International Paper Co: Form 10-Q for the period ended Mar 31, 2013

EXECUTIVE SUMMARY

International Paper generated Operating Earnings per share attributable to International Paper common shareholders of $0.65 in the first quarter of 2013, compared with 2012 fourth quarter earnings of $0.69 and 2012 first quarter earnings of $0.63. Diluted earnings per share attributable to International Paper common shareholders were $0.71 in the first quarter of 2013, compared with $0.53 in the fourth quarter of 2012 and $0.43 in the first quarter of 2012.

We delivered solid results in the first quarter of 2013, particularly in our Industrial Packaging business, despite seasonally slow demand across our global operations, higher input costs and an unfavorable foreign currency swing impacting Ilim. Within our North American Industrial Packaging business, we realized a benefit of $55 per ton associated with the containerboard price increase announced in September 2012 and exceeded our stretch target run-rate of $400 million in Temple-Inland synergies. Input costs were higher during the first quarter, primarily associated with recycled fiber, but were largely offset by lower maintenance outage costs. On the strategic project front, we completed the formation of a joint venture containing Grupo Orsa's industrial packaging assets, including three mills and four box plants, in which we hold a 75% interest. Additionally, we acquired a majority shareholder position of the Turkish corrugated packaging company, Olmuksa International Paper Sabanci Ambalaj Sanayi ve Ticaret A.S. The first quarter results also reflect the benefit of approximately $35 million related to the enactment of The American Taxpayer Relief Act of 2012.

Volumes during the 2013 first quarter were lower compared to the 2012 fourth quarter reflecting normal lower seasonal demand. Prices averaged higher than the previous quarter primarily due to price increases in our North American Industrial Packaging business. The quarter also reflects the favorable results associated with improved mill operations largely offset by other costs and one-time items. During the first quarter, we were successful in our execution of the start-up of the Mogi Guacu biomass boiler and began to generate the energy cost savings expected from this project. Earnings for our xpedx distribution business were lower during the first quarter as a result of seasonally lower volumes and competitive market conditions which impacted margins. Finally, the quarter was unfavorably impacted by a decrease in equity earnings from our Ilim joint venture in Russia, mainly due to unfavorable foreign currency movements related to Ilim's US dollar denominated debt.

Looking ahead to the second quarter, volumes should be seasonally stronger in our North American packaging businesses and in our Brazilian papers business. Volumes in our European packaging and paper businesses are expected to be stable given the continued weakness of Western European economies while Asian volumes are expected to remain flat in a market facing continued macro-economic uncertainty and excess capacity. We expect on-going price realizations associated with the September 2012 containerboard price increase as well as partial realization of the April 2013 containerboard price increase. Higher prices on containerboard purchases mandated by DOJ rulings will offset some of the benefits related to the recent price increases. The Brazil paper business should benefit from improved mix associated with increased domestic sales. Input costs should be stable except for wood costs in Russia and recycled fiber in North America. Planned maintenance outage costs will be higher with the second quarter being the peak quarter in terms of cost. For our Ilim joint venture, the positive impact we expect from the non-repeating first quarter unfavorable currency adjustment will be more than offset by increased project ramp-up costs. Finally, we expect a normalized tax rate during the second quarter in the absence of the significant tax benefits recognized during the first quarter.

Operating Earnings is a non-GAAP measure. Diluted earnings (loss) per share attributable to International Paper Company common shareholders is the most direct comparable GAAP measure. The Company calculates Operating Earnings by excluding the after-tax effect of items considered by management to be unusual from the earnings reported under GAAP, non-operating pension expense, and discontinued operations. 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 the most direct comparable GAAP measure, provides for a more complete analysis of the results of operations. The following are reconciliations of Operating Earnings per share attributable to International Paper Company common shareholders to diluted earnings (loss) per share attributable to International Paper Company common shareholders.

RESULTS OF OPERATIONS

For the first quarter of 2013, International Paper Company reported net sales of $7.1 billion, compared with $7.1 billion in the fourth quarter of 2012 and $6.7 billion in the first quarter of 2012. The results of operations of Temple-Inland are included since the acquisition in February 2012.

Net earnings attributable to International Paper totaled $318 million, or $0.71 per share, in the 2013 first quarter. This compared with $188 million, or $0.43 per share, in the first quarter of 2012 and $235 million, or $0.53 per share, in the fourth quarter of 2012.

Earnings from continuing operations attributable to International Paper Company were $292 million in the first quarter of 2013 compared with $183 million in the first quarter of 2012 and $225 million in the fourth quarter of 2012. Compared with the first quarter of 2012, earnings in the 2013 first quarter benefited from higher average sales price realizations ($105 million), almost flat mill outage costs ($1 million), lower tax expense ($41 million) reflecting a lower estimated tax rate and lower corporate and other costs ($3 million). These benefits were offset by lower sales volumes ($22 million), the net impact of a less favorable mix of products sold and higher operating costs ($31 million), higher raw material and freight costs ($15 million), the net impact of the divestiture of three containerboard mills in 2012, step-up depreciation recorded for Temple-Inland in the first quarter of 2013 and the earnings from an additional month of Temple-Inland results included in the 2013 first quarter ($10 million), higher interest expense ($1 million) and higher non-operating pension expense ($26 million). Equity earnings, net of taxes, relating to International Paper’s investment in Ilim Holding S.A. were $51 million lower in the 2013 first quarter than in the 2012 first quarter. Net special items were a gain of $51 million in the 2013 first quarter, compared with a loss of $64 million in the 2012 first quarter.

