# International Paper Co: Form 10-Q for the period ended Sep 30, 2010

- Company: [International Paper Co](/companies/ip.md) (CIK 51434)
- Form: 10-Q
- Filed: 2010-11-05
- Accepted by EDGAR: Nov 5, 2010, 19:14 ET
- Period: 2010-09-30
- Accession: 0001193125-10-249934
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/51434/000119312510249934/d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/51434/000119312510249934/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2010-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2010-07-01 to 2010-09-30 | $6.72bn | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2010-01-01 to 2010-09-30 | $18.65bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2010-07-01 to 2010-09-30 | $4.76bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2010-01-01 to 2010-09-30 | $13.71bn | us-gaap:CostOfGoodsSold |
| Selling, general and administrative | 3 months, 2010-07-01 to 2010-09-30 | $504.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2010-01-01 to 2010-09-30 | $1.40bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Interest expense | 3 months, 2010-07-01 to 2010-09-30 | $162.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2010-01-01 to 2010-09-30 | $484.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2010-07-01 to 2010-09-30 | $170.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2010-01-01 to 2010-09-30 | $171.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2010-07-01 to 2010-09-30 | $397.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2010-01-01 to 2010-09-30 | $328.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2010-07-01 to 2010-09-30 | $0.91 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2010-01-01 to 2010-09-30 | $0.76 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2010-07-01 to 2010-09-30 | $0.92 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2010-01-01 to 2010-09-30 | $0.76 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2010-07-01 to 2010-09-30 | 433,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2010-01-01 to 2010-09-30 | 433,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2010-01-01 to 2010-09-30 | $587.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 9 months, 2010-01-01 to 2010-09-30 | $120.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2010-01-01 to 2010-09-30 | $26.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2010-09-30 | $1.43bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2010-09-30 | $7.81bn | us-gaap:AssetsCurrent |
| Total assets | at 2010-09-30 | $25.09bn | us-gaap:Assets |
| Current liabilities | at 2010-09-30 | $4.52bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2010-09-30 | $8.43bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2010-09-30 | $100.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2010-09-30 | $6.39bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 74,146 characters.

### EXECUTIVE SUMMARY

International Paper produced record earnings per share before special items of $0.91 in the third quarter of 2010 (on an equivalent-share basis), up from $0.42 in the 2010 second quarter and $0.37 in the 2009 third quarter. Excluding earnings from land sales, earnings per share would have been $0.83 in the 2010 third quarter, also a record. The strong earnings were driven by excellent results across all our mill business segments and geographic regions. We experienced modest increases in volume from our printing papers and consumer packaging businesses and stronger increases in our North American distribution business, but equally important was the strong performance of our European operations where we did not experience as large of a seasonal drop as normal in our box and printing papers business. Improved price realizations from previously announced price increases drove solid margin expansion that was also enhanced by the realization of benefits from our 2008 and 2009 restructuring efforts and strong operations at our mills and converting plants. Reduced mill maintenance outages and an improved contribution from our Ilim joint venture also contributed to the earnings growth. Strong free cash flow allowed us to contribute nearly $1.2 billion to our pension plan and to repay approximately $200 million of balance sheet debt.

Looking ahead to the fourth quarter, we expect to continue to generate strong, but seasonally lower, earnings and free cash flow. We expect paper and packaging volumes to decline in line with typical seasonal demand declines, accompanied by stable prices and higher costs for recycled fiber and certain chemicals. Maintenance outages are expected to increase by approximately $30 million. Our North American distribution business, xpedx, is expected to experience a seasonal decline in earnings, while the contribution from our Ilim joint venture is expected to be in line with third quarter results. Fourth quarter earnings will be lower than the third quarter due to the absence of two non-recurring items: a $16 million bad debt recovery and a $50 million gain from land sales, both occurring in the third quarter.

Earnings per share attributable to International Paper Company shareholders before special items 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 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 the most direct comparable GAAP measure, 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 Company common shareholders before special items to diluted earnings (loss) per share attributable to International Paper Company common shareholders.

|  | Three Months Ended September 30, 2010 | 2009 | Three Months Ended June 30, 2010 |
| --- | ---: | ---: | ---: |
| **Earnings Per Share Before Special Items** | **$0.91** | $0.37 | $0.42 |
| Restructuring and other charges | **0** | (0.22) | (0.21) |
| CBPR business integration costs | **0** | (0.03) | 0 |
| Alternative fuel mixture credits | **0** | 0.75 | 0 |
| **Diluted Earnings Per Common Share as Reported** | **$0.91** | $0.87 | $0.21 |

### RESULTS OF OPERATIONS

For the third quarter of 2010, International Paper Company reported net sales of $6.7 billion, compared with $5.9 billion in the third quarter of 2009 and $6.1 billion in the second quarter of 2010.

Net earnings attributable to International Paper Company totaled $397 million, or $0.91 per share, in the 2010 third quarter. This compared with earnings of $371 million, or $0.87 per share, in the third quarter of 2009 and $93 million, or $0.21 per share, in the second quarter of 2010.

Compared with the third quarter of 2009, earnings in the 2010 third quarter benefited from higher average sales price realizations ($285 million), higher sales volumes and lower lack-of-order downtime ($29 million), higher earnings from land sales ($33 million), the partial reversal of a second quarter 2010 provision for bad debt related to a large envelope company ($11 million), and lower net interest expense ($13 million). These benefits were partially offset by the net impact of higher operating costs and a more favorable mix of products sold ($9 million), higher mill outage costs ($2 million), higher raw material and freight costs ($132 million), slightly higher corporate items and other costs ($4 million), and a higher income tax expense ($6 million) reflecting a higher estimated tax rate. Equity earnings, net of taxes, relating to International Paper’s investment in Ilim Holding S.A. were $22 million higher in the 2010 third quarter than in the 2009 third quarter. There were no special items in the 2010 third quarter, compared with a net special item gain of $214 million in the 2009 third quarter.

Compared with the second quarter of 2010, earnings benefited from higher average sales price realizations ($116 million), higher sales volumes ($17 million), lower mill outage costs ($45 million), slightly lower raw material and freight costs ($1 million), higher earnings from land sales ($6 million), a provision for bad debt for a large envelope company recorded in the second quarter and partially reversed in the third quarter ($33 million), and decreased corporate items and other costs ($1 million). These benefits were partially offset by higher operating costs and a less favorable mix of products sold ($21 million) and a higher income tax provision ($1 million). Net interest expense decreased ($2 million). Equity earnings, net of taxes for Ilim Holding, S.A. increased by $17 million versus the second quarter. There were no special items in the 2010 third quarter, compared with net special items losses of $88 million in the 2010 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 business segment operating profit. This is defined as earnings before taxes, equity earnings and noncontrolling interests net of taxes, excluding interest expense, corporate charges and special items that 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 to its operating profit:

