# International Paper Co: Form 10-Q for the period ended Jun 30, 2011

- Company: [International Paper Co](/companies/ip.md) (CIK 51434)
- Form: 10-Q
- Filed: 2011-08-09
- Accepted by EDGAR: Aug 9, 2011, 14:46 ET
- Period: 2011-06-30
- Accession: 0001193125-11-215656
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/51434/000119312511215656/d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/51434/000119312511215656/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-04-01 to 2011-06-30 | $6.65bn | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2011-01-01 to 2011-06-30 | $13.04bn | us-gaap:SalesRevenueNet |
| Selling, general and administrative | 3 months, 2011-04-01 to 2011-06-30 | $484.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2011-01-01 to 2011-06-30 | $969.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2011-04-01 to 2011-06-30 | $483.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2011-01-01 to 2011-06-30 | $1.07bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-04-01 to 2011-06-30 | $150.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2011-01-01 to 2011-06-30 | $300.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-04-01 to 2011-06-30 | $118.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2011-01-01 to 2011-06-30 | $241.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-04-01 to 2011-06-30 | $224.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2011-01-01 to 2011-06-30 | $566.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-04-01 to 2011-06-30 | $0.52 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2011-01-01 to 2011-06-30 | $1.30 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-04-01 to 2011-06-30 | $0.52 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2011-01-01 to 2011-06-30 | $1.31 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-04-01 to 2011-06-30 | 430,500,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2011-01-01 to 2011-06-30 | 433,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2011-01-01 to 2011-06-30 | $1.16bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 6 months, 2011-01-01 to 2011-06-30 | $197.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2011-01-01 to 2011-06-30 | $30.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2011-06-30 | $2.40bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-06-30 | $9.42bn | us-gaap:AssetsCurrent |
| Total assets | at 2011-06-30 | $26.04bn | us-gaap:Assets |
| Current liabilities | at 2011-06-30 | $4.82bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2011-06-30 | $7.88bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2011-06-30 | $610.0m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2011-06-30 | $7.71bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 69,993 characters.

### EXECUTIVE SUMMARY

International Paper generated diluted earnings per share attributable to International Paper shareholders before special items of $0.80 in the second quarter of 2011, exceeding 2011 first quarter earnings of $0.74 and almost doubling 2010 second quarter earnings of $0.42. Diluted earnings (loss) per share attributable to International Paper shareholders were $0.52 in the second quarter of 2011, compared with $0.78 in the first quarter of 2011 and $0.21 in the second quarter of 2010.

The second quarter of 2011 was a strong quarter for International Paper, with solid earnings that were driven by our balanced segment and global portfolio. Despite encountering a seasonal demand uptick domestically compared to the first quarter, year-over-year volume growth reflected a global economy that is still recovering, not fully recovered. Our domestic box demand, while strong, was hampered by a light agricultural season in the West due to unfavorable weather conditions. Demand improved for our packaging products outside the U.S. during the quarter. Prices in our printing papers businesses were up across all regions. Generally, our mills and converting plants continued to run exceptionally well with very good execution on outages. As expected, we saw an increase in input costs, primarily related to chemicals and transportation costs, and we experienced higher costs for planned mill maintenance outages. Also, an unplanned outage at our Vicksburg mill due to regional flooding cost us a little over $0.03 per share of earnings during the quarter. Our share of the earnings from our Ilim joint venture increased from $44 million in the 2010 first quarter to $57 million in the current quarter, as volume and price increases for pulp combined with good operations at the mills more than offset input cost pressures. We generated free cash flow of $419 million during the 2011 second quarter, which was in line with the first quarter, even with a $48 million increase in capital spending during the current quarter.

Looking ahead to the 2011 third quarter, we expect continued steady demand domestically and seasonal decreases in Europe. Pricing on average will remain relatively stable with some pass through of previously announced increases. Higher input costs will continue across most commodities, largely offsetting reduced maintenance outage spending of $65 million. In addition to higher energy, transportation and chemical costs, increased costs for recycled fiber alone could amount to $20 to $30 million of incremental costs in the quarter.

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

|  | Three Months Ended June 30, 2011 | 2010 | Three Months Ended March 31, 2011 |
| --- | ---: | ---: | ---: |
| Earnings Per Share Before Special Items | $0.80 | $0.42 | $0.74 |
| Restructuring and other charges | (0.03) | (0.21) | (0.07) |
| Net gains (losses) on sales and impairments of businesses | (0.24) | 0 | (0.02) |
| Income tax items | (0.01) | 0 | 0 |
| Bargain purchase price adjustment recorded in equity earnings | 0 | 0 | 0.02 |
| Earnings Per Common Share from Continuing Operations | 0.52 | 0.21 | 0.67 |
| Discontinued operations | 0 | 0 | 0.11 |
| Diluted Earnings (Loss) Per Common Share as Reported | $0.52 | $0.21 | $0.78 |

### RESULTS OF OPERATIONS

For the second quarter of 2011, International Paper Company reported net sales of $6.6 billion, compared with $6.1 billion in the second quarter of 2010 and $6.4 billion in the first quarter of 2011.

Net earnings attributable to International Paper totaled $224 million, or $0.52 per share, in the 2011 second quarter. This compared with $93 million, or $0.21 per share, in the second quarter of 2010 and $342 million, or $0.78 per share, in the first quarter of 2011.

Earnings from continuing operations attributable to International Paper Company were $224 million in the second quarter of 2011 compared with $93 million in the second quarter of 2010 and $293 million in the first quarter of 2011. Compared with the second quarter of 2010, earnings in the 2011 second quarter benefited from higher average sales price realizations ($156 million), higher sales volumes ($12 million), the net impact of lower operating costs and a less favorable mix of products sold ($36 million), and lower net interest expense ($15 million). These benefits were partially offset by higher mill outage costs ($14 million), higher raw material and freight costs ($65 million), lower earnings from land sales ($27 million), and a higher income tax expense ($8 million) reflecting a higher estimated tax rate. Corporate and other items were $5 million lower in the second quarter of 2011 which includes a $33 million benefit for a bad debt expense related to a large envelope company in the 2010 second quarter, partially offset by a $20 million expense related to downtime at the Vicksburg mill due to the flooding of the Yazoo River in the current quarter. Equity earnings, net of taxes, relating to International Paper’s investment in Ilim Holding S.A. were $52 million higher in the 2011 second quarter than in the 2010 second quarter. Net special items were a loss of $119 million in the 2011 second quarter, compared with a net special item loss of $88 million in the 2010 second quarter.