Compared with the fourth quarter of 2012, earnings benefited from higher average sales price realizations ($49 million), lower mill outage costs ($16 million), and lower tax expense ($2 million). These benefits were offset by lower sales volumes ($29 million), the net impact of a less favorable mix of products sold and higher operating costs ($15 million), higher raw material and freight costs ($17 million) and higher non-operating pension expense ($20 million). Equity earnings, net of taxes, for Ilim Holding, S.A. decreased by $19 million versus the 2012 fourth quarter. Net special items were a gain of $51 million in the 2013 first quarter, compared with a loss of $49 million in the 2012 fourth 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

31

Industry Segment Operating Profit

Total industry segment operating profits of $506 million in the 2013 first quarter were higher than the $462 million in the 2012 first quarter, but lower than the $528 million in the 2012 fourth quarter. Compared with the first quarter of 2012, operating profits in the current quarter benefited from higher average sales price realizations ($155 million) and almost flat mill outage costs ($2 million). These benefits were offset by lower sales volumes ($33 million), the net impact of a less favorable mix of products sold and higher operating costs ($47 million), higher raw material and freight costs ($22 million), the net impact of the divestiture of three containerboard mills in 2012, step-up depreciation recorded for Temple-Inland in the first quarter of 2013 and the earnings from an additional month of Temple-Inland results included in the 2013 first quarter ($14 million) and lower other items ($8 million). Special items were a loss of $65 million in the 2013 first quarter, compared with a loss of $76 million in the 2012 first quarter.

Compared with the fourth quarter of 2012, operating profits benefited from higher average sales price realizations ($63 million) and lower mill outage costs ($20 million). These benefits were offset by lower sales volumes ($37 million), the net impact of a less favorable product mix and higher operating costs ($18 million) and higher raw material and freight costs ($22 million). Special items were a loss of $65 million in the 2013 first quarter, compared with a loss of $37 million in the 2012 fourth quarter.

During the 2013 first quarter, International Paper took approximately 252,000 tons of downtime of which approximately 53,000 tons were market-related compared with approximately 248,000 tons of downtime, which included about 93,000 tons that were market-related, in the 2012 first quarter. In addition, the Company permanently shutdown a paper machine at our Augusta, Georgia mill which reduced capacity during the first quarter of 2013 by approximately 13,000 tons. During the 2012 fourth quarter, International Paper took approximately 285,000 tons of downtime of which approximately 86,000 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 (a)

Sales volumes of major products for the three months ended March 31, 2013 and 2012 were as follows:

In thousands of short tons

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

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

(c) Includes volumes for Turkish box plants beginning in Q1 2013 when a majority ownership was acquired.

(d) Includes volumes for Brazil Packaging from date of acquisition in mid-January 2013.

(e) Includes North American, European and Brazilian volumes and internal sales to mills.

Discontinued Operations

2013: On February 13, 2013, the Company entered into an agreement to sell Temple-Inland's 50% interest in Del-Tin Fiber L.L.C. (Del-Tin) to joint venture partner Deltic Timber Corporation (Deltic) for $20 million in assumed liabilities and cash. Accordingly, the Del-Tin assets will be excluded from the sale to Georgia-Pacific and the purchase price under our sale agreement with Georgia-Pacific will be adjusted to $710 million. The operating results of the Temple-Inland Building Products business have been included in Discontinued operations from the date of acquisition. The assets of this business, totaling $775 million and $759 million at March 31, 2013 and December 31, 2012, respectively, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet at March 31, 2013 and December 31, 2012. Included in these amounts are $26 million and $153 million related to goodwill and intangibles, respectively. The liabilities of this business, totaling $43 million and $44 million at March 31, 2013 and December 31, 2012, respectively, are included in Liabilities of businesses held for sale in the accompanying consolidated balance sheet at March 31, 2013 and December 31, 2012.

2012: Upon the acquisition of Temple-Inland, management committed to a plan to sell the Temple-Inland Building Products business, and on December 12, 2012, International Paper reached an agreement to sell the business (including Del-Tin) to Georgia-Pacific for $750 million in cash, subject to satisfaction of customary closing conditions, including satisfactory review by the DOJ, and to certain pre- and post-closing purchase price adjustments. The assets to be sold include 16 manufacturing facilities.

Income Taxes

An income tax benefit of $69 million was recorded for the 2013 first quarter. Excluding a tax benefit of $116 million related to the tax effects of special items and a benefit of $33 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 21% for the quarter.

The first quarter rate includes a benefit of approximately $35 million related to the enactment into law of The American Taxpayer Relief Act of 2012 on January 2, 2013 (the Act). The Act retroactively restored several expired business tax provisions including the research and experimentation credit and the Subpart F controlled foreign corporation look-through exception.

The income tax provision was $74 million for the 2012 fourth quarter. Excluding an expense of $3 million related to the tax effects of special items and a benefit of $9 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 22% for the quarter.

An income tax provision of $70 million was recorded for the 2012 first quarter. Excluding a benefit of $28 million related to the tax effects of special items and a benefit of $12 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 32% for the quarter.