*In millions*

|  | Three Months Ended September 30, 2010 | 2009 | June 30, 2010 |
| --- | ---: | ---: | ---: |
| **Net Earnings (Loss) Attributable to International Paper Company** | **$397** | $371 | $93 |
| Add back (deduct): |  |  |  |
| Income tax provision (benefit) | **170** | 212 | 25 |
| Equity (earnings) loss, net of taxes | **(22)** | 0 | (7) |
| Noncontrolling interests, net of taxes | **2** | 6 | 7 |
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | **547** | 589 | 118 |
| Interest expense, net | **152** | 169 | 157 |
| Noncontrolling interests / equity earnings included in operations | **(5)** | (5) | (7) |
| Corporate items | **58** | 46 | 54 |
| Special items: |  |  |  |
| Restructuring and other charges | **0** | 141 | 31 |
|  | **$752** | $940 | $353 |
| **Industry Segment Operating Profit** |  |  |  |
| Industrial Packaging | **$332** | $410 | $192 |
| Printing Papers | **278** | 363 | 47 |
| Consumer Packaging | **71** | 144 | 48 |
| Distribution | **22** | 21 | 26 |
| Forest Products | **49** | 2 | 40 |
| **Total Industry Segment Operating Profit (1)** | **$752** | $940 | $353 |

(1) In addition to the operating profits shown above, International Paper recorded equity earnings, net of taxes, of $22 million and $5 million for the three months ended September 30, 2010 and June 30, 2010, respectively, and no equity earnings for the three months ended September 30, 2009 related to its equity investment in Ilim Holding S.A., a separate reportable industry segment.

### Industry Segment Operating Profit

Industry segment operating profits of $752 million in the 2010 third quarter were lower than the $940 million in the 2009 third quarter, but higher than the $353 million in the 2010 second quarter. Compared with the third quarter of 2009, earnings in the current quarter benefited from higher average sales price realizations ($408 million), higher sales volumes and decreased lack-of-order downtime ($42 million), higher gains from land sales ($47 million), the partial reversal of a provision for bad debt for a large envelope company ($16 million), and slightly lower corporate items and other costs ($1 million). These benefits were partially offset by the net impact of higher operating costs and a more favorable mix of products sold ($13 million), higher mill outage costs ($3 million), and higher raw material and freight costs ($189 million). There were no special items in the 2010 third quarter compared to a gain of $497 million in the 2009 third quarter (primarily related to alternative fuel mixture credits).

Compared with the 2010 second quarter, operating profits benefited from higher average sales price realizations ($169 million), higher sales volumes ($24 million), lower mill outage costs ($65 million), slightly lower raw material and freight costs ($1 million), higher gains from land sales ($9 million), and a bad debt provision for a large envelope company recorded in the second quarter and partially reversed in the third quarter ($49 million). These benefits were partially offset by higher operating costs and a less favorable mix of products sold ($31 million). There were no special items in the 2010 third quarter compared to a loss of $113 million in the 2010 second quarter.

During the 2010 third quarter, International Paper took approximately 144,000 tons of downtime, which included 29,000 tons that were market related compared with approximately 715,000 tons of downtime in the third quarter of 2009, which included approximately 101,000 tons that were market-related and 454,000 tons related to capacity reductions at our Albany, Pineville, Franklin and Valliant mills. During the 2010 second quarter, International Paper took approximately 214,000 tons of downtime of which essentially none was 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-month and nine-month periods ended September 30, 2010 and 2009 were as follows:

*In thousands of short tons*

| Industrial Packaging | Three Months Ended September 30, 2010 | 2009 | Nine Months Ended September 30, 2010 | 2009 |
| --- | ---: | ---: | ---: | ---: |
| Corrugated Packaging | **1,928** | 1,856 | **5,693** | 5,531 |
| Containerboard | **634** | 580 | **1,867** | 1,581 |
| Recycling | **636** | 566 | **1,860** | 1,759 |
| Saturated Kraft | **45** | 33 | **136** | 83 |
| Bleached Kraft | **23** | 22 | **66** | 52 |
| European Industrial Packaging | **251** | 252 | **768** | 790 |
| Asian Box | **114** | 43 | **197** | 109 |
| Asian Distribution | **87** | 157 | **270** | 318 |
| Industrial Packaging | **3,718** | 3,509 | **10,857** | 10,223 |
| Printing Papers |  |  |  |  |
| U.S. Uncoated Papers | **684** | 753 | **2,051** | 2,148 |
| European and Russian Uncoated Papers | **311** | 304 | **929** | 1,006 |
| Brazilian Uncoated Papers | **262** | 282 | **792** | 696 |
| Asian Uncoated Papers | **24** | 25 | **75** | 40 |
| Uncoated Papers | **1,281** | 1,364 | **3,847** | 3,890 |
| Market Pulp (2) | **385** | 422 | **1,053** | 1,114 |
| Consumer Packaging |  |  |  |  |
| U.S. Coated Paperboard | **364** | 324 | **1,057** | 932 |
| European Coated Paperboard | **88** | 86 | **264** | 265 |
| Asian Coated Paperboard | **213** | 221 | **651** | 628 |
| Other Consumer Packaging | **45** | 42 | **129** | 130 |
| Consumer Packaging | **710** | 673 | **2,101** | 1,955 |

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

(2) Includes internal sales to mills.

### Income Taxes

The income tax provision was $170 million for the 2010 third quarter reflecting an effective income tax rate for continuing operations of 31% for the quarter.

The income tax provision was $25 million for the 2010 second quarter. Excluding a benefit of $56 million relating 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 $212 million for the 2009 third quarter. Excluding expense of $142 million relating 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 2010 third quarter was $152 million compared with $157 million in the 2010 second quarter and $169 million in the 2009 third quarter. The lower net expense compared with the third quarter of 2009 is due to the repayment of $3.1 billion of debt in 2009.

Corporate items, net, of $58 million in the 2010 third quarter were higher than the $54 million of net expense in the 2010 second quarter and the $46 million of net expense in the 2009 third quarter. The increase compared to the prior year reflects higher supply chain initiative costs and higher pension costs, partially offset by the reversal of an environmental reserve.

### Special Items

#### Restructuring and Other Charges

### 2010:

Restructuring and other charges during the three months ended September 30, 2010 were immaterial.

During the three months ended June 30, 2010, restructuring and other charges totaling $144 million before taxes ($88 million after taxes) were recorded, including a $111 million pre-tax charge ($68 million after taxes) for closure costs related to the paper mill and associated operations in Franklin, Virginia (including $46 million of accelerated depreciation and $36 million of environmental closure costs), a $2 million pre-tax charge ($1 million after taxes) for costs associated with the Company’s S&A reduction initiative, an $18 million pre-tax charge ($11 million after taxes) for costs related to the early extinguishment of debt, an $11 million pre-tax charge ($7 million after taxes) to write off an Ohio Commercial Activity tax receivable and a $2 million pre-tax charge ($1 million after taxes) for other items.

During the three months ended March 31, 2010, restructuring and other charges totaling $215 million before taxes ($132 million after taxes) were recorded, including a $204 million pre-tax charge ($124 million after taxes) for closure costs related to the paper mill and associated operations in Franklin, Virginia (including accelerated depreciation of $190 million), a $4 million pre-tax charge ($2 million after taxes) for costs related to the early extinguishment of debt, a $3 million pre-tax charge ($2 million after taxes) for costs associated with the reorganization of the Company’s Shorewood Packaging operations and charges of $4 million (before and after taxes) for other items. Additionally, a $46 million after-tax charge was recorded for tax adjustments related to incentive compensation and postretirement prescription drug coverage.

