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, 2011March 31, 2012
¨ | 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, par value $1.00 per share, as of November 1, 2011April 30, 2012 was 437,070,722.437,318,509.
INDEX
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, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2012 | 2011 | |||||||||||||||||||
Net Sales | $ | 6,632 | $ | 6,720 | $ | 19,667 | $ | 18,648 | $ | 6,655 | $ | 6,387 | ||||||||||||
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Costs and Expenses | ||||||||||||||||||||||||
Cost of products sold | 4,793 | 4,758 | 14,298 | 13,712 | 4,984 | 4,625 | ||||||||||||||||||
Selling and administrative expenses | 477 | 504 | 1,446 | 1,397 | 513 | 485 | ||||||||||||||||||
Depreciation, amortization and cost of timber harvested | 335 | 362 | 1,011 | 1,096 | 362 | 340 | ||||||||||||||||||
Distribution expenses | 352 | 339 | 1,053 | 986 | 347 | 340 | ||||||||||||||||||
Taxes other than payroll and income taxes | 33 | 58 | 111 | 150 | 41 | 40 | ||||||||||||||||||
Restructuring and other charges | 49 | 0 | 84 | 359 | 34 | 45 | ||||||||||||||||||
Net (gains) losses on sales and impairments of businesses | 82 | 0 | 219 | 0 | (7 | ) | 8 | |||||||||||||||||
Interest expense, net | 130 | 152 | 403 | 458 | 168 | 136 | ||||||||||||||||||
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Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 381 | 547 | 1,042 | 490 | 213 | 368 | ||||||||||||||||||
Income tax provision (benefit) | (84 | ) | 170 | 157 | 171 | 70 | 123 | |||||||||||||||||
Equity earnings (losses), net of taxes | 50 | 22 | 160 | 27 | 44 | 65 | ||||||||||||||||||
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Earnings (Loss) From Continuing Operations | 515 | 399 | 1,045 | 346 | 187 | 310 | ||||||||||||||||||
Discontinued operations, net of taxes | 0 | 0 | 49 | 0 | 5 | 49 | ||||||||||||||||||
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Net Earnings (Loss) | 515 | 399 | 1,094 | 346 | 192 | 359 | ||||||||||||||||||
Less: Net earnings (loss) attributable to noncontrolling interests | (3 | ) | 2 | 10 | 18 | 4 | 5 | |||||||||||||||||
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Net Earnings (Loss) Attributable to International Paper Company | $ | 518 | $ | 397 | $ | 1,084 | $ | 328 | $ | 188 | $ | 354 | ||||||||||||
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Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders | ||||||||||||||||||||||||
Earnings (loss) from continuing operations | $ | 1.20 | $ | 0.92 | $ | 2.40 | $ | 0.76 | $ | 0.42 | $ | 0.71 | ||||||||||||
Discontinued operations, net of taxes | 0 | 0 | 0.11 | 0 | 0.01 | 0.11 | ||||||||||||||||||
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Net earnings (loss) | $ | 1.20 | $ | 0.92 | $ | 2.51 | $ | 0.76 | $ | 0.43 | $ | 0.82 | ||||||||||||
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Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders | ||||||||||||||||||||||||
Earnings (loss) from continuing operations | $ | 1.19 | $ | 0.91 | $ | 2.37 | $ | 0.76 | $ | 0.42 | $ | 0.70 | ||||||||||||
Discontinued operations, net of taxes | 0 | 0 | 0.11 | 0 | 0.01 | 0.11 | ||||||||||||||||||
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Net earnings (loss) | $ | 1.19 | $ | 0.91 | $ | 2.48 | $ | 0.76 | $ | 0.43 | $ | 0.81 | ||||||||||||
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Average Shares of Common Stock Outstanding – assuming dilution | 435.2 | 433.8 | 436.7 | 433.8 | 438.6 | 433.8 | ||||||||||||||||||
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Cash Dividends Per Common Share | $ | 0.2625 | $ | 0.125 | $ | 0.7125 | $ | 0.275 | $ | 0.2625 | $ | 0.1875 | ||||||||||||
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Amounts Attributable to International Paper Company Common Shareholders | ||||||||||||||||||||||||
Earnings (loss) from continuing operations | $ | 518 | $ | 397 | $ | 1,035 | $ | 328 | $ | 183 | $ | 305 | ||||||||||||
Discontinued operations, net of taxes | 0 | 0 | 49 | 0 | 5 | 49 | ||||||||||||||||||
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Net earnings (loss) | $ | 518 | $ | 397 | $ | 1,084 | $ | 328 | $ | 188 | $ | 354 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statement of Comprehensive Income
(Unaudited)
(In millions)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net Earnings (Loss) | $ | 192 | $ | 359 | ||||
Other Comprehensive Income, Net of Tax: | ||||||||
Amortization of pension and post-retirement prior service costs and net loss: | ||||||||
U.S. plans | 49 | 33 | ||||||
Pension and postretirement liability adjustments: | ||||||||
U.S. plans | 24 | 0 | ||||||
Change in cumulative foreign currency translation adjustment | 199 | 216 | ||||||
Net gains/losses on cash flow hedging derivatives: | ||||||||
Net gains (losses) arising during the period | 27 | 4 | ||||||
Reclassification adjustment for (gains) losses included in net earnings | 4 | (3 | ) | |||||
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Total Other Comprehensive Income, Net of Tax | 303 | 250 | ||||||
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Comprehensive Income (Loss) | 495 | 609 | ||||||
Net (earnings) loss attributable to noncontrolling interests | (4 | ) | (5 | ) | ||||
Other comprehensive (income) loss attributable to noncontrolling interests | 0 | (1 | ) | |||||
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Comprehensive Income (Loss) Attributable to International Paper Company | $ | 491 | $ | 603 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Balance Sheet
(In millions, except par value)
September 30, 2011 | December 31, 2010 | March 31, 2012 | December 31, 2011 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and temporary investments | $ | 2,722 | $ | 2,073 | $ | 1,288 | $ | 3,994 | ||||||||
Accounts and notes receivable, net | 3,830 | 3,039 | 3,802 | 3,486 | ||||||||||||
Inventories | 2,326 | 2,347 | 2,748 | 2,320 | ||||||||||||
Deferred income tax assets | 550 | 339 | 468 | 296 | ||||||||||||
Assets of businesses held for sale | 228 | 0 | 668 | 196 | ||||||||||||
Other current assets | 279 | 230 | 238 | 164 | ||||||||||||
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Total Current Assets | 9,935 | 8,028 | 9,212 | 10,456 | ||||||||||||
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Plants, Properties and Equipment, net | 11,401 | 12,002 | 15,159 | 11,817 | ||||||||||||
Forestlands | 674 | 747 | 681 | 660 | ||||||||||||
Investments | 706 | 1,092 | 869 | 657 | ||||||||||||
Financial Assets of Special Purpose Entities (Note 12) | 2,475 | 0 | ||||||||||||||
Goodwill | 2,243 | 2,308 | 4,218 | 2,346 | ||||||||||||
Deferred Charges and Other Assets | 875 | 1,191 | 1,235 | 1,082 | ||||||||||||
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Total Assets | $ | 25,834 | $ | 25,368 | $ | 33,849 | $ | 27,018 | ||||||||
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Liabilities and Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Notes payable and current maturities of long-term debt | $ | 644 | $ | 313 | $ | 738 | $ | 719 | ||||||||
Accounts payable | 2,494 | 2,556 | 2,777 | 2,500 | ||||||||||||
Accrued payroll and benefits | 452 | 471 | 421 | 467 | ||||||||||||
Liabilities of businesses held for sale | 48 | 0 | 52 | 43 | ||||||||||||
Other accrued liabilities | 1,109 | 1,163 | 1,045 | 1,009 | ||||||||||||
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Total Current Liabilities | 4,747 | 4,503 | 5,033 | 4,738 | ||||||||||||
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Long-Term Debt | 7,801 | 8,358 | 10,905 | 9,189 | ||||||||||||
Nonrecourse Financial Liabilities of Special Purpose Entities (Note 12) | 2,140 | 0 | ||||||||||||||
Deferred Income Taxes | 2,715 | 2,793 | 4,025 | 2,497 | ||||||||||||
Pension Benefit Obligation | 1,439 | 1,482 | 2,645 | 2,375 | ||||||||||||
Postretirement and Postemployment Benefit Obligation | 459 | 499 | 504 | 476 | ||||||||||||
Other Liabilities | 1,011 | 649 | 1,104 | 758 | ||||||||||||
Equity | ||||||||||||||||
Common stock, $1 par value, 2011 – 438.9 shares and 2010 – 438.9 shares | 439 | 439 | ||||||||||||||
Common stock, $1 par value, 2012 – 438.9 shares and 2011 – 438.9 shares | 439 | 439 | ||||||||||||||
Paid-in capital | 5,901 | 5,829 | 5,947 | 5,908 | ||||||||||||
Retained earnings | 3,188 | 2,416 | 3,423 | 3,355 | ||||||||||||
Accumulated other comprehensive loss | (2,077 | ) | (1,822 | ) | (2,702 | ) | (3,005 | ) | ||||||||
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7,451 | 6,862 | 7,107 | 6,697 | |||||||||||||
Less: Common stock held in treasury, at cost, 2011 – 1.8 shares and 2010 – 1.2 shares | 49 | 28 | ||||||||||||||
Less: Common stock held in treasury, at cost, 2012 – 1.6 shares and 2011 – 1.9 shares | 46 | 52 | ||||||||||||||
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Total Shareholders’ Equity | 7,402 | 6,834 | 7,061 | 6,645 | ||||||||||||
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Noncontrolling interests | 260 | 250 | 432 | 340 | ||||||||||||
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Total Equity | 7,662 | 7,084 | 7,493 | 6,985 | ||||||||||||
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Total Liabilities and Equity | $ | 25,834 | $ | 25,368 | $ | 33,849 | $ | 27,018 | ||||||||
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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, | |||||||||||||||
2011 | 2010 | 2012 | 2011 | |||||||||||||
Operating Activities | ||||||||||||||||
Net earnings | $ | 192 | $ | 359 | ||||||||||||
Discontinued operations, net of taxes and noncontrolling interests | (5 | ) | (49 | ) | ||||||||||||
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Earnings (loss) from continuing operations | $ | 1,045 | $ | 346 | 187 | 310 | ||||||||||
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Depreciation, amortization and cost of timber harvested | 1,011 | 1,096 | 362 | 340 | ||||||||||||
Cost of timberlands sold | 0 | 143 | ||||||||||||||
Deferred income tax provision (benefit), net | 35 | 397 | 81 | (2 | ) | |||||||||||
Restructuring and other charges | 84 | 359 | 34 | 45 | ||||||||||||
Pension plan contribution | 0 | (1,150 | ) | |||||||||||||
Net (gains) losses on sales and impairments of businesses | 219 | 0 | (7 | ) | 8 | |||||||||||
Equity (earnings) losses, net | (160 | ) | (27 | ) | (44 | ) | (65 | ) | ||||||||
Periodic pension expense, net | 146 | 174 | 83 | 45 | ||||||||||||
Other, net | 133 | (59 | ) | 3 | 60 | |||||||||||
Changes in current assets and liabilities | ||||||||||||||||
Accounts and notes receivable | (502 | ) | (555 | ) | 113 | (365 | ) | |||||||||
Inventories | (85 | ) | (181 | ) | 39 | 7 | ||||||||||
Accounts payable and accrued liabilities | 13 | 126 | (253 | ) | 14 | |||||||||||
Interest payable | 43 | 49 | 68 | 42 | ||||||||||||
Other | 56 | (131 | ) | (33 | ) | 75 | ||||||||||
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Cash Provided By (Used For) Operations – Continuing Operations | 633 | 514 | ||||||||||||||
Cash Provided By (Used For) Operations – Discontinued Operations | (52 | ) | 0 | |||||||||||||
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Cash Provided By (Used For) Operations | 2,038 | 587 | 581 | 514 | ||||||||||||
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Investment Activities | ||||||||||||||||
Invested in capital projects | (725 | ) | (457 | ) | (285 | ) | (181 | ) | ||||||||
Acquisitions, net of cash acquired | (3 | ) | (152 | ) | (3,734 | ) | 0 | |||||||||
Proceeds from divestitures | 50 | 0 | 5 | 50 | ||||||||||||
Escrow arrangement for acquisition | (139 | ) | 0 | 0 | (105 | ) | ||||||||||
Other | (76 | ) | (2 | ) | (91 | ) | (71 | ) | ||||||||
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Cash Provided By (Used For) Investment Activities – Continuing Operations | (4,105 | ) | (307 | ) | ||||||||||||
Cash Provided By (Used For) Investment Activities – Discontinued Operations | (49 | ) | 0 | |||||||||||||
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Cash Provided By (Used For) Investment Activities | (893 | ) | (611 | ) | (4,154 | ) | (307 | ) | ||||||||
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Financing Activities | ||||||||||||||||
Repurchases of common stock and payments of restricted stock tax withholding | (30 | ) | (26 | ) | (35 | ) | (29 | ) | ||||||||
Issuance of common stock | 21 | 0 | ||||||||||||||
Issuance of debt | 172 | 177 | 1,594 | 49 | ||||||||||||
Reduction of debt | (284 | ) | (505 | ) | (516 | ) | (152 | ) | ||||||||
Change in book overdrafts | (27 | ) | 80 | (75 | ) | (33 | ) | |||||||||
Dividends paid | (312 | ) | (120 | ) | (115 | ) | (82 | ) | ||||||||
Other | (9 | ) | (24 | ) | (26 | ) | (33 | ) | ||||||||
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Cash Provided By (Used For) Financing Activities | (490 | ) | (418 | ) | 848 | (280 | ) | |||||||||
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Effect of Exchange Rate Changes on Cash | (6 | ) | (21 | ) | 19 | 49 | ||||||||||
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Change in Cash and Temporary Investments | 649 | (463 | ) | (2,706 | ) | (24 | ) | |||||||||
Cash and Temporary Investments | ||||||||||||||||
Beginning of period | 2,073 | 1,892 | 3,994 | 2,073 | ||||||||||||
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End of period | $ | 2,722 | $ | 1,429 | $ | 1,288 | $ | 2,049 | ||||||||
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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, include all adjustments that are necessary for the fair presentation of International Paper Company’s (International Paper’s, the Company’s or our) 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, 20102011 which havehas 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. DuePrior to 2012, due to the complex organizational structure of Ilim’s operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reportsreported its share of Ilim’s operating results on a one-quarter lag basis. In 2012, the Company determined that the elimination of the one-quarter lag was preferable because the same period-end reporting date improves overall financial reporting as the impact of current events, economic conditions and global trends are consistently reflected in the financial statements. Beginning January 1, 2012, the Company has applied this change in accounting principle retrospectively to all prior financial periods presented.