Interest Expense and Corporate Items

Net interest expense for the 2013 first quarter was $164 million compared with $169 million in the 2012 fourth quarter and $168 million in the 2012 first quarter. The net interest expense for the 2013 first quarter includes interest income of $6 million related to the settlement of a U.S. federal income tax audit.

Corporate items, net, of $22 million in the 2013 first quarter were higher than the $15 million of net expense in the 2012 fourth quarter, but lower than the $32 million of net expense in the 2012 first quarter.

Special Items

2013: During the three months ended March 31, 2013, restructuring and other charges totaling $59 million before taxes ($36 million after taxes) were recorded. Details of these charges were as follows:

In millions

In addition, a $6 million pre-tax benefit ($4 million after tax) was recorded during the first three months of 2013 for interest income related to the settlement of a U.S. federal income tax audit.

2012: 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

Net (Gains) Losses on Sales and Impairments of Businesses

2012: 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. This charge is included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations.

As referenced in Note 7 to the financial statements of this Form 10-Q , 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.

BUSINESS SEGMENT OPERATING RESULTS

The following presents business segment discussions for the first quarter of 2013.

Industrial Packaging

In millions

Industrial Packaging net sales and operating profits include the results of the Temple-Inland packaging operations from the date of acquisition in February 2012 and the results of the Brazil Packaging business from the date of acquisition in January 2013. In addition, due to the acquisition of a majority share of Olmuksa International Paper Sabanci Ambalaj Sanayi Ve Ticaret A.S., net sales for our corrugated packaging business in Turkey are included in the business segment totals beginning in the first quarter of 2013 and operating profits reflect a higher ownership percentage than previously. Net sales for the first quarter of 2013 were 5% higher than in the fourth quarter of 2012 and 14% higher than in the first quarter of 2012. Operating profits in the first quarter of 2013 included charges of $12 million for integration costs associated with the Temple-Inland acquisition, a charge of $1 million associated with the third-quarter 2012 divestiture of three containerboard mills, and a net charge of $1 million for costs associated with the acquisition in Turkey. Operating profits in the fourth quarter of 2012 included charges of $28 million for integration costs associated with the Temple-Inland acquisition, charges of $1 million for costs associated with the third-quarter 2012 divestiture of three containerboard mills, a charge of $2 million for costs associated with the acquisition of the additional shares of the corrugated packaging operations in Turkey and charges of $1 million for restructuring the Company's Packaging business in Europe. Operating profits in the first quarter of 2012 included a charge of $43 million for costs associated with the agreement to acquire Temple-Inland and a charge of $20 million related to the write-up of Temple-Inland inventories to fair value. Excluding these items, operating profits in the first quarter of 2013 were 0% higher than in the fourth quarter of 2012 and 33% higher than in the first quarter of 2012.

North American Industrial Packaging net sales were $3.0 billion in the first quarter of 2013 compared with $3.0 billion in the fourth quarter of 2012 and $2.7 billion in the first quarter of 2012. Operating profits were $337 million ($350 million excluding Temple-Inland integration costs, and costs associated with the 2012 divestiture of three containerboard mills) in the first quarter of 2013 compared with $309 million ($338 million excluding Temple-Inland integration costs and mill divestiture costs) in the fourth quarter of 2012 and $195 million ($258 million excluding Temple-Inland acquisition costs and inventory write-up charges) in the first quarter of 2012.

Sales volumes in the first quarter of 2013 were lower than in the fourth quarter of 2012, reflecting a seasonally slower period in the box market, partially offset by higher containerboard domestic and export shipments. Total maintenance and market-related downtime increased about 10,000 tons. Maintenance downtime increased 40,000 tons to 167,000 tons in the first quarter of 2013 while market-related downtime decreased 30,000 tons to 30,000 tons versus the fourth quarter of 2012. Average sales price realizations increased for both boxes and domestic containerboard reflecting the full realization of price increases implemented in the third quarter of 2012. Exported containerboard sales price realizations were also higher. Input costs increased, primarily for recycled fiber, but also for wood and energy. Planned maintenance downtime costs were $16 million higher in the 2013 first quarter with outages at eight mills compared with outages at six mills in the 2012 fourth quarter. Operating costs were favorable.

Compared with the first quarter of 2012, sales volumes in the first quarter of 2013 decreased for boxes, but increased for domestic and exported containerboard. Average sales price realizations were higher, reflecting sales price increases for boxes and domestic containerboard that were implemented during 2012. Input costs for recycled fiber decreased, but this benefit was more than offset by higher wood and energy costs. Planned maintenance downtime costs were $2 million higher in the first quarter of 2013. The business took about 204,000 tons of total downtime in the first quarter of 2012 of which about 126,000 tons were maintenance downtime and about 78,000 were market-related.

Entering the second quarter of 2013, sales volumes are expected to be seasonally higher for boxes, while containerboard sales volumes are expected to be flat. Average sales price realizations are expected to improve reflecting the implementation of an announced containerboard price increase. Higher recycled fiber costs are expected to be offset by lower wood and energy costs. Planned maintenance downtime costs should be about $17 million higher with outages planned at seven mills.