### 2009:

During the three months ended September 30, 2009, restructuring and other charges totaling $151 million before taxes ($95 million after taxes) were recorded, including a $102 million charge before taxes ($62 million after taxes) for costs related to the early extinguishment of debt (see Note 13), a $39 million charge before taxes ($24 million after taxes) for severance and benefit costs associated with the Company’s 2008 overhead reduction program, a $7 million charge, before and after taxes, for severance and other costs related to the planned closure of the Company’s Etienne mill in France, and a $3 million charge before taxes ($2 million after taxes) for other closure costs.

During the three months ended June 30, 2009, restructuring and other charges totaling $79 million before taxes ($55 million after taxes) were recorded, including a $34 million charge before taxes ($21 million after taxes) for severance and benefit costs associated with the Company’s 2008 overhead reduction program, a $25 million charge before taxes ($16 million after taxes) related to early debt extinguishment costs, a $15 million charge, before and after taxes, for severance and other costs related to the Company’s Etienne mill in France, and a $5 million charge before taxes ($3 million after taxes) for other closure costs. Additionally, the second quarter income tax provision included a $156 million charge to establish a valuation allowance for deferred tax assets in France, and a $26 million credit related to the settlement of certain tax issues.

During the three months ended March 31, 2009, restructuring and other charges totaling $83 million before taxes ($65 million after taxes) were recorded, including a $52 million charge before taxes ($32 million after taxes) for severance and benefits associated with the Company’s 2008 overhead reduction program, a $23 million charge before taxes ($28 million after taxes) for closure costs related to the Inverurie mill in Scotland, a $6 million charge before taxes ($4 million after taxes) related to the shutdown of certain operations at the Franklin, Virginia mill, and a $2 million pre-tax charge ($1 million after taxes) for costs associated with the reorganization of the Company’s Shorewood Packaging operations. Additionally, a $20 million charge was recorded for certain tax adjustments.

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

### 2009:

During the three months ended June 30, 2009, based on a current strategic plan update of projected future operating results of the Company’s Etienne, France mill, a determination was made that the current book value of the mill’s long-lived assets exceeded their estimated fair value, calculated using the probability-weighted present value of projected future cash flows. As a result, a $48 million charge, before and after taxes, was recorded to write down the long-lived assets of the mill to their estimated fair value. This charge is 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 2010.

### Industrial Packaging

*In millions*

|  | 2010 3rd Quarter | 2nd Quarter | Nine Months | 2009 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$2,610** | $2,440 | $7,270 | $2,230 | $2,270 | $6,680 |
| Operating Profit | **332** | 192 | 565 | 410 | 382 | 1,152 |

Industrial Packaging net sales for the third quarter of 2010 were 7% higher than in the second quarter of 2010 and 17% higher than in the third quarter of 2009. Operating profits included $1 million in the second quarter of 2010 of expenses related to the closure of the Etienne mill in France. Operating profits in the third quarter of 2009 included a gain of $221 million relating to alternative fuel mixture credits, $7 million of costs associated with the closure of the Etienne mill and $18 million for costs associated with the integration of the CBPR acquisition. Excluding these items, operating profits in the third quarter of 2010 were 72% higher than in the second quarter of 2010, and 55% higher than in the third quarter of 2009.

***North American Industrial Packaging*** net sales were $2.2 billion in the third quarter of 2010 compared with $2.1 billion in the second quarter of 2010 and $1.9 billion in the third quarter of 2009. Operating earnings were $320 million in the third quarter of 2010 compared with $172 million in the second quarter of 2010 and $404 million ($201 million excluding alternative fuel mixture credits and integration costs related to Weyerhaeuser Company’s Containerboard, Packaging and Recycling (CBPR) business) in the third quarter of 2009.

Sales volumes in the third quarter of 2010 increased slightly compared with the second quarter of 2010 reflecting higher export linerboard shipments partially offset by seasonally weaker demand in North American box markets. Average sales price realizations were significantly higher due to the full-quarter impact of price increases effective in the second quarter for containerboard and boxes. Input costs decreased due to lower wood and recycled fiber costs, partially offset by higher natural gas and chemical costs. Manufacturing operating costs decreased due to good performance at the mills and increased efficiencies at the box plants, however overhead costs for incentive compensation were higher. Planned maintenance downtime costs were $38 million lower than in the second quarter of 2010 with no major outages occurring in the third quarter.

Compared with the third quarter of 2009, sales volumes improved in the third quarter of 2010 due to stronger customer demand for boxes and for exported linerboard. The year-to-date cumulative impact of 2010 announced price increases resulted in significantly higher average sales price realizations than in the third quarter of 2009 which was negatively impacted by poor economic conditions. Input costs have increased sharply, primarily for recycled fiber, but also for wood, natural gas and chemicals. Manufacturing operating costs were favorable reflecting the fixed cost savings from the closures of the Albany and Pineville mills in the 2009 fourth quarter. Planned maintenance downtime costs were about the same as in the third quarter of 2009. In 2010, capacity was reduced by 377,000 tons per quarter related to the 2009 shutdowns of the Albany and Pineville mills and idling of a paper machine at the Valliant mill. In the third quarter of 2009, the business took about 465,000 tons of lack-of-order downtime including 98,000 tons associated with the idling of a paper machine at the Valliant mill.

Entering the fourth quarter of 2010, sales volumes are expected to seasonally decline due to fewer operating days in the box business. Average sales price realizations should continue to improve slightly reflecting a more favorable customer mix for containerboard and boxes. Input costs are expected to slightly increase primarily due to higher costs for recycled fiber. Planned maintenance downtime costs should be about $23 million higher with major outages scheduled at the Pine Hill and Prattville mills.

***European Industrial Packaging*** net sales were $235 million in both the third and second quarters of 2010 and $240 million in the third quarter of 2009. Operating earnings were $14 million in the third quarter of 2010 compared with $18 million ($19 million excluding facility closure costs) in the second quarter of 2010 and $6 million ($13 million excluding facility closure costs) in the third quarter of 2009.

Sales volumes in the third quarter of 2010 were lower than the second quarter of 2010 due to normal seasonality, the European holiday season and the Ramadan period in Morocco. Demand in industrial markets continues to recover, while the improvement in the fruit and vegetable markets was hampered by poor weather conditions throughout Europe. Average sales margins decreased as box price increases only partially offset higher costs for kraft and recycled containerboard. Also, sales margins were negatively impacted by a higher percentage of export shipments from Italy and Morocco and an unfavorable mix in the fruit and vegetable markets. Other input costs were about the same as in the 2010 second quarter.