The elimination of the one-quarter reporting lag for Ilim had the following impact:
Consolidated Statement of Operations
In millions | Three Months Ended March 31, 2011 | |||
Equity earnings (loss) | $ | 12 | ||
Earnings (loss) from continuing operations | 12 | |||
Net earnings (loss) attributable to International Paper Company | 12 | |||
Basic earnings (loss) per share from continuing operations | 0.03 | |||
Basic net earnings (loss) per share | 0.03 | |||
Diluted earnings (loss) per share from continuing operations | 0.03 | |||
Diluted net earnings (loss) per share | 0.03 |
Consolidated Balance Sheet
In millions | December 31, 2011 | |||
Investments | $ | 25 | ||
Retained earnings | 25 |
NOTE 2 – RECENT ACCOUNTING DEVELOPMENTS
Intangibles – Goodwill and Other
In September 2011, the FASBFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, “Intangibles – Goodwill and Other.” This guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances
leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes
otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt the provisions of this guidance in Januaryconjunction with its annual impairment testing in the fourth quarter of 2012.
Comprehensive Income
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which entities should present comprehensive income in their financial statements. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company will adoptadopted the provisions of this guidance beginning in January 2012.
Revenue Arrangements with Multiple Deliverablesusing the two statement approach in the first quarter of 2012 on a retrospective basis for all periods presented.
In October 2009,December 2011, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements,2011-12, “Presentation of Comprehensive Income,” which amendsdefers certain provision of ASU 2011-05 that require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the multiple-element arrangement guidance under ASC 605, “Revenue Recognition.”statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). This guidance amendsrequirement is indefinitely deferred by ASU 2011-12 and will be further deliberated by the criteria for separating consideration for products or services in multiple-deliverable arrangements. This guidance establishesFASB at a selling price hierarchy for determiningfuture date. The Company does not anticipate that the selling price of a deliverable, eliminates the residual method of allocation, and requires that arrangement consideration be allocated at the inceptionadoption 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 application of theremaining requirements of this guidance did notwill have a material effect on theits consolidated financial statements.
Fair Value Measurements
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 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 is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop converged guidance on how to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP; however, it expands existing disclosure requirements for fair value measurements and makes other amendments, many of which eliminate unnecessary wording differences between U.S. GAAP and IFRS. This ASU is effective for interim and annual periods beginning after December 15, 2011. The Company is currently evaluatingapplication of the effects thatrequirements of this guidance willdid not have a material effect on itsthe consolidated financial statements.
NOTE 3 – EQUITY
A summary of the changes in equity for the nine-monththree-month periods ended September 30,March 31, 2012 and 2011 and 2010 is provided below:
Nine Months Ended September 30, | ||||||||||||||||||||||||
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In millions, except per share amounts | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||
Balance, January 1 | $ | 6,834 | $ | 250 | $ | 7,084 | $ | 6,023 | $ | 232 | $ | 6,255 | ||||||||||||
Issuance of stock for various plans, net | 81 | 0 | 81 | 96 | 0 | 96 | ||||||||||||||||||
Repurchase of stock | (30 | ) | 0 | (30 | ) | (26 | ) | 0 | (26 | ) | ||||||||||||||
Common stock dividends ($0.7125 per share in 2011 and $0.275 per share in 2010) | (312 | ) | 0 | (312 | ) | (122 | ) | 0 | (122 | ) | ||||||||||||||
Dividends paid to noncontrolling interests by subsidiary | 0 | (4 | ) | (4 | ) | 0 | (4 | ) | (4 | ) | ||||||||||||||
Noncontrolling interests of acquired entities | 0 | 0 | 0 | 0 | 9 | 9 | ||||||||||||||||||
Acquisition of noncontrolling interests | 0 | 0 | 0 | (12 | ) | (7 | ) | (19 | ) | |||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||
Net earnings (loss) | 1,084 | 10 | 1,094 | 328 | 18 | 346 | ||||||||||||||||||
Amortization of pension and post-retirement prior service costs and net loss: | ||||||||||||||||||||||||
U.S. plans | 104 | 0 | 104 | 85 | 0 | 85 | ||||||||||||||||||
Non-U.S. plans | 4 | 0 | 4 | (3 | ) | 0 | (3 | ) | ||||||||||||||||
Change in cumulative foreign currency translation adjustment | (315 | ) | 4 | (311 | ) | 29 | 2 | 31 | ||||||||||||||||
Net gains/losses on cash flow hedging derivatives: | ||||||||||||||||||||||||
Net gains (losses) arising during the period | (49 | ) | 0 | (49 | ) | 12 | 0 | 12 | ||||||||||||||||
Less: Reclassification adjustment for (gains) losses included in net earnings (loss) | 1 | 0 | 1 | (22 | ) | 0 | (22 | ) | ||||||||||||||||
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| |||||||||||||||||||||
Total comprehensive income (loss) | 843 | 449 | ||||||||||||||||||||||
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Balance, September 30 | $ | 7,402 | $ | 260 | $ | 7,662 | $ | 6,388 | $ | 250 | $ | 6,638 | ||||||||||||
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Three Months Ended March 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
In millions, except per share amounts | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||
Balance, January 1 | $ | 6,645 | $ | 340 | $ | 6,985 | $ | 6,875 | $ | 250 | $ | 7,125 | ||||||||||||
Issuance of stock for various plans, net | 80 | 0 | 80 | 45 | 0 | 45 | ||||||||||||||||||
Repurchase of stock | (35 | ) | 0 | (35 | ) | (29 | ) | 0 | (29 | ) | ||||||||||||||
Common stock dividends ($0.2625 per share in 2012 and $0.1875 per share in 2011) | (120 | ) | 0 | (120 | ) | (83 | ) | 0 | (83 | ) | ||||||||||||||
Dividends paid to noncontrolling interests by subsidiary | 0 | (2 | ) | (2 | ) | 0 | (1 | ) | (1 | ) | ||||||||||||||
Noncontrolling interests of acquired entities | 0 | 92 | 92 | 0 | 0 | 0 | ||||||||||||||||||
Acquisition of noncontrolling interests | 0 | (2 | ) | (2 | ) | 0 | 0 | 0 | ||||||||||||||||
Comprehensive income (loss) | 491 | 4 | 495 | 603 | 6 | 609 | ||||||||||||||||||
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| |||||||||||||
Balance, March 31 | $ | 7,061 | $ | 432 | $ | 7,493 | $ | 7,411 | $ | 255 | $ | 7,666 | ||||||||||||
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NOTE 4 – EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS
Basic earnings per common share is computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings per common share is computed assuming that all potentially dilutive securities, including “in-the-money” stock options, were converted into common shares at the beginning of each period.shares. A reconciliation of the amounts included in the computation of basic earnings (loss) per common share, and diluted earnings (loss) per common share is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions, except per share amounts | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Earnings (loss) from continuing operations | $ | 518 | $ | 397 | $ | 1,035 | $ | 328 | $ | 183 | $ | 305 | ||||||||||||
Effect of dilutive securities (a) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
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| |||||||||||||||||||
Earnings (loss) from continuing operations – assuming dilution | $ | 518 | $ | 397 | $ | 1,035 | $ | 328 | $ | 183 | $ | 305 | ||||||||||||
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| |||||||||||||||||||
Average common shares outstanding | 432.3 | 430.1 | 432.2 | 429.5 | 434.1 | 430.2 | ||||||||||||||||||
Effect of dilutive securities (a) | ||||||||||||||||||||||||
Restricted stock performance share plan | 2.9 | 3.7 | 4.5 | 4.3 | 4.5 | 3.6 | ||||||||||||||||||
Stock options (b) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
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| |||||||||||||||||||
Average common shares outstanding – assuming dilution | 435.2 | 433.8 | 436.7 | 433.8 | 438.6 | 433.8 | ||||||||||||||||||
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| |||||||||||||||||||
Basic earnings (loss) from continuing operations per common share | $ | 1.20 | $ | 0.92 | $ | 2.40 | $ | 0.76 | $ | 0.42 | $ | 0.71 | ||||||||||||
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| |||||||||||||||||||
Diluted earnings (loss) from continuing operations per common share | $ | 1.19 | $ | 0.91 | $ | 2.37 | $ | 0.76 | $ | 0.42 | $ | 0.70 | ||||||||||||
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(a) | Securities are not included in the table in periods when antidilutive. |
(b) | Options to purchase |
NOTE 5 – RESTRUCTURING CHARGES AND OTHER ITEMS
Restructuring and Other Charges
2011:2012:During the three months ended September 30, 2011,March 31, 2012, restructuring and other charges totaling $49$34 million before taxes ($3223 million after taxes) were recorded. Details of these charges were as follows:
Three Months Ended September 30, 2011 | ||||||||
In millions | Before-Tax Charges | After-Tax Charges | ||||||
xpedx restructuring | $ | 18 | $ | 13 | ||||
APPM acquisition | 16 | 10 | ||||||
Temple-Inland merger agreement | 8 | 5 | ||||||
Shorewood | 6 | 4 | ||||||
Other | 1 | 0 | ||||||
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| |||||
Total | $ | 49 | $ | 32 | ||||
|
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|
|
Three Months Ended March 31, 2012 | ||||||||
In millions | Before-Tax Charges | After-Tax Charges | ||||||
Early debt extinguishment costs | $ | 16 | $ | 10 | ||||
xpedx restructuring | 19 | 14 | ||||||
Other | (1 | ) | (1 | ) | ||||
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| |||||
Total | $ | 34 | $ | 23 | ||||
|
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|
During the three months ended June 30, 2011, restructuring and other charges totaling a gain of $10 million before taxes (a gain of $7 million after taxes) were recorded. Details of these charges were as follows:
Three Months Ended June 30, 2011 | ||||||||
In millions | Before-Tax Charges | After-Tax Charges | ||||||
xpedx restructuring | $ | 10 | $ | 6 | ||||
Franklin, Virginia mill closure costs | (21 | ) | (13 | ) | ||||
Other | 1 | 0 | ||||||
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| |||||
Total | $ | (10 | ) | $ | (7 | ) | ||
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The 2011 second-quarter change in estimate of closure costs related to the Franklin, Virginia mill is the result of the Company’s decision to repurpose a portion of the mill to produce fluff pulp.
Additionally, a $5 million after-tax charge was recorded for tax adjustments related to state legislative changes and audit settlements.
2011:During the three months ended March 31, 2011, restructuring and other charges totaling $45 million before taxes ($28 million after taxes) were recorded. Details of these charges were as follows:
Three Months Ended March 31, 2011 | Three Months Ended March 31, 2011 | |||||||||||||||
In millions | Before-Tax Charges | After-Tax Charges | Before-Tax Charges | After-Tax Charges | ||||||||||||
Early debt extinguishment costs | $ | 32 | $ | 19 | $ | 32 | $ | 19 | ||||||||
xpedx restructuring | 7 | 4 | 7 | 4 | ||||||||||||
S&A reduction initiative | 3 | 2 | ||||||||||||||
Other | 3 | 3 | 6 | 5 | ||||||||||||
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| |||||||||||||
Total | $ | 45 | $ | 28 | $ | 45 | $ | 28 | ||||||||
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NOTE 6 – ACQUISITIONS AND JOINT VENTURES
Acquisitions
2012: On February 13, 2012, upon regulatory approval, International Paper completed the acquisition of Temple-Inland Inc. (Temple-Inland). International Paper acquired all of the outstanding common stock of Temple-Inland for $32.00 per share in cash and assumed approximately $700 million in Temple-Inland’s debt. As a condition to allowing the transaction to proceed, the Company entered into an agreement on a Proposed Final Judgment with the Antitrust Division of the U.S. Department of Justice (DOJ) that requires us to divest three containerboard mills, with approximately 970,000 tons of aggregate containerboard capacity, within four months of closing (with the possibility of two 30-day extensions). We are marketing for sale the Company’s containerboard mills located in Oxnard (Hueneme), California; Ontario, California; and New Johnsonville, Tennessee, as described further in Note 7.