European Industrial Packaging net sales were $320 million in the first quarter of 2013 compared with $255 million in the fourth quarter of 2012 and $270 million in the first quarter of 2012. Net sales in the first quarter of 2013 include the sales of our packaging operations in Turkey which are now fully consolidated. Operating profits were $17 million ($18 million excluding costs associated with the acquisition in Turkey) in the first quarter of 2013 compared with $26 million ($29 million excluding acquisition and restructuring costs) in the fourth quarter of 2012 and $19 million in the first quarter of 2012.

Sales volumes in the first quarter of 2013 were about even with the fourth quarter of 2012 as strong demand in the agricultural market in Morocco was offset by lower sales volumes in Europe due to weak economic conditions and a poor agricultural market in France. Average sales margins decreased reflecting our inability to recover increased containerboard costs due to market pressures on sales prices. Other input costs were slightly higher, primarily for energy. Insurance settlements of $5 million and $16 million were recorded in the first quarter of 2013 and fourth quarter of 2012, respectively, related to the earthquakes in Northern Italy in May 2012 which affected our San Felice box plant.

Compared with the first quarter of 2012, sales volumes in the first quarter of 2013 were lower reflecting weak demand for industrial packaging due to the poor economic conditions in Europe, partially offset by strong demand for agricultural and industrial packaging in Morocco. Average sales margins decreased significantly due to input costs for containerboard rising ahead of box sales price increases. Input costs for energy were slightly higher.

Looking ahead to the second quarter of 2013, sales volumes are expected to be higher reflecting a seasonal increase in the fruit and vegetable packaging market. Average sales margins are expected to continue to erode as box prices remain under pressure and costs for containerboard increase further. Input costs for energy should be slightly lower.

Brazilian Industrial Packaging includes the results of Orsa International Paper Embalagens S.A., a corrugated packaging producer in which International Paper acquired a 75% share in January 2013. Net sales were $45 million in the first quarter of 2013. Operating profits were $1 million in the first quarter of 2013. Operating profits in the second quarter of 2013 which will include a full three months of operating results, are expected to be higher than in the first quarter of 2013 reflecting higher sales volumes and average sales price realizations as well as the impact of cost savings synergies.

Asian Industrial Packaging net sales for the packaging operations were $95 million in the first quarter of 2013 compared with $100 million in the fourth quarter of 2012 and $95 million in the first quarter of 2012. Operating profits for the packaging operations were a loss of $1 million in the first quarter of 2013 compared with about breakeven in both the fourth quarter and first quarter of 2012,

Net sales for the distribution operations were $75 million in the first quarter of 2013 compared with $75 million in the fourth quarter of 2012 and $60 million in the first quarter of 2012. Operating profits for the distribution operations were $1 million in the first quarter of 2013, $1 million in the fourth quarter of 2012 and $1 million in the first quarter of 2012.

Compared with the fourth quarter of 2012, sales volumes for the packaging business decreased reflecting seasonally lower market demand while average sales margins were lower reflecting an unfavorable sales mix. Operating profits in the second quarter of 2013 are expected to remain flat from the first quarter of 2013 despite seasonally higher sales volumes and continuing improvement in operations.

Printing Papers

In millions

Printing Papers net sales for the first quarter of 2013 were 3% lower than in the fourth quarter of 2012 and 1% lower than in the first quarter of 2012. Operating profits included a $1 million gain in the first quarter of 2012 associated with the acquisition of a majority share of Andhra Pradesh Paper Mills Limited. Excluding this item, operating profits in the first quarter of 2013 were 1% higher than in the fourth quarter of 2012 and 3% higher than in the first quarter of 2012.

North American Printing Papers net sales were $645 million in the first quarter of 2013 compared with $650 million in the fourth quarter of 2012 and $700 million in the first quarter of 2012. Operating profits were $63 million in the first quarter of 2013, $52 million in the fourth quarter of 2012 and $100 million in the first quarter of 2012.

Sales volumes in the first quarter of 2013 increased slightly from the fourth quarter of 2012 but market demand remained soft as expected. Average domestic sales price realizations declined slightly, while sales prices to export markets were stable. Input costs were higher for wood, energy and chemicals. Planned maintenance downtime costs were $22 million lower with an outage at the Georgetown mill in the first quarter of 2013 compared with outages at the Eastover and Courtland mills in the fourth quarter of 2012. Operating costs were seasonally higher.

Compared with the first quarter of 2012, sales volumes in the first quarter of 2013 were lower due to fewer shipping days and higher inventory levels at the beginning of 2012. Average sales price realizations were lower in the domestic market, but improved in export markets. Input costs were higher for wood, chemicals and energy. Planned maintenance downtime costs were $2 million lower than in the first quarter of 2012. Operating costs in the 2013 first quarter were higher due to lower performance versus the first quarter of 2012 and inflation.

Entering the second quarter of 2013, sales volumes are expected to be higher for domestic uncoated freesheet paper. Average sales price realizations are expected to be stable in both the domestic and export markets. Input costs for wood and energy are expected to be lower. Planned maintenance downtime costs should be $44 million higher with outages scheduled at the Eastover, Ticonderoga and Riverdale mills.

European Printing Papers net sales were $365 million in the first quarter of 2013, compared with $375 million in the fourth quarter of 2012 and $335 million in the first quarter of 2012. Operating profits were $54 million in the first quarter of 2013 compared with $64 million in the fourth quarter of 2012 and $44 million in the first quarter of 2012.

