UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2010March 31, 2011
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York | 13-0872805 | |
(State or other jurisdiction of incorporation of organization) | (I.R.S. Employer Identification No.) | |
6400 Poplar Avenue, Memphis, TN | 38197 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (901) 419-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s common stock as of November 1, 2010April 29, 2011 was 437,456,223.437,219,419.
INDEX
PAGE NO. | ||||||||
PART I. FINANCIAL INFORMATION | ||||||||
Item 1. | ||||||||
1 | ||||||||
Consolidated Balance Sheet - | 2 | |||||||
3 | ||||||||
4 | ||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
Item 3. | ||||||||
Item 4. | ||||||||
PART II. OTHER INFORMATION | ||||||||
Item 1. | ||||||||
Item 1A. | * | |||||||
Item 2. | ||||||||
Item 3. | * | |||||||
Item 4. | * | |||||||
Item 5. | * | |||||||
Item 6. | ||||||||
Signatures |
* | Omitted since no answer is called for, answer is in the negative or inapplicable. |
ITEM 1. | FINANCIAL STATEMENTS |
Consolidated Statement of Operations
(Unaudited)
(In millions, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2011 | 2010 | |||||||||||||||||||
Net Sales | $ | 6,720 | $ | 5,919 | $ | 18,648 | $ | 17,389 | $ | 6,387 | $ | 5,807 | ||||||||||||
Costs and Expenses | ||||||||||||||||||||||||
Cost of products sold (Note 5) | 4,758 | 3,758 | 13,712 | 11,270 | ||||||||||||||||||||
Cost of products sold | 4,625 | 4,464 | ||||||||||||||||||||||
Selling and administrative expenses | 504 | 527 | 1,397 | 1,535 | 485 | 421 | ||||||||||||||||||
Depreciation, amortization and cost of timber harvested | 362 | 378 | 1,096 | 1,088 | 340 | 371 | ||||||||||||||||||
Distribution expenses | 339 | 299 | 986 | 857 | 340 | 317 | ||||||||||||||||||
Taxes other than payroll and income taxes | 58 | 48 | 150 | 145 | 40 | 45 | ||||||||||||||||||
Restructuring and other charges | 0 | 151 | 359 | 313 | 45 | 215 | ||||||||||||||||||
Net (gains) losses on sales and impairments of businesses | 0 | 0 | 0 | 48 | 8 | 0 | ||||||||||||||||||
Interest expense, net | 152 | 169 | 458 | 506 | 136 | 149 | ||||||||||||||||||
Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 547 | 589 | 490 | 1,627 | 368 | (175 | ) | |||||||||||||||||
Income tax provision (benefit) | 170 | 212 | 171 | 790 | 123 | (24 | ) | |||||||||||||||||
Equity earnings (losses), net of taxes | 22 | 0 | 27 | (59 | ) | 53 | (2 | ) | ||||||||||||||||
Earnings (Loss) From Continuing Operations | 298 | (153 | ) | |||||||||||||||||||||
Discontinued operations, net of taxes | 49 | 0 | ||||||||||||||||||||||
Net Earnings (Loss) | 399 | 377 | 346 | 778 | 347 | (153 | ) | |||||||||||||||||
Less: Net earnings (loss) attributable to noncontrolling interests | 2 | 6 | 18 | 14 | 5 | 9 | ||||||||||||||||||
Net Earnings (Loss) Attributable to International Paper Company | $ | 397 | $ | 371 | $ | 328 | $ | 764 | $ | 342 | $ | (162 | ) | |||||||||||
Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders | $ | 0.92 | $ | 0.87 | $ | 0.76 | $ | 1.80 | ||||||||||||||||
Earnings (loss) from continuing operations | $ | 0.68 | $ | (0.38 | ) | |||||||||||||||||||
Discontinued operations, net of taxes | 0.11 | 0.00 | ||||||||||||||||||||||
Net earnings (loss) | $ | 0.79 | $ | (0.38 | ) | |||||||||||||||||||
Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders | $ | 0.91 | $ | 0.87 | $ | 0.76 | $ | 1.79 | ||||||||||||||||
Earnings (loss) from continuing operations | $ | 0.67 | $ | (0.38 | ) | |||||||||||||||||||
Discontinued operations, net of taxes | 0.11 | 0.00 | ||||||||||||||||||||||
Net earnings (loss) | $ | 0.78 | $ | (0.38 | ) | |||||||||||||||||||
Average Shares of Common Stock Outstanding – assuming dilution | 433.8 | 428.7 | 433.8 | 426.6 | 433.8 | 428.8 | ||||||||||||||||||
Cash Dividends Per Common Share | $ | 0.125 | $ | 0.025 | $ | 0.275 | $ | 0.300 | $ | 0.1875 | $ | 0.025 | ||||||||||||
Amounts Attributable to International Paper Company Common Shareholders | ||||||||||||||||||||||||
Earnings (loss) from continuing operations | $ | 293 | $ | (162 | ) | |||||||||||||||||||
Discontinued operations, net of taxes | 49 | 0 | ||||||||||||||||||||||
Net earnings (loss) | $ | 342 | $ | (162 | ) | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Balance Sheet
(In millions, except per share amounts)millions)
September 30, 2010 | December 31, 2009 | March 31, 2011 | December 31, 2010 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and temporary investments | $ | 1,429 | $ | 1,892 | $ | 2,049 | $ | 2,073 | ||||||||
Accounts and notes receivable, net | 3,310 | 2,695 | 3,428 | 3,039 | ||||||||||||
Inventories | 2,336 | 2,179 | 2,390 | 2,347 | ||||||||||||
Deferred income tax assets | 330 | 368 | 343 | 339 | ||||||||||||
Other current assets | 403 | 417 | 278 | 230 | ||||||||||||
Total Current Assets | 7,808 | 7,551 | 8,488 | 8,028 | ||||||||||||
Plants, Properties and Equipment, net | 12,030 | 12,688 | 11,952 | 12,002 | ||||||||||||
Forestlands | 730 | 757 | 763 | 747 | ||||||||||||
Investments | 1,065 | 1,077 | 1,095 | 1,092 | ||||||||||||
Goodwill | 2,285 | 2,290 | 2,320 | 2,308 | ||||||||||||
Deferred Charges and Other Assets | 1,171 | 1,185 | 977 | 1,191 | ||||||||||||
Total Assets | $ | 25,089 | $ | 25,548 | $ | 25,595 | $ | 25,368 | ||||||||
Liabilities and Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Notes payable and current maturities of long-term debt | $ | 312 | $ | 304 | $ | 375 | $ | 313 | ||||||||
Accounts payable | 2,556 | 2,058 | 2,541 | 2,556 | ||||||||||||
Accrued payroll and benefits | 431 | 473 | 355 | 471 | ||||||||||||
Other accrued liabilities | 1,219 | 1,177 | 1,226 | 1,163 | ||||||||||||
Total Current Liabilities | 4,518 | 4,012 | 4,497 | 4,503 | ||||||||||||
Long-Term Debt | 8,428 | 8,729 | 8,156 | 8,358 | ||||||||||||
Deferred Income Taxes | 2,759 | 2,425 | 2,805 | 2,793 | ||||||||||||
Pension Benefit Obligation | 1,607 | 2,765 | 1,463 | 1,482 | ||||||||||||
Postretirement and Postemployment Benefit Obligation | 517 | 538 | 491 | 499 | ||||||||||||
Other Liabilities | 622 | 824 | 608 | 649 | ||||||||||||
Equity | ||||||||||||||||
Common stock, $1 par value, 2010 – 438.5 shares and 2009 – 437.0 shares | 438 | 437 | ||||||||||||||
Common stock, $1 par value, 2011 – 438.9 shares and 2010 – 438.9 shares | 439 | 439 | ||||||||||||||
Paid-in capital | 5,798 | 5,803 | 5,861 | 5,829 | ||||||||||||
Retained earnings | 2,154 | 1,949 | 2,675 | 2,416 | ||||||||||||
Accumulated other comprehensive loss | (1,975 | ) | (2,077 | ) | (1,611 | ) | (1,822 | ) | ||||||||
6,415 | 6,112 | 7,364 | 6,862 | |||||||||||||
Less: Common stock held in treasury, at cost, 2010 – 1.2 shares and 2009 – 3.9 shares | 27 | 89 | ||||||||||||||
Less: Common stock held in treasury, at cost, 2011 – 1.6 shares and 2010 – 1.2 shares | 44 | 28 | ||||||||||||||
Total Shareholders’ Equity | 6,388 | 6,023 | 7,320 | 6,834 | ||||||||||||
Noncontrolling interests | 250 | 232 | 255 | 250 | ||||||||||||
Total Equity | 6,638 | 6,255 | 7,575 | 7,084 | ||||||||||||
Total Liabilities and Equity | $ | 25,089 | $ | 25,548 | $ | 25,595 | $ | 25,368 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2010 | 2009 | 2011 | 2010 | |||||||||||||
Operating Activities | ||||||||||||||||
Net earnings (loss) | $ | 346 | $ | 778 | ||||||||||||
Earnings (loss) from continuing operations | $ | 298 | $ | (153 | ) | |||||||||||
Depreciation, amortization and cost of timber harvested | 1,096 | 1,088 | 340 | 371 | ||||||||||||
Cost of timberlands sold | 143 | 0 | ||||||||||||||
Deferred income tax provision (benefit), net | 397 | 585 | ||||||||||||||
Deferred income tax provision, net | (2 | ) | 76 | |||||||||||||
Restructuring and other charges | 359 | 313 | 45 | 215 | ||||||||||||
Payments related to restructuring and legal reserves | (2 | ) | (35 | ) | ||||||||||||
Pension plan contribution | (1,150 | ) | 0 | |||||||||||||
Net (gains) losses on sales and impairments of businesses | 0 | 48 | 8 | 0 | ||||||||||||
Equity (earnings) losses, net | (27 | ) | 59 | (53 | ) | 2 | ||||||||||
Periodic pension expense, net | 174 | 160 | 45 | 59 | ||||||||||||
Alternative fuel mixture credits receivable | 0 | (251 | ) | |||||||||||||
Other, net | (57 | ) | 140 | 60 | (106 | ) | ||||||||||
Changes in current assets and liabilities | ||||||||||||||||
Accounts and notes receivable | (555 | ) | 466 | (365 | ) | (206 | ) | |||||||||
Inventories | (181 | ) | 262 | 7 | (51 | ) | ||||||||||
Accounts payable and accrued liabilities | 126 | (38 | ) | 14 | (14 | ) | ||||||||||
Interest payable | 49 | 21 | 42 | 42 | ||||||||||||
Other | (131 | ) | (26 | ) | 75 | (76 | ) | |||||||||
Cash Provided by (Used for) Operations | 587 | 3,570 | ||||||||||||||
Cash Provided By (Used For) Operations | 514 | 159 | ||||||||||||||
Investment Activities | ||||||||||||||||
Invested in capital projects | (457 | ) | (367 | ) | (181 | ) | (120 | ) | ||||||||
Acquisitions, net of cash acquired | (152 | ) | (17 | ) | ||||||||||||
Proceeds from divestitures | 50 | 0 | ||||||||||||||
Escrow arrangement for acquisition | (105 | ) | 0 | |||||||||||||
Other | (2 | ) | (59 | ) | (71 | ) | (31 | ) | ||||||||
Cash Provided by (Used for) Investment Activities | (611 | ) | (443 | ) | ||||||||||||
Cash Provided By (Used For) Investment Activities | (307 | ) | (151 | ) | ||||||||||||
Financing Activities | ||||||||||||||||
Repurchases of common stock and payments of restricted stock tax withholding | (26 | ) | (10 | ) | (29 | ) | (26 | ) | ||||||||
Issuance of debt | 177 | 2,490 | 49 | 38 | ||||||||||||
Reduction of debt | (505 | ) | (4,911 | ) | (152 | ) | (120 | ) | ||||||||
Change in book overdrafts | 80 | (5 | ) | (33 | ) | (27 | ) | |||||||||
Dividends paid | (120 | ) | (129 | ) | (82 | ) | (11 | ) | ||||||||
Other | (24 | ) | (113 | ) | (33 | ) | (3 | ) | ||||||||
Cash Provided by (Used for) Financing Activities | (418 | ) | (2,678 | ) | ||||||||||||
Cash Provided By (Used For) Financing Activities | (280 | ) | (149 | ) | ||||||||||||
Effect of Exchange Rate Changes on Cash | (21 | ) | 59 | 49 | (2 | ) | ||||||||||
Change in Cash and Temporary Investments | (463 | ) | 508 | (24 | ) | (143 | ) | |||||||||
Cash and Temporary Investments | ||||||||||||||||
Beginning of period | 1,892 | 1,144 | 2,073 | 1,892 | ||||||||||||
End of period | $ | 1,429 | $ | 1,652 | $ | 2,049 | $ | 1,749 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and in accordance with the instructions to Form 10-Q and, in the opinion of Management,management, include all adjustments that are necessary for the fair presentation of International Paper Company’s (International Paper or the Company)(the Company’s) financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed herein, such adjustments are of a normal, recurring nature. Results for the first ninethree months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as amended, (Form 10-K)2010 which have previously been filed with the Securities and Exchange Commission.
International Paper accounts for its investment in Ilim Holding S.A. (Ilim), a separate reportable industry segment, using the equity method of accounting. 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.
NOTE 2 – RECENT ACCOUNTING DEVELOPMENTS
Accounting For Distributions to Shareholders:Revenue Arrangements with Multiple Deliverables
In January 2010,October 2009, the Financial Accounting Standards Board (FASB)FASB issued Accounting Standards Update (ASU) 2010-01, “Accounting for Distributions to Shareholders with Components of Stock and Cash,” which clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend for purposes of applying Accounting Standards Codification (ASC) 505, “Equity,” and ASC 260, “Earnings Per Share.” This guidance was effective for interim and annual periods ending on or after December 15, 2009 (calendar year 2009), and should be applied on a retrospective basis. The application of the requirements of this guidance had no effect on the accompanying consolidated financial statements.
Accounting for Decreases in Ownership of a Subsidiary:
In January 2010, the FASB issued ASU 2010-02, “Accounting and Reporting for Decreases in Ownership of a Subsidiary,” which clarifies the scope of the guidance for the decrease in ownership of a subsidiary in ASC 810, “Consolidations,” and expands the disclosures required for the deconsolidation of a subsidiary or derecognition of a group of assets. This guidance was effective on a retrospective basis to January 1, 2009. The application of the requirements of this guidance had no effect on the accompanying consolidated financial statements.
Revenue Arrangements with Multiple Deliverables:
In September 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements,” which amends the multiple-element arrangement guidance under ASC 605, “Revenue Recognition.” This guidance amends the criteria for separating consideration for products or services in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation, and requires that arrangement consideration be
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (calendar year 2011). The Company is currently evaluating the provisions of this guidance but does not anticipate that it will have a material effect on its consolidated financial statements.
Variable Interest Entities:
In June 2009, the FASB issued ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amends the consolidation guidance that applies to variable interest entities under ASC 810, “Consolidations.” This guidance changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This guidance was effective for financial statements issued in fiscal years (and interim periods) beginning after November 15, 2009 (calendar year 2010). The Company adopted this guidance on January 1, 2010 and it did not have an effect on the accompanying consolidated financial statements.
Transfers of Financial Assets:
In June 2009, the FASB issued ASU 2009-16, “Accounting for Transfers of Financial Assets,” which amends the derecognition guidance in ASC 860, “Transfers and Servicing.” This guidance eliminates the concept of qualifying special-purpose entities, changes the requirements for derecognizing financial assets and requires additional disclosures. This guidance was effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year beginning after November 15, 2009 (calendar year 2010). The Company adopted this guidance on January 1, 2010 and it did not have an effect on the accompanying consolidated financial statements.
Subsequent Events:
In May 2009, the FASB issued ASC 855, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance is effective prospectively for interim and annual periods ending after June 15, 2009. In February 2010, the FASB issued ASU 2010-09, which amends ASC 855 to address certain implementation issues related to performing and disclosing subsequent events procedures. The Company included the requirements of this guidance in the preparation of the accompanying consolidated financial statements.
Other-Than-Temporary Impairment for Debt Securities:
In April 2009, the FASB issued new guidance under ASC 320, “Investments – Debt and Equity Securities,” which provides a new other-than-temporary impairment model for debt securities. This guidance was effective for financial statements issued for fiscal years (and interim periods) ending after June 15, 2009. The application of the requirements of this guidance did not have a material effect on the accompanying consolidated financial statements.
Fair Value Measurements:Measurements
In April 2009, the FASB issued guidance under ASC 820, “Fair Value Measurements and Disclosures,” which provides guidance on estimating the fair value of an asset or liability (financial or nonfinancial) when the volume and level of activity for the asset or liability have significantly decreased and on identifying transactions that are not orderly. The application of the requirements of this guidance did not have a material effect on the accompanying consolidated financial statements.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
In August 2009, the FASB issued ASU 2009-05, “Measuring Liabilities at Fair Value,” which further amends ASC 820 by providing clarification for circumstances in which a quoted price in an active market for the identical liability is not available. The Company included the disclosures required by this guidance in the accompanying consolidated financial statements.