Compared with the first quarter of 2011, earnings benefited from higher average sales price realizations ($8 million), higher sales volumes ($33 million), the net impact of lower operating costs and a less favorable mix of products sold ($48 million), and a lower income tax provision ($1 million). These benefits were partially offset by higher mill outage costs ($48 million), higher raw material and freight costs ($21 million), and increased corporate items and other costs ($14 million) including $20 million of costs related to the Vicksburg mill flood. Net interest expense decreased slightly ($1 million). Equity earnings, net of taxes for Ilim Holding, S.A. increased by $13 million versus the first quarter. Net special items were a loss of $119 million in the 2011 second quarter, compared with a loss of $29 million in the 2011 first 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 before taxes, equity earnings and noncontrolling interests net of taxes, excluding interest expense, corporate charges and corporate special items.

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

*In millions*

|  | Three Months Ended June 30, 2011 | 2010 | March 31, 2011 |
| --- | ---: | ---: | ---: |
| Earnings (Loss) From Continuing Operations Attributable to International Paper Company | $224 | $93 | $293 |
| Add back (deduct): |  |  |  |
| Income tax provision (benefit) | 118 | 25 | 123 |
| Equity (earnings) loss, net of taxes | (57) | (7) | (53) |
| Noncontrolling interests, net of taxes | 8 | 7 | 5 |
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 293 | 118 | 368 |
| Interest expense, net | 137 | 157 | 136 |
| Noncontrolling interests / equity earnings included in operations | (9) | (7) | 2 |
| Corporate items | 36 | 54 | 44 |
| Special items: |  |  |  |
| Restructuring and other charges | 26 | 31 | 35 |
|  | $483 | $353 | $585 |
| Industry Segment Operating Profit |  |  |  |
| Industrial Packaging | $269 | $192 | $279 |
| Printing Papers | 243 | 47 | 201 |
| Consumer Packaging | (33) | 48 | 100 |
| Distribution | 4 | 26 | 5 |
| Forest Products (1) | 0 | 40 | 0 |
| Total Industry Segment Operating Profit | $483 | $353 | $585 |

(1) The Company has substantially completed its land sales and earnings for future land sales are expected to be insignificant. Beginning in 2011, Forest Products is no longer reported as a separate industry segment.

### Industry Segment Operating Profit

Total industry segment operating profits were $483 million in the 2011 second quarter compared with $353 million in the 2010 second quarter and $585 million in the 2011 first quarter. Compared with the second quarter of 2010, operating profits in the current quarter benefited from higher average sales price realizations ($227 million), higher sales volumes ($18 million), and the net impact of lower operating costs and a less favorable mix of products sold ($52 million). These benefits were partially offset by higher mill outage costs ($20 million), higher raw material and freight costs ($94 million), and lower gains from land sales ($40 million). Corporate and other items were $6 million higher in the second quarter of 2011 including a $33 million benefit for a bad debt expense related to a large envelope company in the 2010 second quarter, partially offset by a $20 million expense related to downtime at the Vicksburg mill due to the flooding of the Yazoo River in the current quarter. Special items were a loss of $120 million in the 2011 second quarter, compared with a special item loss of $113 million in the 2010 second quarter.

Compared with the 2011 first quarter, operating profits benefited from higher average sales price realizations ($13 million), higher sales volumes ($50 million), and the net impact of lower operating costs and a less favorable mix of products sold ($71 million). These benefits were partially offset by higher mill outage costs ($72 million), higher raw material and freight costs ($31 million), and higher corporate items and other costs

($24 million) including $20 million of costs related to the Vicksburg flood. Special items were a loss of $120 million in the 2011 second quarter, compared with a special item loss of $11 million in the 2011 first quarter.

During the 2011 second quarter, International Paper took approximately 325,000 tons of downtime of which approximately 80,000 tons were related to production outages at the Vicksburg mill caused by the flooding of the Yazoo River, and about 25,000 tons were market related compared with approximately 214,000 tons of downtime of which essentially none was market related in the 2010 second quarter. During the 2011 first quarter, International Paper took approximately 225,000 tons of downtime, which included 93,000 tons that were market related. Market-related downtime is taken to balance internal supply with our customer demand to help manage inventory levels, while maintenance downtime, which makes up the majority of the difference between total downtime and market-related downtime, is taken periodically during the year.

### Sales Volumes by Product (1)

Sales volumes of major products for the three-month and six-month periods ended June 30, 2011 and 2010 were as follows:

*In thousands of short tons*

| Industrial Packaging | Three Months Ended June 30, 2011 | 2010 | Six Months Ended June 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Corrugated Packaging | 1,913 | 1,956 | 3,723 | 3,765 |
| Containerboard | 620 | 602 | 1,175 | 1,233 |
| Recycling | 609 | 644 | 1,252 | 1,224 |
| Saturated Kraft | 45 | 50 | 84 | 91 |
| Bleached Kraft | 25 | 21 | 48 | 43 |
| European Industrial Packaging | 266 | 259 | 539 | 517 |
| Asian Box (2) | 116 | 43 | 219 | 82 |
| Industrial Packaging | 3,594 | 3,575 | 7,040 | 6,955 |
| Printing Papers |  |  |  |  |
| U.S. Uncoated Papers | 656 | 667 | 1,318 | 1,367 |
| European and Russian Uncoated Papers | 306 | 310 | 618 | 618 |
| Brazilian Uncoated Papers | 270 | 282 | 543 | 530 |
| Uncoated Papers | 1,232 | 1,259 | 2,479 | 2,515 |
| Market Pulp (3) | 364 | 317 | 705 | 668 |
| Consumer Packaging |  |  |  |  |
| U.S. Coated Paperboard | 364 | 354 | 728 | 693 |
| European Coated Paperboard | 80 | 86 | 164 | 176 |
| Asian Coated Paperboard | 258 | 217 | 480 | 438 |
| Other Consumer Packaging | 47 | 44 | 92 | 84 |
| Consumer Packaging | 749 | 701 | 1,464 | 1,391 |

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

(2) Includes SCA Packaging volumes from date of acquisition in June 2010.