Compared with the fourth quarter of 2012, sales volumes in the first quarter of 2013 were seasonally lower in Russia, while sales volumes in Europe remained about flat due to continuing poor economic conditions. Average sales price realizations for uncoated freesheet paper eroded in both Europe and Russia. Input costs were about flat as lower energy costs in Europe were partially offset by higher costs for chemicals in Russia. There were no planned maintenance outages in either period. Operating costs were favorable reflecting strong performance in all three mills.

Sales volumes in the first quarter of 2013 were higher in Russia, but lower in Europe compared with the first quarter of 2012. Average sales price realizations decreased in Europe due to weak economic conditions and market demand, while average sales price realizations in Russia were stable. Input costs decreased for wood at the Kwidzyn mill, but this benefit was offset by higher costs for wood, energy and freight in Russia. There were no planned maintenance outages in the first quarter of 2012. Manufacturing operating costs were also lower.

Looking forward to the second quarter of 2013, sales volumes are expected to be seasonally stronger in Russia, but will continue to decline in Europe due to the weak economy. Average sales price realizations are expected to decrease for uncoated freesheet paper. Input costs will increase in Russia due to higher wood costs. Planned maintenance downtime costs should be $26 million higher with outages scheduled at the Kwidzyn and Svetogorsk mills.

Brazilian Printing Papers net sales were $260 million in the first quarter of 2013 compared with $295 million in the fourth quarter of 2012 and $270 million in the first quarter of 2012. Operating profits were $45 million in the first quarter of 2013, $44 million in the fourth quarter of 2012 and $23 million in the first quarter of 2012.

Sales volumes in the first quarter of 2013 were lower than in the fourth quarter of 2012 primarily due to seasonally weaker demand in the Brazilian domestic market for uncoated freesheet paper. Export volumes were also impacted by seasonality and import barriers in Argentina and Venezuela. Average sales price realizations increased for paper in the Brazilian market reflecting the impact of price increases for both cutsize and offset paper, but this benefit was offset by lower average sales prices in export markets driven by higher customer inventory levels. Average sales margins were negatively impacted by a decreased proportion of sales to the higher-margin domestic market. Input costs decreased for energy. Operating costs were lower reflecting the impact of the new biomass boiler at the Mogi Guacu mill. Planned maintenance downtime costs were $4 million lower in the first quarter of 2013 with no outages occurring compared with an outage at the Luiz Antonio mill in the fourth quarter of 2012.

Compared with the first quarter of 2012, sales volumes in the first quarter of 2013 increased for uncoated freesheet paper in the Brazilian domestic market, but were more than offset by lower export shipments. Average sales price realizations improved for domestic uncoated freesheet paper and for pulp, but decreased for exported paper. Input costs were about flat. There were no planned maintenance outages in either quarter.

Entering the second quarter of 2013, 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 the implementation of announced domestic and other Latin American price increases. Planned maintenance downtime costs should be $1 million higher with an outage planned at the Tres Lagoas mill.

Indian Printing Papers net sales were $50 million in the first quarter of 2013 compared with $45 million in the fourth quarter of 2012 and $60 million in the first quarter of 2012. Operating profits were a loss of $4 million in the first quarter of 2013 compared to a loss of $6 million in the fourth quarter of 2012 and a gain of $2 million ($1 million excluding acquisition costs) in the first quarter of 2012. Compared with the fourth quarter of 2012, operating results in the first quarter of 2013 reflect higher sales price realizations, partially offset by increased costs for wood. Operating profits in the second quarter of 2013 are expected to improve reflecting continued sales volume growth, strong sales prices and stable input costs for wood. Planned maintenance downtime costs should be higher due to an outage at the Kadiam mill.

Asian Printing Papers net sales were $25 million in the first quarter of 2013 compared with $15 million in the fourth quarter of 2012 and $20 million in the first quarter of 2012. Operating profits were about breakeven in all periods presented.

U.S. Market Pulp net sales were $195 million in the first quarter of 2013 compared with $200 million in the fourth quarter of 2012 and $175 million in the first quarter of 2012. Operating profits were a loss of $9 million in the first quarter of 2013 compared with a loss of $7 million in the fourth quarter of 2012 and a loss of $23 million in the first quarter of 2012.

Sales volumes were up slightly in the first quarter of 2013 compared with the fourth quarter of 2012 reflecting higher shipments of fluff pulp due to the ramp up of the Franklin mill to full fluff pulp production. The increased fluff shipments were largely offset by lower market pulp shipments. Average sales price realizations for fluff pulp were relatively flat, but increased for market pulp. Input costs were lower for energy and wood. Planned maintenance downtime costs in the first quarter of 2013 were $8 million higher with an outage at the Georgetown mill compared with an outage at the Pensacola mill in the fourth quarter of 2012. Operating costs were flat.

Compared with the first quarter of 2012, sales volumes were higher in the first quarter of 2013. Average sales price realizations were lower for fluff pulp, but were higher for market pulp. Input costs were higher for wood, energy and chemicals. Planned maintenance downtime costs were $1 million lower. Operating costs were lower due to the start-up of the Franklin mill and solid mill performance.

Entering the second quarter of 2013, sales volumes are expected to be flat, however, average sales price realizations are expected to improve as previously announced price increases for fluff pulp and paper and tissue pulp are realized. Input costs are expected to be lower. Planned maintenance downtime costs should be $4 million higher with outage-related expenses at the Pensacola, Eastover and Riegelwood mills.