In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which further amends ASC 820, “Fair Value Measurements and Disclosures,” to add new disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. This new guidance also clarifies the level of disaggregation, inputs and valuation techniques used to measure fair value and amends guidance under ASC 715 related to employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. This guidance was effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will beis effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company included the disclosures required by this guidance in the accompanying consolidated financial statements. The Company does not anticipate that the adoptionapplication of the remaining requirements of this guidance willdid not have a material effect on itsthe consolidated financial statements.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
NOTE 3 – EQUITY
A summary of the changes in equity for the nine monthsthree-month periods ended September 30,March 31, 2011 and 2010 and 2009 is provided below:
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||||||||||
In millions, except per share amounts | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||
Balance, January 1 | $ | 6,023 | $ | 232 | $ | 6,255 | $ | 4,169 | $ | 232 | $ | 4,401 | $ | 6,834 | $ | 250 | $ | 7,084 | $ | 6,023 | $ | 232 | $ | 6,255 | ||||||||||||||||||||||||
Issuance of stock for various plans, net | 96 | 0 | 96 | 91 | 0 | 91 | 45 | 0 | 45 | 47 | 0 | 47 | ||||||||||||||||||||||||||||||||||||
Repurchase of stock | (26 | ) | 0 | (26 | ) | (10 | ) | 0 | (10 | ) | (29 | ) | 0 | (29 | ) | (26 | ) | 0 | (26 | ) | ||||||||||||||||||||||||||||
Common stock dividends ($0.275 per share in 2010 and $0.30 per share in 2009) | (122 | ) | 0 | (122 | ) | (133 | ) | 0 | (133 | ) | ||||||||||||||||||||||||||||||||||||||
Common stock dividends ($0.1875 per share in 2011 and $0.025 per share in 2010) | (83 | ) | 0 | (83 | ) | (13 | ) | 0 | (13 | ) | ||||||||||||||||||||||||||||||||||||||
Dividends paid to noncontrolling interests by subsidiary | 0 | (4 | ) | (4 | ) | 0 | (6 | ) | (6 | ) | 0 | (1 | ) | (1 | ) | 0 | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||
Noncontrolling interests of acquired entities | 0 | 9 | 9 | 0 | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Acquisition of noncontrolling interests | (12 | ) | (7 | ) | (19 | ) | 0 | 0 | 0 | 0 | 0 | 0 | (12 | ) | (7 | ) | (19 | ) | ||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings (loss) | 328 | 18 | 346 | 764 | 14 | 778 | 342 | 5 | 347 | (162 | ) | 9 | (153 | ) | ||||||||||||||||||||||||||||||||||
Amortization of pension and post-retirement prior service costs and net loss: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. plans | 85 | 0 | 85 | 82 | 0 | 82 | 33 | 0 | 33 | 30 | 0 | 30 | ||||||||||||||||||||||||||||||||||||
Non-U.S. plans | (3 | ) | 0 | (3 | ) | 7 | 0 | 7 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||
Change in cumulative foreign currency translation adjustment | 29 | 2 | 31 | 604 | 0 | 604 | 177 | 1 | 178 | (69 | ) | 0 | (69 | ) | ||||||||||||||||||||||||||||||||||
Net gains/losses on cash flow hedging derivatives: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net gains (losses) arising during the period | 12 | 0 | 12 | 31 | 0 | 31 | 4 | 0 | 4 | 4 | 0 | 4 | ||||||||||||||||||||||||||||||||||||
Less: Reclassification adjustment for (gains) losses included in net earnings (loss) | (22 | ) | 0 | (22 | ) | 40 | 0 | 40 | (3 | ) | 0 | (3 | ) | (3 | ) | 0 | (3 | ) | ||||||||||||||||||||||||||||||
Total comprehensive income (loss) | 449 | 1,542 | 559 | (191 | ) | |||||||||||||||||||||||||||||||||||||||||||
Balance, September 30 | $ | 6,388 | $ | 250 | $ | 6,638 | $ | 5,645 | $ | 239 | $ | 5,884 | ||||||||||||||||||||||||||||||||||||
Balance, March 31 | $ | 7,320 | $ | 255 | $ | 7,575 | $ | 5,819 | $ | 233 | $ | 6,052 | ||||||||||||||||||||||||||||||||||||
NOTE 4 – EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS
Basic earnings per common share are computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings per common share are computed assuming that all potentially dilutive securities, including “in-the-money” stock options, were converted into common shares at the beginning of each period. A reconciliation of the amounts included in the computation of earnings (loss) per common share, and diluted earnings (loss) per common share is as follows:
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions, except per share amounts | 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | ||||||||||||||||||
Net earnings (loss) attributable to International Paper Company | $ | 397 | $ | 371 | $ | 328 | $ | 764 | ||||||||||||||||
Earnings (loss) from continuing operations | $ | 293 | $ | (162 | ) | |||||||||||||||||||
Effect of dilutive securities (a) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Net earnings (loss) – assuming dilution | $ | 397 | $ | 371 | $ | 328 | $ | 764 | ||||||||||||||||
Earnings (loss) from continuing operations – assuming dilution | $ | 293 | $ | (162 | ) | |||||||||||||||||||
Average common shares outstanding | 430.1 | 426.1 | 429.5 | 424.8 | 430.2 | 428.8 | ||||||||||||||||||
Effect of dilutive securities | ||||||||||||||||||||||||
Restricted stock performance share plan (a) | 3.7 | 2.6 | 4.3 | 1.8 | ||||||||||||||||||||
Restricted performance share plan (a) | 3.6 | 0 | ||||||||||||||||||||||
Stock options (b) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Average common shares outstanding – assuming dilution | 433.8 | 428.7 | 433.8 | 426.6 | 433.8 | 428.8 | ||||||||||||||||||
Basic earnings (loss) per common share | $ | 0.92 | $ | 0.87 | $ | 0.76 | $ | 1.80 | ||||||||||||||||
Basic earnings (loss) from continuing operations per common share | $ | 0.68 | $ | (0.38 | ) | |||||||||||||||||||
Diluted earnings (loss) per common share | $ | 0.91 | $ | 0.87 | $ | 0.76 | $ | 1.79 | ||||||||||||||||
Diluted earnings (loss) from continuing operations per common share | $ | 0.67 | $ | (0.38 | ) | |||||||||||||||||||
(a) | Securities are not included in the table in periods when antidilutive. |
(b) | Options to purchase |
NOTE 5 – RESTRUCTURING CHARGES AND OTHER ITEMS
2010:
Restructuring and Other Charges
Restructuring and other charges during the three months ended September 30, 2010 were immaterial.
2011:During the three months ended June 30, 2010,March 31, 2011, restructuring and other charges totaling $144$45 million before taxes ($8828 million after taxes) were recorded. Details of this charge were as follows:
Three Months Ended June 30, 2010 | Three Months Ended March 31, 2011 | |||||||||||||||
In millions | Before-Tax Charges | After-Tax Charges | Before-Tax Charges | After-Tax Charges | ||||||||||||
Franklin, Virginia mill closure costs (including before-tax charges of $46 million of accelerated depreciation and $36 million of environmental closure costs) | $ | 111 | $ | 68 | ||||||||||||
Early debt extinguishment costs | $ | 32 | $ | 19 | ||||||||||||
xpedx restructuring | 7 | 4 | ||||||||||||||
S&A reduction initiative | 2 | 1 | 3 | 2 | ||||||||||||
Early debt extinguishment costs | 18 | 11 | ||||||||||||||
Write-off of Ohio Commercial Activity tax receivable | 11 | 7 | ||||||||||||||
Other | 2 | 1 | 3 | 3 | ||||||||||||
Total | $ | 144 | $ | 88 | $ | 45 | $ | 28 | ||||||||
Additionally, during the three months ended March 31, 2011, the Company recorded a gain of $7 million (before and after taxes) related to a bargain purchase price adjustment on an acquisition by our joint venture in Turkey. This gain is included in Equity earnings (losses), net of taxes in the accompanying consolidated statement of operations.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
2010:During the three months ended March 31,first quarter of 2010, restructuring and other charges totaling $215 million before taxes ($132 million after taxes) were recorded. Details of this charge were as follows:
Three Months Ended March 31, 2010 | Three Months Ended March 31, 2010 | |||||||||||||||
In millions | Before-Tax Charges | After-Tax Charges | Before-Tax Charges | After-Tax Charges | ||||||||||||
Franklin, Virginia mill closure costs (including $190 million of accelerated depreciation) | $ | 204 | $ | 124 | ||||||||||||
Franklin, Virginia mill closure costs (including before-tax charges of $190 million of accelerated depreciation) | $ | 204 | $ | 124 | ||||||||||||
Early debt extinguishment costs | 4 | 2 | 4 | 2 | ||||||||||||
Shorewood Packaging reorganization | 3 | 2 | 3 | 2 | ||||||||||||
Other | 4 | 4 | 4 | 4 | ||||||||||||
Total | $ | 215 | $ | 132 | $ | 215 | $ | 132 | ||||||||
Additionally, a $46 million after-tax charge was recorded during the three months ended March 31, 2010 for tax adjustments related to incentive compensation and postretirement prescription drug coverage (see Note 10).
2009:Cellulosic Bio-fuel Tax Credit
RestructuringIn a memorandum dated June 28, 2010, the IRS concluded that black liquor would 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 the $0.50 per gallon alternative fuel mixture credit and Other Chargesthe $1.01 cellulosic bio-fuel tax credit for 2009, but not for the same gallons. To the extent a taxpayer changes their position and uses the $1.01 credit, they must re-pay the refunds they 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 taxable earnings, and the credit may be carried forward against taxable earnings through 2015. In contrast, the $0.50 credit is refundable in cash. 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 its 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 credit. The Company will continue evaluating its position with regard to the previously claimed alternative fuel mixture credit gallons produced in 2009. This continued evaluation 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.
During 2009, the three months ended September 30,Company did produce 64 million gallons of black liquor that were not eligible for the alternative fuel mixture credit. The Company does intend to claim these gallons for the cellulosic bio-fuel credit by amending the Company’s 2009 restructuring and other charges totaling $151 million before taxes ($95 million after taxes) were recorded. Detailstax return. The impact of this charge were as follows:
Three Months Ended September 30, 2009 | ||||||||
In millions | Before-Tax Charges | After-Tax Charges | ||||||
2008 overhead reduction program – severance and benefits | $ | 39 | $ | 24 | ||||
Early debt extinguishment costs | 102 | 62 | ||||||
Etienne mill – severance and other costs | 7 | 7 | ||||||
Other | 3 | 2 | ||||||
Total | $ | 151 | $ | 95 | ||||
Duringamendment, which has been included in the three months ended June 30, 2009, restructuring and other charges totaling $79 million before taxes ($55 million after taxes) were recorded. Details of this charge were as follows:
Three Months Ended June 30, 2009 | ||||||||
In millions | Before-Tax Charges | After-Tax Charges | ||||||
2008 overhead reduction program – severance and benefits | $ | 34 | $ | 21 | ||||
Early debt extinguishment costs | 25 | 16 | ||||||
Etienne mill – severance and other costs | 15 | 15 | ||||||
Other | 5 | 3 | ||||||
Total | $ | 79 | $ | 55 | ||||
Additionally, the incomeCompany’s 2010 Income tax provision for the three months ended June 30, 2009 included(benefit), is a $156$40 million chargenet credit to establish a valuation allowance for deferred tax assets in France, and a $26 million credit related to the settlement of certain tax issues (see Note 10).expense.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
DuringAs is the three months ended March 31, 2009, restructuring andcase with other charges totaling $83 million before taxes ($65 million after taxes) were recorded. Details of this charge were as follows:
Three Months Ended March 31, 2009 | ||||||||
In millions | Before-Tax Charges | After-Tax Charges | ||||||
2008 overhead reduction program – severance and benefits | $ | 52 | $ | 32 | ||||
Inverurie mill closure costs | 23 | 28 | ||||||
Franklin, Virginia lumber mill, sheet converting plant and converting innovations center closure costs | 6 | 4 | ||||||
Shorewood Packaging reorganization | 2 | 1 | ||||||
Total | $ | 83 | $ | 65 | ||||
Additionally, duringtax credits, taxpayer claims are subject to possible future review by the three months ended March 31, 2009, a $20 million charge was recorded relatedIRS which has the authority to certain taxpropose adjustments (see Note 10).
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, equal to $0.50 per gallon of alternative fuel contained in the mixture, was refundable to the taxpayer. In January 2009, the Company received notification that its application to be registered as an alternative fuel mixer had been approved. During the nine months ended September 30, 2009, the Company filed claims for alternative fuel mixtureamounts claimed, or 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 months 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. The credit expired on December 31, 2009.received.
NOTE 6 – ACQUISITIONS EXCHANGES AND JOINT VENTURES
On March 29, 2011, International Paper entered into an agreement to purchase approximately 53.5% of the outstanding shares of Andhra Pradesh Paper Mills Limited (APPM) for approximately $257 million in cash. In addition, International Paper has agreed to make a $62 million non-compete payment. Pursuant to Indian securities law, International Paper will also launch a mandatory public tender offer to acquire up to an additional 21.5% of the outstanding shares of APPM for approximately $104 million in cash. International Paper anticipates acquiring up to 75% of APPM’s outstanding shares through these two transactions. APPM is one of the leading integrated paper manufacturers in India, with two mills that have a combined capacity of about 250,000 tonnes of uncoated freesheet papers annually. This transaction is expected to close upon approval by all regulatory jurisdictions.
In accordance with the Securities and Exchange Board in India (SEBI) regulations, International Paper placed approximately $105 million into an escrow account in connection with the tender offer in India. In the unlikely event that International Paper fails to fulfill its obligations under the applicable SEBI regulations, SEBI may direct the amount of cash remaining in escrow to be distributed in equal proportion to APPM shareholders who have successfully tendered their shares, the SEBI Investor Protection and Education Fund, and the Target company (APPM).
On June 30, 2010, International Paper announced that it had completed the previously announced acquisition of SCA Packaging Asia (SCA) for a preliminary purchase price of $206$205 million, including $172$171 million in cash plus assumed debt of $34 million, subject to post-closing adjustments. The SCA packaging business in Asia consists of 13 corrugated box plants and two specialty packaging facilities, which are primarily in China, along with locations in Singapore, Malaysia and Indonesia.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The following table summarizes the preliminary allocation of the purchase price to the fair value of assets and liabilities acquired:acquired.
In millions | ||||||||
Cash and temporary investments | $ | 20 | $ | 19 | ||||
Accounts and notes receivable, net | 74 | 70 | ||||||
Inventory | 23 | 24 | ||||||
Other current assets | 1 | 1 | ||||||
Plants, properties and equipment, net | 121 | 103 | ||||||
Goodwill | 3 | 26 | ||||||
Deferred tax asset | 1 | |||||||
Other intangible assets | 49 | 38 | ||||||
Total assets acquired | 291 | 282 | ||||||
Accounts payable and accrued liabilities | 51 | 64 | ||||||
Long-term debt | 34 | |||||||
Deferred tax liability | 5 | |||||||
Non-controlling interest | 8 | |||||||
Total liabilities assumed | 85 | 77 | ||||||
Net assets acquired | $ | 206 | $ | 205 | ||||
The purchase price allocation will be finalized in the first halfsecond quarter of 2011.
The identifiable intangible assets acquired in connection with the SCA acquisition included the following:
In millions | Estimated Fair Value | Average Remaining Useful Life | ||||||
(at acquisition date) | ||||||||
Asset Class: | ||||||||
Land-use rights | $ | 49 | 39 years | |||||
Total | $ | 49 | ||||||
On August 4, 2008, International Paper completed the acquisition of the assets of Weyerhaeuser Company’s Containerboard, Packaging and Recycling (CBPR) business for approximately $6 billion in cash, subject to post-closing adjustments. The CBPR operating results are included in International Paper’s North American Industrial Packaging business from the date of acquisition. Selling and administrative expenses for the three months and nine months ended September 30, 2009 included charges of $18 million before taxes ($11 million after taxes) and $72 million before taxes ($44 million after taxes), respectively, of costs related to the integration of the CBPR business.
In millions | Estimated Fair Value | Average Remaining Useful Life | ||||||
(at acquisition date) | ||||||||
Asset Class: | ||||||||
Land-use rights | $ | 29 | 39 years | |||||
Customer relationships | 9 | 16 years | ||||||
Total | $ | 38 | ||||||
NOTE 7 – BUSINESSES HELD FOR SALE, DIVESTITURES AND DIVESTITURESIMPAIRMENTS
Discontinued Operations
The sale of the Company’s Kraft Papers business that closed in January 2007 contained an earnout provision to potentially require KapStone to make an additional payment to International Paper in 2012. Based on the results through the first four years of the earnout period, KapStone concluded that the threshold would be attained and the full earnout payment would be due to International Paper in 2012. On January 3, 2011, International Paper signed an agreement with KapStone to allow KapStone to pay the Company on January 4, 2011, the discounted amount of $50 million before taxes ($30 million after taxes) that otherwise would have been owed in full under the agreement in 2012. This amount has been included in Discontinued operations in the accompanying consolidated statement of operations.
In the third quarter of 2006, the Company completed the sale of its Brazilian Coated Papers business and restated its financial statements to reflect this business as a discontinued operation. Included in the results for this business in 2005 and 2006 were local country tax contingency reserves to which the related statute of limitations has now expired. A $15 million tax benefit for the reversal of these reserves plus associated interest income of $6 million ($4 million after taxes) was recorded during the three months ended March 31, 2011 and is included in Discontinued operations in the accompanying consolidated statement of operations.
Other Divestitures and Impairments
During the three months ended June 30, 2009, based on a current strategic plan update of projected future operating results ofMarch 31, 2011, 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 $48Company recorded an $8 million charge before(before and after taxes, was recordedtaxes) to further write down the long-lived assets of theits Inverurie, Scotland 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.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
NOTE 8 – SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Temporary investmentsInvestments
Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments were as follows:
In millions | September 30, 2010 | December 31, 2009 | ||||||
Temporary investments | $ | 1,117 | $ | 1,634 |
In millions Temporary investmentsInventories by major category were: March 31,
2011 December 31,
2010 $ 1,656 $ 1,752
In millions | September 30, 2010 | December 31, 2009 | ||||||
Raw materials | $ | 432 | $ | 307 | ||||
Finished pulp, paper and packaging | 1,469 | 1,443 | ||||||
Operating supplies | 374 | 377 | ||||||
Other | 61 | 52 | ||||||
Total | $ | 2,336 | $ | 2,179 | ||||
Depreciation expense was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Depreciation expense | $ | 349 | $ | 362 | $ | 1,052 | $ | 1,048 |
Certain valuation accounts were as follows:
In millions | September 30, 2010 | December 31, 2009 | ||||||
Accumulated depreciation | $ | 18,802 | $ | 17,817 | ||||
Allowance for doubtful accounts | 144 | 136 |
There was no material activity related toasset retirement obligationsduring the nine months ended September 30, 2010 or 2009.
Certain cash payments made were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Interest payments | $ | 105 | $ | 101 | $ | 432 | $ | 444 | ||||||||
Income tax payments/(refunds) | 16 | 36 | (75 | ) | 49 |
Amounts related tointerest were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Interest expense (a) | $ | 162 | $ | 177 | $ | 484 | $ | 530 | ||||||||
Interest income (a) | 10 | 8 | 26 | 24 | ||||||||||||
Capitalized interest costs | 4 | 2 | 10 | 9 |
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Accounts and Notes Receivable
Accounts and notes receivable, net of allowances, by classification were:
In millions | March 31, 2011 | December 31, 2010 | ||||||
Accounts and notes receivable, net: | ||||||||
Trade | $ | 3,236 | $ | 2,854 | ||||
Other | 192 | 185 | ||||||
Total | $ | 3,428 | $ | 3,039 | ||||
Inventories
Inventories by major category were:
In millions | March 31, 2011 | December 31, 2010 | ||||||
Raw materials | $ | 389 | $ | 419 | ||||
Finished pulp, paper and packaging | 1,567 | 1,505 | ||||||
Operating supplies | 365 | 364 | ||||||
Other | 69 | 59 | ||||||
Total | $ | 2,390 | $ | 2,347 | ||||
Depreciation Expense
Depreciation expense was as follows:
Three Months Ended March 31, | ||||||||
In millions | 2011 | 2010 | ||||||
Depreciation expense | $ | 323 | $ | 355 |
Valuation Accounts
Certain valuation accounts were as follows:
In millions | March 31, 2011 | December 31, 2010 | ||||||
Accumulated depreciation | $ | 19,393 | $ | 18,991 | ||||
Allowance for doubtful accounts | 139 | 129 |
There was no material activity related to asset retirement obligations during either of the first quarters of 2011 or 2010.
