd Quarter | Nine Months | 2011 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $1,580 | $1,510 | $4,650 | $1,550 | $1,585 | $4,665 |
| Operating Profit | 202 | 104 | 452 | 239 | 243 | 683 |

Printing Papers net sales for the third quarter of 2012 were 5% higher than in the second quarter of 2012 and 2% higher than in the third quarter of 2011. Operating profits included a $1 million gain and a $2 million charge in the third quarter of 2012 and the second quarter of 2012, respectively, associated with the acquisition of a majority share of Andhra Pradesh Paper Mills Limited and a gain of $1 million in the third quarter of 2011 for an adjustment to costs associated with the closure of the Franklin mill. Excluding these items, operating profits in the third quarter of 2012 were 90% higher than in the second quarter of 2012 and 16% lower than in the third quarter of 2011.

***North American Printing Papers*** net sales were $695 million in the third quarter of 2012 compared with $670 million in the second quarter of 2012 and $705 million in the third quarter of 2011. Operating profits were $110 million in the third quarter of 2012, $69 million in the second quarter of 2012 and $128 million ($127 million excluding mill closure cost adjustments) in the third quarter of 2011.

Sales volumes in the third quarter of 2012 increased from the second quarter of 2012 reflecting flat demand for uncoated freesheet paper in the domestic market while export shipments increased from the low second quarter level that resulted from capacity constraints at the mills due to planned maintenance outages. Average sales price realizations were flat. Input costs increased for wood, energy, purchased pulp and chemicals. Freight costs were also slightly higher. No planned maintenance outages occurred in the third quarter of 2012 resulting in downtime costs that were $44 million lower than in the second quarter of 2012 during which there were outages at the Eastover, Ticonderoga and Riverdale mills. Operating costs were favorable.

Compared with the third quarter of 2011, sales volumes in the third quarter of 2012 were higher, but average sales margins were lower, reflecting increased shipments to export markets. Average sales price realizations decreased for uncoated freesheet paper in both our domestic and export markets. Higher input costs for chemicals and wood were only partially offset by lower costs for purchased pulp and energy. Freight costs also increased. Planned maintenance downtime costs were $16 million lower than in the third quarter of 2011. Operating costs in the 2012 third quarter were slightly higher reflecting the impact of inflation year-over-year.

Entering the fourth quarter of 2012, sales volumes are expected to be seasonally lower for domestic uncoated freesheet paper. Average sales price realizations are expected to be lower due to export volume and mix. Input costs are expected to be flat. Planned maintenance downtime costs should be $31 million higher with outages scheduled at the Courtland and Eastover mills.

***European Printing Papers*** net sales were $345 million in the third quarter of 2012, compared with $335 million in the second quarter of 2012 and $350 million in the third quarter of 2011. Operating profits were $51 million in the third quarter of 2012 compared with $20 million in the second quarter of 2012 and $48 million in the third quarter of 2011.

Compared with the second quarter of 2012, sales volumes in the third quarter of 2012 were seasonally higher in Russia, while sales volumes in Europe were about flat due to continuing poor economic conditions. Average sales price realizations for uncoated freesheet paper remained stable in both Europe and Russia. Input costs were slightly lower, particularly for wood at the Kwidzyn mill. Planned maintenance downtime costs were $22 million lower in the third quarter of 2012 due to an outage at the Kwidzyn mill compared to outages at the Svetogorsk and Saillat mills in the second quarter of 2012. Operating costs were favorable reflecting strong performance.

Sales volumes in the third quarter of 2012 were higher than in the third quarter of 2011. Average sales price realizations were lower in Europe due to weak economic conditions and market demand, while average sales price realizations in Russia increased. Input costs decreased for wood at the Kwidzyn mill, but increased in Russia. Planned maintenance downtime costs were $1 million lower than in the third quarter of 2011 although both periods had only an outage at the Kwidzyn mill. Manufacturing operating costs were lower.

Looking forward to the fourth quarter of 2012, sales volumes are expected to be seasonally stronger in Russia and up slightly in Europe. Average sales price realizations are expected to remain stable. Input costs will increase in Russia due to higher energy and wood costs. Planned maintenance downtime costs should be $11 million lower with no outages scheduled.

***Brazilian Printing Papers*** net sales were $280 million in the third quarter of 2012 compared with $285 million in the second quarter of 2012 and $290 million in the third quarter of 2011. Operating profits were $45 million in the third quarter of 2012, $51 million in the second quarter of 2012 and $37 million in the third quarter of 2011.