(3) Includes internal sales to mills.

### Discontinued Operations

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

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

### Income Taxes

The income tax provision was $118 million for the 2011 second quarter. Excluding a benefit of $27 million related to the tax effects of special items, the effective income tax rate for continuing operations was 33% for the quarter.

The income tax provision was $123 million for the 2011 first quarter. Excluding a $17 million tax benefit related to the tax effects of special items, the effective income tax rate for continuing operations was 33% for the quarter.

The income tax provision was $25 million for the 2010 second quarter. Excluding a $56 million tax benefit related to the tax effects of special items, the effective income tax rate for continuing operations was 31% for the quarter.

### Interest Expense and Corporate Items

Net interest expense for the 2011 second quarter was $137 million compared with $136 million in the 2011 first quarter and $157 million in the 2010 second quarter. The lower net expense compared with the prior year is due to debt reduction.

Corporate items, net, of $36 million in the 2011 second quarter were lower than the $44 million of net expense in the 2011 first quarter and the $54 million of net expense in the 2010 second quarter. The decrease compared with both the 2011 first quarter and 2010 second quarter reflects lower supply chain project costs. The decrease compared with the 2010 second quarter also reflects lower pension costs.

### Special Items

#### Restructuring and Other Charges

***2011:*** During the second quarter of 2011, restructuring and other charges totaling a gain of $10 million before taxes (a gain of $7 million after taxes) were recorded, including a $10 million pre-tax charge ($6 million after taxes) for restructuring costs related to the Company’s xpedx business, a $21 million pre-tax gain (a $13 million gain after taxes) related to a change in the estimate of closure costs related to the Franklin, Virginia mill due to the Company’s decision to repurpose a portion of the mill to produce fluff pulp and a $1 million pre-tax charge ($0 million after taxes) for other items. Additionally during the quarter, a $5 million after-tax charge was recorded for tax adjustments related to legislative changes and audit settlements.

During the first quarter of 2011, restructuring and other charges totaling $45 million before taxes ($28 million after taxes) were recorded, including a $32 million pre-tax charge ($19 million after taxes) for costs related to the early extinguishment of debt, a $7 million pre-tax charge ($4 million after taxes) for restructuring costs related to the Company’s xpedx business, $3 million before taxes ($2 million after taxes) for costs associated with the Company’s S&A reduction initiative and a charge of $3 million (before and after taxes) for other items. Additionally, during the first quarter of 2011, the Company recorded a gain of $7 million (before and after taxes) related to a bargain purchase price adjustment on an acquisition by our joint venture in Turkey. This gain is included in Equity earnings (losses), net of taxes, in the accompanying consolidated statement of operations.

***2010:*** During the second quarter of 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, and $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 first quarter of 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.

#### Other Divestitures and Impairments

***2011:*** In connection with the preparation of the accompanying consolidated financial statements, based on a current strategic plan update of projected future operating results of Shorewood’s North American asset group within the Company’s Consumer Packaging segment, a determination was made that the current book value of the asset group exceeded its estimated fair value, calculated using the probability-weighted present value of projected future cash flows. As a result, a $129 million charge ($104 million after taxes) was recorded during the three months ended June 30, 2011 in the Company’s Consumer Packaging segment to write down the long-lived assets of the asset group to their estimated fair value.

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

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

### BUSINESS SEGMENT OPERATING RESULTS

The following presents business segment discussions for the second quarter of 2011.

### Industrial Packaging

*In millions*

|  | 2011 2nd Quarter | 1st Quarter | Six Months | 2010 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $2,705 | $2,555 | $5,260 | $2,440 | $2,220 | $4,660 |
| Operating Profit | 269 | 279 | 548 | 192 | 41 | 233 |

Industrial Packaging net sales for the second quarter of 2011 were 6% higher than in the first quarter of 2011 and 11% higher than in the second quarter of 2010. Operating profits in the first quarter of 2011 included a $7 million gain for a bargain purchase price adjustment on an acquisition by our joint venture in Turkey. In addition, operating profits included $2 million in the first quarter of 2011 and $1 million in the second quarter of 2010 of expenses related to the closure of the Etienne mill in France. Excluding these items, operating profits in the second quarter of 2011 were 2% lower than in the first quarter of 2011 and 39% higher than in the second quarter of 2010.

***North American Industrial Packaging*** net sales were $2.2 billion in the second quarter of 2011 compared with $2.1 billion in both the first quarter of 2011 and the second quarter of 2010. Operating earnings were $253 million in the second quarter of 2011 compared with $256 million in the first quarter of 2011 and $172 million in the second quarter of 2010.

Sales volumes in the second quarter of 2011 increased compared with the first quarter of 2011, reflecting seasonally stronger market demand for boxes. Containerboard sales volumes were also higher due to seasonality of the domestic business and increased export shipments. Average sales price realizations decreased for containerboard in both domestic and export markets. Box sales price realizations also declined due to changes in product mix. Input costs for wood were lower, but were partially offset by higher recycled fiber costs. Freight costs increased due to higher fuel costs. Planned maintenance downtime costs were $41 million higher in the second quarter of 2011, which should represent the highest maintenance cost quarter of the year. In addition, the Vicksburg mill was down for most of May and June due to flooding of the Yazoo River which resulted in about $20 million of costs related to lost production and other expenses. Despite losing about 80,000 tons of production, our domestic customers experienced no supply interruptions, but we missed opportunities to export more volume.