Interest
Cash payments related to interest were as follows:
Three Months Ended March 31, | ||||||||
In millions | 2011 | 2010 | ||||||
Interest payments | $ | 101 | $ | 105 |
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Amounts related to interest were as follows:
Three Months Ended March 31, | ||||||||
In millions | 2011 | 2010 | ||||||
Interest expense (a) | $ | 150 | $ | 158 | ||||
Interest income (a) | 14 | 9 | ||||||
Capitalized interest costs | 4 | 3 |
(a) | Interest expense and interest income exclude approximately |
Postretirement Benefit Expense
The components of the Company’spostretirement benefitexpense were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Service cost | $ | 0 | $ | 0 | $ | 1 | $ | 1 | ||||||||
Interest cost | 6 | 8 | 18 | 23 | ||||||||||||
Actuarial loss | 3 | 5 | 9 | 17 | ||||||||||||
Amortization of prior service credit | (7 | ) | (7 | ) | (23 | ) | (21 | ) | ||||||||
Net postretirement benefit expense (a) | $ | 2 | $ | 6 | $ | 5 | $ | 20 | ||||||||
On September 23, 2010, the Company finalized the sale of 163,000 acres of properties located in the southeastern United States to an affiliate of Rock Creek Capital (the Partnership) for $199 million, resulting in a $50 million pre-tax gain ($31 million after taxes), after expenses. Cash of $160 million was received at closing, with the balance of $39 million, plus interest, to be received no later than three years from closing. In addition, the Company has received a 20% profits interest in the Partnership.
Three Months Ended March 31, | ||||||||
In millions | 2011 | 2010 | ||||||
Service cost | $ | 1 | $ | 1 | ||||
Interest cost | 5 | 6 | ||||||
Actuarial loss | 2 | 4 | ||||||
Amortization of prior service credit | (6 | ) | (8 | ) | ||||
Net postretirement benefit expense | $ | 2 | $ | 3 | ||||
NOTE 9 – GOODWILL AND OTHER INTANGIBLES
The following tables presenttable presents changes in goodwill balances as allocated to each business segment for the nine monthsthree-month period ended September 30, 2010 and 2009:March 31, 2011:
In millions | Industrial Packaging | Printing Papers | Consumer Packaging | Distribution | Total | Industrial Packaging | Printing Papers | Consumer Packaging | Distribution | Total | ||||||||||||||||||||||||||||||
Balance as of January 1, 2010 | ||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2011 | ||||||||||||||||||||||||||||||||||||||||
Goodwill | $ | 1,131 | $ | 2,423 | $ | 1,765 | $ | 400 | $ | 5,719 | $ | 1,151 | $ | 2,418 | $ | 1,768 | $ | 400 | $ | 5,737 | ||||||||||||||||||||
Accumulated impairment losses (a) | 0 | (1,765 | ) | (1,664 | ) | 0 | (3,429 | ) | 0 | (1,765 | ) | (1,664 | ) | 0 | (3,429 | ) | ||||||||||||||||||||||||
1,131 | 658 | 101 | 400 | 2,290 | $ | 1,151 | $ | 653 | $ | 104 | $ | 400 | $ | 2,308 | ||||||||||||||||||||||||||
Reclassifications and other (b) | (2 | ) | 13 | 1 | 0 | 12 | 2 | 14 | 1 | 0 | 17 | |||||||||||||||||||||||||||||
Additions/reductions | 3 | (c) | (20 | )(d) | 0 | 0 | (17 | ) | 3 | (c) | (8 | ) (d) | 0 | 0 | (5 | ) | ||||||||||||||||||||||||
Balance as of September 30, 2010 | ||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2011 | ||||||||||||||||||||||||||||||||||||||||
Goodwill | 1,132 | 2,416 | 1,766 | 400 | 5,714 | 1,156 | 2,424 | 1,769 | 400 | 5,749 | ||||||||||||||||||||||||||||||
Accumulated impairment losses (a) | 0 | (1,765 | ) | (1,664 | ) | 0 | (3,429 | ) | 0 | (1,765 | ) | (1,664 | ) | 0 | (3,429 | ) | ||||||||||||||||||||||||
Total | $ | 1,132 | $ | 651 | $ | 102 | $ | 400 | $ | 2,285 | $ | 1,156 | $ | 659 | $ | 105 | $ | 400 | $ | 2,320 | ||||||||||||||||||||
(a) | Represents accumulated goodwill impairment charges since the adoption of ASC 350, “Intangibles – Goodwill and Other” in 2002. |
(b) | Represents the effects of foreign currency translations and reclassifications. |
(c) | Represents |
(d) | Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in Brazil. |
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
OTHER INTANGIBLES
In millions | Industrial Packaging | Printing Papers | Consumer Packaging | Distribution | Total | |||||||||||||||
Balance as of January 1, 2009 | ||||||||||||||||||||
Goodwill | $ | 989 | $ | 2,302 | $ | 1,766 | $ | 399 | $ | 5,456 | ||||||||||
Accumulated impairment losses (a) | 0 | (1,765 | ) | (1,664 | ) | 0 | (3,429 | ) | ||||||||||||
989 | 537 | 102 | 399 | 2,027 | ||||||||||||||||
Reclassifications and other (b) | 3 | 135 | 0 | 0 | 138 | |||||||||||||||
Additions/reductions | 140 | (c) | (18 | )(d) | 0 | 1 | 123 | |||||||||||||
Balance as of September 30, 2009 | ||||||||||||||||||||
Goodwill | 1,132 | 2,419 | 1,766 | 400 | 5,717 | |||||||||||||||
Accumulated impairment losses (a) | 0 | (1,765 | ) | (1,664 | ) | 0 | (3,429 | ) | ||||||||||||
Total | $ | 1,132 | $ | 654 | $ | 102 | $ | 400 | $ | 2,288 | ||||||||||
The net carrying amount of identifiable intangible assets (such as trade names, customer lists, patented technology, etc.), excluding goodwill, was as follows:
In millions | September 30, 2010 | December 31, 2009 | March 31, 2011 | December 31, 2010 | ||||||||||||
Intangible assets | $ | 276 | $ | 248 | ||||||||||||
Intangibles assets | $ | 258 | $ | 261 |
The Company recognized the following amounts as amortization expense related to intangible assets:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | ||||||||||||||||||
Amortization expense related to intangible assets | $ | 7 | $ | 8 | $ | 22 | $ | 25 | $ | 8 | $ | 8 |
NOTE 10 – INCOME TAXES
International Paper made income tax payments, net of refunds, as follows:
Three Months Ended March 31, | ||||||||
In millions | 2011 | 2010 | ||||||
Income tax payments/(refunds) | $ | (92 | ) | $ | (7 | ) |
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The following table presents a rollforward of unrecognized tax benefits and related accrued estimated interest and penalties for the ninethree months ended September 30, 2010:March 31, 2011:
In millions | Unrecognized Tax Benefits | Accrued Estimated Interest and Tax Penalties | ||||||
Balance at December 31, 2009 | $ | (308 | ) | $ | (95 | ) | ||
Activity for three months ended March 31, 2010 | 116 | 9 | ||||||
Activity for the three months ended June 30, 2010 | 4 | (3 | ) | |||||
Activity for the three months ended September 30, 2010 | 8 | (2 | ) | |||||
Balance at September 30, 2010 | $ | (180 | ) | $ | (91 | ) | ||
In millions | Unrecognized Tax Benefits | Accrued Estimated Interest and Tax Penalties | ||||||
Balance at December 31, 2010 | $ | (199 | ) | $ | (100 | ) | ||
Activity for three months ended March 31, 2011 | 11 | 7 | ||||||
Balance at March 31, 2011 | $ | (188 | ) | $ | (93 | ) | ||
The Company currently estimates that, as a result of ongoing discussions, pending tax settlements and expirations of statutes of limitations, the amount of unrecognized tax benefits could be reduced by approximately $80$50 million during the next 12 months.
Included in the Company’s income tax provisions for the three months ended March 31, 2011 and 2010, are $(10) million and $(37) million, respectively, related to special items. The components of the net provision related to special items were as follows:
Three Months Ended March 31, | ||||||||
In millions | 2011 | 2010 | ||||||
Special items and other charges: | ||||||||
Restructuring and other charges | $ | 5 | $ | (83 | ) | |||
Tax-related adjustments: | ||||||||
Incentive plan deferred tax write-off | 0 | 14 | ||||||
Medicare D deferred tax write-off | 0 | 32 | ||||||
Expired tax contingency reserves | (15 | ) | 0 | |||||
Income tax provision (benefit) related to special items and discontinued operations | $ | (10 | ) | $ | (37 | ) | ||
NOTE 11—COMMITMENTS AND CONTINGENCIES
In May 2008, a recovery boiler at the Company’s Vicksburg, Mississippi facility exploded, resulting in one fatality and injuries to employees of contractors working on the site. The Company has resolved all of the eight original lawsuits arising from this matter. However, two new personal injury cases were filed in January 2011. The Company believes it has adequate insurance to resolve any remaining matters, and these lawsuits will not have a material adverse effect on its consolidated financial statements.
International Paper has been named as a potentially responsible party in various environmental remediation actions. During 2009, in connection with an environmental site remediation action under Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), International Paper submitted to the Environmental Protection Agency (EPA) a feasibility study for a closed wood treating facility located in Cass Lake, Minnesota. In November 2010 the EPA provided comments that required International Paper to narrow the remedial action alternatives identified in the study. As a result of this recent information, the Company increased its remediation reserve for this site from $6 million to $24 million in the fourth quarter of 2010. The remediation plan for this site has not been approved by the EPA, and of the five alternatives, the Company’s reserve reflects the low end of the range of estimated remediation costs, since, at this time, no one of the alternatives proposed by the EPA is any more likely than the others to be approved. If the most expensive of the clean-up alternatives were approved by the EPA, the remediation costs could be material, and significantly higher than amounts currently recorded.
On April 8, 2011, the United States District Court for the Northern District of Illinois denied motions by the Company and eight other U.S. and Canadian containerboard producers to dismiss a lawsuit alleging that these producers violated the Sherman Act by conspiring to limit the supply and fix the prices of containerboard from mid-2005 to the present. Plaintiffs in the lawsuit seek certification of a nationwide class of direct purchasers
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
During the three months ended March 31, 2010,of containerboard products, treble damages, and costs, including attorneys’ fees. In January 2011, the Company recordedwas named as a defendant in Income tax provision (benefit), charges totaling $46 million, consistinga lawsuit filed in state court in Cocke County, Tennessee alleging that the Company and other containerboard producers violated Tennessee law by conspiring to limit the supply and fix the prices of containerboard from mid-2005 to the present. Plaintiffs in the lawsuit seek certification of a $14 million adjustmentclass of deferred income tax assets relating to incentive compensation payments duringTennessee indirect purchasers of containerboard products, damages, and costs, including attorneys’ fees. The Company believes the quarterallegations in both lawsuits are without merit, but both lawsuits are in preliminary stages and a $32 million charge to reduce deferred income tax assets related to post-retirement prescription drug coverage (Medicare Part D reimbursement) as a resultthe costs and other effects of the recently enacted “Health Care and Education Reconciliation Act of 2010.”
During the three months ended June 30, 2009, in connectionpending litigation cannot be determined with the ongoing evaluation of the Company’s Etienne mill in France, the Company determinedcertainty. Although we believe that the future realization of previously recorded deferred tax assets in France, including net operating loss carryforwards, no longer met the “more likely than not” standard for asset recognition. Accordingly, a charge of $156 million, before and after taxes, was recorded in the quarter to establish a valuation allowance for alloutcome of these assets. Additionally, duringlawsuits will not have a material adverse effect on our business or consolidated financial statements, there can be no assurance that the quarter, as a resultoutcome of an agreement on the 2004 and 2005 U.S. federal income tax audit and the related state income tax effects, a $26 million credit was recorded.
During the three months ended March 31, 2009, the Company recorded in Income tax provision (benefit), charges totaling $20 million, consisting of a $14 million adjustment of deferred income taxes relating to incentive compensation payments during the quarter and a $6 million charge relating to recent state income tax legislation.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
During the three months ended September 30, 2009, in connection with an environmental site remediation action under CERCLA, International Paper submitted to the EPA a feasibility study for the site. The EPA has indicated that it intends to select a proposed remedial action alternative from those identified in the study and present this proposal for public comment. Since it is not currently possible to determine the final remedial action thatany lawsuit or claim will be required, theas expected.
The Company has accrued an estimate of the minimum costs that could be required for this site. When the remediation plan is finalized by the EPA, it is possible that the remediation costs could be significantly higher than amounts currently recorded.
In June 2010, the South Carolina Department of Health and Environmental Control (DHEC) finalized its previously proposed consent order to the Company with a civil penalty of $115,000. The penalty was levied for self-disclosed failures by the Company’s Georgetown mill to operate within carbon monoxide and total reduced sulfur emission limits under the mill’s Part 70 (Title V) Air Quality Operating Permit.
International Paper is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, contracts, sales of property, intellectual property, environmental and safety matters, tax, personal injury, labor and employment and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, the Company believes that the outcome of any of the lawsuits or claims that are pending or threatened or all of them combined (other than those that cannot be assessed due to their preliminary nature) will not have a material adverse effect on its consolidated financial statements.
NOTE 12 – VARIABLE INTEREST ENTITIES AND PREFERRED SECURITIES OF SUBSIDIARIES
Variable Interest Entities:Entities
In connection with the 2006 sale of approximately 5.6 million acres of forestlands, International Paper received installment notes (the Timber Notes) totaling approximately $4.8 billion. The Timber Notes, which do not require principal payments prior to their August 2016 maturity, are supported by irrevocable letters of credit obtained by the buyers of the forestlands.
During the three months ended December 31, 2006, International Paper contributed the Timber Notes to newly formed entities (the Borrower Entities) in exchange for Class A and Class B interests in these entities. Subsequently, International Paper contributed its $200 million Class A interests in the Borrower Entities, along with approximately $400 million of
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
International Paper promissory notes, to other newly formed entities (the Investor Entities, and together with the Borrower Entities, the Entities) in exchange for Class A and Class B interests in these entities, and simultaneously sold its Class A interestsinterest in the Investor Entities to a third party investor. As a result, at December 31, 2006, International Paper held Class B interests in the Borrower Entities and Class B interests in the Investor Entities valued at approximately $5.0 billion. International Paper has no obligation to make any further capital contributions to these Entities and did not provide any financial support that was not previously contractually required for the ninethree months ended September 30, 2010March 31, 2011 and the year ended December 31, 2009.2010.
Following the 2006 sale of forestlands and creation of the Entities discussed above, the Timber Notes were used as collateral for borrowings from a third party lender, which effectively monetized the Timber Notes. Certain provisions of the respective loan agreements require any bank issuing letters of credit supporting the Timber Notes to maintain a credit rating above a specified threshold. In the event the credit rating of a letter of credit bank is downgraded below the specified threshold, the letters of credit must be replaced within 60 days by letters of credit from a qualifying institution. The Company, retained to provide management services for the third-party entities that hold the Timber Notes, has, on occasion, successfully replaced banks that fell below the specified threshold as required by the loan agreements.
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Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Also during 2006, the Entities acquired approximately $4.8 billion of International Paper debt obligations for cash, resulting in a total of approximately $5.2 billion of International Paper debt obligations held by the Entities at December 31, 2006. The various agreements entered into in connection with these transactions provide that International Paper has, and International Paper intends to effect,affect, a legal right to offset its obligation under these debt instruments with its investments in the Entities. Accordingly, for financial reporting purposes, International Paper has offset approximately $5.1 billion of Class B interests in the Entities against $5.1 billion of International Paper debt obligations held by these Entities at September 30, 2010March 31, 2011 and December 31, 2009.2010. Despite the offset treatment, these remain debt obligations of International Paper. Remaining borrowings of $117 million and $129 million and $144 million at September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively, are included in Long-term debt in the accompanying consolidated balance sheet. Additional debt related to the above transaction of $38 million and $46 million is included in short-term debt at September 30, 2010March 31, 2011 and December 31, 2009,2010.
International Paper recognized revenues related to its interests in the Entities of $13 million and $12.7 million and expense of $20 million and $21 million for the three months ended March 31, 2011 and 2010, respectively. The net expense is included in interest expense in the accompanying consolidated statement of operations, as International Paper has and intends to affect its legal right to offset as discussed above. The Company made cash payments of $40 million and $44 million related to the outstanding debt obligations discussed above for the three months ended March 31, 2011 and 2010, respectively. In addition, International Paper received cash distributions from the Entities of $14 million and $19 million for the three months ended March 31, 2011 and 2010, respectively.
International Paper also holds variable interests in two financing entities that were used to monetize long-term notes received from the sale of forestlands in 20022001 and 2001.2002. International Paper transferred notes (the Monetized Notes)Notes, with an original maturity of 10 years from inception) and cash having a value of approximately $1.0 billion to these entities in exchange for preferred interests, and accounted for the transfers as a sale of the notes with no associated gain or loss. In the same period, the entities acquired approximately $1.0 billion of International Paper debt obligations for cash. International Paper has no obligation to make any further capital contributions to these entities and did not provide any financial support that was not previously contractually required during the ninethree months ended September 30, 2010March 31, 2011 and the year ended December 31, 2009. At September 30,2010.
International Paper recorded revenues related to its interests in the 2001 financing entities of $.5 million and $3 million and expense of $3 million and $2 million for the three months ended March 31, 2011 and 2010, International Paper’s $543respectively. The net expense is included in interest expense in the accompanying consolidated statement of operations. The Company made cash payments of $3 million preferred interest in one ofrelated to the entities has been offset against relatedoutstanding debt obligations sincediscussed above for the three months ended March 31, 2011 and 2010. In addition, International Paper has,received cash distributions from the 2001 financing entities of $.1 million and intends to effect, a legal right$1 million for the three months ended March 31, 2011 and 2010, respectively.
The 2001 Monetized Notes of offset to net-settle these two amounts.$499 million matured on March 16, 2011. Following their maturity, International Paper’sPaper purchased the Class A preferred interest in the remaining entity2001 financing entities from an external third party for $21 million. As a result of $485the purchase, effective March 16, 2011, International Paper owns 100% of the 2001 financing entities. Based on an analysis performed by the Company after the purchase, under guidance that considers the potential magnitude of the variability in the structure and which party has a controlling financial interest, International Paper determined that it is the primary beneficiary of the 2001 financing entities and thus consolidated the entities effective March 16, 2011.
Due to the consolidation of the 2001 financing entities, Notes payable and current maturities of long-term debt decreased by $21 million in the first quarter of 2011. Deferred tax liabilities associated with the 2001 forestlands sales decreased by $164 million.