The following summarizes the preliminary allocation of the purchase price to the fair value of assets and liabilities acquired as of February 13, 2012.
In millions | ||||
Accounts and notes receivable | $ | 467 | ||
Inventory | 528 | |||
Deferred income tax assets – current | 179 | |||
Other current assets | 57 | |||
Plants, properties and equipment | 3,705 | |||
Financial assets of special purpose entities | 2,475 | |||
Goodwill | 1,856 | |||
Deferred charges and other assets | 261 | |||
|
| |||
Total assets acquired | 9,528 | |||
|
| |||
Notes payable and current maturities of long-term debt | 130 | |||
Accounts payable and accrued liabilities | 589 | |||
Long-term debt | 527 | |||
Nonrecourse financial liabilities of special purpose entities | 2,140 | |||
Deferred income tax liability | 1,498 | |||
Pension benefit obligation | 338 | |||
Postretirement and postemployment benefit obligation | 99 | |||
Other liabilities | 381 | |||
|
| |||
Total liabilities assumed | 5,702 | |||
|
| |||
Noncontrolling interest | 92 | |||
|
| |||
Net assets acquired | $ | 3,734 | ||
|
|
Due to the timing of the completion of the acquisition, certain assumptions and estimates were used in determining the preliminary purchase price allocation disclosed above. Those assumptions and estimates primarily relate to the amounts allocated to Inventory, Plants, properties and equipment, current and deferred taxes (which are reported in different captions based on the nature of the account), contingent liabilities (which are reported in Accounts payable and accrued liabilities or Other liabilities) and amounts related to special purpose entities as work is still ongoing to determine the fair value of those assets and liabilities at the acquisition date. Also, no amounts have been allocated to identifiable intangible assets (which are reported in Deferred charges and other assets) as that work is ongoing as well. Therefore, the amounts disclosed above may change materially as the purchase price allocation is refined. The amounts allocated to Pension, Postretirement and postemployment benefit obligations disclosed above is based on an actuarial remeasurement of those plans as of the acquisition date and are not expected to change materially. The purchase price allocation is expected to be finalized in the fourth quarter of 2012.
In connection with the purchase price allocation, inventories were written up by approximately $20 million before taxes ($12 million after taxes) to their estimated fair value. As the related inventories were sold in the 2012 first quarter, this amount was expensed in Cost of products sold for the quarter.
Additionally, Selling and administrative expenses for the 2012 first quarter included $43 million in charges before taxes ($33 million after taxes) for integration costs associated with the acquisition.
The following unaudited pro forma information for the three months ended March 31, 2012 and 2011 represents the results of operations of International Paper as if the Temple-Inland acquisition had occurred January 1, 2011. This information does not purport to represent International Paper’s actual results of operations if the transaction described above would have occurred on January 1, 2011, nor is it necessarily indicative of future results.
In millions, except per share amounts Net sales Earnings (loss) from continuing operations (1) Net earnings (loss) (1) Diluted earnings (loss) from continuing operations per common share (1) Diluted net earnings (loss) per common share (1) Three Months Ended
March 31, 2012 2011 $ 6,947 $ 7,369 169 225 170 270 0.38 0.52 0.39 0.62
(1) | Attributable to International Paper Company common shareholders. |
2011:On October 14, 2011, International Paper completed the acquisition of a 75% interest in Andhra Pradesh Paper Mills Limited (APPM). The Company purchased 53.5% of APPM for a purchase price of $226 million in cash plus assumed debt from private investors. These sellers also entered into a covenant not to compete for which they received a cash payment of $58 million. The Company also purchased a 21.5% stake of APPM in a public tender offer completed on October 8, 2011 for approximately $105 million in cash.
In November 2011, International Paper appealed a direction from the Securities and Exchange Board of India (SEBI) that International Paper pay to the tendering shareholders the same non-compete payment that was paid to the previous controlling shareholders. The appeal is still pending, and International Paper has deposited approximately $25 million into an escrow account to fund the additional non-compete payment in the event SEBI’s direction is upheld. The appeal has been delayed on several occasions and the hearing on the appeal has been extended indefinitely pending the appointment of a presiding officer on the Indian Securities Appellate Tribunal.
The following table summarizes the preliminary allocation of the purchase price to the fair value of assets and liabilities acquired as of October 14, 2011.
In millions | ||||
Cash and temporary investments | $ | 3 | ||
Accounts and notes receivable, net | 7 | |||
Inventory | 43 | |||
Other current assets | 13 | |||
Plants, properties and equipment | 352 | |||
Goodwill | 117 | |||
Deferred tax asset | 4 | |||
Other intangible assets | 91 | |||
Other long-term assets | 1 | |||
|
| |||
Total assets acquired | 631 | |||
|
| |||
Accounts payable and accrued liabilities | 67 | |||
Long-term debt | 47 | |||
Other liabilities | 11 | |||
Deferred tax liability | 90 | |||
|
| |||
Total liabilities assumed | 215 | |||
|
| |||
Noncontrolling interest | 37 | |||
|
| |||
Net assets acquired | $ | 379 | ||
|
|
The purchase price allocation is expected to be finalized once the matter regarding the tendering shareholder non-compete appeal is resolved.
The identifiable intangible assets acquired in connection with the APPM acquisition included the following:
In millions | Estimated Fair Value | Average Remaining Useful Life | ||||||
(at acquisition date) | ||||||||
Asset Class: | ||||||||
Non-compete agreement | $ | 58 | 6 years | |||||
Tradename | 20 | Indefinite | ||||||
Fuel supply agreements | 5 | 2 years | ||||||
Power purchase arrangements | 5 | 5 years | ||||||
Wholesale distribution network | 3 | 18 years | ||||||
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| |||||||
Total | $ | 91 | ||||||
|
|
Pro forma information related to the acquisition of APPM has not been included as it does not have a material effect on the Company’s consolidated results of operations.
Joint Ventures
On April 15, 2011, International Paper and Sun Paper Industry Co. Ltd. entered into a Cooperative Joint Venture agreement to establish Shandong IP & Sun Food Packaging Co., Ltd. in China. During December 2011, the business license was obtained and International Paper contributed $55 million in cash for a 55% interest in the joint venture and Sun Paper Industry Co. Ltd. contributed land-use rights valued at approximately $28 million, representing a 45% interest. The purpose of the joint venture is to build and operate a new production line to manufacture coated paperboard for food packaging with a designed annual production capacity of 400,000 tons. The financial position and results of operations of this joint venture have been included in International Paper’s consolidated financial statements from the date of formation in December 2011.
Additionally, during the three months ended March 31, 2011, the Company recorded a gain of $7 million (before and after taxes) related to a bargain purchase price adjustment on an acquisition by our joint venture in Turkey. This gain is included in Equity earnings (losses), net of taxes in the accompanying consolidated statement of operations.
2010:Restructuring and other charges during the three months ended September 30, 2010 were immaterial.
During the three months ended June 30, 2010, restructuring and other charges totaling $144 million before taxes ($88 million after taxes) were recorded. Details of these charges were as follows:
Three Months Ended June 30, 2010 | ||||||||
In millions | 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 | ||||
S&A reduction initiative | 2 | 1 | ||||||
Early debt extinguishment costs | 18 | 11 | ||||||
Write-off of Ohio Commercial Activity tax receivable | 11 | 7 | ||||||
Other | 2 | 1 | ||||||
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|
|
| |||||
Total | $ | 144 | $ | 88 | ||||
|
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|
|
During the three months ended March 31, 2010, restructuring and other charges totaling $215 million before taxes ($132 million after taxes) were recorded. Details of these charges were as follows:
Three Months Ended March 31, 2010 | ||||||||
In millions | Before-Tax Charges | After-Tax Charges | ||||||
Franklin, Virginia mill closure costs (including before-tax charges of $190 million of accelerated depreciation) | $ | 204 | $ | 124 | ||||
Early debt extinguishment costs | 4 | 2 | ||||||
Shorewood Packaging reorganization | 3 | 2 | ||||||
Other | 4 | 4 | ||||||
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| |||||
Total | $ | 215 | $ | 132 | ||||
|
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|
|
Additionally, a $46 million after-tax charge was recorded for tax adjustments related to incentive compensation and postretirement prescription drug coverage (see Note 10).
Cellulosic Bio-fuel Tax Credit
In 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 both the $0.50 per gallon alternative fuel mixture credit and the $1.01 cellulosic bio-fuel tax credit for 2009, but not for the same gallons of fuel produced and consumed. To the extent a taxpayer changes its position and elects the $1.01 credit, it must re-pay the refunds received as alternative fuel mixture credits attributable to the gallons converted to the cellulosic bio-fuel credit. The repayment of this refund must include interest.
One important difference between the two credits is that the $1.01 credit must be credited against a company’s Federal tax liability, and the credit may be carried forward through 2015. In contrast, the $0.50 credit is refundable in cash. Also, the cellulosic bio-fuel credit is required to be included in Federal taxable income.
The Company filed an application with the IRS on November 18, 2010, to receive the required registration code to become a registered cellulosic bio-fuel producer. The Company received 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, acquisitions, debt repayments and voluntary pension contributions versus repayment of alternative fuel mixture credits with interest. At the present time, the Company does not intend to convert any gallons under the alternative fuel mixture credit to gallons under the cellulosic bio-fuel tax credit. On July 19, 2011, the Company filed an amended 2009 tax return claiming alternative fuel mixture tax credits as non-taxable income. If that amended position is not upheld, the Company will re-evaluate its position with regard to alternative fuel mixture gallons produced in 2009.
During 2009, the Company produced 64 million gallons of black liquor that were not eligible for the alternative fuel mixture credit. The Company claimed these gallons for the cellulosic bio-fuel credit by amending the Company’s 2009 tax return. The impact of this amendment was included in the Company’s 2010 fourth quarter Income tax provision (benefit), resulting in a $40 million net credit to tax expense.
As is the case with other tax credits, taxpayer claims are subject to possible future review by the IRS which has the authority to propose adjustments to the amounts claimed, or credits received.
NOTE 6 – ACQUISITIONS
2011: On September 6, 2011, International Paper and Temple-Inland Inc. (Temple-Inland) entered into a definitive merger agreement under which International Paper will acquire all of the outstanding common stock of Temple-Inland for $32.00 per share in cash, plus the assumption of approximately $600 million in Temple-Inland’s debt. The total transaction is valued at approximately $4.3 billion and is expected to close in the fourth quarter of 2011 or the first quarter of 2012, subject to regulatory and Temple-Inland’s shareholders approval. The closing of the transaction is not conditioned on financing, as International Paper has secured committed financing.
On October 14, 2011, International Paper completed the acquisition of a 75% interest in Andhra Pradesh Paper Mills Limited (APPM). The Company purchased 53.5% of APPM’s outstanding shares from the controlling shareholders for approximately $226 million in cash. These sellers have also entered into a covenant not to compete for which they received a cash payment of $57 million. International Paper also acquired an additional 21.5% of the outstanding shares of APPM in a public tender offer completed on October 8, 2011 for approximately $105 million in cash. International Paper has appealed a direction from the Securities and Exchange Board of India (SEBI) that International Paper pay to the tendering shareholders the same non-compete payment that was paid to the previous controlling shareholders. The appeal is still pending, and International Paper has deposited approximately $23 million into an escrow account to fund the additional non-compete payments in the event SEBI’s direction is upheld. The Indian Securities Appellate Tribunal is scheduled to hear the appeal on November 16, 2011. 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 positions International Paper as the first global paper and packaging company with a significant position in India’s fast growing economy. Both APPM and the India paper and packaging industry are growing at substantial rates, and this acquisition along with International Paper’s global operations and technical expertise, can accelerate that growth and create value for International Paper.
The Company will account for the acquisition under ASC 805, “Business Combinations.” APPM’s results of operations will be included in the consolidated financial statements for periods ending after October 14, 2011, the acquisition date. Given the date of acquisition, the Company has not completed the valuation of assets acquired and liabilities assumed. The Company anticipates providing a preliminary purchase price allocation and a qualitative description of factors that make up goodwill to be recognized in our Form 10-K to be filed on or before February 29, 2012. Pro forma information related to the acquisition of APPM will not be included as it does not have a material effect on the Company’s consolidated results of operations.
2010:On June 30, 2010, International Paper completed the acquisition of SCA Packaging Asia (SCA) for a purchase price of $202 million, including $168 million in cash plus assumed debt of $34 million. 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.
The following table summarizes the final allocation of the purchase price to the fair value of assets and liabilities acquired.