Compared with the second quarter of 2010, sales volumes in the second quarter of 2011 were about flat overall with increased export containerboard shipments offsetting lower box shipments. Average sales price realizations were significantly higher reflecting the realization of price increases in the second half of 2010 for containerboard in both domestic and export markets and for boxes. Input costs for wood were lower, but were more than offset by higher costs for recycled fiber, energy, starch and wax. Freight costs were also higher. Planned maintenance downtime costs were $31 million higher in the second quarter of 2011 due to the timing of the outages year-over-year. Excluding the impact of the Vicksburg mill flood, manufacturing operating costs were favorable.

Looking ahead to the third quarter, sales volumes for boxes are expected to track the growth of the recovering economy. Input costs are expected to continue to increase. Planned maintenance downtime costs should be $57 million lower than in the second quarter. The Vicksburg mill is up and running in the third quarter.

***European Industrial Packaging*** net sales were $295 million in the second quarter of 2011 compared with $280 million in the first quarter of 2011 and $235 million in the second quarter of 2010. Operating earnings were $16 million compared with $22 million ($17 million excluding a bargain purchase price adjustment in Turkey and facility closure costs for the Etienne mill in France) in the first quarter of 2011 and $18 million ($19 million excluding facility closure costs for the Etienne mill in France) in the second quarter of 2010.

Sales volumes in the second quarter of 2011 were lower than in the first quarter of 2011 reflecting seasonally weaker demand for packaging in the Moroccan fruit and vegetable market. Demand for packaging in the industrial markets softened. Average sales margins decreased due to competitive pressures on sales prices in Spain and Italy which have hindered the pass-through of increased board costs. Input costs for energy have decreased, but operating costs were higher due to a shoe press failure and a slower than expected startup following a planned maintenance outage at the Kenitra mill in Morocco.

Compared with the second quarter of 2010, sales volumes increased in the second quarter of 2011 due to a stronger fruit and vegetable season which had been adversely affected by poor weather conditions in the second quarter of 2010. Demand for packaging in the industrial market has grown slightly. Average sales margins are significantly lower as board costs rose more than box prices have increased.

Looking ahead to the third quarter of 2011, sales volumes are expected to be lower reflecting the seasonal decline in the fruit and vegetables markets in most regions and a Moroccan holiday in August. Demand in the industrial markets is expected to continue to weaken. Average sales margins should improve as June contract sales price increases will begin to be realized and board costs should be lower.

***Asian Industrial Packaging*** net sales for the packaging operations were $105 million in the second quarter of 2011 compared with $95 million in the first quarter of 2011 and $30 million in the second quarter of 2010. Operating earnings for the packaging operations were a loss of $1 million in the second quarter of 2011, about breakeven in the first quarter of 2011 and a gain of $1 million in the second quarter of 2010. Net sales and operating profits include the results of SCA Packaging Asia since the acquisition in June 2010.

Net sales for the distribution operations were $85 million in the second quarter of 2011 compared with $65 million in the first quarter of 2011 and $55 million in the second quarter of 2010. Operating earnings were about $1 million in all periods presented.

Compared with the first quarter of 2011, sales volumes and average sales margins increased while operating costs were higher. The second quarter of 2011 included $2 million of box plant consolidation costs in Singapore. Earnings in the third quarter of 2011 are expected to reflect continued positive market demand, although average sales margins may be squeezed due to rising input costs.

### Printing Papers

*In millions*

|  | 2011 2nd Quarter | 1st Quarter | Six Months | 2010 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $1,585 | $1,530 | $3,115 | $1,445 | $1,405 | $2,850 |
| Operating Profit | 243 | 201 | 444 | 47 | (78) | (31) |

Printing Papers net sales for the second quarter of 2011 were 4% higher than in the first quarter of 2011 and 10% higher than in the second quarter of 2010. Operating profits included a gain of $21 million in the second quarter of 2011 related to a change in estimate of closure costs related to the announced repurposing of the Franklin mill, an $8 million charge in the first quarter of 2011 for asset impairments associated with the Inverurie, Scotland mill, and a $111 million charge in the second quarter of 2010 for closure costs for the Franklin mill. Excluding these items, operating profits in the second quarter of 2011 were 6% higher than in the first quarter of 2011 and 41% higher than in the second quarter of 2010.

***North American Printing Papers*** net sales were $695 million in the second quarter of 2011 compared with $690 million in the first quarter of 2011 and $675 million in the second quarter of 2010. Operating earnings were $122 million ($101 million excluding a gain related to a change in estimated closure costs related to the announced repurposing of the Franklin mill) compared with $88 million in the first quarter of 2011 and a loss of $65 million (a gain of $46 million excluding facility closure costs) in the second quarter of 2010.

Compared with the first quarter of 2011, tons shipped in the second quarter of 2011 were lower as slightly higher domestic shipments of uncoated freesheet paper were offset by a decrease in export shipments. However, the product mix included a higher proportion of cutsize paper which reduced the lack-of-order downtime at our sheeter plants and increased average sales margins. Average sales margins were also positively impacted by a more favorable geographic mix with a higher proportion of domestic sales versus export sales. Average sales price realizations for uncoated freesheet paper were higher, reflecting the realization of announced sales price increases for offset rolls and for cutsize paper. Input costs increased for energy, chemicals and purchased pulp. Freight costs reflected rising fuel costs. Planned maintenance outages costs were $3 million higher, while excellent mill operations resulted in favorable manufacturing operating costs.

Sales volumes in the second quarter of 2011 were lower than in the second quarter of 2010, but included a more favorable product mix and increased sheeter plant activity. Average sales price realizations were higher reflecting increased average prices for sales to export markets and the continued realization of higher domestic prices for uncoated freesheet paper that began in the second half of 2010. Input costs for energy, chemicals and purchased pulp were higher, but were partially offset by lower wood costs. Higher freight costs were due to increased fuel prices. Planned maintenance outages were taken at one fewer mill in the 2011 second quarter than in the 2010 second quarter resulting in $13 million less downtime costs. Manufacturing operating costs were favorable, largely due to the closure of the Franklin mill in the second quarter of 2010. Operating earnings in the 2010 second quarter also included a $33 million bad debt expense.