Compared with the third quarter of 2009, total sales volumes increased reflecting improved demand for packaging in the industrial markets, but a weaker fruit and vegetable season. Average sales margins were lower as prices for kraft and recycled linerboard have increased from the record low levels of the 2009 third quarter. Operating costs were favorable, but energy costs were higher. Earnings were favorably impacted by savings from the closure of the Etienne mill. Foreign exchange effects had a $2 million more negative impact on earnings in the third quarter of 2010 than in the third quarter of 2009.

Looking ahead to the fourth quarter of 2010, sales volumes are expected to be higher with the start of the winter fruit and vegetable season in Spain, Morocco and Turkey and the continued strengthening of demand in the industrial markets. Average sales prices for boxes should be stable, but average margins are expected to improve as costs for containerboard remain at or below third quarter levels.

***Asian Industrial Packaging*** net sales were $165 million in the third quarter of 2010 compared with $85 million in the second quarter of 2010 and $100 million in the third quarter of 2009. Operating earnings for the packaging operations were a loss of $2 million in the third quarter of 2010 compared with a gain of about $1 million in both the second quarter of 2010 and the third quarter of 2009. The third quarter of 2010 included the results of the SCA Packaging Asia acquisition on June 30, 2010. SCA was about breakeven from operations for the quarter before incurring incremental integration expenses. Operating earnings for the distribution activities of the business were about breakeven in the third quarter of 2010 compared with a gain of about $1 million in the second quarter of 2010 and a loss of about $1 million in the third quarter of 2009.

### Printing Papers

*In millions*

|  | 2010 3rd Quarter | 2nd Quarter | Nine Months | 2009 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$1,550** | $1,445 | $4,400 | $1,470 | $1,360 | $4,155 |
| Operating Profit | **278** | 47 | 247 | 363 | 279 | 954 |

Printing Papers net sales for the third quarter of 2010 were 7% higher than in the second quarter of 2010 and 5% higher than in the third quarter of 2009. Operating profits included $111 million in the second quarter of 2010 for closure costs for the Franklin mill. Operating profits in the third quarter of 2009 included a gain of $226 million for alternative fuel mixture credits and costs of $1 million for facility closures. Excluding these items, operating profits in the third quarter of 2010 were 76% higher than in the second quarter of 2010 and double the third quarter of 2009.

***North American Printing Papers*** net sales were $715 million in the third quarter of 2010 compared with $675 million in the second quarter of 2010 and $725 million in the third quarter of 2009. Operating earnings were $125 million in the third quarter of 2010 compared with a loss of $65 million (a gain of $46 million excluding facility closure costs) in the second quarter of 2010 and income of $254 million ($92 million excluding alternative fuel mixture credits and facility closure costs) in the third quarter of 2009.

Compared with the second quarter of 2010, sales volumes in the third quarter of 2010 increased due to seasonally stronger demand for uncoated freesheet paper in North America and higher export shipments. Average sales price realizations improved reflecting the full-quarter impact of the realization of a May price increase for uncoated freesheet paper. Input costs for wood were lower, but were partially offset by higher energy and chemical costs. Freight costs were stable as higher domestic fuel costs were offset by lower ocean freight rates on export shipments. Manufacturing operations continued to be strong, but costs were slightly less favorable than in the 2010 second quarter. Planned maintenance downtime costs were $4 million lower than in the 2010 second quarter. In addition, operating earnings in the second quarter of 2010 included a $33 million bad debt expense of which $16 million was reversed in the third quarter of 2010.

Sales volumes in the third quarter of 2010 decreased from the third quarter of 2009 partially due to reduced capacity related to the permanent closure of the Franklin mill. Average sales price realizations improved reflecting sales price increases announced during 2010. Input costs were higher for wood, purchased fiber, energy and chemicals. Freight costs were also higher. Planned maintenance downtime costs were slightly higher in the third quarter of 2010, while operating costs were unfavorable. In the third quarter of 2009, 42,000 tons of lack-of-order downtime was taken, but capacity has been reduced by 150,000 tons per quarter in 2010 due to the closure of the Franklin mill.

Entering the fourth quarter of 2010, domestic market conditions are expected to remain steady; however, sales volumes are expected to be impacted by a seasonally weaker period. Average sales price realizations should be stable. Average margins are expected to decrease due to an increase in lower-margin export shipments. Operating costs and planned mill maintenance downtime costs should be about flat. Input costs for wood are expected to decrease, but be largely offset by higher energy and chemical costs.

***European Printing Papers*** net sales were $325 million in the third quarter of 2010 compared with $320 million in the second quarter of 2010 and $300 million in the third quarter of 2009. Operating earnings were $58 million in the third quarter of 2010 compared with $55 million in the second quarter of 2010 and $28 million in the third quarter of 2009.

Sales volumes for uncoated freesheet paper were higher in the third quarter of 2010 than in the second quarter of 2010 as market demand in Russia continues to strengthen, more than offsetting seasonal declines in the rest of Europe. Pulp shipments increased in Russia and Poland. Average sales price realizations improved as price increases were realized, primarily in Western Europe, for uncoated freesheet paper. Manufacturing operating costs were favorable, but planned maintenance downtime costs for an outage at the Kwidzyn mill in the third quarter of 2010 were $2 million higher than for an outage at the Svetogorsk mill in the second quarter of 2010. Input costs for wood, energy, chemicals and purchased pulp all increased slightly.

Compared with the 2009 third quarter, sales volumes for uncoated freesheet paper in the 2010 third quarter increased, reflecting stronger market demand. Average sales price realizations for uncoated freesheet paper increased due to improved market conditions, and market pulp prices were significantly higher. Manufacturing operating costs and planned maintenance downtime costs were each about flat. Input costs for wood and energy were higher, but were partially offset by lower costs for chemicals.

In the 2010 fourth quarter, average sales price realizations for uncoated freesheet paper are expected to improve, but should be partially offset by significantly lower pulp sales prices. Planned maintenance downtime costs should be higher due to an outage at the Saillat mill in France. Sales volumes are expected to be higher overall, but lower in Russia due to capacity constraints. Input costs for wood are expected to be about flat, but costs for energy and chemicals are expected to be higher. Operating costs should be seasonally higher.

***Brazilian Printing Papers*** net sales were $275 million in both the third and second quarters of 2010 and the third quarter of 2009. Operating earnings were $46 million in the third quarter of 2010 compared with $39 million in the second quarter of 2010 and $36 million in the third quarter of 2009.

Sales volumes in the third quarter of 2010 decreased compared with the second quarter of 2010 as higher sales volumes in the domestic Brazilian market were more than offset by lower export shipments. Market demand in Brazil and the rest of Latin America remains strong. Average sales price realizations were higher reflecting the realization of uncoated freesheet paper sales price increases in the Latin American and European export markets. Average margins were favorably impacted by a greater proportion of higher-margin domestic sales. Input costs for purchased pulp and energy were higher, but wood costs were lower. Manufacturing operating costs were favorable, but overhead costs and planned maintenance downtime costs were higher.