Sales volumes in the third quarter of 2012 were slightly higher than in the second quarter of 2012 due to stronger demand in the Brazilian domestic market for uncoated freesheet paper, partially offset by lower shipments to export markets. Average sales price realizations increased for paper in both the Brazilian market and in the Latin American export paper markets and for pulp. Average sales margins were positively impacted by an increased proportion of sales to the higher-margin domestic market. Input costs increased for purchased pulp, chemicals, energy and wood. Operating costs were lower reflecting good manufacturing performance. Planned maintenance downtime costs were $6 million higher in the third quarter of 2012 with an outage at the Mogi Guacu mill compared with an outage at the Tres Lagoas mill in the second quarter of 2012.

Compared with the third quarter of 2011, sales volumes in the third quarter of 2012 increased for uncoated freesheet paper in both the Brazilian domestic market and the Latin American export markets, and for pulp. Average sales price realizations improved for domestic uncoated freesheet paper and for pulp, but the benefit was more than offset by declining prices for exported paper. Lower input costs for purchased pulp and packaging were partially offset by higher costs for wood and chemicals. Planned maintenance downtime costs were $3 million lower in the 2012 third quarter.

Entering the fourth quarter of 2012, sales volumes are expected to increase reflecting seasonally stronger demand for uncoated freesheet paper in the Brazilian domestic and Latin American export markets. Average sales margins should improve due to higher sales price realizations and a more favorable geographic mix. Input costs are expected to increase for purchased pulp, energy and packaging, but decrease for wood. Planned maintenance downtime costs should be $2 million lower with an outage planned at the Luiz Antonio mill.

***Indian Printing Papers*** net sales were $45 million in the third quarter of 2012 compared with $35 million in the second quarter of 2012. Operating profits were a loss of $2 million ($3 million excluding a gain associated with the acquisition of a majority ownership of Andhra Pradesh Paper Mills (APPM)) in the third quarter of 2012 compared to a loss of $10 million ($8 million excluding costs associated with the acquisition of a majority ownership of APPM), in the second quarter of 2012. The loss in the second quarter of 2012 reflects $8 million of planned maintenance downtime costs.

***Asian Printing Papers*** net sales were $25 million in the third quarter of 2012 compared with $25 million in the second quarter of 2012 and $20 million in the third quarter of 2011. Operating profits were about breakeven in all periods presented.

***U.S. Market Pulp*** net sales were $190 million in the third quarter of 2012 compared with $160 million in the second quarter of 2012 and $185 million in the third quarter of 2011. Operating profits were a loss of $3 million in the third quarter of 2012 compared with a loss of $26 million in the second quarter of 2012 and a gain of $26 million in the third quarter of 2011.

Sales volumes were higher in the third quarter of 2012 compared with the second quarter of 2012 due to the start-up of the Franklin mill in the third quarter. Average sales price realizations for hardwood and softwood market pulp decreased reflecting softening market demand. Fluff pulp average sales price realizations were higher quarter-over-quarter. Input costs were higher for wood, chemicals and energy. Planned maintenance downtime costs in the third quarter of 2012 were $11 million lower with no outages compared with outages at the Pensacola, Eastover and Riegelwood mills in the second quarter of 2012. Operating costs were favorable primarily due to the start-up of the Franklin mill.

Compared with the third quarter of 2011, sales volumes in the third quarter of 2012 were higher. Average sales price realizations were lower for both fluff pulp and market pulp due to weaker market demand. Input costs were about flat. Planned maintenance downtime costs were $1 million lower. Operating costs were higher due to costs at the Franklin mill and inflation.

Entering the fourth quarter of 2012, both sales volumes and average sales price realizations are expected to be about flat overall, however prices are expected to improve for softwood market pulp. Input costs for wood will be higher. Planned maintenance downtime costs should be $4 million higher with outage-related expenses at the Pensacola, Eastover and Franklin mills.

### Consumer Packaging

*In millions*

|  | 2012 3rd Quarter | 2nd Quarter | Nine Months | 2011 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $765 | $780 | $2,355 | $955 | $945 | $2,805 |
| Operating Profit | 67 | 57 | 227 | 30 | (33) | 97 |

Consumer Packaging net sales in the third quarter of 2012 were 2% lower than in the second quarter of 2012 and 20% lower than in the third quarter of 2011. Operating profits in the second quarter of 2012 included charges of $6 million related to the sale of the Shorewood business. Operating profits in the third quarter of 2011 included a charge of $82 million to reduce the fair market value of the Shorewood business, a gain of $8 million for a noncontrolling interest adjustment related to a 2011 second quarter fixed asset impairment at Shorewood Mexico and a gain of $1 million related to the Shorewood reorganization. Excluding these items, operating profits in the third quarter of 2012 were 6% higher than in the second quarter of 2012 and 35% lower than in the third quarter of 2011.