International Paper recognized revenue related to its interest in the 2002 financing entities of $1 million and expense on the associated debt obligations of $2 million for the three months ended March 31, 2011 and
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
2010. The revenue and expense are included in equity earnings and interest expense in the accompanying consolidated statement of operations. The Company made cash payments of $2 million related to the outstanding debt obligations discussed above for the three months ended March 31, 2011 and 2010. In addition, International Paper received cash distributions from the 2002 financing entities of $1 million for the three months ended March 31, 2011 and 2010.
Outstanding debt related to the 2002 financing entities of $445 million is included in Investmentslong-term debt in the accompanying consolidated balance sheets at September 30, 2010March 31, 2011 and December 31, 2009. Other outstanding2010. Additional debt related to the above transactionsthese entities of $345$2 million and $465 million is included in Long-term debt and $124 million and $7$3 million is included in short-term debt in the accompanying consolidated balance sheets at September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively. The Company’s retained interest in the 2002 financing entities was $486 million at March 31, 2011 and December 31, 2010, and is included in deferred charges and other assets in the accompanying consolidated balance sheet.
Based on an analysis of thesethe 2002 and 2006 entities discussed above under guidance that considers the potential magnitude of the variability in the structures and which party has a controlling financial interest, International Paper determined that it is not the primary beneficiary of the above2002 and 2006 financing entities, and therefore, should not consolidate its investments in these entities. It was also determined that the source of variability in the structures is the value of the Timber Notes and Monetized Notes, the assets most significantly impacting each structure’s economic performance. The credit quality of the Timber Notes and Monetized Notes are supported by irrevocable letters of credit obtained by the third party buyers which are 100% cash collateralized. International Paper analyzed which party has control over the economic performance of each entity, and concluded International Paper does not have control over significant decisions surrounding the Timber Notes, 2002 Monetized Notes and letters of credit and therefore is not the primary beneficiary. The Company’s maximum exposure to loss equals the value of the Timber Notes and Monetized Notes,Notes; however, an analysis performed by the Company concluded the likelihood of this exposure is remote.
INTERNATIONAL PAPER COMPANY
CondensedThe use of the above entities facilitated the monetization of the credit enhanced Timber and Monetized Notes in a cost effective manner by increasing the borrowing capacity and lowering the interest rate while continuing to Consolidated Financial Statements—(Continued)
(Unaudited)
preserve the tax deferral that resulted from the forestlands installment sales and the offset accounting treatment described above.
Preferred Securities of Subsidiaries:Subsidiaries
In March 2003, Southeast Timber, Inc. (Southeast Timber), a consolidated subsidiary of International Paper, issued $150 million of preferred securities to a private investor with future dividend payments based on LIBOR. Southeast Timber, which through a subsidiary initially held approximately 1.5 million acres of forestlands in the southern United States, was International Paper’s primary vehicle for sales of southern forestlands. As of September 30, 2010,March 31, 2011, substantially all of these forestlands have been sold. These preferred securities may be put back to International Paper by the private investor upon the occurrence of certain events, and have a liquidation preference that approximates their face amount. The $150 million preferred third-party interest is included in Noncontrolling interests in the accompanying consolidated balance sheet. Distributions paid to the third-party investor were $4$1 million and $5 millioneach for the ninethree months ended September 30, 2010March 31, 2011 and 2009, respectively.2010. The expense related to these preferred securities is shown in Net earnings (loss) attributable to noncontrolling interests in the accompanying consolidated statement of operations.
NOTE 13 – DEBT
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 May 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 $21 million related to these debt repayments are included in Restructuring and other charges in the accompanying consolidated statement of operations (offset by a $3 million gain on associated interest rate swaps as discussed in Note 14).
During the three months ended March 31, 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 $5 million related to first-quarter debt repayments are included in Restructuring and other charges in the accompanying consolidated statement of operations (offset by a $1 million gain on associated interest rate swaps as discussed in Note 14).
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, this debt was 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. Pre-tax early debt retirement costs of $118 million related to third quarter debt repayments are included in Restructuring and other charges in the accompanying consolidated statement of operations (offset by a $16 million gain on associated interest rate swaps as discussed in Note 14).
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 ventures that matured. Pre-tax early debt retirement costs of $46 million related to these debt repayments are included in Restructuring and other charges in the accompanying consolidated statement of operations (offset by a $21 million gain on associated interest rate swaps as discussed in Note 14).
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
NOTE 13 – DEBT
In March 2009, International Paper Investments (Luxembourg) S.a.r.l, a wholly-owned subsidiary of International Paper, borrowed $468 million of long-termAmounts related to early 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 31, 2009, the $468 million loan was repaid. Other debt activitiesextinguishment during the first quarter of 2011 and 2010 were as follows:
Three Months Ended March 31, | ||||||||
In millions | 2011 | 2010 | ||||||
Debt reductions (a) | $ | 129 | $ | 120 | ||||
Pre-tax early debt extinguishment costs (b) | 32 | 5 |
(a) | Reductions related to notes with interest rates ranging from 6.2% to 9.375% and original maturities from 2018 to 2025 and from 5.25% to 7.4% and original maturities from 2010 to 2027 for the three months ended March 31, 2011 and 2010, respectively. |
(b) | Amounts are included in Restructuring and Other Charges in the accompanying consolidated statements of operations. |
At March 31, 2009 included the repayment of approximately $366 million of notes with interest rates ranging from 4.25% to 5.0% that had matured.
At September 30, 20102011 and December 31, 2009,2010, International Paper classified $100 million and $450 million, respectively, of currentCurrent maturities of long-term debt as Long-term debt. International Paper has the intent and ability, as evidenced by its contractually committed credit facility, to renew or convert these obligations.
At September 30, 2010,March 31, 2011, the fair value of International Paper had $8.7Paper’s $8.5 billion of debt with a fair value ofwas approximately $9.9$9.5 billion. The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2010,March 31, 2011, the Company held long-term credit ratings of BBB (stable outlook) and Baa3 (stable outlook) by S&P and Moody’s, respectively.
NOTE 14 – DERIVATIVES AND HEDGING ACTIVITIES
International Paper periodically uses derivatives and other financial instruments to hedge exposures to interest rate, commodity and currency risks. International Paper does not hold or issue financial instruments for trading purposes. For hedges that meet the hedge accounting criteria, International Paper, at inception, formally designates and documents the instrument as a fair value hedge, a cash flow hedge or a net investment hedge of a specific underlying exposure, as well as the risk management objective and strategy for undertaking each hedge transaction. Derivatives are recorded in the consolidated balance sheet at fair value, determined using available market information or other appropriate valuation methodologies, in Other current assets, Deferred charges and other assets, Other accrued liabilities andor Other liabilities. The earnings impact resulting from changes in the fair value of derivative instruments is recorded in the same line item in the consolidated statement of operations as the underlying exposure being hedged or in Accumulated other comprehensive income (AOCI) for derivatives that qualify as cash flow hedges. Any ineffective portion of a financial instrument’s change in fair value is recognized currently in earnings together with changes in the fair value of any derivatives not designated as hedges.
Foreign exchange contracts are used by International Paper to offset the earnings impact relating to the variability in exchange rates on certain monetary assets and liabilities denominated in non-functional currencies and are not designated as hedges. Changes in the fair value of these instruments, recognized currently in earnings to offset the remeasurement of the related assets and liabilities, were a gain of $30 million for the nine months ended September 30, 2010 andtotaled a loss of approximately $50$2 million and a gain of approximately $2 million for the ninethree months ended September 30, 2009.March 31, 2011 and 2010, respectively. As of September 30, 2010March 31, 2011 and December 31, 2009,2010, outstanding undesignated foreign exchange contracts included the following:
Undesignated Volumes
In millions | September 30, 2010 | December 31, 2009 | ||||||
Sell / Buy | Sell Notional | Sell Notional | ||||||
U.S. dollar / European euro | 431 | 108 | ||||||
European euro / Great British pounds | 39 | 29 | ||||||
European euro / Polish zloty | 0 | 39 | ||||||
European euro/ U.S. dollar | 13 | 9 | ||||||
South Korean won / U.S. dollar | 8,076 | 3,629 |
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Undesignated Volumes
In millions | March 31, 2011 | December 31, 2010 | ||||||
Sell / Buy | Sell Notional | Sell Notional | ||||||
U.S. dollar / European euro | 0 | 109 | ||||||
Russian ruble / U.S. dollar | 1,024 | 0 | ||||||
Indian rupee / U.S. dollar | 4,813 | 0 | ||||||
European euro/ U.S. dollar | 4 | 85 | ||||||
South Korean won / U.S. dollar | 8,076 | 8,076 |
Interest rate swap agreements at March 31, 2010, of $1 billion floating-to-fixed notional and an offsetting $1 billion fixed-to-floating notional, did not qualify as hedges under the accounting guidance and matured in September 2010. Changes in the fair value of these instruments, recognized in earnings, totaled a gain of $7 million for the three months ended March 31, 2010.
Fair Value Hedges
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in earnings.
International Paper utilizes interest rate swaps as fair value hedges of the benchmark interest rates of fixed-rate debt. At September 30, 2010March 31, 2011 and December 31, 2009,2010, the outstanding notional amounts of interest rate swap agreements that qualify as fully effective fair value hedges were approximately $374 million and $274 million, and $1.1 billion, respectively.
DuringIn February 2011, the three months ended June 30, 2010, in connection with early debt extinguishment,Company entered into two fixed-to-floating interest rate swap hedgesswaps with a notional value of $2totaling $100 million were undesignated as effective fair value hedges.to hedge existing debt. The resulting gain was immaterial. Also, related to early debt extinguishment, deferred gains of $3 million related to previously terminated effective interest rate swaps were recognizedeffective when issued and mature in earnings. This gain is included in RestructuringJune 2014 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 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 January 2010, approximately $700 million fixed-to-floating interest rate swaps that were 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 March 31, 2010, a previously deferred gain of $1 million was recognized in earnings in connection with early debt retirements. This gain is included in Restructuring and other charges in the accompanying consolidated statement of operations.
In the third quarter of 2009, the Company entered into a fixed-to-floating interest rate swap agreement with a notional value of $100 million. The interest rate swap was effective August 2009 with an original maturity date in April 2015. The interest rate swap was designated as a fully effective fair value hedge of the benchmark interest rate. Subsequently, in January 2010, the interest rate swap agreement was terminated.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
During the three months ended June 30, 2009, the Company entered into a series of fixed-to-floating interest rate swap agreements with a notional amount of $500 million. In the third quarter of 2009, these interest rate swap agreements plus interest rate swap agreements that were previously issued with a notional of $20 million were terminated or undesignated as effective fair value hedges in connection with various early debt retirements resulting in a gain of approximately $9 million. In addition, a previously deferred gain of $17 million related to earlier swap terminations was recognized in earnings. These gains are included in Restructuring and other charges in the accompanying consolidated statement of operations.
Also in May 2009, in connection with various early debt retirements, unamortized deferred gains of $21 million related to earlier swap terminations were reclassified from Long-term debt and included in Restructuring and other charges in the accompanying consolidated statement of operations.
During the three months ended March 31, 2009, an interest rate swap agreement designated as a fair value hedge with a notional value of $100 million was terminated. The termination was not in connection with early retirement of debt. The resulting gain of $11 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 2016.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods in which the hedged transaction affects earnings. Financial instruments designated as cash flow hedges are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in the cash flows of the related underlying exposures. The fair value of the hedge instruments are reclassified out of AOCI to earnings if the hedge ceases to be highly effective or if the hedged transaction is no longer probable.
Interest Rate Risk
International Paper utilizes interest rate swaps as cash flow hedges of the benchmark interest rate of future interest payments. At September 30, 2010March 31, 2011 and December 31, 2009,2010, there were no outstanding interest rate swap agreements that qualified as cash flow hedges.
On September 30, 2009, the Company undesignated $1 billion of interest rate swaps that qualified as cash flow hedges and had a maturity date in September 2010 and entered into an offsetting $1 billion fixed-to-floating interest rate swap with a maturity date in September 2010 to minimize the earnings exposure from the undesignated swaps. These swaps resulted in a $22 million gain that was to be recognized in earnings for the nine months ended September 2010. There was no earnings impact for the nine months ended September 2009.
Also, during the three months ended September 30, 2009, in connection with various early debt retirements, unamortized deferred losses of approximately $10 million related to earlier swap terminations were reclassified from Accumulated other comprehensive loss and included in Restructuring and other charges in the accompanying consolidated statement of operations.
Commodity Risk
To minimize volatility in earnings due to large fluctuations in the price of commodities, International Paper utilizes swap contracts to manage risks associated with market fluctuations in energy prices. These contracts are designated as cash flow hedges of forecasted commodity purchases. At September 30, 2010,March 31, 2011, the hedged volumes of these energy contracts totaled 300,00084,000 barrels of fuel oil and 14 million MMBTU (Million British Thermal Units) of natural gas. These contracts had maturities of two years or less as of September 30, 2010. At December 31, 2009, the hedged volumes totaled 900,000 barrels of fuel oil and 2110 million MMBTUs of natural gas. Deferred losses totaling $17 million after taxes at September 30, 2010 are expected to be recognized through earnings within the next 12 months.(Million British
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Thermal Units) of natural gas. At December 31, 2010, the hedged volumes totaled 200,000 barrels of fuel oil and 12 million MMBTUs of natural gas. These contracts had maturities of two years or less as of March 31, 2011. Deferred losses totaling $12 million after taxes at March 31, 2011 are expected to be recognized through earnings within the next 12 months.
Foreign Currency Risk
Foreign exchange contracts are also used as cash flow hedges of certain forecasted transactions denominated in foreign currencies to manage volatility associated with these transactions and to protect International Paper from currency fluctuations between the contract date and ultimate settlement. At September 30, 2010,March 31, 2011, these contracts have maturities of three years or less. Deferred gains of $14$7 million after taxes at September 30, 2010March 31, 2011 are expected to be recognized through earnings within the next 12 months. As of September 30, 2010March 31, 2011 and December 31, 2009,2010, the following outstanding foreign exchange contracts were entered into as cash flow hedges of forecasted transactions:
Designated Volumes
In millions | September 30, 2010 | December 31, 2009 | ||||||
Sell / Buy | Sell Notional | Sell Notional | ||||||
European euro / Brazilian real | 5 | 11 | ||||||
U.S. dollar / Brazilian real | 95 | 265 | ||||||
Great British pounds / Brazilian real | 9 | 12 | ||||||
European euro / Polish zloty | 230 | 164 |
On June 30, 2010, foreign exchange contracts to sell 123 million U.S. dollars and buy Brazilian reals were undesignated as cash flow hedges of an International Paper wholly-owned subsidiary’s foreign exchange risk due to the forecasted transactions not being probable. In July 2010, the undesignated foreign exchange contracts were terminated resulting in cash received of $5 million. The change, a $3 million gain, in the fair value of the contracts since they were undesignated was recognized in earnings. The fair value of the contracts when they were undesignated, a $1 million gain after tax, was deferred in AOCI since the forecasted transactions remained reasonably possible. The deferred gain will be reclassified out of AOCI to earnings when the forecasted transactions are no longer reasonably possible or when the hedged transactions affect earnings. As of September 30, 2010, the forecasted transactions remained reasonably possible.
In millions | March 31, 2011 | December 31, 2010 | ||||||
Sell / Buy | Sell Notional | Sell Notional | ||||||
European euro / Brazilian real | 3 | 4 | ||||||
U.S. dollar / Brazilian real | 58 | 74 | ||||||
U.S. dollar / European euro | 22 | 0 | ||||||
British pounds / Brazilian real | 6 | 8 | ||||||
European euro / Polish zloty | 230 | 223 |
Fair Value Measurements
International Paper’s financial assets and liabilities that are recorded at fair value on a recurring basis consist of derivative contracts, including interest rate swaps, foreign currency forward contracts, and other financial instruments that are used to hedge exposures to interest rate, commodity and currency risks. In addition, a consolidated subsidiary of International Paper containshas an embedded derivative. For these financial instruments and the embedded derivative, fair value is determined at each balance sheet date using an income approach. Below is a description of the valuation calculation and the inputs used for each class of contract:
Interest Rate Contracts
Interest rate forward contracts are valued using swap curves obtained from an independent market data provider. The market value of each contract is the sum of the fair value of all future interest payments between the contract counterparties, discounted to present value. The fair value of the future interest payments is determined by comparing the contract rate to the derived forward interest rate and present valued using the appropriate derived interest rate curve.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Fuel Oil Contracts
Fuel oil forward contracts are valued using the average of two forward fuel oil curves as quoted by third parties. The fair value of each contract is determined by comparing the strike price to the forward price of the corresponding fuel oil contract and present valued using the appropriate interest rate curve.
Natural Gas Contracts
All naturalNatural gas contracts are traded over-the-counter and settled using the NYMEX last day settle price; therefore, forward contracts are valued using the closing prices of the NYMEX natural gas future contracts.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The fair value of each contract is determined by comparing the strike price to the closing price of the corresponding natural gas future contract and present valued using the appropriate interest rate curve.
Foreign Exchange Contracts
Foreign currency forward contracts are valued using foreign currency forward and interest rate curves obtained directly from an independent market data provider. The fair value of each contract is determined by comparing the contract rate to the forward rate. The fair value is present valued using the applicable interest rate from an independent market data provider.
Embedded Derivative
The embedded derivative isEmbedded derivatives are valued using a hypothetical interest rate derivative with identical terms. The hypothetical interest rate derivative contracts are fair valued as described above under Interest Rate Contracts.
Since the volume and level of activity of the markets that each of the above contracts are traded in has been normal, the fair value calculations have not been adjusted for inactive markets or disorderly transactions.