Compared with the third quarter of 2009, sales volumes decreased for both domestic and export sales of uncoated freesheet paper and for pulp. Average sales price realizations for uncoated freesheet paper increased significantly in export markets, but decreased slightly in domestic markets. Average sales price realizations for pulp increased. Input costs were higher primarily reflecting increased costs for purchased pulp at the Tres Lagoas mill. Manufacturing operating costs were unfavorable and planned maintenance downtime costs were $3 million higher with outages at the Luis Antonio and Mogi Guacu mills in the third quarter of 2010 and at only the Luis Antonio mill in the third quarter of 2009.

Entering the 2010 fourth quarter, sales volumes are expected to increase, and average margins are expected to rise due to stable domestic market demand for uncoated freesheet paper. Average sales price realizations should improve particularly in export markets with the full-quarter impact of the realization of previously announced price increases. Costs associated with planned maintenance downtime are expected to be lower with no outages scheduled for the fourth quarter. Input costs are expected to increase as purchased pulp prices moderate slightly, and operating costs should be about flat.

***Asian Printing Papers*** net sales were $25 million in the third quarter of 2010 compared with $15 million in both the second quarter of 2010 and the third quarter of 2009. Operating earnings were about breakeven in all periods presented.

***U.S. Market Pulp*** net sales were $210 million in the third quarter of 2010 compared with $160 million in the second quarter of 2010 and $155 million in the third quarter of 2009. Operating earnings were $49 million in the third quarter of 2010 compared with $18 million in the second quarter of 2010 and $45 million (a loss of $18 million excluding alternative fuel mixture credits) in the third quarter of 2009.

Sales volumes in the third quarter of 2010 were higher than in the second quarter of 2010 reflecting strong market demand, particularly for fluff pulp. Average sales price realizations increased for fluff pulp, but this benefit was partially offset by decreases for softwood and hardwood pulp. Input costs decreased reflecting lower wood costs, but higher energy and chemical costs. Freight costs increased due to higher fuel costs. Planned maintenance downtime costs were about $11 million higher than in the 2010 second quarter. Operating costs were favorable due to strong performance at the mills.

Compared with the third quarter of 2009, sales volumes were slightly higher. Average sales price realizations increased significantly, reflecting the impact of stronger market demand. Input costs for wood and energy were higher, and freight costs were also higher. Planned maintenance downtime costs were about the same as in the third quarter of 2009. Operating costs were lower reflecting strong mill performance.

Looking ahead to the fourth quarter of 2010, average sales price realizations are expected to decrease reflecting competitive pressure on softwood, hardwood and fluff pulp prices. Sales volumes are also expected to decrease reflecting seasonal weakness. No planned maintenance outages are scheduled in the fourth quarter. Input costs for energy and chemicals are expected to increase, but should be partially offset by lower wood costs. Manufacturing operating costs should be seasonally higher.

### Consumer Packaging

*In millions*

|  | 2010 3rd Quarter | 2nd Quarter | Nine Months | 2009 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$870** | $845 | $2,520 | $790 | $770 | $2,275 |
| Operating Profit | **71** | 48 | 147 | 144 | 114 | 370 |

Consumer Packaging net sales for the third quarter of 2010 were 3% higher than in the second quarter of 2010 and 10% higher than in the third quarter of 2009. Operating earnings in the second quarter of 2010 included $1 million of costs associated with the reorganization of the Shorewood business, while operating earnings in the third quarter of 2009 included a gain of $78 million for alternative fuel mixture credits and costs of $2 million related to the Shorewood reorganization. Excluding these items, operating earnings in the third quarter of 2010 were 45% higher than in the second quarter of 2010 and 4% higher than in the third quarter of 2009.

***North American Consumer Packaging*** net sales were $615 million in the third quarter of 2010 compared with $580 million in the second quarter of 2010 and $565 million in the third quarter of 2009. Operating earnings in the third quarter of 2010 were $51 million compared with $16 million ($17 million excluding Shorewood reorganization costs) in the second quarter of 2010 and earnings of $120 million ($44 million excluding alternative fuel mixture credits and Shorewood reorganization costs) in the third quarter of 2009.

Coated Paperboard sales volumes in the third quarter of 2010 increased compared with the second quarter of 2010 reflecting continued strong market demand across all product lines. Average sales price realizations were higher due to the full-quarter realization of price increases announced in June. Input costs for wood decreased and were only partially offset by increased costs for energy and chemicals. Planned maintenance downtime costs were $19 million lower in the third quarter with no mills taking outages compared with two in the second quarter. Manufacturing costs were about flat as the mills continued to perform well.

Compared with the third quarter of 2009, sales volumes were higher reflecting stronger market demand. Average sales price realizations increased due to the flow through of previously announced price increases. Input costs have increased for wood, energy and chemicals, and freight costs are also higher. Manufacturing operating costs were favorable compared with the third quarter of 2009 primarily reflecting cost savings associated with the closure of the Franklin mill. Planned maintenance downtime costs were slightly lower. In the third quarter of 2009, the business took 51,000 tons of lack-of-order downtime. Capacity in 2010 has been reduced by 35,000 tons per quarter related to the shutdown of the paperboard machine at the Franklin mill at the end of 2009.

Shorewood sales in the third quarter of 2010 were higher than in the second quarter of 2010 primarily reflecting a seasonal increase in the home entertainment segment. Lower sales in the tobacco segment were partially offset by increases in the consumer products and display segments. Average margins declined slightly reflecting lower prices in the Korean tobacco market and higher board costs. Operating costs were unfavorable primarily due to the start-up of new equipment. Compared with the third quarter of 2009, sales declined in all segments. Input costs increased, primarily for board. Operating costs were higher, but were more than offset with favorable overhead cost savings.

Foodservice sales volumes in the third quarter of 2010 were up slightly from the second quarter of 2010. Average margins decreased slightly due to a change in product mix. Average sales price realizations increased reflecting the impact of passing on higher raw material costs through mid-year contract price increases. Input costs for board increased, but were partially offset by lower resin costs. Compared with the third quarter of 2009, sales volumes in the third quarter of 2010 improved. Average sales price realizations were higher, but the timing of higher input costs for board and resins squeezed margins. Operating and overhead costs were favorable.

Looking forward to the fourth quarter of 2010, coated paperboard sales volumes are expected to be seasonally lower. Average sales price realizations should increase as a previously announced price increase for folding carton board effective in October is realized. Planned maintenance downtime costs are expected to be about $16 million higher than in the third quarter. Input costs are expected to remain stable. Operating costs should reflect seasonally higher fuel consumption. Shorewood’s sales volumes are expected to increase reflecting seasonally higher demand in the home entertainment segment. Input costs for board are expected to be about flat, but operating costs should be lower. Sales volumes for Foodservice should be seasonally lower, but average margins should improve due to a more favorable product mix. Average sales price realizations should increase reflecting the pass-through of earlier input cost increases. Input costs for resins are expected to be lower in the fourth quarter, but should be partially offset by higher board costs. Freight costs are also expected to increase.

***European Consumer Packaging*** net sales were $85 million in the third quarter of 2010 compared with $80 million in both the second quarter of 2010 and the third quarter of 2009. Operating earnings were $17 million in the third quarter of 2010 compared with $19 million in the second quarter of 2010 and $17 million in the third quarter of 2009.