***North American Consumer Packaging*** net sales in the third quarter of 2012 were $475 million compared with $495 million in the second quarter of 2012 and $640 million in the third quarter of 2011. Operating profits were $45 million in the third quarter of 2012 compared with $31 million ($37 million excluding costs associated with the sale of the Shorewood business) in the second quarter of 2012 and $3 million ($76 million excluding costs associated with the sale and the reorganization of the Shorewood business) in the third quarter of 2011.

Coated Paperboard sales volumes in the third quarter of 2012 were slightly higher than in the second quarter of 2012, but the business took 53,000 tons of market-related downtime in the third quarter of 2012 compared with 18,000 tons in the second quarter of 2012. Average sales price realizations eroded slightly. Input costs decreased, primarily for polyethylene. Planned maintenance downtime costs were $12 million lower with a small outage at the Texarkana mill in the 2012 third quarter compared with outages at the Augusta, Riegelwood and Texarkana mills in the 2012 second quarter. Operating costs were lower due to improved performance issues.

Compared with the third quarter of 2011, sales volumes in the third quarter of 2012 decreased, primarily for folding carton board. The business took 15,000 tons of market-related downtime in the third quarter of 2011. Average sales price realizations were lower. Input costs for natural gas and polyethylene were lower, but were partially offset by higher costs for wood. Planned maintenance downtime costs were $6 million higher in the third quarter of 2012 with no outages in the third quarter of 2011. Operating costs were higher.

Foodservice sales volumes in the third quarter of 2012 were seasonally lower than in the second quarter of 2012. Average sales margins increased due to lower costs for board and resin and a more favorable customer mix. Compared with the third quarter of 2011, sales volumes increased in the third quarter of 2012. Average sales margins improved as sales prices increased to allow the pass-through of earlier cost increases and input costs decreased for resins.

Net sales and operating earnings for 2011 also include the Shorewood business.

Looking forward to the fourth quarter of 2012, coated paperboard sales volumes are expected to decrease reflecting a seasonal slowdown and weaker market demand. Average sales margins are also expected to decrease due to lower average sales price realizations and product mix. Planned maintenance downtime costs are expected to be $13 million higher with outages scheduled at the Texarkana and Augusta mills. Input costs are expected to increase for energy, wood and chemicals. Foodservice sales volumes are expected to be higher. Average sales margins are expected to decrease reflecting slightly lower average sales price realizations and higher input costs.

***European Consumer Packaging*** net sales were $95 million in the third quarter of 2012 compared with $90 million in the second quarter of 2012 and $90 million in the third quarter of 2011. Operating profits in the third quarter of 2012 were $21 million compared with $21 million in the second quarter of 2012 and $19 million in the third quarter of 2011.

Sales volumes in the third quarter of 2012 were higher than in the second quarter of 2012 reflecting mixed demand in the Western European market, but strong demand in Eastern Europe. Average sales price realizations were slightly higher due to a more favorable product mix. Operating costs and input costs were about flat. Planned mill maintenance downtime costs were $2 million higher in the third quarter of 2012 which had an outage at the Kwidzyn mill compared to an outage at the Svetogorsk mill in the second quarter of 2012. Compared with the third quarter of 2011, sales volumes were higher. Average sales price realizations were lower. Planned mill maintenance downtime costs were $6 million lower with outages at the Kwidzyn mill in both periods.

Entering the fourth quarter of 2012, sales volumes are expected to be essentially flat, but average sales price realizations are expected to be lower. Planned maintenance downtime costs will be $5 million lower with no outages scheduled. Input costs are expected to increase slightly, particularly for energy costs in Russia.

***Asian Consumer Packaging*** net sales were $195 million in the third quarter of 2012, $195 million in the second quarter of 2012 and $225 million in the third quarter of 2011. Operating profits were $1 million in the third quarter of 2012 compared with $5 million in the second quarter of 2012 and $8 million in the third quarter of 2011. Compared with the second quarter of 2012, operating profits were lower as the unfavorable impacts from lower average sales price realizations and start-up costs associated with a new paper machine were only partially offset by a favorable foreign exchange impact and lower input costs. Compared with the third quarter of 2011, operating profits declined due to lower average sales price realizations and start-up costs for a new paper machine.

Looking ahead to the fourth quarter of 2012, revenues are expected to increase with additional volume from the new paper machine. However, operating profits will continue to be impacted by the ramp-up and high start-up costs and low average sales price realizations.