Consumer Packaging

In millions

Consumer Packaging net sales in the first quarter of 2013 were 2% higher than in the fourth quarter of 2012 and 2% higher than in the first quarter of 2012. Operating profits in the first quarter of 2013 included charges of $44 million related to the permanent shutdown of a paper machine at our Augusta, Georgia mill. Operating profits in the fourth quarter of 2012 included a gain of $2 million related to the sale of the Shorewood business. Operating profits in the first quarter of 2012 included a gain of $7 million related to the sale of the Shorewood business. Excluding these items, operating profits in the first quarter of 2013 were 31% higher than in the fourth quarter of 2012 and 47% lower than in the first quarter of 2012.

North American Consumer Packaging net sales in the first quarter of 2013 were $460 million compared with $470 million in the fourth quarter of 2012 and $520 million in the first quarter of 2012. Operating profits were a loss of $22 million (a gain of $22 million excluding paper machine shutdown costs) in the first quarter of 2013 compared with $19 million ($17 million excluding a gain associated with the sale of the Shorewood business) in the fourth quarter of 2012 and $70 million ($63 million excluding a gain associated with the sale of the Shorewood business) in the first quarter of 2012.

Coated Paperboard sales volumes in the first quarter of 2013 were higher than in the fourth quarter of 2012 reflecting improving market demand. The business took 23,000 tons of market-related downtime in the first quarter of 2013 and had about 13,000 tons of reduced capacity due to the permanent shut down of a paper machine at our Augusta mill compared with 27,000 tons of market-related downtime in the fourth quarter of 2012. Average sales price realizations eroded primarily for cupstock and folding carton board. Input costs were higher for wood and energy. Planned maintenance downtime costs were $18 million lower with no outages in the 2013 first quarter compared with outages at the Augusta and Texarkana mills in the 2012 fourth quarter. Operating costs were higher primarily related to an unplanned reliability issue in January on the digester at the August, Georgia coated paperboard mill.

Compared with the first quarter of 2012, sales volumes in the first quarter of 2013 decreased slightly. However, the 15,000 tons of market-related downtime that the business took in the first quarter of 2012 was less than in the current quarter. Average sales price realizations were significantly lower. Input costs for wood and energy were higher, but were largely offset by lower resin costs. There was no planned maintenance in either period. Operating costs were higher primarily related to an unplanned reliability issue in January on the digester at the August, Georgia coated paperboard mill.

Foodservice sales volumes in the first quarter of 2013 were slightly lower than in the fourth quarter of 2012 mainly due to seasonally lower hot cup sales. Average sales margins increased due to a more favorable customer mix. Compared with the first quarter of 2012, sales volumes in the first quarter of 2013 were slightly lower reflecting the impact of colder weather versus last year, as well as other demand factors, impacting cold cup sales to large quick service restaurant chains. Average sales margins improved as input costs decreased for board and resins.

Looking forward to the second quarter of 2013, coated paperboard sales volumes are expected to increase due to a seasonal strengthening of demand. Average sales margins are expected to increase due to the realization of announced sales price increases. Planned maintenance downtime costs are expected to be $15 million higher with outages scheduled at the Riegelwood mill. Input costs are expected to be about flat. Foodservice sales volumes are expected to be higher. Average sales margins are expected to decrease reflecting slightly lower average sales price realizations.

European Consumer Packaging net sales were $95 million in the first quarter of 2013 compared with $95 million in the fourth quarter of 2012 and $100 million in the first quarter of 2012. Operating profits in the first quarter of 2013 were $32 million compared with $29 million in the fourth quarter of 2012 and $28 million in the first quarter of 2012.

Sales volumes in the first quarter of 2013 were seasonally lower than in the fourth quarter of 2012. Despite pricing pressures, average sales margins were stable, partially due to an improved geographical mix in Europe. Operating costs and input costs were both slightly favorable. There were no planned mill maintenance outages in either the first quarter of 2013 or the fourth quarter of 2012. Compared with the first quarter of 2012, sales volumes were lower. Average sales price realizations were flat, but sales margins improved due to a more favorable mix. There were no planned maintenance outages in either period. Unfavorable mill operating costs were largely offset by lower input costs.

Entering the second quarter of 2013, sales volumes are expected to decrease, but average sales price realizations are expected to be higher. Planned maintenance downtime costs will be $4 million higher with an outage scheduled at the Svetogorsk mill. Input costs are expected to increase slightly particularly for wood in Russia.

Asian Consumer Packaging net sales were $275 million in the first quarter of 2013, $250 million in the fourth quarter of 2012 and $190 million in the first quarter of 2012. Operating profits were a loss of $3 million in the first quarter of 2013 compared with a loss of $7 million in the fourth quarter of 2012 and a gain of $5 million in the first quarter of 2012. Compared with the fourth quarter of 2012, sales volumes increased and operating losses decreased due to the continuing successful ramp-up of the new paper machine. The largest hurdle continues to be squeezed average sales margins reflecting competitive pressures on sales prices and increasing pulp costs. Compared with the first quarter of 2012, operating profits declined reflecting competitive pressure on sales prices which squeezed margins and created an unfavorable product mix.