Sales volumes in the third quarter of 2010 were slightly higher than in the second quarter of 2010. Average sales price realizations increased in both Europe and Russia. A planned maintenance outage was taken at the Kwidzyn mill in the third quarter while one was taken at the Svetogorsk mill in the second quarter, but costs were about $2 million higher in the third quarter. Input costs were higher for wood and energy. Compared with the third quarter of 2009, sales volumes in the third quarter of 2010 were slightly higher. Average sales price realizations improved. Input costs for wood and energy increased.

Operating results in the 2010 fourth quarter are expected to reflect an increase in average sales price realizations in Europe, but a decrease in Russia. Operating profits are expected to be adversely affected by seasonally higher input costs, but should benefit from a reduction in planned maintenance downtime expenses.

***Asian Consumer Packaging*** net sales were $170 million in the third quarter of 2010 compared with $185 million in the second quarter of 2010 and $145 million in the third quarter of 2009. Operating earnings were $3 million in the third quarter of 2010 compared with $13 million in the second quarter of 2010 and $7 million in the third quarter of 2009.

Average sales price realizations in the third quarter of 2010 were lower than in the second quarter of 2010 primarily for folding carton board and coated bristols reflecting competitive pricing pressures. Sales volumes were about flat and market demand remained solid. Manufacturing costs were favorable, but this benefit was offset by higher input costs for pulp, energy and chemicals. Compared with the third quarter of 2009, average sales price realizations were significantly higher, but were offset by increased input costs, primarily for pulp, but also for energy and chemicals. Sales volumes decreased slightly.

Entering the fourth quarter of 2010, average sales price realizations are expected to improve as tobacco board, folding carton board and coated bristols prices begin to increase during the quarter. Pulp costs in the Chinese market are volatile and if they increase, average margins will be negatively impacted.

### Distribution

*In millions*

|  | 2010 3rd Quarter | 2nd Quarter | Nine Months | 2009 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$1,755** | $1,630 | $4,965 | $1,665 | $1,595 | $4,850 |
| Operating Profit | **22** | 26 | 69 | 21 | 10 | 24 |

***Distribution’s*** 2010 third quarter sales were 8% higher than in the second quarter of 2010 and 5% higher than the third quarter of 2009. Operating earnings in the third quarter of 2010 were 15% lower than in the second quarter of 2010, and 5% higher than earnings in the third quarter of 2009.

Sales of papers and graphic arts supplies and equipment in the third quarter of 2010 totaled $1.1 billion compared with $1.0 billion in the second quarter of 2010 and $1.1 billion in the third quarter of 2009. Trade margins as a percent of sales for printing papers declined from the second quarter of 2010 due to a higher proportion of lower-margin sales shipped directly from the manufacturer versus sales shipped from warehouses, but increased from the third quarter of 2009 as a result of higher resale prices. Packaging sales were $400 million in both the third and second quarters of 2010 and $350 million in third quarter of 2009. Trade margins as a percent of sales for packaging products decreased from both the second quarter of 2010 and third quarter of 2009 reflecting changing product and service mix. Sales of facility supply products totaled $300 million in the third quarter of 2010, compared with $250 million in the second quarter of 2010 and $300 million in the third quarter of 2009.

Operating profits were $22 million in the third quarter of 2010 compared with $26 million in the second quarter of 2010 and $21 million in the third quarter of 2009. Compared with the second quarter of 2010, operating profits declined due to a change in sales mix and higher inventory valuation adjustment charges. Increased sales volume and improved margins were the primary causes of the earnings improvement compared with the 2009 third quarter.

Looking ahead to the 2010 fourth quarter, operating results are expected to be seasonally lower.

### Forest Products

*In millions*

|  | 2010 3rd Quarter | 2nd Quarter | Nine Months | 2009 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$205** | $5 | $220 | $5 | $10 | $20 |
| Operating Profit | **49** | 40 | 97 | 2 | 3 | 7 |

Forest Products sales and profits are driven mainly by land and mineral rights sales, which varied from quarter to quarter due to various factors. Operating earnings in the third quarter of 2010 included a $50 million gain on the sale of 163,000 acres of land in the southeastern U.S. Operating earnings in the second quarter of 2010 were primarily due to a $39 million gain on the sale of mineral rights on more than 7 million acres throughout the U.S.

The Company has substantially completed its land sales, and earnings for future land sales are expected to be insignificant in any given quarter.

### Equity Earnings, Net of Taxes – Ilim Holding S.A.

On October 5, 2007, International Paper and Ilim Holding S.A. (Ilim) announced the completion of a 50:50 joint venture to operate in Russia. 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 reports its share of Ilim’s operating results on a one-quarter lag basis. Accordingly, the accompanying consolidated statement of operations for the three months ended September 30, 2010 includes the Company’s 50% share of Ilim’s operating results for the three-month period ended June 30, 2010 under the caption “Equity earnings (losses) net of taxes.” Ilim is reported as a separate reportable industry segment.

The Company recorded equity earnings, net of taxes, of $22 million in the third quarter of 2010 related to operations in the second quarter of 2010 compared with $5 million recorded in the second quarter of 2010 related to operations in the first quarter of 2010. Sales volumes in the second quarter of 2010 decreased from the prior quarter due to lower market pulp and containerboard shipments. Market demand for pulp was strong throughout most of the quarter due to the first-quarter Chilean earthquake, but demand in the Chinese market decreased sharply in the second half of June. Average sales price realizations increased significantly for market pulp with more modest increases for linerboard in both domestic and export markets. Input costs for wood were unfavorable reflecting seasonal difficulties in harvesting and transportation. Operating costs were favorable primarily due to seasonally lower energy consumption. Additionally, in the second quarter of 2010, the after-tax foreign exchange impact was a loss of $6 million compared with a slight loss recorded in the first quarter of 2010.

In the third quarter of 2009, the Company had recorded equity earnings, net of taxes, for Ilim of about breakeven related to operations in the second quarter of 2009. Compared to the second quarter of 2009, sales volumes in the second quarter of 2010 increased, primarily for market pulp, reflecting strong demand. Average sales price realizations were significantly higher for softwood and hardwood pulp in the domestic and Chinese export markets as well as for linerboard. A foreign exchange gain of $10 million on the remeasurement of U.S. dollar-denominated debt was recorded in the second quarter of 2009.

Looking forward to the results we expect to record in the Company’s fourth quarter of 2010 for Ilim’s third quarter, sales volumes are expected to increase as domestic market demand remains strong. Average sales price realizations are expected to be lower reflecting the decline in market demand for pulp, particularly in China, although sales prices are expected to begin to recover toward the end of the quarter. Input costs are expected to decrease, primarily for wood, and operating costs should be favorable. Earnings will be negatively impacted by the recognition of a fixed asset retirement charge. A highly favorable foreign exchange impact is expected.