### Distribution

*In millions*

|  | 2012 3rd Quarter | 2nd Quarter | Nine Months | 2011 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $1,535 | $1,500 | $4,510 | $1,710 | $1,655 | $5,005 |
| Operating Profit | 15 | 5 | 18 | 9 | 4 | 18 |

Distribution net sales in the third quarter of 2012 were 2% higher than in the second quarter of 2012 but 10% lower than in the third quarter of 2011. Operating profits included $9 million, $12 million and $18 million in the third quarter of 2012, the second quarter of 2012 and the third quarter of 2011, respectively, of costs related to the reorganization of the Company’s xpedx operations. Excluding these items, operating profits in the third quarter of 2012 were 41% higher than in the second quarter of 2012 and 11% lower than in the third quarter of 2011.

Sales of papers and graphic arts products in the third quarter of 2012 totaled $900 million compared to $860 million in the second quarter of 2012 and $1.0 billion in the third quarter of 2011. Trade margins as a percent of sales for printing papers decreased from the second quarter of 2012 and the third quarter of 2011 due to shifts between warehouse sales and lower-margin sales shipped directly from the manufacturer. Packaging sales were $400 million in the third quarter of 2012, unchanged from the second quarter of 2012 and the third quarter of 2011. Trade margins as a percent of sales for packaging products remain unchanged from the second quarter of 2012 and increased from the third quarter of 2011 reflecting a change in mix. Sales of facility solutions products totaled $235 million in the third quarter of 2012, down from sales of $240 million in the second quarter of 2012 and $250 million in the third quarter of 2011.

Operating profits before reorganization costs in the third quarter of 2012 were $7 million higher than in the second quarter of 2012 due to an inventory valuation adjustment made in the third quarter of 2012. Operating profits before reorganization costs in the third quarter of 2012 were $3 million lower than in the third quarter of 2011. Decreased sales volumes led to the lower earnings. Looking ahead to the 2012 fourth quarter, operating results are expected to reflect sales levels similar to the third quarter of 2012 offset in part by cost reductions related to the continued reorganization efforts.

### Equity Earnings, Net of Taxes – Ilim

Since October 2007, International Paper and Ilim Holding S.A. (Ilim) have operated a 50:50 joint venture in Russia. Ilim is a separate reportable industry segment and prior to 2012, due to the complex organizational structure of Ilim’s operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reported its share of Ilim’s operating results on a one-quarter lag basis. In 2012, the Company determined that the elimination of the one-quarter lag was preferable because the same period-end reporting date improves overall financial reporting as the impact of current events, economic conditions and global trends are consistently reflected in the financial statements. Beginning January 1, 2012, the Company has applied this change in accounting principle retrospectively to all prior financial periods presented.

The elimination of the one-quarter reporting lag for Ilim had the following impact:

### Consolidated Statement of Operations

*In millions, except per share amounts*

|  | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 |
| --- | ---: | ---: |
| Equity earnings (loss) | $(50) | $(43) |
| Earnings (loss) from continuing operations | (50) | (43) |
| Net earnings (loss) attributable to International Paper Company | (50) | (43) |
| Basic earnings (loss) per share from continuing operations | (0.12) | (0.10) |
| Basic net earnings (loss) per share | (0.12) | (0.10) |
| Diluted earnings (loss) per share from continuing operations | (0.11) | (0.10) |
| Diluted net earnings (loss) per share | (0.11) | (0.10) |

### Consolidated Balance Sheet

*In millions*

|  | December 31, 2011 |
| --- | ---: |
| Investments | $25 |
| Retained earnings | 25 |

The Company recorded equity earnings, net of taxes, of $33 million in the third quarter of 2012 compared with an equity loss, net of taxes, of $25 million in the second quarter of 2012 and equity earnings, net of taxes, of $1 million in the third quarter of 2011. In the third quarter of 2012, the after-tax foreign exchange impact was a gain of $21 million on the remeasurement of U.S. dollar-denominated debt compared with a loss of $41 million in the second quarter of 2012. Sales volumes in the third quarter of 2012 decreased from the second quarter of 2012 mostly due to weakening demand in China. Shipments to China, particularly for softwood pulp, also decreased due to ongoing high inventory levels in China. Average sales price realizations for domestic sales were seasonally higher for kraft linerboard, while export sales prices decreased, reflecting a price reduction on sales of softwood pulp to China. Input costs were slightly higher, primarily for energy and chemicals. Planned maintenance downtime costs were lower in the third quarter of 2012 due to outages taken at Ust Ilimsk compared with the second quarter of 2012 during which there were outages at the Bratsk and Koriazhma mills.