The guidance for fair value measurements and disclosures sets out a fair value hierarchy that groups fair value measurement inputs into three classifications: Level 1, Level 2 and Level 3. Level 1 inputs are quoted prices in an active market for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Transfers between levels are recognized at the end of the reporting period. All of International Paper’s derivative fair value measurements use Level 2 inputs. The following table provides a summary of the impact of our derivative instruments in the consolidated balance sheet:
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Fair Value Measurements
Level 2 – Significant Other Observable Inputs
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||
In millions | September 30, 2010 | December 31, 2009 | September 30, 2010 | December 31, 2009 | March 31, 2011 | December 31, 2010 | March 31, 2011 | December 31, 2010 | ||||||||||||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||||||||||||||||||
Interest rate contracts – fair value | $ | 20 | (a) | $ | 5 | (e) | $ | 0 | $ | 20 | (h) | $ | 9 | (a) | $ | 10 | (e) | $ | 0 | $ | 0 | |||||||||||
Fuel oil contracts – cash flow | 5 | (b) | 16 | (f) | 0 | 4 | (i) | 3 | (b) | 3 | (b) | 0 | 0 | |||||||||||||||||||
Natural gas contracts – cash flow | 0 | 0 | 43 | (g) | 38 | (j) | 0 | 0 | 24 | (g) | 32 | (j) | ||||||||||||||||||||
Foreign exchange contracts – cash flow | 23 | (c) | 32 | (b) | 1 | (h) | 0 | 13 | (c) | 18 | (f) | 2 | (h) | 1 | (h) | |||||||||||||||||
Total derivatives designated as hedging instruments | $ | 48 | $ | 53 | $ | 44 | $ | 62 | $ | 25 | $ | 31 | $ | 26 | $ | 33 | ||||||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 0 | $ | 1 | (b) | $ | 10 | (h) | $ | 29 | (k) | $ | 0 | $ | 0 | $ | 7 | (h) | $ | 8 | (h) | |||||||||||
Embedded derivatives | 10 | (d) | 6 | (d) | 0 | 0 | 7 | (d) | 8 | (d) | 0 | 0 | ||||||||||||||||||||
Foreign exchange contracts | 30 | (b) | 2 | (b) | 3 | (i) | 2 | (i) | 0 | 1 | (b) | 2 | (i) | 5 | (i) | |||||||||||||||||
Total derivatives not designated as hedging instruments | $ | 40 | $ | 9 | $ | 13 | $ | 31 | $ | 7 | $ | 9 | $ | 9 | $ | 13 | ||||||||||||||||
Total derivatives | $ | 88 | $ | 62 | $ | 57 | $ | 93 | $ | 32 | $ | 40 | $ | 35 | $ | 46 | ||||||||||||||||
(a) | Includes |
(b) | Included in Other current assets in the accompanying consolidated balance sheet. |
(c) | Includes |
(d) | Included in Deferred charges and other assets in the accompanying consolidated balance sheet. |
(e) | Includes $3 million recorded in Accounts and notes receivable, net, and $7 million recorded in Deferred charges and other assets in the accompanying consolidated balance sheet. |
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
(f) | Includes $13 million recorded in Other current assets and $5 million recorded in Deferred charges and other assets in the accompanying consolidated balance sheet. |
(g) | Includes |
(h) | Included in Other liabilities in the accompanying consolidated balance sheet. |
(i) | Included in Other accrued liabilities in the accompanying consolidated balance sheet. |
(j) | Includes |
The following table providesshows the change in AOCI, net of tax, related to derivative instruments for the ninethree months ended September 30:March 31:
Gain or (Loss) Recognized in OCI (Effective Portion) | Location of Gain or (Loss) Reclassified from OCI into Income (Effective Portion) | (Gain) or Loss Reclassified from OCI into Income (Effective Portion) | Gain or (Loss) Recognized in AOCI (Effective Portion) | Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) | (Gain) or Loss Reclassified from AOCI into Income (Effective Portion) | |||||||||||||||||||||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 0 | $ | (6 | ) | Interest expense, net | $ | 0 | $ | 21 | ||||||||||||||||||||||||||||
2011 | 2010 | Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) | 2011 | 2010 | ||||||||||||||||||||||||||||||||||
Fuel oil contracts | (2 | ) | 16 | Cost of products sold | (2 | ) | 5 | $ | 2 | (1 | ) | $ | (2 | ) | $ | (1 | ) | |||||||||||||||||||||
Natural gas contracts | (14 | ) | (18 | ) | Cost of products sold | 9 | 22 | (1 | ) | (14 | ) | Cost of products sold | 6 | 6 | ||||||||||||||||||||||||
Foreign exchange contracts | 28 | 39 | Cost of products sold | (29 | ) | (8 | ) | 3 | 19 | Cost of products sold | (7 | ) | (8 | ) | ||||||||||||||||||||||||
Total | $ | 12 | $ | 31 | $ | (22 | ) | $ | 40 | $ | 4 | $ | 4 | $ | (3 | ) | $ | (3 | ) | |||||||||||||||||||
Credit-Risk-Related Contingent Features
International Paper evaluates credit risk by monitoring its exposure with each counterparty to ensure that exposure stays within acceptable policy limits. Credit risk is also mitigated by contractual provisions with the majority of our banks. Most of the contracts include a credit support annex that requires the posting of collateral by the counterparty or International Paperthe Company based on each party’s rating and level of exposure. Based on the Company’s current credit rating, the collateral threshold is generally $10 million. If the lower of the Company’s credit rating by Moody’s or S&P were to drop below investment grade, the Company
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
would be required to post collateral for all of its derivatives in a net liability position, although no derivatives would terminate. The fair values of derivative instruments containing credit-risk-relatedcredit risk-related contingent features in a net liability position were $33$22 million and $32 million as of September 30, 2010March 31, 2011 and $65 million as of December 31, 2009.2010, respectively. The Company was not required to post any collateral as of September 30, 2010 and an immaterial amount of collateral as ofMarch 31, 2011 or December 31, 2009 due to exceeding the counterparty’s collateral threshold in the normal course of business.2010. In addition, existing derivative contracts (except foreign exchange contracts) provide for netting across most derivative positions in the event a counterparty defaults on a payment obligation. International Paper currently does not expect any of the counterparties to default on their obligations.
NOTE 15 – RETIREMENT PLANS
International Paper sponsors and maintains the Retirement Plan of International Paper Company (the “Pension Plan”), a tax-qualified defined benefit pension plansplan that provideprovides retirement benefits to substantially all U.S. salaried U.S. employees and hourly employees (receiving salaried benefits) hired prior to July 1, 2004, and substantially all other U.S. hourly and union employees who work at a participating business unit regardless of hire date. These employees generally are eligible to participate in the plansPension Plan upon completionattaining 21 years of age and completing one year of serviceeligibility service. U.S. salaried employees and attainment of age 21. Salariedhourly employees (receiving salaried benefits) hired after June 30, 2004, who are not eligible for these pension plans,the Pension Plan, but receive an additionala company contribution to their individual savings plans.plan accounts.
The Pension Plan provides defined pension plans provide defined benefits based on years of credited service and either final average earnings (salaried employees)employees and hourly employees receiving salaried benefits), hourly job rates or specified benefit rates (hourly and union employees). A detailed discussion of these plans is presented in Note 1615 to the financial statements included in International Paper’s 2009 Form2010 10-K.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Net periodic pension expense for our qualified and nonqualified U.S. defined benefit plans comprised the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Service cost | $ | 29 | $ | 30 | $ | 87 | $ | 90 | ||||||||
Interest cost | 136 | 134 | 406 | 402 | ||||||||||||
Expected return on plan assets | (158 | ) | (159 | ) | (473 | ) | (475 | ) | ||||||||
Actuarial loss | 44 | 40 | 131 | 120 | ||||||||||||
Amortization of prior service cost | 7 | 8 | 23 | 23 | ||||||||||||
Net periodic pension expense (a) | $ | 58 | $ | 53 | $ | 174 | $ | 160 | ||||||||
Three Months Ended March 31, | ||||||||
In millions | 2011 | 2010 | ||||||
Service cost | $ | 29 | $ | 29 | ||||
Interest cost | 135 | 136 | ||||||
Expected return on plan assets | (178 | ) | (158 | ) | ||||
Actuarial loss | 51 | 44 | ||||||
Amortization of prior service cost | 8 | 8 | ||||||
Net periodic pension expense | $ | 45 | $ | 59 | ||||
The Company’s funding policy for its qualified pension plansthe Pension Plan 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 plan, tax deductibility, the cash flows generated by the Company, and other factors. The Company periodicallyexpects that no cash funding contribution will be required for its domestic qualified plan in 2011. The Company continually reassesses the amount and timing of any discretionary contributions and made voluntary contributions totaling $1.15 billion during the three months ended September 30, 2010.could elect to make such a contribution in 2011. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $32$5 million for the ninethree months ended September 30, 2010.March 31, 2011.
NOTE 16 – STOCK-BASED COMPENSATION
International Paper has an Incentive Compensation Plan (ICP) which, upon the approval by the Company’s shareholders in May 2009, replaced the Company’s Long-Term Incentive Compensation Plan (LTICP). The ICP is administered by the Management Development and Compensation Committee of the Board of Directors (the Committee). The ICP authorizes the grants of restricted stock, restricted or deferred stock units, performance awards payable in cash or stock upon the attainment of specified performance goals, dividend equivalents, stock options, stock appreciation rights, other stock-based awards and cash-based awards in the discretion of the Committee, and cash-based
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
awards. The ICP is administered by the Management Development and Compensation Committee of the Board of Directors (the Committee).Committee. A detailed discussion of the ICP and LTICP, including the stock option program and executive continuity award program that provided for tandem grants of restricted stock and stock options, is presented in Note 1817 to the consolidated financial statements included in International Paper’s 2009 Form2010 10-K. As of September 30, 2010, 17.1March 31, 2011, 15.5 million shares were available for grant under the ICP.
Total stock-based compensation cost recognized in Selling and administrative expenses in the accompanying consolidated statement of operations for the ninethree months ended September 30,March 31, 2011 and 2010 and 2009 was $38$27 million and $72$7 million, respectively. The actual tax deduction realized for stock-based compensation costs related to non-qualified stock options was zero$0 for both of the nine monthsthree-month periods ended September 30, 2010March 31, 2011 and 2009.2010. The actual tax deduction realized for stock-based compensation costs related to restricted and performance shares was $75$86 million and $28$75 million for the nine monthsthree-month periods ended September 30,March 31, 2011 and 2010, and 2009, respectively. At September 30, 2010, $69March 31, 2011, $182 million, net of estimated forfeitures, of compensation cost related to unvested restricted performance shares, executive continuity awards and restricted stock attributable to future performanceservice had not yet been recognized. This amount will be recognized in expense over a weighted-average period of 1.61.7 years.
Performance-Based RestrictedPerformance Share Program:Plan
Under the Performance Share ProgramPlan (PSP), contingent awards of International Paper common stock are granted by the Committee to approximately 1,2001,000 employees. Awards are earned based on the Company’s performance achievement of defined performance rankings ofin relative return on investment (ROI) and total shareholder return (TSR) compared to peer groups. Awards are weighted 75% for ROI and 25% for TSR for all participants except for officers for whom awards are weighted 50% for ROI and 50% for TSR. The ROI component of the PSP awards is valued at the closing stock price on the day prior to the grant date. As the ROI component contains a performance condition, compensation expense, net
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
of estimated forfeitures, is recorded over the requisite service period based on the most probable number of awards expected to vest. The TSR component of the PSP awards is valued using a Monte Carlo simulation as the TSR component contains a market condition. The Monte Carlo simulation estimates the fair value of the TSR component based on the expected term of the award, the risk-free rate, expected dividends, and the expected volatility for the Company and its competitors. The expected term was estimated based on the vesting period of the awards, the risk-free rate was based on the yield on U.S. Treasury securities matching the vesting period, the expected dividends were assumed to be zero for all companies, and the volatility was based on the Company’s historical volatility over the expected term.
Beginning with the 2011 PSP, grants will be made in performance-based restricted stock units (PSU’s). The PSP will continue to be paid in unrestricted shares of Company stock.
PSP awards issued to certain members of senior management are liability awards, which are required to be remeasured at fair value at each balance sheet date. The valuation of these PSP liability awards is computed based on the same methodology as other PSP awards.
The following table sets forth the assumptions used to determine compensation cost for the market condition component of the PSP plan:
| ||||||||
|
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Expected volatility | 34.35% - 64.26% | 33.83% - 61.62% | ||||||
Risk-free interest rate | 0.23% - 1.16% | 0.28% - 1.49% |
The following summarizes the activity for PSP for the ninethree months ended September 30, 2010:March 31, 2011:
Nonvested Shares | Weighted Average Grant Date Fair Value | Shares/Units | Weighted Average Grant Date Fair Value | |||||||||||||
Outstanding at December 31, 2009 | 6,066,050 | $ | 24.28 | |||||||||||||
Outstanding at December 31, 2010 | 6,812,594 | $ | 23.31 | |||||||||||||
Granted | 3,842,626 | 28.93 | 4,314,376 | 28.04 | ||||||||||||
Shares Issued (a) | (2,791,387 | ) | 33.30 | (2,415,236 | ) | 33.02 | ||||||||||
Forfeited | (244,477 | ) | 21.62 | (63,734 | ) | 25.28 | ||||||||||
Outstanding at September 30, 2010 | 6,872,812 | $ | 23.31 | |||||||||||||
Outstanding at March 31, 2011 | 8,648,000 | $ | 22.94 | |||||||||||||
(a) | Includes |
Stock Option Program:Program
The Company discontinued its stock option program in 2004 for members of executive management, and in 2005 for all other eligible U.S. and non-U.S. employees.
The following summarizes the
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
A summary of option activity under the plan for the nine months ended September 30, 2010:as of March 31, 2011 is presented below:
Options | Weighted Average Exercise Price | Weighted Average Remaining Life (years) | Aggregate Intrinsic Value (millions) | |||||||||||||
Outstanding at December 31, 2009 | 22,217,057 | $ | 39.24 | |||||||||||||
Forfeited | (40,575 | ) | 34.25 | |||||||||||||
Expired | (2,295,279 | ) | 56.03 | |||||||||||||
Outstanding at September 30, 2010 | 19,881,203 | $ | 37.31 | 2.35 | $ | 0 | ||||||||||
Options | Weighted Average Exercise Price | Weighted Average Remaining Life (years) | Aggregate Intrinsic Value (millions) | |||||||||||||
Outstanding at December 31, 2010 | 18,245,253 | $ | 37.73 | |||||||||||||
Granted | 0 | 0 | ||||||||||||||
Exercised | 0 | 0 | ||||||||||||||
Forfeited | (11,050 | ) | 35.02 | |||||||||||||
Expired (net of corrections) | 5,292 | 35.40 | ||||||||||||||
Outstanding at March 31, 2011 | 18,239,495 | $ | 37.73 | 2.1 | $ | 0 | ||||||||||
All options were fully vested and exercisable as of September 30, 2010.March 31, 2011.
Executive Continuity and Restricted Stock Award Program:Program
The following summarizes the activity of the Executive Continuity and Restricted Stock Award Program for the ninethree months ended September 30, 2010:March 31, 2011:
Nonvested Shares | Weighted Average Grant Date Fair Value | Nonvested Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Outstanding at December 31, 2009 | 83,000 | $ | 33.93 | |||||||||||||
Outstanding at December 31, 2010 | 167,500 | $ | 26.95 | |||||||||||||
Granted | 168,000 | 25.65 | 16,500 | 26.36 | ||||||||||||
Shares Issued | (51,000 | ) | 31.96 | (23,000 | ) | 27.79 | ||||||||||
Forfeited | 0 | 0.00 | 0 | 0 | ||||||||||||
Outstanding at September 30, 2010 | 200,000 | $ | 27.48 | |||||||||||||
Outstanding at March 31, 2011 | 161,000 | $ | 26.77 | |||||||||||||
NOTE 17 – INDUSTRY SEGMENT INFORMATION
International Paper’s industry segments, Industrial Packaging, Printing Papers, Consumer Packaging Distribution and Forest Products,Distribution are consistent with the internal structure used to manage these businesses. Effective January 1, 2011, the Forest Products Business is no longer being reported by the Company as a separate industry segment due to the immateriality of the results of the remaining business on the Company’s consolidated financial statements. All segments are differentiated on a common product, common customer basis consistent with the business segmentation generally used in the Forest Products industry.
The Company also has a 50% equity interest in Ilim in Russia that is a separate reportable industry segment.
Sales by industry segment for the three months ended March 31, 2011 and 2010 were as follows:
Three Months Ended March 31, | ||||||||
In millions | 2011 | 2010 | ||||||
Industrial Packaging | $ | 2,555 | $ | 2,220 | ||||
Printing Papers | 1,530 | 1,405 | ||||||
Consumer Packaging | 905 | 805 | ||||||
Distribution | 1,640 | 1,580 | ||||||
Forest Products (1) | 0 | 10 | ||||||
Corporate and Inter-segment Sales | (243 | ) | (213 | ) | ||||
Net Sales | $ | 6,387 | $ | 5,807 | ||||
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Sales by industry segment for the three months and nine months ended September 30, 2010 and 2009 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Industrial Packaging | $ | 2,610 | $ | 2,230 | $ | 7,270 | $ | 6,680 | ||||||||
Printing Papers | 1,550 | 1,470 | 4,400 | 4,155 | ||||||||||||
Consumer Packaging | 870 | 790 | 2,520 | 2,275 | ||||||||||||
Distribution | 1,755 | 1,665 | 4,965 | 4,850 | ||||||||||||
Forest Products | 205 | 5 | 220 | 20 | ||||||||||||
Corporate and Intersegment Sales | (270 | ) | (241 | ) | (727 | ) | (591 | ) | ||||||||
Net Sales | $ | 6,720 | $ | 5,919 | $ | 18,648 | $ | 17,389 | ||||||||
Operating profit by industry segment for the three months ended March 31, 2011 and nine months ended September 30, 2010 and 2009 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | ||||||||||||||||||
Industrial Packaging | $ | 332 | $ | 410 | (b,c,d) | $ | 565 | (g) | $ | 1,152 | (b,c,d) | $ | 279 | (3) | $ | 41 | (3) | |||||||
Printing Papers | 278 | 363 | (b,e) | 247 | (h) | 954 | (b,e) | 201 | (4) | (78 | )(4) | |||||||||||||
Consumer Packaging | 71 | 144 | (b,f) | 147 | (f) | 370 | (b,f) | 100 | (5) | 28 | (5) | |||||||||||||
Distribution | 22 | 21 | 69 | 24 | 5 | (6) | 21 | |||||||||||||||||
Forest Products | 49 | 2 | 97 | 7 | 0 | 8 | ||||||||||||||||||
Operating Profit | 752 | 940 | 1,125 | 2,507 | 585 | 20 | ||||||||||||||||||
Interest expense, net | (152 | ) | (169 | ) | (458 | ) | (506 | ) | (136 | ) | (149 | ) | ||||||||||||
Noncontrolling interests/equity earnings adjustment (i) | 5 | 5 | 20 | 19 | ||||||||||||||||||||
Noncontrolling interest/equity earnings adjustment (7) | (2 | ) | 8 | |||||||||||||||||||||
Corporate items, net | (58 | ) | (46 | ) | (163 | ) | (141 | ) | (44 | ) | (51 | ) | ||||||||||||
Restructuring and other charges | 0 | (141 | ) | (34 | ) | (252 | ) | (35 | ) | (3 | ) | |||||||||||||
Earnings (loss) from continuing operations before income taxes and equity earnings | $ | 547 | $ | 589 | $ | 490 | $ | 1,627 | $ | 368 | $ | (175 | ) | |||||||||||
Equity earnings (loss), net of taxes – Ilim | $ | 22 | $ | 0 | $ | 24 | $ | (56 | ) | $ | 44 | $ | (3 | ) | ||||||||||
The Company has substantially completed its land sales and earnings for future land sales are expected to be insignificant. Beginning in 2011, Forest Products will no longer be reported as a separate industry segment. |
(2) | In addition to the operating profits shown above, International Paper recorded equity earnings, net of taxes, of |
Includes charges of |
(4) | Includes a charge of |
Includes charges of $1 million and |
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Includes |
Operating profits for industry segments include each segment’s percentage share of the profits of subsidiaries included in that segment that are less than wholly owned. The pre-tax noncontrolling interest and equity earnings for these subsidiaries are adjusted here to present consolidated earnings before income taxes and equity earnings. |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
EXECUTIVE SUMMARY
International Paper produced recordgenerated diluted earnings per share attributable to International Paper shareholders before special items of $0.91$0.74 in the thirdfirst quarter of 2011, exceeding 2010 fourth quarter earnings of $0.68 and 2010 first quarter earnings of $0.04. Diluted earnings (loss) per share attributable to International Paper shareholders were $0.78 in the first quarter of 2011, compared with $0.73 in the fourth quarter of 2010 (on an equivalent-share basis), up from $0.42and a loss of $(0.38) in the first quarter of 2010.