### LIQUIDITY AND CAPITAL RESOURCES

Cash provided by continuing operations totaled $587 million for the first nine months of 2010, down from $3.6 billion for the comparable 2009 nine-month period. Earnings from continuing operations adjusted for non-cash charges were $1.3 billion for the first nine months of 2010 compared to $2.9 billion for the first nine months of 2009. Cash used for working capital components totaled $692 million for the first nine months of 2010, down from a source of $685 million for the comparable 2009 nine-month period.

The Company generated free cash flow of approximately $1.1 billion and $1.9 billion in the first nine months of 2010 and 2009, respectively. Free cash flow is a non-GAAP measure and the most comparable GAAP measure is cash provided by 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. The following is a reconciliation of free cash flow to cash provided by operations:

*In millions*

|  | Nine Months Ended September 30, 2010 | 2009 |
| --- | ---: | ---: |
| Cash provided by operations | **$587** | $3,570 |
| Less/Add: |  |  |
| Cash invested in capital projects | **(457)** | (367) |
| Cash contribution to pension plan | **1,150** | — |
| Cash received from alternative fuel mixture credits | **(132)** | (1,295) |
| **Free Cash Flow** | **$1,148** | $1,908 |

Investments in capital projects totaled $457 million in the first nine months of 2010 compared to $367 million in the first nine months of 2009. Full-year 2010 capital spending is currently expected to be approximately $800 million, or about 55% of depreciation and amortization expense for our current businesses. Cash used for acquisitions (net of cash acquired) for the first nine months of 2010 totaled $152 million related to the Company’s purchase of SCA Packaging Asia.

Financing activities for the first nine months of 2010 included a $328 million net reduction in debt versus a $2.4 billion net reduction during the comparable 2009 nine-month period.

During the three months ended September 30, 2010, International Paper repaid approximately $111 million of notes with interest rates ranging from 5.375% to 6.8% and original maturities from 2016 to 2024.

In the second quarter of 2010, International Paper repaid approximately $108 million of notes with interest rates ranging from 5.3% to 9.375% and original maturities from 2015 to 2019. In connection with these early debt extinguishments, interest rate swap hedges with a notional value of $2 million were undesignated as effective fair value hedges. The resulting gain was immaterial. Pre-tax early debt retirement costs of $18 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.

In June 2010, interest rate swap agreements designated as fair value hedges with a notional value of $100 million were terminated. The termination was not in connection with the early retirement of debt. The resulting gain of $3 million was deferred and recorded in Long-term debt and will be amortized as an adjustment of interest expense over the life of the underlying debt through 2019.

In the first quarter of 2010, International Paper repaid approximately $120 million of notes with interest rates ranging from 5.25% to 7.4% and original maturities from 2010 to 2027. In connection with these early debt retirements, previously deferred gains of $1 million related to earlier swap terminations were recognized in earnings. Pre-tax early debt retirement costs of $4 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.

Also in the first quarter of 2010, approximately $700 million of fixed-to-floating interest rate swaps, issued in 2009, were terminated, $100 million of which was issued in the third quarter of 2009 as discussed below. These terminations were not in connection with early debt retirements. The resulting $2 million gain was deferred and recorded in Long-term debt and is being amortized as an adjustment of interest expense over the life of the underlying debt through 2015.

During the three months ended September 30, 2009, International Paper repaid approximately $1.1 billion of the $2.5 billion of long-term debt issued in connection with the CBPR business acquisition. As of December 31, 2009, the remainder of this debt had been repaid.

In August 2009, International Paper issued $1.0 billion of 7.5% senior unsecured notes with a maturity date in August 2021. The proceeds from this borrowing were used to repay approximately $942 million of notes with interest rates ranging from 5.125% to 7.4% and original maturities from 2012 to 2026.

Also during the third quarter of 2009, in connection with these early debt retirements, interest rate swaps with a notional value of $520 million, including $500 million of swaps issued in the second quarter of 2009, were terminated or undesignated as effective fair value hedges, resulting in a gain of approximately $9 million. In addition, previously deferred net gains of $7 million related to earlier swap terminations were recognized in earnings. Pre-tax early debt retirement costs of $102 million related to these debt repayments, net of the gains on swap terminations, are included in Restructuring and other charges in the accompanying consolidated statement of operations.

Also in August 2009, International Paper entered into a fixed-to-floating interest rate swap agreement with a notional amount of $100 million due in 2015 to manage interest rate exposure.

In May 2009, International Paper issued $1 billion of 9.375% senior unsecured notes with a maturity date in May 2019. The proceeds from this borrowing were used, along with available cash, to repay approximately $875 million of notes with interest rates ranging from 4.0% to 9.25% and original maturities from 2010 to 2012. In April 2009, International Paper repaid $313 million of the $2.5 billion long-term debt issued in connection with the CBPR business acquisition. Also in April 2009, International Paper Company Europe Ltd, a wholly-owned subsidiary of International Paper, repaid $75 million of notes issued in connection with the Ilim Holdings S.A. joint venture that matured. Pre-tax early debt retirement costs of $25 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.

In March 2009, International Paper Investments (Luxembourg) S.ar.l, a wholly-owned subsidiary of International Paper, borrowed $468 million of long-term debt with an initial interest rate of LIBOR plus a margin of 450 basis points that varied upon the credit rating of the Company, and a maturity date in March 2012. International Paper used the $468 million of proceeds from the loan and cash of approximately $170 million to repay its 500 million euro-denominated debt (equivalent to $638 million at date of payment) with an original maturity date in August 2009. As of July 2009, the $468 million loan was repaid. Other debt activity for the three months ended March 2009 included the repayment of approximately $366 million of notes with interest rates ranging from 4.25% to 5.0% that had matured.

Also in the first quarter of 2009, International Paper terminated an interest rate swap with a notional value of $100 million designated as a fair value hedge, resulting in a gain of $11 million that was deferred and recorded in Long-term debt in the accompanying consolidated balance sheet. As the swap agreement was terminated early, the resulting gain will be amortized to earnings over the life of the related debt through April 2016.

At September 30, 2010 and December 31, 2009, International Paper classified $100 million and $450 million, respectively, of Current maturities of long-term debt as Long-term debt. International Paper has the intent and ability, as evidenced by its fully committed credit facility, to renew or convert these obligations.

During the first nine months of 2010, International Paper issued approximately 2.7 million shares of treasury stock, net of restricted stock withholding, and 1.4 million shares of common stock for various plans. Payments of restricted stock withholding taxes totaled $26 million. During the first nine months of 2009, the Company issued approximately 2.4 million shares of treasury stock, net of restricted stock withholding, and 3.1 million shares of common stock for various plans. Payments of restricted stock withholding taxes totaled $10 million. Common stock dividend payments totaled $120 million and $129 million for the first nine months of 2010 and 2009, respectively. Dividends were $0.275 per share and $0.30 per share for the first nine months in 2010 and 2009, respectively. In March 2009, the Company had announced that the quarterly dividend would be reduced to $0.025 per share in the 2009 second quarter. In April 2010, International Paper announced that the quarterly dividend would be increased from $0.025 per share to $0.125 per share, effective for the 2010 second quarter.