Compared with the third quarter of 2011, sales volumes in the third quarter of 2012 were higher for all product lines in the domestic market and for hardwood pulp and linerboard sales to China, but were lower for softwood pulp sales to China and total sales to other export markets. Average sales price realizations were significantly lower for pulp and containerboard in both domestic and export markets. Input costs increased for wood, electricity and chemicals. A foreign exchange loss of $34 million on the remeasurement of U.S. dollar-denominated debt was recorded in the third quarter of 2011.

Looking forward to the fourth quarter of 2012, sales volumes are expected to be about flat. Average sales price realizations are expected to improve reflecting a seasonal increase in sales prices for domestic linerboard and slight upward movement for export softwood pulp. Input costs are expected to seasonally increase for wood while costs for energy and chemicals are expected to increase slightly.

### LIQUIDITY AND CAPITAL RESOURCES

Cash provided by continuing operations totaled $2.3 billion for the first nine months of 2012, compared with $2.0 billion for the comparable 2011 nine-month period. Earnings from operations adjusted for non-cash charges were $2.1 billion for the first nine months of 2012 compared to $2.5 billion for the first nine months of 2011. Cash provided by working capital components totaled $168 million for the first nine months of 2012 compared to a use of $475 million for the comparable 2011 nine-month period.

The Company generated free cash flow of approximately $1.2 billion and $1.4 billion in the first nine months of 2012 and 2011, respectively. Free cash flow is a non-GAAP measure and the most comparable GAAP measure is cash provided by continuing operations. Management uses free cash flow as a liquidity metric because it measures the amount of cash generated that is available to maintain our assets, make investments or acquisitions, pay dividends and reduce debt, and fund other activities. The following is a reconciliation of free cash flow to cash provided by operations:

*In millions*

|  | Nine Months Ended September 30, 2012 | 2011 |
| --- | ---: | ---: |
| Cash provided by continuing operations | $2,274 | $2,038 |
| Adjustments: |  |  |
| Cash invested in capital projects | (1,001) | (725) |
| Cash contribution to pension plan | 44 | — |
| European A/R securitization program cessation | — | 209 |
| Tax receivable collected related to pension contributions | — | (123) |
| Cash received from unwinding a timber monetization | (251) | — |
| Change in control payments related to Temple-Inland acquisition | 120 | — |
| Free Cash Flow | $1,186 | $1,399 |

Investments in capital projects totaled $1.0 billion in the first nine months of 2012 compared to $725 million in the first nine months of 2011. Full-year 2012 capital spending is currently expected to be approximately $1.5 billion, or about 102% of depreciation and amortization expense for our current businesses.

Financing activities for the first nine months of 2012 included a $71 million net reduction in debt versus an $112 million net reduction in debt during the comparable 2011 nine-month period.

In February 2012, International Paper issued a $1.2 billion term loan with an initial interest rate of LIBOR plus a margin of 138 basis points that varies depending on the credit rating of the Company and a $200 million term loan with an interest rate of LIBOR plus a margin of 175 basis points, both with maturity dates in 2017. The proceeds from these borrowings were used, along with available cash, to fund the acquisition of Temple-Inland. As of September 30, 2012, International Paper has repaid $1 billion on the $1.2 billion term loan. In October 2012, International Paper made a $200 million payment to fully repay the $1.2 billion term loan.

During the third quarter of 2012, International Paper extinguished debt early of approximately $611 million of notes with interest rates ranging from 1.625% to 6.95% and original maturities from 2017 to 2023. Pre-tax early debt retirement costs of $13 million related to these debt repayments are included in Restructuring and other charges in the accompanying consolidated statement of operations.

During the second quarter of 2012, International Paper extinguished debt early of approximately $406 million of notes with interest rates ranging from 1.625% to 7.95% and original maturities from 2017 to 2018. Pre-tax early debt retirement costs of $10 million related to these debt repayments, net of gains on swap terminations, are included in Restructuring and other charges in the accompanying consolidated statement of operations.

During the first quarter of 2012, International Paper extinguished debt early of approximately $30 million of notes with interest rates ranging from 7.82% to 7.95% and original maturities from 2012 to 2018. Pre-tax early debt retirement costs of $4 million related to these debt repayments are included in Restructuring and other charges in the accompanying consolidated statement of operations.

In the third quarter of 2011, approximately $464 million fixed-to-floating interest rate swaps were terminated. These terminations were not in connection with early debt retirements. The resulting $27 million gain was deferred and will be amortized over the life of the associated debt.

During the third and second quarters of 2011, International Paper had no early debt retirements.