In millions | ||||
Cash and temporary investments | $ | 19 | ||
Accounts and notes receivable, net | 70 | |||
Inventory | 24 | |||
Other current assets | 2 | |||
Plants, properties and equipment, net | 103 | |||
Goodwill | 30 | |||
Other intangible assets | 38 | |||
|
| |||
Total assets acquired | 286 | |||
|
| |||
Accounts payable and accrued liabilities | 66 | |||
Deferred tax liability | 7 | |||
Non-controlling interest | 8 | |||
Other liabilities | 3 | |||
|
| |||
Total liabilities assumed | 84 | |||
|
| |||
Net assets acquired | $ | 202 | ||
|
|
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 | $ | 29 | 39 years | |||||
Customer relationships | 9 | 16 years | ||||||
|
| |||||||
Total | $ | 38 | ||||||
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|
NOTE 7 – BUSINESSES HELD FOR SALE, DIVESTITURES AND IMPAIRMENTS
Discontinued Operations
2012: Upon the acquisition of Temple-Inland, management committed to a plan to sell the Temple-Inland Building Products business and an active program to market the sale has been initiated. The Company believes such sale can be accomplished within one year. The operating results of this business are included in Discontinued operations from the date of acquisition. The assets of this business, totaling $481 million at March 31, 2012, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet at March 31, 2012. The liabilities of this business, totaling $52 million at March 31, 2012, are included in Liabilities of businesses held for sale in the accompanying consolidated balance sheet at March 31, 2012.
2011:The sale of the Company’s Kraft Papers business that closed in January 2007 contained an earnout provision that could require KapStone to make an additional payment to International Paper in 2012. Based on the results through the first four years of the earnout period, KapStone concluded that the threshold would be attained and the full earnout payment would be due to International Paper in 2012. On January 3, 2011, International Paper signed an agreement with KapStone to allow KapStone to pay the Company on January 4, 2011, the discounted amount of $50 million before taxes ($30 million after taxes) that otherwise would have been owed in full under the agreement in 2012. This amount has been included in Discontinued operations, net of taxes in the accompanying consolidated statement of operations.
In the third quarter of 2006, the Company completed the sale of its Brazilian Coated Papers business and recast its financial statements to reflect this business as a discontinued operation. Included in the results for this business in 2005 and 2006 were local country tax contingency reserves for which the related statute of limitations has now expired.expired in the 2011 first quarter. A $15 million tax benefit for the reversal of these reserves plus associated interest income of $6 million ($4 million after taxes) was recorded during the three months ended March 31, 2011, and is included in Discontinued operations, net of taxes in the accompanying consolidated statement of operations.
Other Divestitures and Impairments
On August 22, 2011, International Paper announced that it had signed an agreement to sell its Shorewood business to Atlas Holdings, pending regulatory approval and other customary closing conditions. 2012:During the three months ended September 30, 2011,March 31, 2012, the Company recorded a pre-tax charge of $82 million (after a $222 million tax benefit and a gain of $8$7 million related($6 million after taxes) to a non-controlling interest, a gain of $148 million), was recorded to reduceadjust the carrying valuepreviously estimated loss on the sale of the Company’s Shorewood business to fair market value. As part of the transaction, International Paper will retain a minority interest of approximately 40% in the newly combined AGI-Shorewood business outside the U.S. Since the interest retained represents significant continuing involvement in the operations of the business, the operating results of the Shorewood business have beenbusiness. This charge is included in continuing operationsNet (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations insteadoperations.
The sale of Discontinued operations.the Shorewood non-U.S. business was completed in January 2012.
As referenced in Note 6, pursuant to a Proposed Final Judgment with the DOJ in connection with the Company’s acquisition of Temple-Inland, the Company is marketing for sale its containerboard mills located in Oxnard (Hueneme), California; Ontario, California (a legacy Temple-Inland mill); and New Johnsonville, Tennessee (a legacy Temple-Inland mill) (together, the Divestiture Mills). Under the terms of the Proposed Final Judgment, we are required to accomplish the divestiture of the Divestiture Mills by June 11, 2012 (with the possibility of two 30-day extensions). The long-lived assets of the Shorewood business,Divestiture Mills, totaling $228$187 million at September 30, 2011,March 31, 2012, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet. The liabilities of the Shorewood business totaling $48 millionsheet at September 30, 2011 are included in Liabilities of businesses held for sale in current liabilities in the accompanying consolidated balance sheet. The transaction will close in stages and is expected to be completed by the end of 2011.March 31, 2012.
During the three months ended June 30, 2011, a determination was made that the current book value of the Shorewood North American asset group exceeded its estimated fair value, calculated using the probability-weighted present value of projected future cash flows. As a result, a $129 million charge ($104 million after taxes) was recorded in the Company’s Consumer Packaging segment to write down the long-lived assets of the asset group to their estimated fair value.
2011:During the three months ended March 31, 2011, the Company recorded an $8 million charge (before and after taxes) to further write down the long-lived assets of its Inverurie, Scotland mill to their estimated fair value.
The charges discussed above are This charge is included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations.
On August 22, 2011, International Paper announced that it had signed an agreement to sell its Shorewood business to Atlas Holdings. The sale of the U.S. portion of the Shorewood business to Atlas Holdings closed on December 31, 2011; however, the sale of the remainder of the Shorewood business occurred during January 2012. The assets of the remainder of the Shorewood business, totaling $196 million at December 31, 2011, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet at December 31, 2011. The liabilities of the remainder of the Shorewood business totaling $43 million at December 31, 2011 are included in Liabilities of businesses held for sale in the accompanying consolidated balance sheet at December 31, 2011.
NOTE 8 – SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Temporary Investments
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 | March 31, 2012 | December 31, 2011 | ||||||
Temporary investments | $ | 899 | $ | 2,904 |
In millions | September 30, 2011 | December 31, 2010 | ||||||
Temporary investments | $ | 1,987 | $ | 1,752 |
Accounts and Notes Receivable
Accounts and notes receivable, net of allowances, by classification were:
In millions | September 30, 2011 | December 31, 2010 | ||||||
Accounts and notes receivable, net: | ||||||||
Trade | $ | 3,232 | $ | 2,854 | ||||
Other | 598 | 185 | ||||||
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Total | $ | 3,830 | $ | 3,039 | ||||
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In millions Accounts and notes receivable, net: Trade Other Total March 31,
2012 December 31,
2011 $ 3,461 $ 3,039 341 447 $ 3,802 $ 3,486
Inventories
Inventories by major category were:
In millions | September 30, 2011 | December 31, 2010 | March 31, 2012 | December 31, 2011 | ||||||||||||
Raw materials | $ | 386 | $ | 419 | $ | 424 | $ | 368 | ||||||||
Finished pulp, paper and packaging | 1,508 | 1,505 | 1,666 | 1,503 | ||||||||||||
Operating supplies | 366 | 364 | 510 | 390 | ||||||||||||
Other | 66 | 59 | 148 | 59 | ||||||||||||
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Total | $ | 2,326 | $ | 2,347 | $ | 2,748 | $ | 2,320 | ||||||||
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Depreciation Expense
Depreciation expense was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Depreciation expense | $ | 319 | $ | 349 | $ | 961 | $ | 1,052 | $ | 345 | $ | 323 |
Valuation Accounts
Certain valuation accounts were as follows:
In millions | September 30, 2011 | December 31, 2010 | March 31, 2012 | December 31, 2011 | ||||||||||||
Accumulated depreciation | $ | 19,320 | $ | 18,991 | $ | 18,691 | $ | 18,591 | ||||||||
Allowance for doubtful accounts | 127 | 129 | 133 | 126 |
There was no material activity related to asset retirement obligations during either of the ninethree months ended September 30, 2011March 31, 2012 or 2010.2011.
Interest
Cash payments related to interest were as follows:
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
In millions | 2011 | 2010 | 2012 | 2011 | ||||||||||||
Interest payments | $ | 415 | $ | 432 | $ | 92 | $ | 101 |
Amounts related to interest were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Interest expense (a) | $ | 144 | $ | 162 | $ | 444 | $ | 484 | $ | 183 | $ | 150 | ||||||||||||
Interest income (a) | 14 | 10 | 41 | 26 | 15 | 14 | ||||||||||||||||||
Capitalized interest costs | 6 | 4 | 14 | 10 | 6 | 4 |
(a) | Interest expense and interest income exclude approximately |
Postretirement Benefit Expense
The components of the Company’s postretirement benefit expense were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Service cost | $ | 0 | $ | 0 | $ | 1 | $ | 1 | ||||||||
Interest cost | 5 | 6 | 16 | 18 | ||||||||||||
Actuarial loss | 2 | 3 | 7 | 9 | ||||||||||||
Amortization of prior service credit | (6 | ) | (7 | ) | (19 | ) | (23 | ) | ||||||||
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Net postretirement benefit expense | $ | 1 | $ | 2 | $ | 5 | $ | 5 | ||||||||
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Sale of Timberlands
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 retained a 20% profit interest in the Partnership.
Three Months Ended March 31, | ||||||||
In millions | 2012 | 2011 | ||||||
Service cost | $ | 1 | $ | 1 | ||||
Interest cost | 5 | 5 | ||||||
Actuarial loss | 2 | 2 | ||||||
Amortization of prior service credit | (7 | ) | (6 | ) | ||||
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Net postretirement benefit expense | $ | 1 | $ | 2 | ||||
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NOTE 9 – GOODWILL AND OTHER INTANGIBLES
The following table presents changes in goodwill balances as allocated to each business segment for the nine-monththree-month period ended September 30, 2011:March 31, 2012:
In millions | Industrial Packaging | Printing Papers | Consumer Packaging | Distribution | Total | Industrial Packaging | Printing Papers | Consumer Packaging | Distribution | Total | ||||||||||||||||||||||||||||||
Balance as of January 1, 2011 | ||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2012 | ||||||||||||||||||||||||||||||||||||||||
Goodwill | $ | 1,151 | $ | 2,418 | $ | 1,768 | $ | 400 | $ | 5,737 | $ | 1,157 | $ | 2,439 | $ | 1,779 | $ | 400 | $ | 5,775 | ||||||||||||||||||||
Accumulated impairment losses (a) | 0 | (1,765 | ) | (1,664 | ) | 0 | (3,429 | ) | 0 | (1,765 | ) | (1,664 | ) | 0 | (3,429 | ) | ||||||||||||||||||||||||
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1,151 | 653 | 104 | 400 | 2,308 | 1,157 | 674 | 115 | 400 | 2,346 | |||||||||||||||||||||||||||||||
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Reclassifications and other (b) | 0 | (53 | ) | 3 | 0 | (50 | ) | 1 | 18 | 0 | 0 | 19 | ||||||||||||||||||||||||||||
Additions/reductions | 7 | (c) | (22 | )(d) | 0 | 0 | (15 | ) | 1,856 | (c) | (6 | )(d) | 3 | (e) | 0 | 1,853 | ||||||||||||||||||||||||
Balance as of September 30, 2011 | ||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2012 | ||||||||||||||||||||||||||||||||||||||||
Goodwill | 1,158 | 2,343 | 1,771 | 400 | 5,672 | 3,014 | 2,451 | 1,782 | 400 | 7,647 | ||||||||||||||||||||||||||||||
Accumulated impairment losses (a) | 0 | (1,765 | ) | (1,664 | ) | 0 | (3,429 | ) | 0 | (1,765 | ) | (1,664 | ) | 0 | (3,429 | ) | ||||||||||||||||||||||||
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Total | $ | 1,158 | $ | 578 | $ | 107 | $ | 400 | $ | 2,243 | $ | 3,014 | $ | 686 | $ | 118 | $ | 400 | $ | 4,218 | ||||||||||||||||||||
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(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. |
(e) | Represents the impact of the change in estimate of the fair value of the contributed land in the Shandong IP & Sun Food Packaging Co., Ltd. joint venture in China entered into in 2011. |
OTHER INTANGIBLES
The net carrying amount of identifiableIdentifiable intangible assets (such as trade names, customer lists, patented technology, etc.), excluding goodwill, was as follows:were comprised of the following:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
In millions | September 30, 2011 | December 31, 2010 | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||
Intangible assets | $ | 218 | $ | 261 | ||||||||||||||||||||
Customer relationships and lists | $ | 233 | $ | 88 | $ | 227 | $ | 82 | ||||||||||||||||
Non-compete agreements | 73 | 22 | 72 | 19 | ||||||||||||||||||||
Tradenames, patents and trademarks | 53 | 22 | 51 | 21 | ||||||||||||||||||||
Land and water rights | 70 | 5 | 60 | 3 | ||||||||||||||||||||
Fuel and power agreements | 30 | 17 | 30 | 16 | ||||||||||||||||||||
Software | 24 | 21 | 37 | 29 | ||||||||||||||||||||
Other | 19 | 14 | 27 | 13 | ||||||||||||||||||||
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Total | $ | 502 | $ | 189 | $ | 504 | $ | 183 | ||||||||||||||||
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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 | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Amortization expense related to intangible assets | $ | 8 | $ | 7 | $ | 25 | $ | 22 | $ | 8 | $ | 8 |
NOTE 10 – INCOME TAXES
International Paper made income tax payments, net of refunds, as follows:
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
In millions | 2011 | 2010 | 2012 | 2011 | ||||||||||||
Income tax payments (refunds) | $ | 10 | $ | (75 | ) | $ | 5 | $ | (92 | ) |
The following table presents a rollforward of unrecognized tax benefits and related accrued estimated interest and penalties for the ninethree months ended September 30, 2011:March 31, 2012:
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 | ||||||
Activity for three months ended June 30, 2011 | (707 | )(a) | (4 | ) | ||||
Activity for the three months ended September, 30, 2011 | (5 | ) | 5 | |||||
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Balance at September 30, 2011 | $ | (900 | ) | $ | (92 | ) | ||
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In millions | Unrecognized Tax Benefits | Accrued Estimated Interest and Tax Penalties | ||||||
Balance at December 31, 2011 | $ | (857 | ) | $ | (88 | ) | ||
Activity for three months ended March 31, 2012 | (119 | )(a) | (10 | ) | ||||
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| |||||
Balance at March 31, 2012 | $ | (976 | ) | $ | (98 | ) | ||
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(a) | This activity primarily relates to the |
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 $50$45 million during the next 12 months.