At September 30, 2010, contractual obligations for future payments of debt maturities by calendar year were as follows (in millions): $143 in 2010; $296 in 2011; $226 in 2012; $136 in 2013; $558 in 2014; $784 in 2015; and $6,597 thereafter.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2010, 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, 2010, 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 November 2012 and has a facility fee of 0.50% payable quarterly. The liquidity facilities also include up to $1.0 billion of commercial paper-based financings based on eligible receivable balances ($1.0 billion at September 30, 2010) under a receivables securitization program. On January 13, 2010, the Company amended the receivables securitization program to, among other things, extend the maturity date from January 2010 to January 2011. The amended agreement has a facility fee of 0.50% payable monthly.

International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements through 2010 through current cash balances and cash from operations, supplemented as required by its existing credit facilities. The Company plans to rely upon 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.

### Ilim Holding S.A. Shareholder’s Agreement

In October 2007, in connection with the formation of the Ilim Holding S.A. joint venture (Ilim), 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 anti-trust authorities. Based on the provisions of the agreement, International Paper estimates that the current purchase price for its partners’ 50% interests would be approximately $425 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.

### Alternative Fuel Mixture Credits

The U.S. Internal Revenue Code provided a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, available for companies that applied for and were qualified by the Internal Revenue Service (IRS) as alternative fuel mixers, expired on December 31, 2009. For paper companies, the credit of $0.50 per gallon applied to black liquor (which is a by-product of paper production) mixed with a small amount of diesel fuel that is then used by the company as a fuel.

In January 2009, the Company received notification that its application to be registered as an alternative fuel mixer had been approved. The Company’s credit applied to approximately 4.2 billion gallons used through the credit’s expiry date (of which 3.8 billion was produced in 2009). During the first nine months of 2009, the Company filed claims for alternative fuel mixture credits covering eligible periods subsequent to November 2008 totaling approximately $1.5 billion, including $251 million recorded in Accounts and notes receivable at September 30, 2009, and $1.3 billion that was received in cash. Accordingly, the accompanying consolidated statement of operations includes credits of approximately $525 million and $1.5 billion for the three and nine months ended September 30, 2009, respectively, in Cost of products sold ($320 million and $944 million after taxes), representing eligible alternative fuel mixture credits earned through September 30, 2009.

In a memorandum dated June 28, 2010, the IRS concluded that black liquor would also qualify for a taxable cellulosic bio-fuel credit of $1.01 per gallon of bio-fuel produced in 2009. On October 15, 2010, the IRS ruled that companies may qualify for the $.50 per gallon alternative fuel mixture credit and the $1.01 cellulosic bio-fuel producer credit for 2009, but not for the same gallons.

The Company plans to file an application with the IRS to receive the required registration code to become a registered cellulosic bio-fuel producer. The difference between the two credits is that the $1.01 credit must be credited against a company’s taxable earnings, and the credit may be carried forward against taxable earnings through 2015. In contrast, the $0.50 credit provided cash or tax credit to a taxpayer. Consequently, the Company will evaluate the optimal use of the two credits with respect to gallons produced in 2009. This may result in the Company repaying some or all of the cash received with respect to the $0.50 credit, and amendment of the Company’s 2009 tax return.

As is the case with other tax credits, taxpayer claims are subject to possible future review by the IRS which has the authority to propose adjustments to the amounts claimed, or credits received.

### 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 the accounting for contingencies, impairment or disposal of long-lived assets, goodwill and other intangible assets, pensions, postretirement benefits other than pensions, and income taxes.

The Company has included in its 2009 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 2010.

### Impairment of Long-Lived Assets and Goodwill

An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material, energy and freight costs, and various other projected operating and economic factors. As these key factors change in future periods, the Company will update its impairment analyses to reflect its latest estimates and projections.

### Pension Accounting

Net pension expense totaled approximately $174 million for International Paper’s U.S. plans for the nine months ended September 30, 2010, or about $14 million more than the pension expense for the first nine months of 2009. Net pension expense for non-U.S. plans was about $3 million and $5 million for the first nine months of 2010 and 2009, respectively. This excludes a $1.5 million curtailment gain and a $2.3 million settlement gain booked by our subsidiary in Brazil during the three months ended September 30, 2010 to reflect the conversion of their defined benefit plan into a defined contribution plan. The increase in U.S. plan pension expense was principally due to a decrease in the assumed discount rate to 5.80% in 2010 from 6.00% in 2009 and higher amortization of unrecognized actuarial losses.

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 expected rate of future salary increases, and various demographic assumptions including expected mortality. The discount rate assumption is determined based on a yield curve that incorporates approximately 500 Aa-graded bonds. The plan’s projected cash payments are then matched to the yield curve to develop the discount rate. 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, 2010, the market value of plan assets for International Paper’s U.S. plans totaled approximately $8 billion, consisting of approximately 45% equity securities, 36% fixed income securities, and 19% real estate and other assets.

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 elected to make voluntary contributions totaling $1.15 billion during the three months ended September 30, 2010. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $36 million in 2010.

### Accounting for Uncertainty in Income Taxes

The guidance for accounting for uncertainty in income taxes requires management to make judgments regarding the probability that certain income tax positions taken by the Company in filing tax returns in the various jurisdictions in which it operates will be sustained upon examination by the respective tax authorities based on the technical merits of these tax positions, and to make estimates of the amount of tax benefits that will be realized upon the settlement of these positions.

### FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, and in particular, statements found in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not historical in nature may constitute forward-looking statements. These statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar nature. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ include, among other things, the following: changes in the cost or availability of raw materials, energy and transportation; economic cyclicality and changes in consumer preferences in the industries in which we operate; changes in the pricing and demand for our products; the effects of competition in the United States and internationally; adverse business and economic conditions; downgrades in credit ratings; the impairment of financial institutions with which we execute transactions; pension and health care costs; the amount of our debt obligations and our ability to refinance or repay our debt; pension plan funding obligations that could be material over the next several years; changes in international conditions; unanticipated expenditures relating to the cost of compliance with environmental and other governmental regulations; results of legal proceedings; material disruptions at one of our manufacturing facilities; and risks related to operations conducted by joint ventures. 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, 295 characters.

Information relating to quantitative and qualitative disclosures about market risk is shown on page 46 of International Paper’s 2009 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, 2009.

## Controls and procedures

As filed, 2,205 characters.

### Evaluation of Disclosure Controls and Procedures:

Disclosure controls and procedures are controls and 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 completely and accurately 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 the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) 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.

### Changes in Internal Controls over Financial Reporting:

There have been no changes in our internal controls during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

During the 2010 second quarter, the Company completed the acquisition of SCA Packaging Asia. 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 SCA Packaging Asia business will be conducted over the course of our 2011 assessment cycle.

The Company has ongoing initiatives to standardize and upgrade its financial, operating and supply chain systems. The system upgrades will be implemented in stages, by business, over the next several years. Management believes the necessary procedures are in place to maintain effective internal controls over financial reporting as these initiatives continue.

Filed Nov 5, 2010.
Source: SEC EDGAR, the filing index for accession 0001193125-10-249934. Last ingested by Listed: Nov 4, 2026, 18:37 ET. No prices; not investment advice.