During the first quarter of 2011, International Paper extinguished debt early of approximately $129 million of notes with interest rates ranging from 6.20% to 9.375% and original maturities from 2018 to 2025. Pre-tax early debt retirement costs of $32 million related to these debt repayments, net of gains on swap terminations, are included in Restructuring and other charges in the accompanying consolidated statement of operations.

During the first nine months of 2012, International Paper used approximately 2.7 million shares of treasury stock for various incentive plans, including stock options exercises that generated approximately $60 million of cash. Also in the first nine months of 2012, International Paper acquired 1.1 million shares of treasury stock primarily related to restricted stock tax withholding. Payments of restricted stock withholding taxes totaled $35 million. During the first nine months of 2011, International Paper used approximately 0.4 million shares of treasury stock for various incentive plans. Also in the first nine months of 2011, International Paper acquired 1.0 million shares of treasury stock primarily related to restricted stock tax withholding. Payments of restricted stock withholding taxes totaled $30 million. Common stock dividend payments totaled $353 million and $312 million for the first nine months of 2012 and 2011, respectively. Dividends were $0.7875 per share and $0.7125 per share for the first nine months in 2012 and 2011, respectively.

At September 30, 2012, contractual obligations for future payments of debt maturities by calendar year were as follows: $299 million in 2012; $260 million in 2013; $687 million in 2014; $470 million in 2015; $584 million in 2016; $386 million in 2017; and $7.7 billion thereafter.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2012, the Company held long-term credit ratings of BBB (stable outlook) and Baa3 (stable outlook) by S&P and Moody’s, respectively.

At September 30, 2012, International Paper’s contractually committed credit agreements totaled $2.75 billion, which management believes are adequate to cover expected operating cash flow variability during the current economic cycle. The credit agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. The committed liquidity facilities include a $1.5 billion contractually committed bank credit agreement that expires in August 2016 and has a facility fee of 0.175% payable quarterly. The liquidity facilities also include two receivable securitization facilities that expire in 2013 with up to $1.25 billion of commercial paper-based financings based on eligible receivable balances ($1.25 billion available at September 30, 2012). On January 11, 2012, the Company amended its $1.0 billion receivables securitization facility to extend the maturity date from January 2012 to January 2013. A $250 million facility was acquired from Temple-Inland. Both facilities have a facility fee of 0.35% payable monthly. In June 2012, International Paper borrowed $225 million under the receivable securitization facility acquired from Temple-Inland with an interest rate of 0.224% plus a margin of 70 basis points. The borrowings under this receivable securitization facility were repaid in July 2012. At September 30, 2012, International Paper had no borrowings under either receivable securitization facility.

International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2012 with current cash balances and cash from operations, supplemented as required by its existing credit facilities. The Company will continue to rely on debt and capital markets for the majority of any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure planning objectives. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors.

### Acquisitions

On February 13, 2012, International Paper completed the acquisition of Temple-Inland Inc. (Temple-Inland). International Paper acquired all of the outstanding common stock of Temple-Inland for $32.00 per share in cash, totaling approximately $3.7 billion, and assumed approximately $700 million in Temple-Inland’s debt. As a condition to allowing the transaction to proceed, the Company entered into an agreement on a proposed Final Judgment with the Antitrust Division of the U.S. Department of Justice (DOJ) that required the Company to divest three containerboard mills, with approximately 970,000 tons of aggregate containerboard capacity, within 24 months months of closing (with the possibility of two 30-day extensions). On May 4, 2012, the Final Judgment, as proposed, was entered by the Court. On June 7, 2012, the DOJ granted the Company an extension of time until July 10, 2012 to complete the divestitures. On July 2, 2012, International Paper finalized the sales of its Ontario and Oxnard (Hueneme), California containerboard mills to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee containerboard mill to Hood Container Corporation. By completing these transactions, the Company satisfied its divestiture obligations under the Final Judgment. See Note 7 for further details.

On October 14, 2011, International Paper completed the acquisition of a 75% interest in Andhra Pradesh Paper Mills Limited (APPM). The Company purchased 53.5% of APPM for a purchase price of $226 million in cash plus assumed debt from private investors. These sellers also entered into a covenant not to compete for which they received a cash payment of $58 million. The Company also purchased a 21.5% stake of APPM in a public tender offer completed on October 8, 2011 for approximately $105 million in cash.

In November 2011, International Paper appealed a directive from the Securities and Exchange Board of India (SEBI) that would require us to pay to the tendering shareholders the equivalent per share value of the non-compete payment that was paid to the previous controlling shareholders. The Company has deposited approximately $25 million into an escrow account to fund the additional non-compete payment in the event SEBI’s direction is ultimately upheld. By an order dated September 12, 2012, the Indian Securities Appellate Tribunal (SAT) upheld the SEBI directive. As a result of this initial unfavorable ruling, International Paper has included the $25 million escrowed cash amount in the final purchase price consideration of APPM. This adjustment to APPM's purchase price increased Goodwill in the third quarter, after effects of foreign exchange fluctuations, by $21 million. On October 8, 2012, International Paper appealed the SAT's decision to the Indian Supreme Court.