Entering the third quarter of 2011, domestic market demand for uncoated freesheet paper is expected to be seasonally higher. Average sales price realizations should be higher due to the continued realization of sales price increases announced in the second quarter for cutsize paper, offset paper rolls and converting grades. Input costs are expected to continue to increase for energy and chemicals, while wood costs should be lower. Planned maintenance downtime costs should be about flat. Manufacturing operating costs are expected to be favorable reflecting the transfer of the Franklin mill indirect costs from the Printing Papers business to the Pulp business due to the announced repurposing of a portion of the mill to pulp production.

***European Printing Papers*** net sales were $380 million in the second quarter of 2011 compared with $360 million in the first quarter of 2011 and $320 million in the second quarter of 2010. Operating earnings in the second quarter of 2011 were $47 million compared with $49 million ($57 million excluding an asset impairment charge associated with the Inverurie, Scotland mill) in the first quarter of 2011 and $55 million in the second quarter of 2010.

Compared with the first quarter of 2011, sales volumes in the second quarter of 2011 were seasonally lower in Europe, but were slightly higher in Russia reflecting the impact of the January holidays in the first quarter. Average sales price realizations for uncoated freesheet paper were higher in both Europe and Russia. Input costs increased for wood at both the Kwidzyn and Svetogorsk mills, while energy costs were lower. Planned maintenance downtime costs were $13 million higher in the second quarter due to an outage at the Svetogorsk mill. Operating costs were higher.

Sales volumes in the second quarter of 2011 were lower than in the second quarter of 2010 for uncoated freesheet paper, but pulp shipments in Russia increased. Average sales price realizations were significantly higher reflecting the realization of price increases in Europe during the second half of 2010 as market demand strengthened. Input costs increased for wood, energy and chemicals. Planned maintenance downtime costs were $3 million higher than in the second quarter of 2010, while mill operating costs also increased.

Entering the third quarter of 2011, sales volumes for uncoated freesheet paper in Russia should be seasonally higher, but volumes in Europe are expected to be seasonally weaker. Average sales price realizations are expected to increase in Russia, but will be about flat in Europe. Input costs for wood are expected to increase in Europe, but will be slightly lower in Russia. Planned maintenance downtime costs should be about $5 million higher due to the outage planned at the Kwidzyn mill.

***Brazilian Printing Papers*** net sales were $295 million in the second quarter of 2011 compared with $285 million in the first quarter of 2011 and $275 million in the second quarter of 2010. Operating profits were $39 million in the second quarter of 2011, $48 million in the first quarter of 2011 and $39 million in the second quarter of 2010.

Sales volumes in the second quarter of 2011 were slightly lower than in the first quarter of 2011 in the Brazilian domestic market, and were flat in export markets. Average sales margins were slightly unfavorable due to a decrease in the proportion of higher-margin domestic sales. Average sales price realizations increased, primarily in Latin American export markets. Input costs for wood and chemicals were higher, while purchased pulp costs decreased. Planned maintenance downtime costs were $7 million higher due to an outage at the Mogi Guacu mill in the second quarter. Operating costs were favorable.

Compared with the second quarter of 2010, sales volumes in the second quarter of 2011 decreased in both domestic and export markets. Average sales margins were favorably impacted by an increase in the percentage of sales in the higher-margin domestic market. Average sales price realizations were significantly higher for sales to export markets, while sales price realizations for sales to the domestic market were slightly lower. Input costs were higher for chemicals and packaging supplies, but were partially offset by lower costs for wood, energy and purchased pulp. Planned maintenance downtime costs were $2 million higher in the 2011 second quarter. Manufacturing operating costs were favorable.

Looking ahead to the third quarter of 2011, sales volumes are expected to reflect seasonally higher market demand in the domestic market. Average sales price realizations should be about flat in the domestic market, but are expected to be higher in Latin America and Europe. Average sales margins are expected to be higher due to the increase in domestic sales. Input costs are expected to increase for natural gas and wood. Planned maintenance downtime costs should be $9 million higher due to the outage planned at the Luis Antonio mill.

***Asian Printing Papers*** net sales were $20 million in both the second and first quarters of 2011 and $15 million in the second quarter of 2010. Operating earnings were about breakeven in all periods presented.

***U.S. Market Pulp*** net sales in the second quarter of 2011 were $195 million compared with $175 million in the first quarter of 2011 and $160 million in the second quarter of 2010. Operating earnings were $35 million in the second quarter of 2011, $16 million in the first quarter of 2011 and $18 million in the second quarter of 2010.

Sales volumes were higher in the second quarter of 2011 than in the first quarter of 2011 reflecting solid market demand for softwood pulp and increased fluff pulp production availability which was limited in the first quarter due to planned maintenance outages. Average sales price realizations were higher for both softwood and hardwood pulp, but were lower for fluff pulp. Input costs for wood decreased, but were more than offset by higher costs for energy and chemicals. Freight costs reflected rising fuel costs. Planned maintenance downtime costs for an outage at the Riegelwood mill in the second quarter of 2011 were $13 million lower than for an outage at the Georgetown mill in the first quarter of 2011. Operating costs were favorable, reflecting excellent mill operations.

Compared with the second quarter of 2010, sales volumes increased for both fluff pulp and softwood pulp. Average sales price realizations were higher, primarily for fluff pulp. Input costs increased for chemicals and energy, but wood costs decreased. Planned maintenance downtime costs were $3 million lower in the second quarter of 2011. Manufacturing operating costs were unfavorable due to cost inflation, but distribution costs, which were unusually high in the second quarter of 2010, improved.

Entering the third quarter of 2011, sales volumes are expected to reflect stable market demand for fluff pulp, but weakening demand for softwood and hardwood pulp. Average sales price realizations will face market pressure and are expected to erode slightly. Input costs should be about flat. Planned maintenance downtime costs should be $8 million lower. Manufacturing operating costs are expected to be higher reflecting the transfer of the Franklin mill indirect costs from the Printing Papers business to the Pulp business due to the announced repurposing of a portion of the mill to pulp production.