Included in the Company’s income tax provisions for the ninethree months ended September 30,March 31, 2012 and 2011, and 2010, are $(276)$(27) million and $(93)$(10) million, respectively, related to special items. The components of the net provision related to special items were as follows:
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
In millions | 2011 | 2010 | 2012 | 2011 | ||||||||||||
Special items and other charges: | ||||||||||||||||
Restructuring and other charges | $ | (266 | ) | $ | (139 | ) | $ | (28 | ) | $ | 5 | |||||
Tax-related adjustments: | ||||||||||||||||
Incentive plan deferred tax write-off | 0 | 14 | ||||||||||||||
Medicare D deferred tax write-off | 0 | 32 | ||||||||||||||
State tax adjustments | 5 | 0 | ||||||||||||||
Temple-Inland acquistion | 3 | 0 | ||||||||||||||
Expired tax contingency reserves | (15 | ) | 0 | 0 | (15 | ) | ||||||||||
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Income tax provision (benefit) related to special items and discontinued operations | $ | (276 | ) | $ | (93 | ) | $ | (25 | ) | $ | (10 | ) | ||||
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NOTE 11 – COMMITMENTS AND CONTINGENCIES
Environmental Proceedings
International Paper has been named as a potentially responsible party in environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). MostMany of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under CERCLA and equivalent state laws, as a practical matter, liability for CERCLA cleanups is typically allocated among the many potential responsible parties. Remedial costs are recorded in the consolidated financial statements when they become probable and reasonably estimable. International Paper has estimated the probable liability associated with these matters to be approximately $95 million.$96 million in the aggregate.
One of the sites includedmatters referenced above is a closed wood treating facility located in Cass Lake, Minnesota. During 2009, in connection with an environmental site remediation action under CERCLA, International Paper submitted to the EPA a site remediation feasibility study. In November 2010 the EPA provided comments that limited the number of acceptable remedial action alternatives that the Company may be allowed to pursue and adopted more restrictive clean up requirements for the site. As a result, the Company increased its remediation reserve for this site from $6 million to $24 million in the fourth quarter of 2010, reflecting the low end of the range of estimated remediation costs, since at that time, no one of the alternatives identified by the EPA was more likely than the other to be approved. In June 2011, the EPA selected and published a proposed soil remedy at the site with an estimated cost of $46 million. As a result, the Company has adjusted the overall remediation reserve for the site from $24 million to $51 million to address this recent selection of an alternative for the soil remediation component of the overall site remedy.The EPA’sIn October 2011, the EPA released a public statement indicating that the final decision on the soil remedy is anticipated in 2012. Ifdecision would be delayed. In the unlikely event that the EPA changes its proposed soil remedy and approves instead a more expensive clean-up alternative, the remediation costs could be material, and significantly higher than amounts currently recorded.
In addition to the above proceedings,matters, other remediation costs related to regulatory matters, typically associated with the cleanup of hazardous substances at the Company’s current, closed or formerly-owned facilities, and recorded as liabilities in the balance sheet, totaled approximately $48 million. Other than as described above, completion of required remedial actions is not expected to have a material adverse effect on our consolidated financial statements.
On April 8, 2011,The Company is a potentially responsible party with respect to the United StatesAllied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site (Kalamazoo River Superfund Site) in Michigan. The EPA asserts that the site is contaminated primarily by PCBs as a result of discharges from various paper mills located along the river, including a paper mill formerly owned by St. Regis Paper Co. (St. Regis). The Company is a successor in interest to St. Regis. International Paper has not received any orders from the EPA with respect to the site and is in the process of collecting information from the EPA and other parties relative to the Kalamazoo River Superfund Site to evaluate the extent of its liability, if any, with respect to the site. Accordingly, it is premature to estimate a loss or range of loss with respect to this site.
Also in connection with the Kalamazoo River Superfund Site, the Company was named as a defendant by Georgia-Pacific Consumer Products LP, Fort James Corporation and Georgia Pacific LLC in a contribution and cost recovery action for alleged pollution at the Kalamazoo River Superfund Site. The suit seeks contribution under CERCLA for $79 million in costs purportedly expended to date by plaintiffs, and for future remediation costs. The suit alleges that a mill, during the time it was allegedly owned and operated by St. Regis, discharged PCB contaminated solids and paper residuals resulting from paper de-inking and recycling. Also named as defendants in the suit are NCR Corporation and Weyerhaeuser Company. In mid-2011, the suit was transferred from District Court for the NorthernEastern District of Illinois denied motionsWisconsin to the District Court for the Western District of Michigan. The Company is involved in discovery and believes it is premature to predict the outcome or to estimate the amount or range of loss, if any, which may be incurred.
International Paper and McGinnis Industrial Maintenance Corporation, a subsidiary of Waste Management, Inc., are potentially responsible parties at the San Jacinto River Superfund Site in Harris County, Texas, and have been actively participating in investigation and remediation activities at this Superfund Site.
In December 2011, Harris County, Texas filed a suit against the Company in Harris County District Court seeking civil penalties with regard to the alleged discharge of dioxin into the San Jacinto River since 1965 from the San Jacinto River Superfund Site. Also named as defendants in this action are McGinnis Industrial Maintenance Corporation, Waste Management, Inc. and Waste Management of Texas Inc. Harris County is seeking civil penalties pursuant to the Texas Water Code, which provides for the imposition of civil penalties between $50 and $25,000 per day. The case is in its preliminary stages and it is therefore premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred.
On August 13, 2011, the Temple-Inland Bogalusa, Louisiana paper mill received predictive test results indicating that Biochemical Oxygen Demand (BOD) limits for permitted discharge from the wastewater treatment pond into the Pearl River were exceeded after an upset condition at the mill and subsequently confirmed reports of a fish kill on the Pearl River (the Bogalusa Incident). Temple-Inland promptly initiated a full mill shut down, notified the Louisiana Department of Environmental Quality (LDEQ) of the situation and took corrective actions to restore the water quality of the river. On September 2, 2011, Bogalusa mill operations were restarted upon receiving approval from the LDEQ. Temple-Inland incurred approximately $6 million in costs related to these clean-up activities. The LDEQ, the Mississippi DEQ, and other regulatory agencies in those states have each given a notice of intent to levy penalties and recover restitution damages resulting from the Bogalusa Incident. To date, we have settled for a total of approximately $1 million the known claims of various Mississippi regulatory agencies and the Louisiana Fish and Wildlife Department (LDWF). However, the settlement with the LDWF for restitution damages related to the Bogalusa Incident is being challenged in the state district court for Washington Parish, Louisiana in a suit brought by the Companydistrict attorney for Washington Parish. We believe that the claims made in the Washington Parish lawsuit are without merit, and eightwe intend to defend them vigorously. The U.S. Attorney’s Office in New Orleans has issued a grand jury subpoena and the EPA and various state agencies have initiated investigations into the Bogalusa Incident that are not resolved by the settlements described above. Potential fines or penalties that still may be levied against Temple-Inland in connection with the Bogalusa Incident are unknown, but will likely exceed $1 million. Temple-Inland is a defendant in 17 civil lawsuits related to the Bogalusa Incident. One case is the LDWF suit discussed above filed by the district attorney for Washington Parish. Fifteen of these civil cases were filed in Louisiana state court and have been removed and consolidated in an action pending in the U.S. District Court for the Eastern District of Louisiana along with a civil case originally filed in that court styledMcGehee v. TIN Inc. (filed September 20, 2011). Additional lawsuits may be filed in connection with the Bogalusa Incident following the date of this report. At this preliminary stage, we cannot reasonably estimate the potential loss and other U.S.effects from these pending proceedings. However, we believe many of the claims are without merit, and Canadianwe are defending them vigorously.
Legal Proceedings
In September 2010, eight containerboard producers, to dismissincluding International Paper and Temple-Inland, were named as defendants in a lawsuit allegingpurported class action complaint that these producers violatedalleged a civil violation of Section 1 of the Sherman Act by conspiringAct. The suit is captionedKleen Products LLC v. Packaging Corp. of America. The complaint alleges that the defendants, beginning in August 2005, conspired to limit the supply and fix thethereby increase prices of containerboard products. The alleged class is all persons who purchased containerboard products directly from mid-2005 to the present. Plaintiffsany defendant for use or delivery in the lawsuit seek certificationUnited States during the period August 2005 to November 2010. The complaint seeks to recover an unspecified amount of a nationwide class
of direct purchasers of containerboard products, treble actual damages and costs, including attorneys’ fees. Inattorney’s fees on behalf of the purported class. Four similar complaints were filed and have been consolidated in the Northern District of Illinois. Moreover, in January 2011, the CompanyInternational Paper was named as a defendant in a lawsuit filed in state court in Cocke County, Tennessee alleging that the Company and other containerboard producersInternational Paper violated Tennessee law by conspiring to limit the supply and fix the prices of containerboard from mid-2005 to the present. Plaintiffs in the lawsuitstate court action seek certification of a class of Tennessee indirect purchasers of containerboard products, damages and costs, including attorneys’ fees. The Company believescompany disputes the allegations made and intends to vigorously defend each action. However, because both actions are in boththe preliminary stages, we are unable to predict an outcome or estimate a range of reasonably possible loss.
The Company’s subsidiary Temple-Inland is a defendant in a lawsuit filed in August 2011 in the United States District Court for the Northern District of Texas captionedTepper v. Temple-Inland Inc. This lawsuit was brought by the liquidating trustee for Guaranty Financial Group, Temple-Inland’s former financial services business which was spun off by Temple-Inland in 2007, on behalf of certain creditors of the business. The lawsuit alleges, among other things, that Temple-Inland and certain of its affiliates, officers, and directors caused the failure of Guaranty Financial Group and its wholly-owned subsidiary Guaranty Bank and asserts various claims related to the failure. Among the claims made are alleged breaches of fiduciary duties by the individual defendants and Temple-Inland related to (1) Guaranty Financial Group’s payment of dividends in 2006 and early 2007 and (2) Guaranty Financial Group’s transfers of real property to subsidiaries of Temple-Inland for allegedly inadequate consideration in December 2005 and in late 2007. Claims are also made against Temple-Inland based on allegations that those transactions were fraudulent transfers. On March 8, 2012, all defendants in the lawsuit filed answers to the complaint.
Temple-Inland is also a defendant in a lawsuit captionedNorth Port Firefighters’ Pension v. Temple-Inland Inc., filed in November 2011 in the United States District Court for the Northern District of Texas. The lawsuit alleges a class action against Temple-Inland and certain individual defendants contending that Temple-Inland misrepresented the financial condition of Guaranty Financial Group during the period December 12, 2007 through August 24, 2009. Temple-Inland distributed the stock of Guaranty Financial Group to its shareholders on December 28, 2007, after which Guaranty Financial Group was an independent, publicly held company. The action is pled as a securities claim on behalf of persons who acquired Guaranty Financial Group stock during the putative class period. Although focused chiefly on statements made by Guaranty Financial Group to its shareholders after it was an independent, publicly held company, the action repeats many of the same allegations of fact made in the Tepper litigation.
We believe the claims made in the Tepper and North Port lawsuits are without merit, but bothand we intend to defend them vigorously. Both lawsuits are in preliminary stages, and thus we believe it is premature to predict the outcome or to estimate the amount or range of loss, if any, which may be incurred. Each of the individual defendants in both the Tepper litigation and the North Port litigation has requested advancement of their costs of defense from Temple-Inland and has asserted a right to indemnification under indemnification rights granted by Temple-Inland. We are advancing costs of defense which have been expensed as incurred and believe that all or part of these costs and other effects of pending litigation cannot be determined with certainty or reasonably estimated. Although we believe thatany damages awarded against the outcome of these lawsuits will not have a material adverse effect on our business or consolidated financial statements, there can be no assurance that the outcome of any lawsuit or claimindividual defendants and covered by Temple-Inland indemnity will be as expected.
In May 2008, a recovery boiler atcovered losses under Temple-Inland’s directors and officers insurance. The carriers under 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 allapplicable policies have been notified of the eight original lawsuits arising from this matter. However, two new personal injury cases were filed in January 2011claims and then two more in April 2011, just prior to the expirationeach has responded with a reservation of the three-year statute of limitation. The Company believes it has adequate insurance to resolve these remaining matters, and these lawsuits should not have a material adverse effect on its consolidated financial statements.rights letter.
The Company is currently being challenged by Brazilian tax authorities concerning the beneficiarystatute of limitations related to the use of certain tax credits. The Company is appealing an unfavorable March 2012 administrative court ruling. The potential loss to the Company in the event of a Value Added Tax (VAT) incentive issued by the Brazilian state of Mato Grosso do Sul. On August 8, 2011, the Brazilian Supreme Court officially issued a decision judging unconstitutional several VAT incentive programs that were enacted without the approval of the Confederation of State VAT Authorities. At this time, it does not appear that the Company’s incentivefinal unfavorable outcome is affected by the decision. The cumulative benefit recorded by the Company through September 30, 2011, is $44approximately $34 million.