### Joint Ventures

On October 24, 2012, International Paper announced that it had entered into an agreement with Jari Celulose, Embalagens e Papel S/A, a Grupo Orsa company, to form a joint venture. Jari's industrial packaging assets, including three containerboard mills and four box plants, will be separated from its pulp and forestry businesses and transferred to a newly formed company in which International Paper will hold a 75% stake. International Paper's investment in the joint venture will be approximately $470 million (based on the foreign exchange rate at the date the agreement was announced). The transaction is subject to regulatory approval and is expected to close in the 2013 first quarter.

In September 2012, International Paper announced that it had entered into an agreement with H.Ö. Sabanci Holdings A.Ş. to purchase Sabanci's stake in Olmuksa International Paper Sabanci Ambalaj Sanayi ve Ticaret A.Ş. (Olmuksa) for approximately $56 million (based on the foreign exchange rate at the date the agreement was announced). The transaction is subject to customary closing conditions and is expected to close in the first quarter of 2013. Olmuksa is a current joint venture of Sabanci and International Paper in Turkey, with International Paper already holding a percentage of Olmuksa's outstanding shares. Because the transaction will result in International Paper taking majority control of Olmuksa, its completion will trigger a mandatory call for tender of the remaining public shares. International Paper currently accounts for its investment in Olmuksa using the equity method of accounting. This transaction, once finalized, will result in International Paper taking majority control of the joint venture. Once we obtain majority control of Olmuksa, its financial results will be consolidated within our Industrial Packaging segment.

On April 15, 2011, International Paper and Sun Paper Industry Co. Ltd. entered into a Cooperative Joint Venture agreement to establish Shandong IP & Sun Food Packaging Co., Ltd. in China. During December 2011, the business license was obtained and International Paper contributed $55 million in cash for a 55% interest in the joint venture and Sun Paper Industry Co. Ltd. contributed land-use rights valued at approximately $28 million, representing a 45% interest. The purpose of the joint venture is to build and operate a new production line to manufacture coated paperboard for food packaging with a designed annual production capacity of 500,000 tons. The financial position and results of operations of this joint venture have been included in International Paper’s consolidated financial statements from the date of formation in December 2011.

Additionally, during the three months ended March 31, 2011, the Company recorded a gain of $7 million (before and after taxes) related to a bargain purchase price adjustment on an acquisition by our joint venture in Turkey. This gain is included in Equity earnings (losses), net of taxes in the accompanying consolidated statement of operations.

### Ilim Holding S.A. Shareholders’ Agreement

In October 2007, in connection with the formation of the Ilim Holding S.A. joint venture, International Paper entered into a shareholders’ agreement that includes provisions relating to the reconciliation of disputes among the partners. This agreement provides that at any time after the second anniversary of the formation of Ilim, either the Company or its partners may commence procedures specified under the deadlock provisions. Under certain circumstances, the Company would be required to purchase its partners’ 50% interest in Ilim. Any such transaction would be subject to review and approval by Russian and other relevant antitrust authorities. Based on the provisions of the agreement, International Paper estimates that the current purchase price for its partners’ 50% interests would be approximately $400 million to $450 million, which could be satisfied by payment of cash or International Paper common stock, or some combination of the two, at the Company’s option. Any such purchase by International Paper would result in the consolidation of Ilim’s financial position and results of operations in all subsequent periods. The parties have informed each other that they have no current intention to commence procedures specified under the deadlock provision of the shareholders’ agreement, although they have the right to do so.

### CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.

Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include accounting for contingencies, impairment or disposal of long-lived assets, goodwill and other intangible assets, pensions, postretirement benefits other than pensions, stock options and income taxes.

The Company has included in its 2011 Form 10-K a discussion of these critical accounting policies, which are important to the portrayal of the Company’s financial condition and results of operations and require management’s judgments. The Company has not made any changes in these critical accounting policies during the first nine months of 2012.

### Pension Accounting

Net pension expense totaled approximately $256 million for International Paper’s U.S. plans for the nine months ended September 30, 2012, or about $110 million more than the pension expense for the first nine months of 2011. The increase in U.S. plan expense was principally due to a decrease in the assumed discount rate to 5.10% in 2012 from 5.60% in 2011, higher amortization of unrecognized actuarial losses, and the acquisition of Temple-Inland in February 2012. Net pension expense for non-U.S. plans was about $2 million and $1 million for the first nine months of 2012 and 2011, respectively.