### Consumer Packaging

*In millions*

|  | 2011 2nd Quarter | 1st Quarter | Six Months | 2010 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $945 | $905 | $1,850 | $845 | $805 | $1,650 |
| Operating Profit | (33) | 100 | 67 | 48 | 28 | 76 |

Consumer Packaging net sales in the second quarter of 2011 were 4% higher than in the first quarter of 2011 and 12% higher than in the second quarter of 2010. Operating earnings included a fixed asset impairment charge of $129 million in the second quarter of 2011 and charges of $2 million, $1 million and $1 million in the second quarter of 2011, first quarter of 2011 and second quarter of 2010, respectively, for costs related to the reorganization of the Company’s Shorewood operations. Excluding these items, operating earnings in the second quarter of 2011 were 3% lower than in the first quarter of 2011 and about double the earnings in the second quarter of 2010.

***North American Consumer Packaging*** net sales were $625 million in the second quarter of 2011 compared with $620 million in the first quarter of 2011 and $580 million in the second quarter of 2010. Operating earnings were a loss of $69 million (a gain of $62 million excluding asset impairment and Shorewood reorganization costs) in the second quarter of 2011 compared with $64 million ($65 million excluding Shorewood reorganization costs) in the first quarter of 2011 and $16 million ($17 million excluding Shorewood reorganization costs) in the second quarter of 2010.

Coated Paperboard sales volumes in the second quarter of 2011 were essentially unchanged from the first quarter of 2011. Domestic market demand softened during the quarter, but was offset by solid export shipments. Average sales price realizations increased across all major product lines reflecting the realization of previously announced price increases. Input costs for chemicals and energy were higher, but were partially offset by slightly lower wood costs. Planned maintenance downtime costs were $17 million higher in the second quarter of 2011 with outages at the Augusta and Riegelwood mills compared with no outages in the first quarter of 2011. Manufacturing operating costs were favorable reflecting continued strong performance at the mills.

Compared with the second quarter of 2010, sales volumes in the second quarter of 2011 increased for all major product lines except coated bristols. Average sales price realizations were significantly higher reflecting the realization of sales price increases during the fourth quarter of 2010 and the first half of 2011. Input costs for polyethylene, starch, resin and natural gas were higher, but were mostly offset by lower wood costs. Freight costs were higher due to rising fuel prices. Planned maintenance downtime costs were about $2 million lower than in the second quarter of 2010. Operating costs were favorable.

Shorewood revenues were about flat, but margins improved compared with the first quarter of 2011, as increases in the tobacco and consumer products segments more than offset a decline in the home entertainment segment. Operating costs improved reflecting the positive impacts of the business reorganization efforts. Compared with the second quarter of 2010, revenues on a comparable basis were up slightly primarily due to higher consumer products sales. Margins were lower reflecting decreased margins in the tobacco segment and higher input costs for board.

Foodservice sales volumes in the second quarter of 2011 were higher than in the first quarter of 2011 due to seasonal increases in cold cup demand. Average sales margins improved reflecting the realization of price increases and a more favorable product mix. Input costs for board and resin were higher, while manufacturing operating costs were favorable due to efficiencies resulting from higher volumes. Compared with the second quarter of 2010, sales volumes increased. Average sales margins were higher reflecting sales price increases realized in the second half of 2010 and the first half of 2011 and a more favorable mix of products sold. Input costs increased for board and resins.

Entering the third quarter of 2011, coated paperboard sales volumes are expected to be slightly higher and average sales margins are expected to improve due to a more favorable product mix. Average sales price realizations should reflect the additional realization of previously announced sales price increases. Planned maintenance downtime costs are expected to be lower with no outages scheduled in the third quarter. Input costs are expected to be higher due to increased costs for energy and chemicals. Shorewood’s revenues and margins are expected to improve driven by seasonally higher demand in the home entertainment segment as well as higher sales in the consumer products and tobacco segments. Foodservice sales volumes are expected to remain at about second-quarter levels. Average sales margins are expected to be favorable due to the realization of the July 1 contract price increases to recover rising input costs. Input costs are expected to continue to increase for board and resin, but operating costs should be lower.

***European Consumer Packaging*** net sales were $95 million in both the second and first quarters of 2011 and $80 million in the second quarter of 2010. Operating earnings were $23 million in the second quarter of 2011 compared with $27 million in the first quarter of 2011 and $19 million in the second quarter of 2010.

Sales volumes in the second quarter of 2011 were lower than in the first quarter of 2011, primarily in Europe, despite stable market demand. Average sales price realizations were slightly higher. Input costs increased, primarily for wood. Planned maintenance downtime costs were $4 million higher than in the first quarter of 2011 due to the outage at the Svetogorsk mill. Compared with the second quarter of 2010, sales volumes were about flat. Average sales price realizations were higher in both Europe and Russia. Input costs increased for wood, energy and chemicals. Planned maintenance downtime costs were about $1 million higher.

Earnings in the third quarter of 2011 should reflect about $3 million higher planned maintenance downtime costs due to the shutdown at the Kwidzyn mill.

***Asian Consumer Packaging*** net sales in the second quarter of 2011 were $225 million compared with $190 million in the first quarter of 2011 and $185 million in the second quarter of 2010. Operating earnings were $13 million in the second quarter of 2011, $9 million in the first quarter of 2011 and $13 million in the second quarter of 2010.

Compared with the first quarter of 2011, sales volumes were about flat. Average sales price realizations were higher reflecting the realization of announced sales price increases for folding carton board and bristols board. Input costs increased for chemicals and utilities, but pulp costs decreased. Manufacturing costs were favorable. Compared with the second quarter of 2010, sales volumes increased, but average sales margins decreased due to lower average sales price realizations and a less favorable product mix. Input costs were higher, but were offset by lower operating costs.

Looking ahead to the third quarter of 2011, average sales margins are expected to decrease due to lower average sales price realizations, partially offset by a more favorable product mix. Input costs are expected to continue to increase for chemicals and energy.