While the first quarter is historically a seasonally weak quarter for us, our earnings improved over the 2010 secondfourth quarter and $0.37in a recovering demand environment, even in the 2009 third quarter. Excludingface of weather effects on business activity in January and February. Operations were also strong across our global businesses. Our earnings from land sales, earnings per share would have been $0.83increase survived the headwinds of significant input cost increases that were in the 2010 third quarter, also a record. The strong earnings were driven by excellent results across allline with 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 ourexpectations. Our Ilim joint venture also contributedgenerated strong results during their 2010 fourth quarter, which we reported this quarter due to the earnings growth. Strongone-quarter reporting lag, and we received a $42 million dividend payment from Ilim during our first quarter. We generated strong free cash flow allowed usof $419 million, and announced our third dividend increase in the last twelve months to contribute nearly $1.2 billiona level higher than our dividend before the 2008/2009 recession. We also announced a strategic entry in the India paper and packaging market, which we expect to our pension plan and to repay approximately $200 millionclose in the second half of balance sheet debt.the year, pending regulatory approval.
Looking ahead to the fourthsecond quarter of 2011, we expect to continue to generate strong,seasonal demand improvement in many product lines, but seasonally lower, earningsparticularly for corrugated boxes as we enter the agricultural season in North America, and free cash flow.broad-based, but slight, pricing improvement. We expect paper and packaging volumesthese improved conditions to declinebe offset by a continuing escalation in line with typical seasonal demand declines, accompanied by stableinput prices, and higheran increase in maintenance outage costs for recycled fiber and certain chemicals. Maintenance outages are expected to increase byof approximately $30$74 million. Our North American distribution business, xpedx, is expected to experience a seasonal decline in earnings, whileWe expect the contribution from our Ilim joint venture is expected to be in line with thirdhigher, as their 2011 first 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 third2011 outpaces their 2010 fourth 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,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 Company common shareholders before special items to diluted earnings (loss) per share attributable to International Paper Company common shareholders.
Three Months Ended September 30, | Three Months Ended June 30, | |||||||||||
2010 | 2009 | 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 | ||||||
Three Months Ended March 31, | Three Months Ended December 31, | �� | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Earnings Per Share Before Special Items | $ | 0.74 | $ | 0.04 | $ | 0.68 | ||||||
Restructuring and other charges | (0.07 | ) | (0.31 | ) | (0.07 | ) | ||||||
Net (gains) losses on sales and impairments of businesses | (0.02 | ) | 0 | 0.03 | ||||||||
Income tax items | 0 | (0.11 | ) | 0.09 | ||||||||
Bargain purchase price adjustment recorded in equity earnings | 0.02 | 0 | 0 | |||||||||
Earnings Per Common Share from Continuing Operations | 0.67 | (0.38 | ) | 0.73 | ||||||||
Discontinued operations | 0.11 | 0 | 0 | |||||||||
Diluted Earnings (Loss) Per Common Share as Reported | $ | 0.78 | $ | (0.38 | ) | $ | 0.73 | |||||
RESULTS OF OPERATIONS
For the thirdfirst quarter of 2010,2011, International Paper Company reported net sales of $6.7$6.4 billion, compared with $5.9$5.8 billion in the thirdfirst quarter of 20092010 and $6.1$6.5 billion in the secondfourth quarter of 2010.
Net earnings attributable to International Paper Company totaled $397$342 million, or $0.91$0.78 per share, in the 2010 third2011 first quarter. This compared with earningsa loss of $371$162 million, or $0.87$0.38 per share, in the thirdfirst quarter of 20092010 and $93earnings of $316 million, or $0.21$0.73 per share, in the secondfourth quarter of 2010.
Earnings from continuing operations attributable to International Paper Company were $293 million in the first quarter of 2011 compared with a loss of $162 million in the first quarter of 2010 and earnings of $316 million in the fourth quarter of 2010. Compared with the thirdfirst quarter of 2009,2010, earnings in the 2010 third2011 first quarter benefited from higher average sales price realizations ($285268 million), the net impact of higher sales volumes and lower lack-of-orderincreased market-related downtime ($2914 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 ($92 million), higherlower mill outage costs ($223 million), lower corporate items and other costs ($5 million), and lower net interest expense ($9 million). These benefits were partially offset by higher raw material and freight costs ($13254 million), slightly higher corporate items and other costslower earnings from land sales ($45 million), and a higher income tax expense ($63 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$47 million higher in the 2010 third2011 first quarter than in the 2009 third2010 first quarter. There were noNet special items were a loss of $29 million in the 2010 third2011 first quarter, compared with a net special item gainloss of $214$178 million in the 2009 third2010 first quarter.
Compared with the secondfourth quarter of 2010, earnings benefited from higher average sales price realizations ($1164 million), higher sales volumeslower operating costs and a more favorable mix of products sold ($1762 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 ($3310 million), and decreased corporate items and other costs ($114 million). These benefits were partially offset by lower sales volumes ($29 million), higher operatingraw material and freight costs and a less favorable mix of products sold ($2135 million), and a higher income tax provision ($123 million). Net interest expense decreased ($210 million). Equity earnings, net of taxes for Ilim Holding, S.A. increased by $17$13 million versus the secondfourth quarter. There were noNet special items were
a loss of $29 million in the 2010 third2011 first quarter, compared with a net special items lossesitem gain of $88$20 million in the 2010 secondfourth 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 Company to its operating profit:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, | June 30, 2010 | March 31, | December 31, 2010 | |||||||||||||||||||||
In millions | 2010 | 2009 | 2011 | 2010 | ||||||||||||||||||||
Net Earnings (Loss) Attributable to International Paper Company | $ | 397 | $ | 371 | $ | 93 | ||||||||||||||||||
Earnings (Loss) From Continuing Operations Attributable to International Paper Company | $ | 293 | $ | (162 | ) | $ | 316 | |||||||||||||||||
Add back (deduct): | ||||||||||||||||||||||||
Income tax provision (benefit) | 170 | 212 | 25 | 123 | (24 | ) | 50 | |||||||||||||||||
Equity (earnings) loss, net of taxes | (22 | ) | 0 | (7 | ) | (53 | ) | 2 | (37 | ) | ||||||||||||||
Noncontrolling interests, net of taxes | 2 | 6 | 7 | 5 | 9 | 3 | ||||||||||||||||||
Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 547 | 589 | 118 | 368 | (175 | ) | 332 | |||||||||||||||||
Interest expense, net | 152 | 169 | 157 | 136 | 149 | 150 | ||||||||||||||||||
Noncontrolling interests / equity earnings included in operations | (5 | ) | (5 | ) | (7 | ) | 2 | (8 | ) | 5 | ||||||||||||||
Corporate items | 58 | 46 | 54 | 44 | 51 | 63 | ||||||||||||||||||
Special items: | ||||||||||||||||||||||||
Restructuring and other charges | 0 | 141 | 31 | 35 | 3 | 36 | ||||||||||||||||||
Net gains (losses) on sales and impairments of businesses | 0 | 0 | (25 | ) | ||||||||||||||||||||
$ | 752 | $ | 940 | $ | 353 | $ | 585 | $ | 20 | $ | 561 | |||||||||||||
Industry Segment Operating Profit | ||||||||||||||||||||||||
Industrial Packaging | $ | 332 | $ | 410 | $ | 192 | $ | 279 | $ | 41 | $ | 261 | ||||||||||||
Printing Papers | 278 | 363 | 47 | 201 | (78 | ) | 234 | |||||||||||||||||
Consumer Packaging | 71 | 144 | 48 | 100 | 28 | 60 | ||||||||||||||||||
Distribution | 22 | 21 | 26 | 5 | 21 | 9 | ||||||||||||||||||
Forest Products | 49 | 2 | 40 | |||||||||||||||||||||
Forest Products (1) | 0 | 8 | (3 | ) | ||||||||||||||||||||
Total Industry Segment Operating Profit (1) | $ | 752 | $ | 940 | $ | 353 | ||||||||||||||||||
Total Industry Segment Operating Profit (2) | $ | 585 | $ | 20 | $ | 561 | ||||||||||||||||||
(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 will no longer be reported as a separate industry segment. |
(2) | In addition to the operating profits shown above, International Paper recorded equity earnings, net of taxes, of |
Industry Segment Operating Profit
Industry segment operating profits of $752$585 million in the 2011 first quarter were higher than both the $20 million in the 2010 thirdfirst quarter were lower thanand the $940 million in the 2009 third quarter, but higher than the $353$561 million in the 2010 secondfourth quarter. Compared with the thirdfirst quarter of 2009,2010, earnings in the current quarter benefited from higher average sales price realizations ($408396 million), the net impact of higher sales volumes and decreased lack-of-orderhigher market-related downtime ($4220 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 ($134 million), higherand lower mill outage costs ($334 million), and. These benefits were partially offset by higher raw material and freight costs ($18980 million), lower gains from land sales ($8 million), and slightly higher corporate items and other costs ($2 million). ThereSpecial items were no special itemsa loss of $11 million in the 2011 first quarter, compared with a loss of $212 million in the 2010 third quarter compared to a gain of $497 million in the 2009 third quarter (primarily related to alternative fuel mixture credits).first quarter.
Compared with the 2010 secondfourth quarter, operating profits benefited from higher average sales price realizations ($1696 million), higher sales volumeslower operating costs and a more favorable mix of products sold ($2485 million), and 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 ($4914 million). These benefits were partially offset by lower sales volumes ($41 million) and higher operatingraw material and freight costs and a less favorable mix of products sold ($3148 million). ThereSpecial items were no special items in the 2010 third quarter compared to a loss of $113$11 million in the 2011 first quarter, compared with a special item loss of $19 million in the 2010 secondfourth quarter.
During the 2010 third2011 first quarter, International Paper took approximately 144,000225,000 tons of downtime, which included 29,000about 93,000 tons that were market related compared with approximately 715,000255,000 tons of downtime, including approximately 52,000 tons of market-related 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.2010 first quarter. During the 2010 secondfourth quarter, International Paper took approximately 214,000240,000 tons of downtime, of which essentially none wasincluded 86,000 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-monthfirst three months of 2011 and nine-month periods ended September 30, 2010 and 2009 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In thousands of short tons | 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | ||||||||||||||||||
Industrial Packaging | ||||||||||||||||||||||||
Corrugated Packaging | 1,928 | 1,856 | 5,693 | 5,531 | 1,810 | 1,809 | ||||||||||||||||||
Containerboard | 634 | 580 | 1,867 | 1,581 | 555 | 631 | ||||||||||||||||||
Recycling | 636 | 566 | 1,860 | 1,759 | 643 | 580 | ||||||||||||||||||
Saturated Kraft | 45 | 33 | 136 | 83 | 39 | 41 | ||||||||||||||||||
Bleached Kraft | 23 | 22 | 66 | 52 | 23 | 22 | ||||||||||||||||||
European Industrial Packaging | 251 | 252 | 768 | 790 | 273 | 258 | ||||||||||||||||||
Asian Box | 114 | 43 | 197 | 109 | 103 | 39 | ||||||||||||||||||
Asian Distribution | 87 | 157 | 270 | 318 | ||||||||||||||||||||
Industrial Packaging | 3,718 | 3,509 | 10,857 | 10,223 | 3,446 | 3,380 | ||||||||||||||||||
Printing Papers | ||||||||||||||||||||||||
U.S. Uncoated Papers | 684 | 753 | 2,051 | 2,148 | 662 | 700 | ||||||||||||||||||
European and Russian Uncoated Papers | 311 | 304 | 929 | 1,006 | 312 | 308 | ||||||||||||||||||
Brazilian Uncoated Papers | 262 | 282 | 792 | 696 | 273 | 248 | ||||||||||||||||||
Asian Uncoated Papers | 24 | 25 | 75 | 40 | ||||||||||||||||||||
Uncoated Papers | 1,281 | 1,364 | 3,847 | 3,890 | 1,247 | 1,256 | ||||||||||||||||||
Market Pulp (2) | 385 | 422 | 1,053 | 1,114 | ||||||||||||||||||||
Market Pulp (3) | 341 | 351 | ||||||||||||||||||||||
Consumer Packaging | ||||||||||||||||||||||||
U.S. Coated Paperboard | 364 | 324 | 1,057 | 932 | 364 | 339 | ||||||||||||||||||
European Coated Paperboard | 88 | 86 | 264 | 265 | 84 | 90 | ||||||||||||||||||
Asian Coated Paperboard | 213 | 221 | 651 | 628 | 222 | 221 | ||||||||||||||||||
Other Consumer Packaging | 45 | 42 | 129 | 130 | 45 | 40 | ||||||||||||||||||
Consumer Packaging | 710 | 673 | 2,101 | 1,955 | 715 | 690 | ||||||||||||||||||
(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 to potentially require KapStone to make an additional payment to International Paper in 2012. Based on the results through the first four years of the earnout period, KapStone concluded that the threshold would be attained and the full earnout payment would be due to International Paper in 2012. On January 3, 2011, International Paper signed an agreement with KapStone to allow KapStone to pay the Company on January 4, 2011, the discounted amount of $50 million before taxes ($30 million after taxes) that otherwise would have been owed in full under the agreement in 2012. This amount has been included in Discontinued operations in the accompanying consolidated statement of operations.
In the third quarter of 2006, the Company completed the sale of its Brazilian Coated Papers business and restated its financial statements to reflect this business as a discontinued operation. Included in the results for this business in 2005 and 2006 were local country tax contingency reserves to which the related statute of limitations has now expired. A $15 million tax benefit for the reversal of these reserves plus associated interest income of $6 million ($4 million after taxes) was recorded during the three months ended March 31, 2011 and is included in Discontinued operations in the accompanying consolidated statement of operations.
Income Taxes
The income tax provision was $170$123 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 second2011 first quarter. Excluding a benefit of $56$17 million relatingrelated to the tax effects of special items, the effective income tax rate for continuing operations was 31%33% for the quarter.
The income tax provision was $212$50 million for the 2009 third2010 fourth quarter. Excluding a net $40 million tax benefit related to cellulosic bio-fuel tax credits and a benefit of $10 million related to the tax effects of other special items, the effective income tax rate for continuing operations was 28% for the quarter.
An income tax benefit of $24 million was recorded for the 2010 first quarter. Excluding a $32 million expense to reduce deferred income tax assets related to postretirement prescription drug coverage (Medicare Part D reimbursement), a $14 million expense to reduce deferred income tax assets related to incentive compensation payments and a benefit of $142$83 million relatingrelated to the tax effects of special items, the effective income tax rate for continuing operations was 30% for the quarter.32%.
Interest Expense and Corporate Items
Net interest expense for the 2010 third2011 first quarter was $152$136 million compared with $157$150 million in the 2010 secondfourth quarter and $169$149 million in the 2009 third2010 first quarter. The lower net expense compared with the third quarter of 2009both periods is due to the repayment of $3.1 billion of debt in 2009.reduction.
Corporate items, net, of $58$44 million in the 2010 third2011 first quarter were higherlower than the $54$63 million of net expense in the 2010 secondfourth quarter and the $46$51 million of net expense in the 2009 third2010 first quarter. The increasedecrease compared to both the prior quarter and the prior year reflects higher supply chain initiative costs and higherlower pension costs, partially offset by the reversal of an environmental reserve.costs.
Special Items
Restructuring and Other Charges
2010:2011:
Restructuring and other charges during the three months ended September 30, 2010 were immaterial.
During the three months ended June 30, 2010,first quarter of 2011, restructuring and other charges totaling $144$45 million before taxes ($8828 million after taxes) were recorded, including a $111$32 million pre-tax charge ($6819 million after taxes) for closure costs related to the paper mill and associated operations in Franklin, Virginia (including $46 millionearly extinguishment of accelerated depreciation and $36 million of environmental closure costs),debt, a $2$7 million pre-tax charge ($14 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 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 $2charge of $3 million pre-tax charge ($1 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 three months ended March 31,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.
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
2009:2011:
During the three months ended June 30, 2009, based on a current strategic plan updatefirst quarter of projected future operating results of2011, 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 $48Company recorded an $8 million charge before(before and after taxes, was recordedtaxes) to further write down the long-lived assets of theits Inverurie, Scotland 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 thirdfirst quarter of 2010.2011.
Industrial Packaging
2010 | 2009 | 2011 | 2010 | |||||||||||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||||||||||||
Sales | $ | 2,610 | $ | 2,440 | $ | 7,270 | $ | 2,230 | $ | 2,270 | $ | 6,680 | $ | 2,555 | $ | 2,220 | $ | 2,570 | ||||||||||||||||||
Operating Profit | 332 | 192 | 565 | 410 | 382 | 1,152 | ||||||||||||||||||||||||||||||
Operating Profit (Loss) | 279 | 41 | 261 |
Industrial Packaging net sales for the thirdfirst quarter of 2011 were 1% lower than in the fourth quarter of 2010, were 7%but 15% higher than in the secondfirst quarter of 2010 and 17% higher than2010. Operating profits in the thirdfirst quarter of 2009. Operating profits2011 included $1a $7 million gain for a bargain purchase price adjustment on an acquisition by our joint venture in the second quarterTurkey and $2 million of 2010 ofadditional expenses related to the closure of the Etienne mill in France. Operating profits in the thirdfourth quarter of 20092010 included a gain of $221 million relating to alternative fuel mixture credits, $7net $10 million of costs associated with U.S. plant closures and $3 million of costs for Asian plant closures. Operating profits in the first quarter of 2010 included $3 million of closure costs for U.S. mills closed in 2009 and $2 million of expenses related to the closure of the Etienne mill and $18 million for costs associated with the integration of the CBPR acquisition.mill. Excluding these items, operating profits in the thirdfirst quarter of 2011 were about even with the fourth quarter of 2010, but were 72%significantly higher than in the secondfirst quarter of 2010, and 55% higher than in the third quarter of 2009.2010.