After consultation with our actuaries, International Paper determines key actuarial assumptions on December 31 of each year that are used to calculate liability information as of that date and pension expense for the following year. Key assumptions affecting pension expense include the discount rate, the expected long-term rate of return on plan assets, the projected rate of future compensation increases, and various demographic assumptions including expected mortality. The discount rate assumption is determined based on approximately 500 Aa-rated bonds appropriate to provide the projected benefit payments of the plan. A bond portfolio is selected and a single rate is determined that equates the market value of the bonds purchased to the discounted value of the plan’s benefit payments. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. At September 30, 2012, the market value of plan assets for International Paper’s U.S. plans totaled approximately $10.1 billion, consisting of approximately 39% equity securities, 40% fixed income securities, and 21% real estate and other assets. Plan assets did not include International Paper common stock.

Based on the current interest rate environment, we expect the discount rate at the end of 2012 that will be used to value the pension liability at December 31, 2012, and determine the pension expense for 2013, will be lower than that used for 2012. Therefore, we expect a material increase in our pension liability at December 31, 2012, and a material increase in our pension expense for 2013.

The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flow generated by the Company, and other factors. The Company made a $44 million contribution to its pension plan in June 2012. The Company continually reassesses the amount and timing of any discretionary contributions and could elect to make another contribution in 2012. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $101 million in 2012.

### FORWARD-LOOKING STATEMENTS

Certain statements in this report that are not historical in nature may be considered “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar nature. These statements are not guarantees of future performance and reflect management’s current views with respect to future events, which 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 but are not limited to: (i) the level of our indebtedness and increases in interest rates; (ii) industry conditions, including but not limited to changes in the cost or availability of raw materials, energy and transportation costs, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products; (iii) global economic conditions and political changes, including but not limited to the impairment of financial institutions, changes in currency exchange rates, credit ratings issued by recognized credit rating organizations, the amount of our future pension funding obligation, changes in tax laws and pension and health care costs; (iv) unanticipated expenditures related to the cost of compliance with existing and new environmental and other governmental regulations and to actual or potential litigation; (v) whether we experience a material disruption at one of our manufacturing facilities; (vi) risks inherent in conducting business through a joint venture; (vii) the failure to realize synergies and cost savings from the Temple-Inland transaction or delay in realization thereof; (viii) our ability to achieve the benefits we expect from all other strategic acquisitions, divestitures and restructurings; and (ix) other factors you can find in our press releases and filings with the Securities and Exchange Commission, including the risk factors identified in Item 1A (“Risk Factors”) of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

## Market risk

As filed, 864 characters.

Information relating to quantitative and qualitative disclosures about market risk is shown on pages 50 and 51 of International Paper’s 2011 10-K, which information is incorporated herein by reference. There have been no material changes in the Company’s exposure to market risk since December 31, 2011 with the exception of $2.03 billion of Nonrecourse Financial Liabilities of Special Purpose Entities and $2.09 billion of Financial Assets of Special Purpose Entities added in 2012 due to the Temple-Inland acquisition. As of September 30, 2012, the fair value of the debt was $2.08 billion and the fair value of the asset was $2.16 billion. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would have been approximately $58 million and $64 million for the liability and the asset, respectively, at September 30, 2012.

## Controls and procedures

As filed, 2,285 characters.

### Evaluation of Disclosure Controls and Procedures:

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported (and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure) within the time periods specified in the Securities and Exchange Commission’s rules and forms. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2012 (the end of the period covered by this report).

### Changes in Internal Control over Financial Reporting:

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the 2011 third quarter, the Company completed the acquisition of Andhra Pradesh Paper Mills Limited (APPM). Integration activities, including a preliminary assessment of internal controls over financial reporting, are currently in process. The initial annual assessment of internal controls over financial reporting for APPM will be conducted over the course of our 2012 assessment cycle.

During the first quarter of 2012, the Company completed the acquisition of Temple-Inland, Inc. (Temple-Inland). Integration activities, including a preliminary assessment of internal controls over financial reporting, are currently in process. The initial annual assessment of internal controls over financial reporting for Temple-Inland will be conducted over the course of our 2013 assessment cycle.

## Risk factors

As filed, 200 characters.

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 in response to Part I, Item 1A of Form 10-K.

Filed Nov 7, 2012.
Source: SEC EDGAR, the filing index for accession 0000051434-12-000004. Last ingested by Listed: Nov 4, 2026, 18:37 ET. No prices; not investment advice.