The Company is involved in various other inquiries, claims, administrative proceedings and litigation (actions) relating to environmental and safety matters, contracts, sales of property, intellectual property, personal injury, labor and employment and other matters, some of which allege substantial monetary damages. While any actionproceeding or litigation has the element of uncertainty, the Company believes that the outcome of any of the actionslawsuits 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
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 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 interest 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, 2011March 31, 2012 and the year ended December 31, 2010.2011.
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 requirerequired 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,as required by the loan agreements, successfully replaced banks that fell below the specified threshold as required by the loan agreements.
Subsequent to the end of the quarter, on October 7, 2011, Moody’s Investor Services reduced its credit rating of senior unsecured long-term debt of the Royal Bank of Scotland Group Plc, which issued letters of credit that support $1.6 billion of the Timber Notes below the specified threshold. The Company expects that the replacement will be completed within the required 60-day period.
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 intends to 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$5.2 billion of Class B interests in the Entities against $5.1$5.2 billion of International Paper debt obligations held by these Entities at September 30, 2011March 31, 2012 and December 31, 2010.
2011. Despite the offset treatment, these remain debt obligations of International Paper. Remaining borrowings of $103$99 million and $129$92 million at September 30, 2011March 31, 2012 and December 31, 2010,2011, respectively, are included in Long-term debt in the accompanying consolidated balance sheet. Additional debt related to the above transaction of $38 million is included in Notes payable and current maturities of long-term debt at September 30, 2011March 31, 2012 and December 31, 2010.2011.
On October 7, 2011, Moody’s Investor Services reduced its credit rating of senior unsecured long-term debt of the Royal Bank of Scotland Group Plc, which issued letters of credit that support $1.6 billion of Timber Notes, below the specific threshold. On November 22, 2011, letters of credit worth $707 million were replaced by another qualifying institution. The relevant parties agreed to extend the 60 day deadline, and then, on February 10, 2012, letters of credit worth $135 million were replaced by another qualifying institution. The Company and third party managing member instituted a replacement waiver for the remaining $797 million. Fees of $3 million were incurred in connection with this replacement. Also in connection with this replacement, fees of $2 million were prepaid and are being amortized over the life of the associated Timber Notes through 2016.
On November 29, 2011, Standard and Poors reduced its credit rating of senior unsecured long-term debt of Lloyds TSB Bank Plc, which issued letters of credit that support $1.2 billion of Timber Notes, below the specific threshold. The relevant parties agreed to extend the 60 day deadline and then, on February 10, 2012, these letters of credit were successfully replaced by another qualifying institution. Fees of $4 million were incurred in connection with this replacement.
On January 23, 2012, Standard and Poors reduced its credit rating of senior unsecured long-term debt of Société Générale SA, which issued letters of credit that support $666 million of Timber Notes, below the specified threshold. On February 23, 2012, these letters of credit were successfully replaced by another qualifying institution. Fees of $5 million were incurred in connection with this replacement.
Activity between the Company and the Entities was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Revenue (a) | $ | 14 | $ | 10 | $ | 39 | $ | 28 | ||||||||||||||||
Revenue (loss) (a) | $ | 8 | $ | 13 | ||||||||||||||||||||
Expense (a) | 20 | 19 | 59 | 59 | 20 | 20 | ||||||||||||||||||
Cash receipts (b) | 14 | 13 | 28 | 32 | 15 | 14 | ||||||||||||||||||
Cash payments (c) | 39 | 38 | 79 | 82 | 40 | 40 |
(a) | The net expense related to the Company’s interest in the Entities is included in Interest expense, net in the accompanying consolidated statement of operations, as International Paper has and intends to affect its legal right to offset as discussed above. |
(b) | The cash receipts are equity distributions from the Entities to International Paper. |
(c) | The semi-annual payments include |
Based on an analysis of the 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 2006 financing entities,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, the assets most significantly impacting the structure’s economic performance. The credit quality of the Timber Notes is supported by irrevocable letters of credit obtained by 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 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; however, an analysis performed by the Company concluded the likelihood of this exposure is remote.
International Paper also held variable interests in two financing entities that were used to monetize long-term notes received from the sale of forestlands in 2001 and 2002. International Paper transferred notes (the Monetized 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, 2011March 31, 2012 and the year ended December 31, 2010.2011.
Activity between the Company and the 2001 financing entities was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | Three Months Ended March 31, 2011 | |||||||||||||||
Revenue (loss) (a) | $ | 0 | $ | 1 | $ | 1 | $ | (1 | ) | $ | 1 | |||||||||
Expense (a) | 0 | 3 | 3 | 9 | 3 | |||||||||||||||
Cash receipts (b) | 0 | 0 | 0 | 2 | 0 | |||||||||||||||
Cash payments (c) | 0 | 3 | 3 | 9 | 3 |
(a) | The net expense related to the Company’s interest in the 2001 financing entities is included in Interest expense, net in the accompanying consolidated statement of operations, as International Paper has and intends to affect its legal right to offset as discussed above. |
(b) | The cash receipts are equity distributions from the 2001 financing entities to International Paper. |
(c) | The cash payments are related to interest on the associated debt obligations discussed above. |
The 2001 Monetized Notes of $499 million matured on March 16, 2011. Following their maturity, International Paper purchased the Class A preferred interest in the 2001 financing entities from an external third party for $21 million. As a result of the purchase, effective March 16, 2011, International Paper owned 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 was the primary beneficiary of the 2001 financing entities and thus consolidated the entities effective March 16, 2011.
Due to the maturity of the 2001 Monetized Notes and 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. Effective April 30, 2011, International Paper liquidated its interest in the 2001 financing entities.
Activity between the Company and the 2002 financing entities was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Revenue (a) | $ | 0 | $ | 1 | $ | 2 | $ | 3 | $ | 0 | $ | 1 | ||||||||||||
Expense (b) | 0 | 2 | 3 | 6 | 0 | 2 | ||||||||||||||||||
Cash receipts (c) | 15 | 1 | 16 | 3 | 111 | 1 | ||||||||||||||||||
Cash payments (d) | 15 | 2 | 68 | 6 | 111 | 2 |
(a) | The revenue is included in Equity earnings (losses) in the accompanying consolidated statement of operations. |
(b) | The expense is in included in Interest expense, net in the accompanying consolidated statement of operations. |
(c) | The cash receipts are |
(d) | The payments include both interest and principal on the associated debt obligations. |
On May 31, 2011, the third party equity holder of the 2002 financing entities retired its Class A interest in the entities for $51 million. As a result of the retirement, effective May 31, 2011, International Paper owns 100% of the 2002 financing entities. Based on an analysis performed by the Company after the retirement,
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 2002 financing entities and thus consolidated the entities effective May 31, 2011.
Due toDuring the consolidation of the 2002 financing entities, Notes payable and current maturities of long-term debt increased $165 million and Long-term debt decreased $211 million in the second quarter of 2011. Deferred charges and other assets decreased $486 million due to the elimination of the Company’s variable interest in the 2002 financing entities, while Accounts and notes receivable, net increased $441 million due to the consolidation of the 2002 Monetized Notes.
On August 17, 2011,three months ended March 31, 2012, approximately $15$111 million of the 2002 Monetized Notes matured. As a result of the maturity,maturities, Accounts and notes receivable, net and Notes payable and current maturities of long-term debt decreased $15$111 million during the three months ended September 30, 2011.
In January 2009, an existing letter of credit bank (LC bank) that held approximately $76 million of letters of credit related toand Deferred tax liabilities associated with the 2002 Monetized Notes was downgraded below the required bank credit rating as outlined in the governing agreements. The affected parties instituted a waiver of the LC bank replacement in March 2009. During the third quarter of 2011, a wholly owned subsidiary of International Paper delivered notice to the issuers of the underlying 2002 Monetized Notes that the waiver was being terminated. The issuer of the 2002 Monetized Notes did not replace the LC bank within the 55 day time frame as required by the agreements. As a result, approximately $52 million and $24 million of the 2002 Monetized Notes, with original maturities in December 2011 and February 2012, respectively, matured on October 18, 2011.
Due to the fourth quarter maturities, International Paper reclassified $24 million of associated debt from long-term debt to Notes payable and current maturities of long-term debt in the accompanying consolidated balance sheet at September 30, 2011. The debt was originally classified as long term based on the Company’s intent and ability to refinance.forestlands sales decreased $30 million.
Outstanding debt related to the 2002 financing entities of $176$48 million and $3$158 million is included in Notes payable and current maturities of long-term debt in the accompanying consolidated balance sheets at September 30, 2011March 31, 2012 and December 31, 2010,2011, respectively. Additional debt related to these entities of $158 million and $445 million is included in Long-term debt in the accompanying consolidated balance sheets at September 30, 2011 and December 31, 2010, respectively. The Company retained no interest in the 2002 financing entities at September 30, 2011 but retained an interest of $486 million at December 31, 2010, which is included in Deferred charges and other assets in the accompanying consolidated balance sheet. The 2002 Monetized Notes of $427$141 million are included in Accounts and notes receivable, net in the accompanying consolidated balance sheet at September 30, 2011.March 31, 2012.
The 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 preserve the tax deferral that resulted from the forestlands installment sales and the offset accounting treatment described above.
In connection with the acquisition of Temple-Inland in February 2012, International Paper became the primary beneficiary of two variable interest entities.
In October 2007, Temple-Inland sold 1.55 million acres of timberland for $2.38 billion. The total consideration consisted almost entirely of notes (the Monetized Notes) due in 2027 issued by the buyer of the timberland, which Temple-Inland contributed to two wholly owned, bankruptcy-remote special purpose entities. The Monetized Notes are supported by $2.38 billion of irrevocable letters of credit issued by three banks, which are required to maintain minimum credit ratings on their long-term debt. The Monetized Notes are recorded in Financial Assets of Special Purpose Entities in the accompanying consolidated balance sheet.
In December 2007, Temple-Inland’s two wholly owned special purpose entities borrowed $2.14 billion, which is recorded in Nonrecourse Financial Liabilities of Special Purpose Entities in the accompanying consolidated balance sheet. As of March 31, 2012, the fair value of this debt was still being assessed and is expected to be adjusted as part of the purchase price allocation by the fourth quarter of 2012. The loans are repayable in 2027 and are supported only by the $2.38 billion of notes and the irrevocable letters of credit supporting the notes and are nonrecourse to International Paper. The loan agreements provide that if a credit rating of any of the banks issuing the letters of credit is downgraded below the required minimum, the letters of credit issued by that bank must be replaced within 30 days with letters of credit from another qualifying financial institution.
The buyer of the timberland issued the $2.38 billion in notes from its wholly owned, bankruptcy-remote special purpose entities. The buyer’s special purpose entities held the timberland from the transaction date until November 2008, at which time the timberland was transferred out of the buyer’s special purpose entities. Due to the transfer of the timberland, Temple-Inland evaluated the buyer’s special purpose entities and determined that the buyer’s special purpose entities were variable interest entities and that Temple-Inland was the primary beneficiary. As a result, in 2008 Temple-Inland began consolidating the buyer’s special purpose entities.
On January 23, 2012, Standard and Poors reduced its credit rating of the long-term debt of Société Genéralé SA, which issued letters of credit that support $506 million of Monetized Notes, below the specific threshold. As a result, on February 13, 2012, these letters of credit were successfully replaced by another qualifying institution. Fees of $2 million were incurred in connection with this replacement.
Activity between the Company and the 2007 financing entities was as follows:
In millions | Three Months Ended March 31, 2012 | |||
Revenue (a) | $ | 2 | ||
Expense (b) | 4 | |||
Cash receipts (c) | 3 | |||
Cash payments (d) | 5 |
(a) | The revenue is included in Interest expense, net in the accompanying consolidated statement of operations. |
(b) | The expense is in included in Interest expense, net in the accompanying consolidated statement of operations. |
(c) | The cash receipts are interest received on the Financial assets of special purpose entities. |
(d) | The payments are interest paid on Nonrecourse financial liabilities of special purpose entities. |
Based on an analysis performed by the Company after the purchase of Temple-Inland, 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 was the primary beneficiary of the 2007 financing entities and thus consolidated the entities effective upon acquisition.
Preferred Securities of 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, 2011,March 31, 2012, 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 for each of the ninethree months ended September 30, 2011March 31, 2012 and 2010.2011. 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
Amounts related to early debt extinguishment during the three months ended March 31, 2012 and nine months ended September 30, 2011 and 2010 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Debt reductions (a) | $ | 0 | $ | 111 | $ | 129 | $ | 339 | $ | 30 | $ | 129 | ||||||||||||
Pre-tax early debt extinguishment costs (b) | 0 | 0 | 32 | 26 | 4 | 32 |
(a) | Reductions related to notes with interest rates ranging from |
(b) | Amounts are included in Restructuring and Other Charges in the accompanying consolidated statements of operations. |
At September 30, 2011 and December 31, 2010,In February 2012, International Paper classified $158issued a $1.2 billion term loan with an initial interest rate of LIBOR plus a margin of 138 basis points that varies depending on the credit rating of the Company and a $200 million and $100 million, respectively,term loan with an interest rate of current maturitiesLIBOR plus a margin of long-term debt as Long-term debt. International Paper has175 basis points, both with maturity dates in 2017. The proceeds from these borrowings were used, along with available cash, to fund the intent and ability, as evidenced by its contractually committed credit facility, to renew or convert these obligations.acquisition of Temple-Inland.