Looking ahead to the second quarter of 2013, revenues are expected to be flat. However, operating profits will continue to be impacted by low average sales price realizations due to an over-supplied market condition along with increasing pulp costs.

Distribution

In millions

Distribution net sales in the first quarter of 2013 were 9% lower than in the fourth quarter of 2012 and 6% lower than in the first quarter of 2012. Operating profits included $7 million, $7 million and $21 million in the first quarter of 2013, the fourth quarter of 2012 and the first quarter of 2012, respectively, of costs related to the reorganization of the Company’s xpedx operations. Excluding these items, operating profits in the first quarter of 2013 were 82% lower than in the fourth quarter of 2012 and 89% lower than in the first quarter of 2012.

Sales of papers and graphic arts products in the first quarter of 2013 totaled $800 million compared to $890 million in the fourth quarter of 2012 and $850 million in the first quarter of 2012. Trade margins as a percent of sales for printing papers were even with the fourth quarter of 2012 and down from the first quarter of 2012 due to a change in mix. Packaging sales were $380 million in the first quarter of 2013, compared with $400 million in both the fourth quarter of 2012 and the first quarter of 2012. Trade margins as a percent of sales for packaging products were down from the fourth quarter of 2012 and unchanged from the first quarter of 2012 reflecting a change in mix. Sales of facility solutions products totaled $205 million in the first quarter of 2013, compared with $240 million in the fourth quarter of 2012 and $225 million in the first quarter of 2012.

Operating profits before reorganization costs in the first quarter of 2013 were $9 million lower than in the fourth quarter of 2012 due to decreased sales volumes. Operating profits before reorganization costs in the first quarter of 2013 were $17 million lower than in the first quarter of 2012.

Earnings for the second quarter of 2013 are expected to improve due to seasonal volume increases and incremental cost reductions as a result of strategic and other cost reduction initiatives.

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. The Company recorded an equity loss, net of taxes, of $11 million in the first quarter of 2013 compared with equity earnings, net of taxes, of $8 million in the fourth quarter of 2012 and $40 million in the first quarter of 2012. In the first quarter of 2013, the after-tax foreign exchange impact was a loss of $11 million on the remeasurement of U.S. dollar-denominated debt compared with a gain of $6 million in the fourth quarter of 2012. Sales volumes in the first quarter of 2013 decreased from the fourth quarter of 2012 due to weak demand for pulp in China and seasonally lower demand in the domestic market. Average sales price realizations for domestic sales were flat. Input costs were slightly higher, primarily for energy and freight, partially offset by seasonally lower wood costs. There were no planned maintenance downtime costs in either period.

Compared with the first quarter of 2012, sales volumes in the first quarter of 2013 were lower for sales of softwood pulp and hardwood pulp to China and for sales of softwood pulp and containerboard in Russia. Average sales price realizations were higher for both pulp and containerboard in the domestic market, while average sales price realizations in the export market increased for hardwood pulp, but decreased for softwood pulp. Input costs increased for wood, energy and freight. A foreign exchange gain of $30 million on the remeasurement of U.S. dollar-denominated debt was recorded in the first quarter of 2012.

Looking forward to the second quarter of 2013, sales volumes are expected to be higher. Average sales price realizations are expected to improve reflecting an increase in sales prices for domestic linerboard and softwood pulp and higher prices for export softwood pulp and hardwood pulp. Input costs are expected to seasonally increase for wood. Earnings will also be negatively impacted by start-up costs associated with the ramp-up of the new pulp line at the Bratsk mill and the coated and uncoated freesheet capacity at the Koryazhma mill.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by continuing operations totaled $516 million for the first three months of 2013, compared with $633 million for the comparable 2012 three-month period. Earnings from operations adjusted for non-cash charges were $797 million for the first three months of 2013 compared to $699 million for the first three months of 2012. Cash used for working capital components totaled $281 million for the first three months of 2013 compared to a use of $66 million for the comparable 2012 three-month period.

The Company generated free cash flow of approximately $300 million and $357 million in the first three months of 2013 and 2012, 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

Investments in capital projects totaled $216 million in the first three months of 2013 compared to $285 million in the first three months of 2012. Full-year 2013 capital spending is currently expected to be approximately $1.4 billion, or about 93% of depreciation and amortization expense for our current businesses.

Amounts related to early debt extinguishment during the three months ended March 31, 2013 and 2012 were as follows:

In millions

(a) Reductions related to notes with interest rates ranging from 6.38% to 7.95% with original maturities from 2014 to 2018 for the three months ended March 31, 2013 and 7.82% to 7.95% with original maturities from 2012 to 2018 for the three months ended March 31, 2012.

(b) Amounts are included in Restructuring and Other Charges in the accompanying consolidated statements of operations.

Financing activities for the first three months of 2013 included an $87 million net increase in debt versus a $1.1 billion net increase in debt during the comparable 2012 three-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. International Paper has fully repaid the $1.2 billion term loan.

During the first three months of 2013, International Paper issued approximately 4.8 million shares of common stock and used 0.5 million shares of treasury stock for various incentive plans, including stock option exercises that generated approximately $191 million of cash. Also in the first three months of 2013, International Paper acquired 1.2 million shares of treasury stock primarily related to restricted stock tax withholding. Payments of restricted stock withholding taxes totaled $51 million. During the first three months of 2012, International Paper used approximately 1.5 million shares of treasury stock for various incentive plans, including stock option exercises that generated approximately $21 million of cash. Also in the first three 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. Cash dividend payments related to common stock totaled $136 million and $120 million for the first three months of 2013 and 2012, respectively. Dividends were $0.3000 per share and $0.2625 per share for the first three months in 2013 and 2012, respectively.