### Distribution

*In millions*

|  | 2011 2nd Quarter | 1st Quarter | Six Months | 2010 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $1,655 | $1,640 | $3,295 | $1,630 | $1,580 | $3,210 |
| Operating Profit | 4 | 5 | 9 | 26 | 21 | 47 |

Distribution net sales in the second quarter of 2011 were 1% higher than in the first quarter of 2011 and 2% higher than in the second quarter of 2010. Operating earnings included $10 million and $7 million in the second quarter of 2011 and the first quarter of 2011, respectively, for costs related to the reorganization of the Company’s xpedx operations. Excluding these items, operating earnings in the second quarter of 2011 were 17% higher than in the first quarter of 2011, but 46% lower than in the second quarter of 2010.

Sales of papers and graphic arts supplies and equipment in the second quarter of 2011 totaled $1.0 billion, unchanged from both the first quarter of 2011 and second quarter of 2010. Trade margins as a percent of sales for printing papers were unchanged from the first quarter of 2011, but decreased from the second quarter of 2010 due to softness in some print channels. Packaging sales were $400 million in the second quarter of 2011, unchanged from the first quarter of 2011 and the second quarter of 2010. Trade margins as a percent of sales for packaging products were down from both the first quarter of 2011 and the second quarter of 2010 reflecting increased sales of commodity products. Sales of facility supply products totaled $250 million in the second quarter of 2011, unchanged from both the first quarter of 2011 and the second quarter of 2010.

Operating earnings before special items in the second quarter of 2011 were $12 million lower than in the second quarter of 2010. The lower gross profit margins together with increased freight and fuel costs caused two-thirds of the earnings decline. The balance of the decline in operating profits reflects a routine inventory valuation adjustment.

Looking ahead to the 2011 third quarter, operating results are expected to benefit from improved seasonal sales volumes and lower costs related to the Company’s reorganization efforts at xpedx.

### Equity Earnings, Net of Taxes – Ilim

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 June 30, 2011 includes the Company’s 50% share of Ilim’s operating results for the three-month period ended March 31, 2011 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 $57 million in the second quarter of 2011 related to operations in the first quarter of 2011 compared with $44 million recorded in the first quarter of 2011 related to operations in the fourth quarter of 2010. Sales volumes in the first quarter of 2011 increased from the prior quarter. Market demand remained strong for softwood pulp, particularly in China, and for board products in the Russian domestic market. Hardwood pulp demand was flat. Average sales price realizations were higher quarter-over-quarter due to monthly sales price increases on export softwood pulp and board products. Input costs increased due to the traditional January 1 price increases for natural gas and electric power. In addition, operating costs reflect increases in social taxes, railway tariffs and diesel fuel. An after-tax foreign exchange gain of $9 million on the remeasurement of U.S. dollar-denominated debt was recorded in the first quarter of 2011 compared with a gain of $2 million recorded in the fourth quarter of 2010.

In the second quarter of 2010, the Company recorded equity earnings, net of taxes, for Ilim of $5 million related to operations in the first quarter of 2010. Compared to the first quarter of 2010, sales volumes in the first quarter of 2011 increased primarily due to shipments of pulp to China. Average sales price realizations were significantly higher for pulp and containerboard in both domestic and export markets. In the first quarter of 2010, the after-tax foreign exchange impact was a slight loss.

Looking forward to the results we expect to record in the Company’s third quarter of 2011 for Ilim’s second quarter, sales volumes are expected to decrease reflecting weakening market demand towards the end of the quarter for pulp in China and for board in the Russian domestic market. Average sales price realizations should increase due to higher sales prices for export softwood pulp early in the quarter. Sales prices for hardwood pulp and board are expected to remain flat. Planned maintenance outage expenses should be higher in the second quarter due to outages scheduled for the Koryazhma and Bratsk mills. The foreign exchange impact is expected to be favorable.

### LIQUIDITY AND CAPITAL RESOURCES

Cash provided by continuing operations totaled $1.2 billion for the first six months of 2011, compared with $800 million for the comparable 2010 six-month period. Earnings from operations adjusted for non-cash charges were $1.4 billion for the first six months of 2011 compared to $1.1 billion for the first six months of 2010. Cash used for working capital components totaled $287 million for the first six months of 2011 compared to a use of $336 million for the comparable 2010 six-month period.

The Company generated free cash flow of approximately $838 million and $395 million in the first six months of 2011 and 2010, 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 and fund other activities. The following is a reconciliation of free cash flow to cash provided by operations:

*In millions*

|  | Six Months Ended June 30, 2011 | 2010 |
| --- | ---: | ---: |
| Cash provided by operations | $1,162 | $800 |
| Less: |  |  |
| Cash invested in capital projects | (410) | (273) |
| Cash received from alternative fuel mixture credits | 0 | (132) |
| European A/R securitization program cessation | 209 | 0 |
| Tax receivable collected related to pension contributions | (123) | 0 |
| Free Cash Flow | $838 | $395 |

Investments in capital projects totaled $410 million in the first six months of 2011 compared to $273 million in the first six months of 2010. Full-year 2011 capital spending is currently expected to be approximately $1.2 to $1.3 billion, or about 86% to 93% of depreciation and amortization expense for our current businesses.

Financing activities for the first six months of 2011 included an $84 million net reduction in debt versus a $143 million net reduction in debt during the comparable 2010 six-month period.

During the second quarter of 2011, International Paper had no early debt extinguishment.

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

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. 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 early retirement of debt. The resulting gain was immaterial.

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. 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 fixed-to-floating interest rate swaps issued in 2009 were terminated. These terminations were not in connection with early debt retirements. The resulting gain was immaterial.

At June 30, 2011 and December 31, 2010, International Paper classified $183 million and $100 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 six months of 2011, International Paper used approximately 0.5 million shares of treasury stock for various incentive plans. Also in the first six months of 2011, International Paper acquired 1.0 million shares of treasury stock primarily related to restricted stock tax withholding. Payments of restricted stock withholding taxes totaled $30 million. During the first six months of 2010, International Paper used approximately 2.7 million shares of treasury stock, net of restricted stock withholding, and 1.0 million shares of newly issued common stock for various incentive plans. Payments of restricted stock withholding taxes totaled $26 million. Common stock dividend payments totaled $197 million and $66 million for the first six months of 2011 and 2010, respectively. Dividends were $0.45 per share and $0.15 per share for the first six months in 2011 and 2010, respectively. The quarterly dividend was increased to $0.2625 per share in the 2011 second quarter.