At September 30, 2011,March 31, 2012, the fair value of International Paper’s $8.4$11.6 billion of debt was approximately $9.3$13.2 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. International Paper’s long-term debt is classified as Level 2 within the fair value hierarchy, which is further defined in Note 13 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2011,March 31, 2012, 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
As a multinational company we are exposed to market risks, such as changes in interest rates, currency exchanges rates and commodity prices.
For detailed information regarding the Company’s hedging activities and related accounting, refer to Note 13 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.2011.
The notional amounts of qualifying and non-qualifying financial instruments used in hedging transactions were as follows:
In millions, except for fuel oil contracts notional | September 30, 2011 | December 31, 2010 | ||||||||||||||
In millions, except for electricity contract notional | March 31, 2012 | December 31, 2011 | ||||||||||||||
Derivatives in Cash Flow Hedging Relationships: | ||||||||||||||||
Foreign exchange contracts (Sell / Buy; in sell notional): (a) | ||||||||||||||||
Foreign exchange contracts (Sell / Buy; denominated in sell notional): (a) | ||||||||||||||||
British pounds / Brazilian real | 29 | 8 | 26 | 26 | ||||||||||||
European euro/ Brazilian real | 25 | 4 | 22 | 16 | ||||||||||||
European euro / Polish zloty | 237 | 223 | 197 | 233 | ||||||||||||
U.S. dollar / Brazilian real | 344 | 74 | 354 | 344 | ||||||||||||
U.S. dollar / European euro | 23 | 0 | 6 | 13 | ||||||||||||
Fuel oil contracts (in barrels) | 0 | 200,000 | ||||||||||||||
Natural gas contracts (in MMBTUs) | 5 | (b) | 12 | 1 | (b) | 3 | ||||||||||
Derivatives in Fair Value Hedging Relationships: | ||||||||||||||||
Derivatives Not Designated as Hedging Instruments: | ||||||||||||||||
Electricity contract (in megawatt hours) | 507,000 | 0 | ||||||||||||||
Embedded derivative (in USD) | 150 | 150 | ||||||||||||||
Foreign exchange contracts (Sell / Buy; denominated in sell notional): (b) | ||||||||||||||||
Indian rupee / U.S. dollar | 1,008 | 904 | ||||||||||||||
Interest rate contracts (in USD) | 0 | 274 | 150 | (c) | 150 | (c) | ||||||||||
Derivatives Not Designated as Hedging Instruments: | ||||||||||||||||
Embedded derivative (in USD) | 150 | 150 | ||||||||||||||
Foreign exchange contracts (Sell / Buy; in sell notional): | ||||||||||||||||
European euro / U.S. dollar | 0 | 85 | ||||||||||||||
South Korean won / U.S. dollar | 0 | 8,076 | ||||||||||||||
U.S. dollar / Brazilian real | 30 | 0 | ||||||||||||||
U.S. dollar / European euro | 0 | 109 | ||||||||||||||
U.S. dollar / Indian rupee | 320 | 0 | ||||||||||||||
U.S. dollar / South Korean won | 14 | 0 | ||||||||||||||
Interest rate contracts (in USD) | 150 | (c) | 154 | (c) |
(a) | These contracts had maturities of three years or less as of |
(b) | These contracts had maturities of one year or less as of |
(c) | Includes $150 million floating-to-fixed interest rate swap notional to offset the embedded derivative. |
The following table shows gains or losses recognized in accumulated other comprehensive income (AOCI), net of tax, related to derivative instruments:
Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) | Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) | |||||||||||||||
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
In millions | 2011 | 2010 | 2012 | 2011 | ||||||||||||
Foreign exchange contracts | $ | (47 | ) | $ | 28 | $ | 28 | $ | 3 | |||||||
Fuel oil contracts | 2 | (2 | ) | 0 | 2 | |||||||||||
Natural gas contracts | (4 | ) | (14 | ) | (1 | ) | (1 | ) | ||||||||
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Total | $ | (49 | ) | $ | 12 | $ | 27 | $ | 4 | |||||||
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During the next 12 months, the amount of the September 30, 2011March 31, 2012 AOCI balance, after tax, that will be reclassified to earnings is $33a $10 million of a loss.
The amountsamount of gains and losses recognized in the consolidated statement of operations on qualifying and non-qualifying financial instruments used in hedging transactions were as follows:
Gain (Loss) Reclassified from AOCI Into Income (Effective Portion) | Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Gain (Loss) Reclassified from AOCI Into Income (Effective Portion) | Location of Gain (Loss) Reclassified from AOCI Into Income (Effective Portion) | |||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships: | ||||||||||||||||||||||||||||||||
Foreign exchange contracts | $ | (2 | ) | $ | 13 | $ | 10 | $ | 29 | Cost of products sold | $ | 0 | $ | 7 | Cost of products sold | |||||||||||||||||
Fuel oil contracts | 1 | 1 | 4 | 2 | Cost of products sold | 0 | 2 | Cost of products sold | ||||||||||||||||||||||||
Natural gas contracts | (5 | ) | 2 | (15 | ) | (9 | ) | Cost of products sold | (4 | ) | (6 | ) | Cost of products sold | |||||||||||||||||||
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Total | $ | (6 | ) | $ | 16 | $ | (1 | ) | $ | 22 | $ | (4 | ) | $ | 3 | |||||||||||||||||
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Gain (Loss) Recognized in Income | Location of Gain (Loss) in Consolidated Statement of Operations | Gain (Loss) Recognized Into Income | Location of Gain (Loss) In Consolidated Statement of Operations | |||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||||||||||
Derivatives in Fair Value Hedging Relationships: | ||||||||||||||||||||||||||||||||
Interest rate contracts | $ | (17 | ) | $ | 9 | $ | (10 | ) | $ | 36 | Interest expense, net | $ | 0 | $ | (1 | ) | Interest expense, net | |||||||||||||||
Debt | 17 | (9 | ) | 10 | (36 | ) | Interest expense, net | 0 | 1 | Interest expense, net | ||||||||||||||||||||||
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Total | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||
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Derivatives Not Designated as Hedging Instruments: | ||||||||||||||||||||||||||||||||
Embedded Derivatives | $ | (1 | ) | $ | 1 | $ | (2 | ) | $ | 4 | Interest expense, net | |||||||||||||||||||||
Foreign exchange contracts | (9 | )(a) | 33 | (16 | )(a) | 33 | Cost of products sold | |||||||||||||||||||||||||
Interest rate contracts | 1 | 6 | (b) | 2 | 18 | (b) | Interest expense, net | |||||||||||||||||||||||||
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Total | $ | (9 | ) | $ | 40 | $ | (16 | ) | $ | 55 | ||||||||||||||||||||||
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Derivatives Not Designated as Hedging Instruments:
Electricity contract | $ | (1 | ) | $ | 0 | Cost of products sold | ||||||
Embedded derivatives | (1 | ) | (1 | ) | Interest expense, net | |||||||
Foreign exchange contracts | (4 | ) | (2 | ) | Cost of products sold | |||||||
Interest rate contracts | 5 | 1 | Interest expense, net | |||||||||
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Total | $ | (1 | ) | $ | (2 | ) | ||||||
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The following activity is related to fully effective interest rate swaps designated as fair value hedges:
2011 | 2010 | 2012 | 2011 | |||||||||||||||||||||||||||||||||||||||||||||
In millions | Issued | Terminated | Undesignated | Issued | Terminated | Undesignated | Issued | Terminated | Undesignated | Issued | Terminated | Undesignated | ||||||||||||||||||||||||||||||||||||
Third Quarter | $ | 0 | $ | 464 | (b) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||||||||||||||||||||||
Second Quarter | 100 | (a) | 0 | 0 | 0 | 100 | (c) | 2 | ||||||||||||||||||||||||||||||||||||||||
First Quarter | 100 | (a) | 0 | 0 | 0 | 700 | (c) | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 100 | (a) | $ | 0 | $ | 0 | |||||||||||||||||||||||||||
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Total | $ | 200 | $ | 464 | $ | 0 | $ | 0 | $ | 800 | $ | 2 | $ | 0 | $ | 0 | $ | 0 | $ | 100 | $ | 0 | $ | 0 | ||||||||||||||||||||||||
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(a) | Fixed-to-floating interest rate swaps were effective when issued and were terminated in the third quarter of 2011. |
Fair Value Measurements
For a discussion of the Company’s fair value measurement policies under the fair value hierarchy, refer to Note 13 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.2011.
The Company has not changed its valuation techniques for measuring the fair value of any financial assets and liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period.
The following table provides a summary of the impact of our derivative instruments in the consolidated balance sheet:
Fair Value Measurements
Level 2 – Significant Other Observable Inputs
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||
In millions | September 30, 2011 | December 31, 2010 | September 30, 2011 | December 31, 2010 | March 31, 2012 | December 31, 2011 | March 31, 2012 | December 31, 2011 | ||||||||||||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||||||||||||||||||
Interest rate contracts – fair value | $ | 0 | $ | 10 | (b) | $ | 0 | $ | 0 | |||||||||||||||||||||||
Foreign exchange contracts – cash flow | 0 | 18 | (c) | 65 | (e) | 1 | (g) | $ | 5 | (a) | $ | 0 | $ | 24 | (c) | $ | 53 | (e) | ||||||||||||||
Fuel oil contracts – cash flow | 0 | 3 | (d) | 0 | 0 | |||||||||||||||||||||||||||
Natural gas contracts – cash flow | 0 | 0 | 14 | (f) | 32 | (h) | 0 | 0 | 4 | (d) | 10 | (d) | ||||||||||||||||||||
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Total derivatives designated as hedging instruments | $ | 0 | $ | 31 | $ | 79 | $ | 33 | $ | 5 | $ | 0 | $ | 28 | $ | 63 | ||||||||||||||||
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Derivatives not designated as hedging instruments | ||||||||||||||||||||||||||||||||
Electricity contract | $ | 0 | $ | 0 | $ | 3 | (d) | $ | 0 | |||||||||||||||||||||||
Embedded derivatives | $ | 6 | (a) | $ | 8 | (a) | $ | 0 | $ | 0 | 4 | (a) | 5 | (b) | 0 | 0 | ||||||||||||||||
Foreign exchange contracts | 0 | 1 | (d) | 3 | (f) | 5 | (f) | 0 | 1 | (a) | 0 | 0 | ||||||||||||||||||||
Interest rate contracts | 0 | 0 | 6 | (g) | 8 | (g) | 0 | 0 | 4 | (d) | 5 | (f) | ||||||||||||||||||||
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Total derivatives not designated as hedging instruments | $ | 6 | $ | 9 | $ | 9 | $ | 13 | $ | 4 | $ | 6 | $ | 7 | $ | 5 | ||||||||||||||||
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Total derivatives | $ | 6 | $ | 40 | $ | 88 | $ | 46 | $ | 9 | $ | 6 | $ | 35 | $ | 68 | ||||||||||||||||
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(a) | Included in |
(b) |
(c) | Includes |
(d) | Included in Other |
(e) | Includes |
(f) | Included in Other |
Credit-Risk-Related Contingent Features
Certain of the Company’s financial instruments used in hedging transactions are governed by industry standard netting agreements with counterparties. If the lower of the Company’s credit rating by Moody’s or
S&P were to drop below investment grade, the Company 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-related contingent features in a net liability position were $88$27 million and $32$67 million as of September 30, 2011March 31, 2012 and December 31, 2010,2011, respectively. The Company was not required to post any collateral as of September 30, 2011March 31, 2012 or December 31, 2010.2011. For more information on credit-risk-related contingent features, refer to Note 13 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.2011.
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 plan that provides retirement benefits to substantially all U.S. salaried 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 Pension Plan upon attaining 21 years of age and completing one year of eligibility service. U.S. salaried employees and hourly employees (receiving salaried benefits) hired after June 30, 2004, are not eligible for the Pension Plan, but receive a company contribution to their individual savings plan accounts.
The Pension Plan provides defined pension benefits based on years of credited service and either final average earnings (salaried 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 15 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.2011.
In connection with the Temple-Inland acquisition in February 2012, International Paper assumed sponsorship of the Temple-Inland Retirement Plan, a defined benefit plan which covers substantially all employees of Temple-Inland.
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, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Service cost | $ | 31 | $ | 29 | $ | 91 | $ | 87 | $ | 38 | $ | 29 | ||||||||||||
Interest cost | 136 | 136 | 408 | 406 | 145 | 135 | ||||||||||||||||||
Expected return on plan assets | (178 | ) | (158 | ) | (535 | ) | (473 | ) | (184 | ) | (178 | ) | ||||||||||||
Actuarial loss | 53 | 44 | 159 | 131 | 76 | 51 | ||||||||||||||||||
Amortization of prior service cost | 7 | 7 | 23 | 23 | 8 | 8 | ||||||||||||||||||
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Net periodic pension expense | $ | 49 | $ | 58 | $ | 146 | $ | 174 | $ | 83 | $ | 45 | ||||||||||||
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The Company’s funding policy for the Pension Planour 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 expects that noa cash funding contribution of $26 million will be required for the Pension Plan in 2011.2012. The Company continually reassesses the amount and timing of any discretionary contributions and could elect to make such a contribution in 2011.2012. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $14$45 million for the ninethree months ended September 30, 2011.March 31, 2012.