North American Industrial Packagingnet sales were $2.2 billion in the third quarter of 2010 compared with $2.1 billion in both the secondfirst quarter of 2011 and the fourth quarter of 2010 and $1.9 billion in the thirdfirst quarter of 2009.2010. Operating earnings were $320$256 million in the thirdfirst quarter of 20102011 compared with $172$251 million ($261 million excluding facility closure costs) in the secondfourth quarter of 2010 and $404$20 million ($20123 million excluding alternative fuel mixture credits and integration costs related to Weyerhaeuser Company’s Containerboard, Packaging and Recycling (CBPR) business)facility closure costs) in the thirdfirst quarter of 2009.2010.
Compared with the fourth quarter of 2010, sales volumes decreased in the first quarter of 2011 primarily due to seasonality and poor weather conditions at the beginning of the quarter which closed production facilities. Average sales price realizations were stable for domestic containerboard, but export prices declined due to additional supply in the market. Box sales price realizations were up slightly with the realization of price increases announced in 2010. Input costs increased for energy, starch, wax and recycled fiber and freight costs were also higher. Planned maintenance downtime costs were about $9 million higher with outages at three mills. Operating costs were favorable reflecting good mill performance and less depreciation expense as a result of lower production volumes. The business took about 93,000 tons of market-related downtime in the first quarter of 2011 compared with approximately 85,000 tons in the fourth quarter of 2010.
Sales volumes in the third2011 first quarter were lower than in the 2010 first quarter because the very high level of export shipments that occurred in the first 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.did not repeat. Average sales price realizations were significantly higher due toreflecting the full-quarter impactrealization of price increases effectivefor domestic and exported containerboard in the second quarter for containerboard and boxes.2010. Input costs decreased due to lowerfor wood and recycled fiber costs,energy were lower, but were partially offset by higher natural gascosts
for recycled fiber and chemical costs. Manufacturing operatingwax. Freight costs decreased due to good performance at the mills and increased efficiencies at the box plants, however overhead costs for incentive compensation were also higher. Planned maintenance downtime costs were $38about $40 million lowerless 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 thirdfirst quarter of 2010 due to stronger customer demand for boxes and for exported linerboard. The year-to-date cumulative impactthe timing 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 operatingmill outages. 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, thefavorable. The business took about 465,00015,000 tons of lack-of-orderlack-of-wood downtime including 98,000 tons associated within the idlingfirst quarter of a paper machine at the Valliant mill.2010 due to weather-related wood supply constraints.
Entering the fourthsecond quarter of 2010,2011, sales volumes are expected to be higher on increased demand for containerboard and seasonally decline due to fewer operating days in the box business.higher for boxes. Average sales price realizations should continueare expected to improvebe slightly reflecting a more favorable customer mix for containerboard and boxes.lower due to continued export sales price declines. Input costs are expected to increase slightly increase primarily due to higher costs for recycled fiber.energy and chemicals. Planned maintenance downtime costs should be about $23$51 million higher with major outages scheduled atslightly more than half of the Pine Hillplanned outage expenses for the year occurring in the second quarter.
On May 6, 2011, the Company announced plans to begin a temporary shutdown of its containerboard mill in Vicksburg, Mississippi, beginning May 8, 2011, in anticipation of flooding and Prattville mills.transportation disruption resulting from the rising Mississippi and Yazoo Rivers.
European Industrial Packagingnet sales were $235$280 million in both the third and second quartersfirst quarter of 2011 compared with $275 million in the fourth quarter of 2010 and $240$245 million in the thirdfirst quarter of 2009.2010. Operating earnings were $14$22 million ($17 million excluding a bargain purchase price adjustment in Turkey and facility closure costs for the Etienne mill in France) compared with $16 million in the thirdfourth quarter of 2010 compared with $18and $22 million ($1924 million excluding facility closure costs) in the secondfirst quarter of 2010 and $6 million ($13 million excluding facility closure costs) in the third quarter of 2009.2010.
Sales volumes in the thirdfirst quarter of 20102011 were lowerhigher than in the secondfourth 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 French industrial markets, butmarket and a weakerstrong fruit and vegetable season.season in Morocco. Average sales margins decreased due to higher board costs. Other input costs were about flat, and operating costs were favorable.
Compared with the first quarter of 2010, sales volumes in the first quarter of 2011 increased across all regions as demand for packaging improved in the industrial markets and the fruit and vegetable season in Morocco was strong. Average sales margins were lower as board costs rose more than box prices for kraft and recycled linerboard have increased from the record low levels of the 2009 third quarter.increased. 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.slightly unfavorable.
Looking ahead to the fourthsecond quarter of 2010,2011, sales volumes are expected to be higher withabout flat as the start ofseasonal decline in the winterMoroccan fruit and vegetable season in Spain, Morocco and Turkey and the continued strengthening of demandmarket is offset by increases in the industrial markets.other regions. Average sales prices for boxes should be stable, but average margins are expected to improveincrease with the realization of a box price increase announced in March as well as a favorable product mix. Freight costs for containerboard remain at or below third quarter levels.
should be higher due to rising oil costs.
Asian Industrial Packagingnet sales for the packaging operations were $165$95 million in the thirdfirst quarter of 20102011 compared with $85$100 million in the secondfourth quarter of 2010 and $100$25 million in the thirdfirst quarter of 2009.2010. Operating earnings for the packaging operations were about breakeven in both the first quarter of 2011 and the first quarter of 2010 and were a loss of $2$6 million (a loss of $3 million excluding facility closure costs) in the fourth quarter of 2010. Net sales and operating earnings include the results of SCA Packaging Asia since the acquisition in June 2010.
Net sales for the distribution operations were $65 million in the thirdfirst quarter of 2010 compared with a gain of about $12011 and $60 million in both the secondfourth and first quarters of 2010. Operating earnings were $1 million in the first quarter of 2011 and about breakeven in both the fourth and first quarters of 2010.
Compared with the fourth quarter of 2010, andearnings in the thirdfirst 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 operations2011 increased due to improved average sales margins and cost controls. Sales volumes were slightly lower although market demand 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 millionboxes remains positive. Earnings in the second quarter of 20102011 are expected to reflect stable sales volumes and a loss of about $1 million in the third quarter of 2009.pricing, however, margins are likely to be squeezed due to rising input costs.
Printing Papers
2010 | 2009 | 2011 | 2010 | |||||||||||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||||||||||||
Sales | $ | 1,550 | $ | 1,445 | $ | 4,400 | $ | 1,470 | $ | 1,360 | $ | 4,155 | $ | 1,530 | $ | 1,405 | $ | 1,540 | ||||||||||||||||||
Operating Profit | 278 | 47 | 247 | 363 | 279 | 954 | ||||||||||||||||||||||||||||||
Operating Profit (Loss) | 201 | (78 | ) | 234 |
Printing Papers net sales for the thirdfirst quarter of 2011 were 1% lower than in the fourth quarter of 2010, were 7%but 9% higher than in the secondfirst quarter of 2010. Operating profits included an $8 million charge in the first quarter of 2011 and a $2 million charge in the fourth quarter of 2010 for asset impairments associated with the Inverurie, Scotland mill and 5% higher thanoperating earnings in the third quarter of 2009. Operating profits included $111 million in the secondfirst quarter of 2010 forincluded $204 million of 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 thirdfirst quarter of 2011 were 11% lower than in the fourth quarter of 2010, were 76%but 66% higher than in the secondfirst quarter of 2010 and double the third quarter of 2009.2010.
North American Printing Papers net sales were $715$690 million in the thirdfirst quarter of 20102011 compared with $675 million in the secondfourth quarter of 2010 and $725$685 million in the thirdfirst quarter of 2009.2010. Operating earnings were $125$88 million in the thirdfirst quarter of 2011 compared with $92 million in the fourth quarter of 2010 compared withand a loss of $65$134 million (a gain of $46$70 million excluding facility closure costs) in the secondfirst quarter of 2010 and income of $254 million ($92 million excluding alternative fuel mixture credits and facility closure costs) in the third quarter of 2009.2010.
Compared with the secondfourth quarter of 2010, sales volumes in the thirdfirst quarter of 2010 increased2011 improved due to seasonally strongerhigher demand for uncoated freesheet paper partially reduced by the effects of adverse weather conditions in North America and higher export shipments.the first half of the quarter. 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 weredeclined 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.lower export prices. Input costs were higher for wood, purchased fiber, energy and chemicals. Freightchemicals, while freight costs were also higher.increased due to higher oil prices. Planned maintenance downtime costs were slightly higher$10 million lower with outages in the thirdfirst quarter of 2011 at the Eastover and Georgetown mills. Operating costs were unfavorable due to seasonally higher energy consumption and operating performance issues.
Sales volumes in the first quarter of 2011 were lower than in the first 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 2010primarily due to the closure of the Franklin mill.mill in the second quarter of 2010 which resulted in about 150,000 tons of reduced capacity per quarter. Average sales price realizations were significantly higher reflecting the realization of price increases for uncoated freesheet paper in 2010. Input costs increased for chemicals and energy, but were partially offset by lower wood and fiber costs. Freight costs also increased. Planned maintenance downtime costs were about $4 million higher. Operating costs were unfavorable.
Entering the fourthsecond quarter of 2010, domestic market conditions are expected to remain steady; however,2011, sales volumes are expected to be impacted by a seasonally weaker period. Average salesfor uncoated freesheet paper. Sales price realizations should be stable. Average margins areincreases have been announced for offset paper rolls and converting paper, with partial realization expected to decrease due to an increase in lower-margin export shipments. Operating costs and planned millthrough the quarter. Planned maintenance downtime costs should be about flat.at approximately the same level as in the first quarter. Input costs for woodchemicals and fuel are expected to decrease, but be largely offset by higher energy and chemical costs.
higher.
European Printing Papersnet sales were $325$360 million in the thirdfirst quarter of 2010 compared with $3202011, up from $345 million in the secondfourth quarter of 2010 and $300$315 million in the thirdfirst quarter of 2009.2010. Operating earnings were $58 million in the thirdfirst quarter of 20102011 were $49 million ($57 million excluding an asset impairment charge associated with the Inverurie, Scotland mill) compared with $55$36 million ($38 million excluding an asset impairment charge associated with the Inverurie, Scotland mill) in the secondfourth quarter of 2010 and $28$48 million in the thirdfirst quarter of 2009.2010.
SalesCompared with the fourth quarter of 2010, sales volumes in the first quarter of 2011 increased in Europe reflecting strong market demand for uncoated freesheet paper, but decreased in Russia due to the January holiday season. Average sales price realizations were higherhigher. Input costs increased for energy and wood, particularly in Russia. Planned maintenance downtime costs were about $16 million lower than in the thirdfourth quarter of 2010 when the Saillat mill had a scheduled outage. Operating costs were favorable due to strong performance at the European mills.
Sales volumes in the first quarter of 2011 were slightly higher than in the secondfirst quarter of 2010 reflecting increased sales of pulp in Russia, while demand for uncoated freesheet paper was lower in both Russia and Europe. Average sales price realizations increased due to the realization of price increases in Europe during 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.strengthened. Input costs for wood, energy, purchased fiber and chemicals were higher, and purchased pulp all increased slightly.operating costs increased.
Compared withEntering the 2009 third2011 second quarter, sales volumes are expected to remain steady at a strong level. Average sales price realizations should be higher due to the realization of previously announced price increases in both Europe and Russia. Input costs for wood and chemicals are expected to continue to increase, but energy costs should be stable. Planned maintenance downtime costs will be up approximately $9 million for a scheduled outage at the Svetogorsk mill.
Brazilian Printing Papers net sales were $285 million in the first quarter of 2011 compared with $315 million in the fourth quarter of 2010 and $225 million in the first quarter of 2010. Operating earnings were $48 million in the first quarter of 2011 compared with $63 million in the fourth quarter of 2010 and $11 million in the first quarter of 2010.
Sales volumes in the first quarter of 2011 were lower than in the fourth quarter of 2010 reflecting seasonally weaker demand for uncoated freesheet paper in the Brazilian domestic market and decreased pulp shipments, partially offset by increased sales to export markets. Average sales price realizations were essentially flat, but declined mostly due to an unfavorable product and customer mix in the Brazilian domestic market. Average sales margins were negatively impacted by an increased proportion of sales to lower-margin export markets. Input costs for wood, energy and purchased pulp were lower, but were mostly offset by higher costs for chemicals. Operating costs were lower than in the fourth quarter.
Compared with the first quarter of 2010, thirdsales volumes in the first quarter of 2011 increased, reflecting stronger market demand.demand in both Brazilian domestic and export markets. Average sales price realizations were significantly higher for sales to export markets while sales price realizations for sales to domestic markets and for pulp were about flat. Average sales margins improved slightly reflecting an increase in sales to higher-margin domestic markets. Input costs were higher, primarily for purchased pulp and energy. Operating costs were favorable. Operating earnings in the first quarter of 2010 included a charge of $15 million for uncollectable accounts receivable.
Entering the second quarter of 2011, sales volumes are expected to be slightly higher reflecting seasonally stronger domestic customer demand 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 decreased pulp sales and lower costs for chemicals.
In the 2010 fourth quarter, averageshipments to export markets. Average sales price realizations for uncoated freesheet papershould increase with the realization of price increases to Latin American export markets and average sales margins should reflect the favorable increase in sales to domestic markets. Input costs are expected to improve, but should be partially offset by significantly lower pulp sales prices.slightly higher and operating costs are also expected to increase. Planned maintenance downtime costs should be about $6 million higher due to an outage atoutages planned for 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 energyMogi Guacu and chemicals are expected to be higher. Operating costs should be seasonally higher.
Brazilian Printing Papersnet 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.
mills.
Asian Printing Papersnet sales were $20 million in the first quarter of 2011, $15 million in the fourth quarter of 2010 and $25 million in the thirdfirst quarter of 2010 compared with $15 million in both the second quarter of 2010 and the third quarter of 2009.2010. Operating earnings were about breakeven in all periods presented.
U.S. Market Pulpnet sales in the first quarter of 2011 were $210$175 million compared with $190 million in the third quarter of 2010 compared with $160 million in the secondfourth quarter of 2010 and $155 million in the thirdfirst quarter of 2009.2010. Operating earnings were $49$16 million in the thirdfirst quarter of 2010 compared with $182011, $43 million in the secondfourth quarter of 2010 and $45 million (aa loss of $18$3 million excluding alternative fuel mixture credits) in the thirdfirst quarter of 2009.2010.
Sales volumes were lower in the thirdfirst quarter of 2010 were higher than in2011 compared with the secondfourth quarter of 2010 reflecting strong market demand, particularly fora decrease in fluff pulp.pulp production availability due to planned maintenance outages. Average sales price realizations increasedimproved slightly with increases for fluff pulp but this benefit wasbeing partially offset by decreases for softwood andin hardwood pulp. Input costs decreased reflecting lowerincreased for 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,chemicals and freight costs were also higher. Planned maintenance downtime costs were about the same as$20 million higher than in the thirdfourth quarter of 2009.2010 due to an outage at the Georgetown mill in the first quarter. Operating costs were unfavorable, largely due to seasonally higher energy consumption.
Compared with the first quarter of 2010, sales volumes were about flat, but average sales margins improved, reflecting an increase in shipments of higher-margin fluff pulp. Average sales price realizations were significantly higher for softwood pulp and fluff pulp. Input costs for wood increased, but were partially offset by lower reflecting strong mill performance.costs for chemicals. Freight costs were higher. Planned maintenance downtime costs were about $8 million higher in the first quarter of 2011, while operating costs were about flat.
Looking ahead to the fourthsecond quarter of 2010, average2011, sales volumes are expected to improve as production levels recover after the first quarter maintenance outages. Average sales price realizations should be about flat, but average sales margins should improve slightly with an increase in fluff pulp shipments. Planned maintenance downtime costs 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 arebe $8 million lower with an outage scheduled infor the fourth quarter.Riegelwood mill. 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.remain at first-quarter levels.
Consumer Packaging
2010 | 2009 | 2011 | 2010 | |||||||||||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||||||||||||
Sales | $ | 870 | $ | 845 | $ | 2,520 | $ | 790 | $ | 770 | $ | 2,275 | $ | 905 | $ | 805 | $ | 880 | ||||||||||||||||||
Operating Profit | 71 | 48 | 147 | 144 | 114 | 370 | 100 | 28 | 60 |
Consumer Packaging net sales for the third quarter of 2010 were 3% higher than in the secondfourth quarter of 2010 and 10%12% higher than in the thirdfirst quarter of 2009.2010. Operating earnings included $1 million, $4 million and $3 million in the secondfirst quarter of 2011, fourth quarter of 2010 included $1 millionand first quarter of 2010, respectively, of costs associated withrelated to the reorganization of the Company’s 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.operations. Excluding these items, operating earnings in the thirdfirst quarter of 20102011 were 45%58% higher than in the secondfourth quarter of 2010 and 4%significantly higher than in the thirdfirst quarter of 2009.2010.
North American Consumer Packagingnet sales were $615$620 million in the thirdfirst quarter of 20102011 compared with $580$605 million in the secondfourth quarter of 2010 and $565$550 million in the thirdfirst quarter of 2009.2010. Operating earnings in the third quarter of 2010 were $51 million compared with $16$64 million ($1765 million excluding Shorewood reorganization costs) in the secondfirst quarter of 2010 and earnings of $1202011 compared with $34 million ($4438 million excluding alternative fuel mixture credits and Shorewood reorganization costs) in the thirdfourth quarter of 2009.2010 and a loss of $4 million (a loss of $1 million excluding Shorewood reorganization costs) in the first quarter of 2010.
Coated Paperboard sales volumes in the thirdfirst quarter of 2011 were higher than in the fourth quarter of 2010 increased comparedas market demand remains strong. Average sales price realizations improved reflecting the realization of January 1 contract price increases. Input costs for natural gas, polyethylene and starch were higher, but wood costs were slightly lower. Planned maintenance downtime costs were about $17 million lower than in the fourth quarter with no outages occurring in the first quarter of 2011. Operating costs decreased due to improved reliability at the mills.
Compared with the secondfirst quarter of 2010, reflecting continued strong market demand across all product lines.sales volumes in the first quarter of 2011 increased. In the first quarter of 2010, the business took 17,000 tons of combined lack-of-wood and market-related downtime compared with none in the first quarter of 2011. Average sales price realizations were significantly higher due toreflecting the full-quarter realization of sales price increases announced in June.during the second half of 2010. Input costs were about flat as higher costs for wood
decreased andchemicals were only partially offset by lower wood costs. Freight costs increased costs for energy and chemicals.slightly. Planned maintenance downtime costs were $19about $6 million lower with an outage at one mill in the third2010 first quarter with no mills taking outages compared with twonone in the second2011 first 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 operatingOperating 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 relateddue to the shutdown of the paperboard machine strong mill performance
at the Franklin mill at the end of 2009.
Shorewood salesall three mills in the thirdcurrent quarter and inefficiencies that impacted the first quarter of 2010 related to low wood availability at the Texarkana mill.