At March 31, 2013, contractual obligations for future payments of debt maturities by calendar year were as follows: $555 million in 2013; $685 million in 2014; $475 million in 2015; $567 million in 2016; $220 million in 2017; $1.9 billion in 2018; and $5.8 billion thereafter.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At March 31, 2013, the Company held long-term credit ratings of BBB (stable outlook) and Baa3 (stable outlook) by S&P and Moody’s, respectively.

At March 31, 2013, International Paper’s contractually committed credit agreements totaled $2.5 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 up to $1.0 billion of commercial paper-based financings based on eligible receivable balances ($825 million available at March 31, 2013). On January 9, 2013, the Company amended its $1.0 billion receivables securitization facility to extend the maturity date from January 2013 to January 2014. The amended agreement has a facility fee of 0.35% payable monthly. During the first quarter of 2013, International Paper borrowed $260 million under the receivable securitization facility at a rate of 0.95% payable monthly. During the first quarter of 2013, $200 million of borrowings under this receivable securitization facility were repaid. At March 31, 2013, International Paper had $60 million of borrowings under the 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 2013 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

2013: On January 3, 2013, International Paper completed the acquisition (effective date of acquisition on January 1, 2013) of the shares of its joint venture partner, Sabanci Holding, in the Turkish corrugated packaging company, Olmuksa International Paper Sabanci Ambalaj Sanayi ve Ticaret A.S. (now called Olmuksan International Paper or Olmuksan), for a purchase price of $56 million. The acquired shares represent 43.7% of Olmuksan's shares. Prior to this acquisition, International Paper held a 43.7% equity interest in Olmuksan.

Because the transaction resulted in International Paper becoming the majority shareholder, owning 87.4% of Olmuksan's outstanding and issued shares, its completion triggered a mandatory call for tender of the remaining public shares which began in March 2013. Also as a result of International Paper taking majority control of the entity, Olmuksan's financial results have been consolidated with the Company's Industrial Packaging segment beginning with the effective date International Paper obtained majority control of the entity on January 1, 2013.

In addition, the cumulative translation adjustment balance relating to the previously held equity interest was released and resulted in a $17 million loss. The preliminary purchase price allocation reflects a gain of $19 million related to a bargain purchase price adjustment.

The $17 million loss on the cumulative translation adjustment write off and the $19 million bargain purchase gain were recorded in the 2013 first-quarter earnings.

2012: 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 DOJ that required the Company to divest three containerboard mills, with approximately 970,000 tons of aggregate containerboard capacity. 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.

Joint Ventures

2013: On January 14, 2013, International Paper and Brazilian corrugated packaging producer, Jari Celulose Embalagens e papel S.A. (Jari), a Grupo Orsa company, formed Orsa International Paper Embalagens S.A. (Orsa IP). The new entity, in which International Paper holds a 75% stake, includes three containerboard mills and four box plants, which make up Jari's former industrial packaging assets. This acquisition supports the Company's strategy of growing its global packaging presence and better serving its global customer base.

The value of International Paper's investment in Orsa IP is approximately $470 million. Because International Paper acquired majority control of the joint venture, Orsa IP's financial results have been consolidated with our Industrial Packaging segment from the date of formation on January 14, 2013.

Due to the complex organizational structure of Orsa IP'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 reports its share of Orsa IP's operating results on a one-month lag basis.

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 $250 million to $300 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 2012 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 three months of 2013.

Pension Accounting

Net pension expense totaled approximately $140 million for International Paper’s U.S. plans for the three months ended March 31, 2013, or about $57 million more than the pension expense for the first three months of 2012. The increase in U.S. plan expense was principally due to a decrease in the assumed discount rate to 4.10% in 2013 from 5.10% in 2012 and higher amortization of unrecognized actuarial losses. Net pension expense for non-U.S. plans was about $1 million for both the first three months of 2013 and 2012.

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 March 31, 2013, the market value of plan assets for International Paper’s U.S. plans totaled approximately $10.1 billion, consisting of approximately 41% equity securities, 38% fixed income securities, and 21% real estate and other assets. Plan assets did not include International Paper common stock.

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 continually reassesses the amount and timing of any discretionary contributions and could elect to make a contribution in 2013. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $31 million in 2013.

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) our ability to reach a definitive agreement on a mutually acceptable transaction combining xpedx with Unisource, the receipt of governmental and other approvals and favorable rulings associated with such a transaction and the successful fulfillment or waiver of all other closing conditions for such a transaction without unexpected delays or conditions, and the successful closing of such transaction within the estimated timeframe; (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, 2012. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Information relating to quantitative and qualitative disclosures about market risk is shown on pages 41 and 42 of International Paper’s 2012 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, 2012.

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 March 31, 2013 (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 March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

During the first quarter of 2013, the Company completed the acquisitions of Olmuksan and Orsa IP. 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 Olmuksan and Orsa IP will be conducted over the course of our 2014 assessment cycle.

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, 2012 in response to Part I, Item 1A of Form 10-K.