At June 30, 2011, contractual obligations for future payments of debt maturities by calendar year were as follows: $484 million in 2011; $486 million in 2012; $157 million in 2013; $558 million in 2014; $441 million in 2015; $435 million in 2016; and $5.9 billion thereafter.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At June 30, 2011, the Company held long-term credit ratings of BBB (stable outlook) and Baa3 (stable outlook) by S&P and Moody’s, respectively.

At June 30, 2011, 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 ($983 million at June 30, 2011) under a receivables securitization program. On January 12, 2011, the Company amended the receivables securitization program to extend the maturity date from January 2011 to January 2012. The amended agreement has a facility fee of 0.40% payable monthly.

International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2011 through 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.

### Tender Offer for Temple-Inland Shares

On July 12, 2011, International Paper commenced a fully financed tender offer for all outstanding common shares of Temple-Inland Inc. for $30.60 per share in cash. International Paper has secured committed financing and the offer is not conditioned on financing.

### Ilim Holding S.A. Shareholder’s 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 $700 million to $750 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.

### Cellulosic Bio-Fuel Tax Credit

In a memorandum dated June 28, 2010, the IRS concluded that black liquor would also qualify for the cellulosic bio-fuel tax credit of $1.01 per gallon produced in 2009. On October 15, 2010, the IRS ruled that companies may qualify in the same year for both the $0.50 per gallon alternative fuel mixture credit and the $1.01 cellulosic bio-fuel tax credit for 2009, but not for the same gallons of fuel produced and consumed. To the extent a taxpayer changes its position and elects the $1.01 credit, it must re-pay the refunds received as alternative fuel mixture credits attributable to the gallons converted to the cellulosic bio-fuel credit. The repayment of this refund must include interest.

One important difference between the two credits is that the $1.01 credit must be credited against a company’s Federal tax liability, and the credit may be carried forward through 2015. In contrast, the $0.50 credit is refundable in cash. Also, the cellulosic bio-fuel credit is required to be included in Federal taxable income.

The Company filed an application with the IRS on November 18, 2010, to receive the required registration code to become a registered cellulosic bio-fuel producer. The Company received this registration code on February 28, 2011.

The Company has evaluated the optimal use of the two credits with respect to gallons produced in 2009. Considerations include uncertainty around future Federal taxable income, the taxability of the alternative fuel mixture credit, future liquidity and uses of cash such as, but not limited to, debt repayments and voluntary pension contributions versus repayment of alternative fuel mixture credits with interest. At the present time, the Company does not intend to convert any gallons under the alternative fuel mixture credit to gallons under the cellulosic bio-fuel tax credit. On July 19, 2011, the Company filed an amended 2009 tax return claiming alternative fuel mixture tax credits as non-taxable income. If that amended position is not upheld, the Company will re-evaluate its position with regard to alternative fuel mixture gallons produced in 2009.

During 2009, the Company produced 64 million gallons of black liquor that were not eligible for the alternative fuel mixture credit. The Company claimed these gallons for the cellulosic bio-fuel credit by amending the Company’s 2009 tax return. The impact of this amendment was included in the Company’s 2010 Income tax provision (benefit) resulting in a $40 million net credit to tax expense.

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

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, and income taxes.

The Company has included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 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 six months of 2011.

### SIGNIFICANT ACCOUNTING ESTIMATES

### Pension Accounting

Net pension expense totaled approximately $97 million for International Paper’s U.S. plans for the six months ended June 30, 2011, or about $19 million less than the pension expense for the first six months of 2010. The decrease in U.S. plan expense was principally due to a higher expected return on assets reflecting increased plan assets as a result of a $1.15 billion contribution in 2010, partially offset by a decrease in the assumed discount rate to 5.6% in 2011 from 5.8% in 2010 and higher amortization of unrecognized actuarial losses. Net pension expense for non-U.S. plans was about $1 million and $2 million for the first six months of 2011 and 2010, respectively.

After consultation with our actuaries, International Paper determines key actuarial assumptions on December 31 of each year that are used to calculate liability information as of that date and pension expense for the following year. Key assumptions affecting pension expense include the discount rate, the expected long-term rate of return on plan assets, the projected rate of future compensation increases, and various demographic assumptions including expected mortality. The discount rate assumption is determined based on approximately 500 Aa-graded 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 June 30, 2011, the market value of plan assets for International Paper’s U.S. plans totaled approximately $8.5 billion, consisting of approximately 45% equity securities, 33% fixed income securities, and 22% 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 expects that no cash funding contribution will be required for its domestic qualified plans in 2011.The Company continually reassesses the amount and timing of any discretionary contributions and could elect to make such a contribution in 2011. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $29 million in 2011.

### 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 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) 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 achieve the benefits we expect from strategic acquisitions and divestitures; and (viii) 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, 2010, as updated by our quarterly reports on Form 10-Q. 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, 364 characters.

Information relating to quantitative and qualitative disclosures about market risk is shown on pages 46 and 47 of International Paper’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which information is incorporated herein by reference. There have been no material changes in the Company’s exposure to market risk since December 31, 2010.

## Controls and procedures

As filed, 1,878 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. We have 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 as of June 30, 2011 (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 June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control 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 control over financial reporting, are currently in process. The initial annual assessment of internal control over financial reporting for SCA Packaging Asia business will be conducted over the course of our 2011 assessment cycle.

## Risk factors

As filed, 200 characters.

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 in response to Part I, Item 1A of Form 10-K.

Filed Aug 9, 2011.
Source: SEC EDGAR, the filing index for accession 0001193125-11-215656. Last ingested by Listed: Nov 4, 2026, 18:37 ET. No prices; not investment advice.