Shorewood revenues in the first quarter of 2011 were higherlower than in the secondfourth quarter of 2010, primarily reflecting a seasonal increasedecline in the home entertainment segment. Lower sales in the tobacco segment, were partially offset by increasesgrowth in the consumer products and displaytobacco segments. Average margins declined slightly reflectingMargins were lower pricesquarter-over-quarter in the Koreanhome entertainment segment driven by lower volumes. Margins were up in the consumer products and tobacco market and higher board costs.segments. Operating costs were unfavorable primarily due tofavorable and earnings were positively impacted by the start-upeffects of new equipment.the business reorganization efforts. Compared with the thirdfirst quarter of 2009, sales declined in all segments. Input2010, revenues were up on a comparable basis, driven by a stronger home entertainment segment. Average margins were off, driven by higher input costs increased, primarily for board. Operating costs wereboard and higher but were more than offset with favorable overhead cost savings.operating costs.
Foodservice sales volumes in the thirdfirst quarter of 2011 were lower than in the fourth quarter of 2010 were up slightlywith the seasonal market shift from the second quarter of 2010.cold cups to hot cups. Average sales margins decreased slightlyimproved due to a change in product mix. Average sales price realizations increased reflecting the impact of passing on higher raw material costs through mid-yearJanuary 1 contract price increases. Input costs, primarily for boardresins, increased, but operating costs were partially offset by lower resin costs.favorable. Compared with the third quarter of 2009, sales volumes in the thirdfirst quarter of 2010, improved.sales volumes increased in the first quarter of 2011. Average sales price realizationsmargins were higher butreflecting price increases realized in the timingsecond half of higher input2010 and a more favorable mix of products sold. Input costs increased for board and resins squeezed margins. Operating and overhead costs were favorable.resins.
Looking forward to the fourthsecond quarter of 2010,2011, coated paperboard sales volumes are expected to be seasonally lower.slightly higher. Average sales price realizations should increase as announced sales price increases for cup stock and plate grade board are realized. Average margins are expected to improve reflecting a previously announced pricemore favorable product mix. Costs are expected to increase for folding carton board effective in October is realized.chemicals and for freight. Planned maintenance downtime costs should be about $17 million higher with outages scheduled for the Riegelwood and Augusta mills. Shorewood’s revenues are expected to be about $16 million higher thanimprove 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 demandconsumer products and tobacco segments, but will be partially offset by a seasonal decrease in the home entertainment segment. InputAverage margins should improve across all segments and operating 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 shouldare expected to improve due to a more favorable product mix.seasonal increases in cold cup demand. Average sales price realizations should increase reflecting the pass-through of earlier input cost increases. Input costs for resinsmargins are expected to be lower in the fourth quarter,favorable. Input costs for board and resins will be higher, but operating costs should be partially offset by higher board costs. Freight costs are also expected to increase.lower.
European Consumer Packagingnet sales were $95 million in both the first quarter of 2011 and the fourth quarter of 2010 and were $85 million in the thirdfirst quarter of 20102010. Operating earnings were $27 million in the first quarter of 2011 compared with $80$20 million in both the second quarterfourth and first quarters 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 2009.2010.
Sales volumes in the thirdfirst quarter of 2011 were about the same as in the fourth quarter of 2010. Average sales price realizations were higher in Europe, but were down slightly in Russia. Input costs increased for wood, chemicals and energy, but operating costs were favorable. Compared with the first quarter of 2010, were slightly higher thansales volumes in the secondfirst quarter of 2010.2011 were lower. 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 slightlyalso higher. Average sales price realizations improved. Input costs for wood and energy increased.
Operating results in the 2010 fourthsecond quarter are expected toof 2011 will 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 inassociated with the planned maintenance downtime expenses.shutdown at the Svetogorsk mill.
Asian Consumer Packagingnet sales were $190 million in the first quarter of 2011, up from $180 million in the fourth quarter of 2010 and $170 million in the thirdfirst quarter of 20102010. Operating earnings were $9 million compared with $185$6 million in the secondfourth quarter of 2010 and $145$12 million in the thirdfirst 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.2010. 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 duringincreased with sale price increases being driven by higher input costs for pulp. Operating costs improved, reflecting excellent operational performance. Compared with the quarter. Pulp costsfirst quarter of 2010, operating earnings declined in the Chinese market are volatilefirst quarter of 2011 as higher average sales price realizations were more than offset by higher costs for pulp and if they increase, average margins will be negatively impacted.other input costs.
Distribution
2010 | 2009 | 2011 | 2010 | |||||||||||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||||||||||||
Sales | $ | 1,755 | $ | 1,630 | $ | 4,965 | $ | 1,665 | $ | 1,595 | $ | 4,850 | $ | 1,640 | $ | 1,580 | $ | 1,770 | ||||||||||||||||||
Operating Profit | 22 | 26 | 69 | 21 | 10 | 24 | ||||||||||||||||||||||||||||||
Operating Profit (Loss) | 5 | 21 | 9 |
Distribution’s2010 third quarterDistribution net sales were 8%7% lower than in the fourth quarter of 2010, but 4% higher than in the secondfirst quarter of 2010. Operating earnings in the first quarter of 2011 included $7 million of costs related to the reorganization of the Company’s xpedx operations. Excluding this item, operating earnings in the first quarter of 2011 were 33% higher than in the fourth quarter of 2010 and 5% higher than the third quarter of 2009. Operating earnings in the third quarter of 2010 were 15%43% lower than in the secondfirst quarter of 2010.
Distribution net sales were $1.6 billion in both the first quarter of 2011 and first quarter of 2010 and 5% higher than earningswere $1.8 billion in the thirdfourth quarter of 2009.2010. Operating earnings were $5 million ($12 million excluding xpedx reorganization costs) in the first quarter of 2011 compared with $9 million in the fourth quarter of 2010 and $21 million in the first quarter of 2010.
Sales of papers and graphic arts supplies and equipmentproducts in the thirdfirst quarter of 2011 totaled $1.0 billion compared with $1.1 billion in the fourth quarter of 2010 totaled $1.1 billion compared withand $1.0 billion in the secondfirst quarter of 2010 and $1.1 billion in the third quarter of 2009.2010. Trade margins as a percent of sales for printing papers declinedwere unchanged from the secondfourth quarter of 2010, but lower than the same quarter last year 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. Packagingsoftness in some print channels. First-quarter 2011 packaging sales were $400 million, the same as in both the third and second quartersfourth quarter of 2010, and $350but substantially above the $300 million in thirdthe first quarter of 2009.2010. Trade margins as a percent of sales for packaging products decreasedwere unchanged from both the secondfourth quarter of 2010, and thirdbut lower than in the first quarter of 20092010 reflecting changing product and service mix.increased sales of commodity products. Sales of facility supply products totaled $300 million in the third quarter of 2010, compared with $250 million in both the second2011 first quarter ofand the 2010 fourth quarter and $300 million in the third2010 first quarter.
Operating earnings before special items in the first quarter of 2009.
Operating profits2011 were $22$9 million lower than in the thirdfirst quarter of 2010 compared with $26 million2010. About one-half of the decline occurred as a result of increased operating expenses including freight and fuel delivery costs. The balance of the decline 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 toreflects a change in sales mix and higherroutine inventory valuation adjustment charges. Increased sales volume and improved margins were the primary causes of the earnings improvement compared with the 2009 third quarter.adjustment.
Looking ahead to the 2010 fourth2011 second quarter, operating results are expected to be seasonally lower.
Forest Products
2010 | 2009 | |||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 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.higher.
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, 2010March 31, 2011 includes the Company’s 50% share of Ilim’s operating results for the three-month period ended June 30,December 31, 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$44 million in the thirdfirst quarter of 2011 related to operations in the fourth quarter of 2010 compared with $31 million recorded in the fourth 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 firstthird quarter of 2010. Sales volumes in the secondfourth quarter of 2010 decreasedincreased from the prior quarter mainly due to lower market pulp and containerboard shipments.higher production volume. Market demand for pulp was stronggrew throughout most of the quarter due to the first-quarter Chilean earthquake, but demandfor
softwood pulp in China and for board products in the Chinese market decreased sharply in the second half of June. AverageRussian domestic market. This strong demand allowed for monthly sales price increases and higher average sales price realizations increased significantly for market pulp with more modest increases for linerboard in both domestic and export markets.quarter-over-quarter. Input costs for wood were unfavorable reflecting seasonal difficulties in harvesting and transportation. Operating costs were favorable primarily due to seasonally lower energy consumption.higher wood costs and diesel fuel cost increases. Additionally, in the secondfourth quarter of 2010, the after-tax foreign exchange impact was a lossgain of $6$2 million compared with a slight lossgain of $10 million recorded in the third quarter of 2010. The Company received a cash dividend from the joint venture of $42 million in March 2011.
In the first quarter of 2010.
In the third quarter of 2009,2010, the Company had recorded an equity earnings,loss, net of taxes, for Ilim of about breakeven$3 million related to operations in the secondfourth quarter of 2009. Compared to the secondfourth quarter of 2009, sales volumes in the secondfourth quarter of 2010 increased primarily fordue to higher Russian domestic shipments of market pulp, reflecting strong demand.pulp. Average sales price realizations were significantly higher for pulp and for containerboard in both domestic and export markets. A foreign exchange loss of $2 million on the remeasurement of U.S. dollar-denominated debt was recorded in the fourth quarter of 2009.
Looking forward to the results we expect to record in the Company’s second quarter of 2011 for Ilim’s first quarter, sales volumes are expected to increase as market pulp demand remains strong. Average sales price realizations are expected to be 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.higher, reflecting increased energy and railway costs. A highly favorable foreign exchange impact is expected.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations totaled $587$514 million for the first ninethree months of 2010, down from $3.6 billion2011, compared with $159 million for the comparable 2009 nine-month2010 three-month period. Earnings from continuing operations adjusted for non-cash charges were $1.3 billion$741 million for the first ninethree months of 20102011 compared to $2.9 billion$464 million for the first ninethree months of 2009.2010. Cash used for working capital components totaled $692$227 million for the first ninethree months of 2010, down from2011 compared to a sourceuse of $685$305 million for the comparable 2009 nine-month2010 three-month period.
The Company generated free cash flow of approximately $1.1 billion$419 million and $1.9 billion$39 million in the first ninethree months of 20102011 and 2009,2010, 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.debt, make investments and fund other activities. The following is a reconciliation of free cash flow to cash provided by operations:
Nine Months Ended September 30, | ||||||||
In millions | 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 | ||||
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cash provided by operations | ||||||||
Less: | $ | 514 | $ | 159 | ||||
Cash invested in capital projects | (181 | ) | (120 | ) | ||||
European A/R securitization program cessation | 209 | 0 | ||||||
Tax receivable collected related to pension contributions | (123 | ) | 0 | |||||
Free Cash Flow | $ | 419 | $ | 39 | ||||
Investments in capital projects totaled $457$181 million in the first ninethree months of 20102011 compared to $367$120 million in the first ninethree months of 2009.2010. Full-year 20102011 capital spending is currently expected to be approximately $800 million,$1.2 to $1.3 billion, or about 55%86% to 93% 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 ninethree months of 20102011 included a $328$103 million net reduction in debt versus a $2.4 billion$82 million net reduction in debt during the comparable 2009 nine-month2010 three-month period.
During the three months ended September 30, 2010,March 31, 2011, International Paper repaid approximately $111$129 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%6.2% to 9.375% and original maturities from 20152018 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.2025. Pre-tax early debt retirement costs of $18$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 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.terminated. These terminations were not in connection with early debt retirements. The resulting gains of $2 million gain waswere deferred and recorded in Long-term debt and isare 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.
2015.
At September 30, 2010March 31, 2011 and December 31, 2009,2010, International Paper classified $100 million and $450 million, respectively, of Currentcurrent 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 ninethree months of 2011, International Paper issued approximately 0.6 million shares of treasury stock for various incentive plans. Payments of restricted stock withholding taxes totaled $29 million. During the first three months of 2010, International Paper issued approximately 2.73.8 million shares of treasury stock net of restricted stock withholding, and 1.4 million shares of common stock for various incentive 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$82 million and $129$11 million for the first ninethree months of 20102011 and 2009,2010, respectively. Dividends were $0.275$0.1875 per share and $0.30$0.025 per share for the first ninethree months in 20102011 and 2009,2010, respectively. In March 2009,2011, 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 $0.025to $0.2625 per share to $0.125 per share, effective forin the 20102011 second quarter.
At September 30, 2010,March 31, 2011, contractual obligations for future payments of debt maturities by calendar year were as follows (in millions): $143 in 2010; $296follows: $308 million in 2011; $226$342 million in 2012; $136$140 million in 2013; $558$559 million in 2014; $784$786 million in 2015; $455 million in 2016; and $6,597$5,941 million thereafter.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2010,March 31, 2011, 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,March 31, 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 ($1.0 billion934 million at September 30, 2010)March 31, 2011) under a receivables securitization program. On January 13, 2010,12, 2011, the Company amended the receivables securitization program to among other things, extend the maturity date from January 20102011 to January 2011.2012. The amended agreement has a facility fee of 0.50%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 through 2010during 2011 through current cash balances and cash from operations, supplemented as required by its existing credit facilities. The Company planswill continue to rely upon 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.
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-trustantitrust 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$650 million to $450$700 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 CreditsCellulosic Bio-Fuel Tax Credit
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 taxablethe cellulosic bio-fuel tax credit of $1.01 per gallon of bio-fuel produced in 2009. On October 15, 2010, the IRS ruled that companies may qualify in the same year for the $.50$0.50 per gallon alternative fuel mixture credit and the $1.01 cellulosic bio-fuel producertax credit for 2009, but not for the same gallons.
The Company plans To the extent a taxpayer changes their position and uses the $1.01 credit, they must re-pay the refunds they received as alternative fuel mixture credits attributable to file an application with the IRSgallons converted to receive the required registration code to become a registered cellulosic bio-fuel producer.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 taxable earnings, and the credit may be carried forward against taxable earnings through 2015. In contrast, the $0.50 credit provided cash or taxis refundable in cash. 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 taxpayer. Consequently, theregistered cellulosic bio-fuel producer. The Company will evaluatereceived 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 credit. The Company will continue evaluating its position with regard to the previously claimed alternative fuel mixture credit gallons produced in 2009. This continued evaluation 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.
During 2009, the Company did produce 64 million gallons of black liquor that were not eligible for the alternative fuel mixture credit. The Company does intend to claim these gallons for the cellulosic bio-fuel credit by amending the Company’s 2009 tax return. The impact of this amendment, which has been included in the Company’s 2010 Income tax provision (benefit), is 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 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 20092010 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 ninethree months of 2010.2011.
Impairment of Long-Lived Assets and GoodwillSIGNIFICANT ACCOUNTING ESTIMATES
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$45 million for International Paper’s U.S. plans for the ninethree months ended September 30, 2010,March 31, 2011, or about $14 million moreless than the pension expense for the first ninethree months of 2009.2010. 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 $3$0.5 million and $5$1 million for the first ninethree months of 2011 and 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 expectedprojected rate of future salarycompensation 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’sbonds appropriate to provide the projected cashbenefit payments are then matchedof the plan. A bond portfolio is selected and a single rate is determined that equates the market value of the bonds purchased to the yield curve to developdiscounted value of the discount rate.plan’s benefit payments. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. At September 30, 2010,March 31, 2011, the market value of plan assets for International Paper’s U.S. plans totaled approximately $8$8.5 billion, consisting of approximately 45%47% equity securities, 36%32% fixed income securities, and 19%21% real estate and other assets. Plan assets did not include International Paper common stock.
The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flow generated by the Company, and other factors. The Company 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 electedcould elect to make voluntary contributions totaling $1.15 billion during the three months ended September 30, 2010.such a contribution in 2011. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $36 million in 2010.2011.
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 Quarterly Report on Form 10-Q, and in particular, statements found in Item 2,2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not historical in nature may constitute forward-looking statements.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. Such statements are not guarantees of future performance, and reflect the current views of International Paper with respect to future events, andwhich are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors thatwhich could cause actual results
to differ include among other things, the following: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; economictransportation costs, competition we face, cyclicality and changes in consumer preferences, in the industries in which we operate; changes in thedemand and pricing and demand for our products; the effects of competition in the United States(iii) global economic conditions and internationally; adverse business and economic conditions; downgrades in credit ratings;political changes, including but not limited to the impairment of financial institutions, with which we execute transactions;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; 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;(iv) unanticipated expenditures relatingrelated to the cost of compliance with existing and new environmental and other governmental regulations; results of legal proceedings;regulations and to actual or potential litigation; (v) whether we experience a material disruptionsdisruption at one of our manufacturing facilities; (vi) risks inherent in conducting business through a joint venture; and risks related(vii) other risk factors discussed in our 2010 10-K and in other filings made from time to operations conducted by joint ventures.time with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Information relating to quantitative and qualitative disclosures about market risk is shown on pagepages 46 and 47 of International Paper’s 20092010 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, 2009.2010.
ITEM 4. | CONTROLS AND PROCEDURES |
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, 2010March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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.
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.
ITEM 1. | LEGAL PROCEEDINGS |
A discussion of material developments in the Company’s litigation and settlement matters occurring in the period covered by this report is found in Note 11 to the Financial Statementsfinancial statements in this Form 10-Q.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Period | Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||||
August 1, 2010 – August 31, 2010 | 3,079 | $ | 21.01 | N/A | N/A | |||||||||||||||||||||||||||
February 1, 2011 – February 28, 2011 | 1,002,966 | $ | 29.21 | N/A | N/A | |||||||||||||||||||||||||||
March 1, 2011 – March 31, 2011 | 505 | 27.78 | N/A | N/A | ||||||||||||||||||||||||||||
1,003,471 | ||||||||||||||||||||||||||||||||
(a) | Shares acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs. |
No activity occurred in months during the quarter not presented above.
ITEM 6. | EXHIBITS |
| 10.1 | Amendment No. 1 to the Industrial Packaging Group Special Incentive Plan Effective February 7, 2011. | ||
10.2 | Share Purchase Agreement between International Paper Company and L.N. Bangur and related family members and affiliates. | |||
10.3 | Amendment No. 4, dated as of January 12, 2011, to the Second Amended and Restated Credit and Security Agreement dated as of March 13, 2008 (the “Agreement”) by and among Red Bird Receivables, LLC, as borrower, International Paper Company as services, the conduits and Liquidity Banks (as such terms are defined in the Agreement) from time to time parties thereto, and the agents’ parties thereto. Certain confidential portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. | |||
11 | Statement of Computation of Per Share Earnings. | |||
12 | Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. | |||
31.1 | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.2 | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
101.INS | XBRL Instance | |||
101.SCH | XBRL Taxonomy Extension Schema.* | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase.* | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase.* | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase.* | |||
101.PRE | XBRL |
*- Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(Registrant)
INTERNATIONAL PAPER COMPANY (Registrant) | ||||||
Date: | By | /S/ | ||||
Tim S. Nicholls Senior Vice President and Chief Financial Officer | ||||||
Date: | By | /S/ | ||||
Terri L. Herrington Vice President – Finance and Controller |
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