NOTE 16 – STOCK-BASED COMPENSATION
International Paper has an Incentive Compensation Plan (ICP) which upon the approval by 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. 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 17 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.2011. As of September 30, 2011, 17.0March 31, 2012, 16.1 million shares were available for grant under the ICP.
Stock-based compensation expense and related income tax benefits were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Total stock-based compensation expense (selling and administrative) | $ | 20 | $ | 17 | $ | 69 | $ | 38 | $ | 31 | $ | 27 | ||||||||||||
Income tax benefits related to stock-based compensation | 0 | 0 | 86 | 75 | 40 | 33 |
At September 30, 2011, $112March 31, 2012, $153 million, net of estimated forfeitures, of compensation cost related to unvested restricted performance shares, executive continuity awards and restricted stock attributable to future service had not yet been recognized. This amount will be recognized in expense over a weighted-average period of 1.52.0 years.
Performance Share Plan
Under the Performance Share Plan (PSP), awards may be granted by the Committee to approximately 1,000 employees. Awards are earned based on the Company’s performance achievement in 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 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 beare 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:
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Expected volatility Risk-free interest rate Three Months Ended
March 31, 2012 2011 36.67% - 55.33% 34.35% - 64.26% 0.12% - 0.46% 0.23% - 1.16%
The following summarizes the activity for PSP for the ninethree months ended September 30, 2011:March 31, 2012:
Nonvested Shares/Units | Weighted Average Grant Date Fair Value | Nonvested Shares/Units | Weighted Average Grant Date Fair Value | |||||||||||||
Outstanding at December 31, 2010 | 6,812,594 | $ | 23.31 | |||||||||||||
Outstanding at December 31, 2011 | 8,060,059 | $ | 22.83 | |||||||||||||
Granted | 4,314,376 | 28.04 | 3,641,911 | 31.57 | ||||||||||||
Shares Issued (a) | (2,470,066 | ) | 32.71 | (2,819,957 | ) | 16.63 | ||||||||||
Forfeited | (364,665 | ) | 24.35 | (43,081 | ) | 28.57 | ||||||||||
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Outstanding at September 30, 2011 | 8,292,239 | $ | 22.93 | |||||||||||||
Outstanding at March 31, 2012 | 8,838,932 | $ | 28.38 | |||||||||||||
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(a) | Includes |
Stock Option 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. Shares granted represent replacement options from a stock swap.
A summary of option activity under the plan as of September 30, 2011for the three months ended March 31, 2012 is presented below:
Options | Weighted Average Exercise Price | Weighted Average Remaining Life (years) | Aggregate Intrinsic Value (millions) | Options | Weighted Average Exercise Price | Weighted Average Remaining Life (years) | Aggregate Intrinsic Value (thousands) | |||||||||||||||||||||||||
Outstanding at December 31, 2010 | 18,245,253 | $ | 37.73 | |||||||||||||||||||||||||||||
Outstanding at December 31, 2011 | 15,556,786 | $ | 38.13 | |||||||||||||||||||||||||||||
Granted | 0 | 0 | 2,513 | 35.94 | ||||||||||||||||||||||||||||
Exercised | (1,850 | ) | 32.54 | (630,675 | ) | 32.85 | ||||||||||||||||||||||||||
Forfeited | (20,870 | ) | 35.22 | 0 | 0 | |||||||||||||||||||||||||||
Expired | (1,326,606 | ) | 35.52 | (83,525 | ) | 40.03 | ||||||||||||||||||||||||||
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Outstanding at September 30, 2011 | 16,895,927 | $ | 37.91 | 1.7 | $ | 0 | ||||||||||||||||||||||||||
Outstanding at March 31, 2012 | 14,845,099 | $ | 38.34 | 1.34 | $ | 759 | ||||||||||||||||||||||||||
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All options were fully vested and exercisable as of September 30, 2011.March 31, 2012.
Executive Continuity and Restricted Stock Award Program
The following summarizes the activity of the Executive Continuity and Restricted Stock Award Program for the ninethree months ended September 30, 2011:March 31, 2012:
Nonvested Shares | Weighted Average Grant Date Fair Value | Nonvested Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Outstanding at December 31, 2010 | 167,500 | $ | 26.95 | |||||||||||||
Outstanding at December 31, 2011 | 128,917 | $ | 27.86 | |||||||||||||
Granted | 21,500 | 25.84 | 65,000 | 31.73 | ||||||||||||
Shares Issued | (43,250 | ) | 26.59 | (17,500 | ) | 28.28 | ||||||||||
Forfeited | (5,000 | ) | 26.78 | (0 | ) | 0 | ||||||||||
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Outstanding at September 30, 2011 | 140,750 | $ | 26.90 | |||||||||||||
Outstanding at March 31, 2012 | 176,417 | $ | 29.25 | |||||||||||||
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NOTE 17 – INDUSTRY SEGMENT INFORMATION
International Paper’s industry segments, Industrial Packaging, Printing Papers, Consumer Packaging and 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, 2012 and nine months ended September 30, 2011 and 2010 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Industrial Packaging | $ | 2,660 | $ | 2,610 | $ | 7,920 | $ | 7,270 | $ | 3,115 | $ | 2,555 | ||||||||||||
Printing Papers | 1,550 | 1,550 | 4,665 | 4,400 | 1,560 | 1,530 | ||||||||||||||||||
Consumer Packaging | 955 | 870 | 2,805 | 2,520 | 810 | 905 | ||||||||||||||||||
Distribution | 1,710 | 1,755 | 5,005 | 4,965 | 1,475 | 1,640 | ||||||||||||||||||
Forest Products (1) | 0 | 205 | 0 | 220 | ||||||||||||||||||||
Corporate and Intersegment Sales | (243 | ) | (270 | ) | (728 | ) | (727 | ) | (305 | ) | (243 | ) | ||||||||||||
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Net Sales | $ | 6,632 | $ | 6,720 | $ | 19,667 | $ | 18,648 | $ | 6,655 | $ | 6,387 | ||||||||||||
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Operating profit by industry segment for the three months ended March 31, 2012 and nine months ended September 30, 2011 and 2010 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Industrial Packaging | $ | 293 | (2) | $ | 332 | $ | 841 | (2) | $ | 565 | (2) | $ | 215 | (1) | $ | 279 | (5) | |||||||
Printing Papers | 239 | (3) | 278 | 683 | (3) | 247 | (3) | 146 | (2) | 201 | (6) | |||||||||||||
Consumer Packaging | 30 | (4) | 71 | 97 | (4) | 147 | (4) | 103 | (3) | 100 | (7) | |||||||||||||
Distribution | 9 | (5) | 22 | 18 | (5) | 69 | (2 | )(4) | 5 | (8) | ||||||||||||||
Forest Products (1) | 0 | 49 | 0 | 97 | ||||||||||||||||||||
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Operating Profit | 571 | 752 | 1,639 | 1,125 | 462 | 585 | ||||||||||||||||||
Interest expense, net | (130 | ) | (152 | ) | (403 | ) | (458 | ) | (168 | ) | (136 | ) | ||||||||||||
Noncontrolling interests/equity earnings adjustment (6) | (1 | ) | 5 | 6 | 20 | |||||||||||||||||||
Noncontrolling interests/equity earnings adjustment (9) | 4 | (2 | ) | |||||||||||||||||||||
Corporate items, net | (34 | ) | (58 | ) | (114 | ) | (163 | ) | (69 | ) | (44 | ) | ||||||||||||
Restructuring and other charges | (25 | ) | 0 | (86 | ) | (34 | ) | (16 | ) | (35 | ) | |||||||||||||
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Earnings (loss) from continuing operations before income taxes and equity earnings | $ | 381 | $ | 547 | $ | 1,042 | $ | 490 | $ | 213 | $ | 368 | ||||||||||||
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Equity earnings (loss), net of taxes – Ilim | $ | 51 | $ | 22 | $ | 152 | $ | 24 | $ | 40 | $ | 56 | ||||||||||||
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(1) |
(2) | Includes |
(3) | Includes a net gain of $7 million for adjustments related to the |
(4) | Includes charges of $21 million associated with the restructuring of the Company’s xpedx operations. |
(5) | Includes charges of $2 million for additional closure costs for the Etienne mill in France and a gain of $7 million for a bargain purchase price adjustment on an acquisition by our joint venture in Turkey |
Includes |
Includes a charge of |
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 generated diluted earnings per share attributable to International Paper common shareholders from continuing operations and before special items of $0.92$0.57 in the thirdfirst quarter of 2011,2012, compared with 2011 secondfourth quarter earnings of $0.80$0.72 and 2010 third2011 first quarter earnings of $0.91, which included $0.08 of earnings related to our Forest Products segment.$0.77. Diluted earnings (loss) per share attributable to International Paper common shareholders were $1.19$0.43 in the thirdfirst quarter of 2011,2012, compared with $0.52$0.65 in the secondfourth quarter of 2011 and $0.91$0.81 in the thirdfirst quarter of 2010.2011.
DuringThe 2012 first quarter saw the 2011 thirdcompletion of the Temple-Inland acquisition, and we are off to an excellent start integrating the Temple-Inland operations with our legacy Industrial Packaging business segment since the mid-February close. Overall, our consolidated results in the 2012 first quarter generally met our global balanceoriginal expectations. We experienced normal seasonal weakness in the Americas as we exited the holiday season and focused portfolio continued to producenavigate what remains an uneven global recovery. The main driver impacting our year-over-year results was lower pulp, paper and packaging prices globally, primarily in export markets supplied by our North American and Brazilian operations. However, we feel that prices in all global markets reached their low during the quarter and on average were higher as we exited the quarter as price realizations from current pricing actions began to take hold. Overall, our revenues were up over the prior year first quarter and the fourth quarter of 2011 mainly due to the Temple-Inland acquisition and we began to see synergies from the acquisition from the first day. Due to those synergies, the Temple-Inland acquisition was neutral to earnings during the quarter, before special items and accounting for incremental interest costs. We continued to generate strong earnings andfree cash flow eventhat approached our first quarter 2011 free cash flow, after adjusting for higher capital spending levels in the facecurrent quarter.
Looking ahead to the 2012 second quarter, we will be moving into our seasonally stronger period of the year and expect increased demand for packaging in North America, as well as improving paper demand in Brazil resulting in a continued toughmore favorable mix between domestic and export sales. So far in the first month of the 2012 second quarter we have seen U.S. box demand modestly outpacing last year on an average per-day basis, and we expect that trend to continue throughout the second quarter. Additionally, earnings from our Industrial Packaging segment will be impacted by a full quarter of earnings from Temple-Inland as well as increased synergy capture. We expect further price realizations throughout the quarter associated with announced increases for paper in North America, Brazil and Russia, containerboard exported from our North American operations, and global economic environment. Steady volumesfluff and stable pricing combined with outstanding operations, a lightermarket pulp. The second quarter is expected to be our heaviest maintenance schedule,outage quarter of the year. We expect to see higher input costs in North America spread across recycled fiber, chemical and a strongfreight costs, only slightly offset by natural gas. Finally, the contribution from our Ilim joint venture in Russia allowed us to achieve costwill likely be reduced by the absence of capital returns during the third quarter and over the most recent five quarters. These results were posted even with the headwind of approximately $0.05 per share of input cost escalation.
In our Industrial Packaging segment, North American prices were relatively stable during the quarter, with some erosion in pricing for sales to our export markets. A modest decline in volume was caused by softeninglarge positive favorable currency impact on their U.S. denominated debt recorded in the North American market and seasonal declines in Europe. The segment’s earnings were favorably impacted by lower mill maintenance outage spending and from resuming production at our Vicksburg mill following the flooding there in the secondfirst quarter. Our Printing Papers segment had an exceptionally good quarter on the strength of our North American operations, while Europe and Brazil were flat with the second quarter and results from our pulp business were down mainly due to lower prices. The Consumer Packaging segment recorded another very good quarter on steady volume and improved price realizations associated with the pass through of previously announced price increases. This segment also benefitted from a lighter maintenance schedule during the quarter. Our distribution business, xpedx, nearly doubled their second quarter earnings during the third quarter on seasonal demand in printing, solid packaging growth and lower overhead costs associated with the previously announced profit improvement program. Our share of earnings from our Ilim joint venture were $51 million, down slightly from $57 million in the second quarter, as prices remained solid, offset by a slightly higher level of outages, lower volume, and a rise in input costs. We generated free cash flow of $561 million during the third quarter, which was $142 million higher than the $419 million generated in the second quarter, even with an $86 million increase in capital spending during the current quarter.
Looking ahead to the 2011 fourth quarter, we expect volumes to exhibit normal seasonal patterns in North America – stable in paper and lower in packaging on four fewer shipment days – partially offset by seasonal increases in Europe and Brazil. While prices are expected to generally be stable, softness in global market pulp is expected to continue and some further erosion of export containerboard pricing is likely. The fourth quarter is expected to be a significantly heavier maintenance outage quarter in North America, but will be somewhat offset by a lighter schedule in Europe and Brazil. We expect input costs to stabilize, but stay elevated on a relative basis compared to prior year. Declines in prices for recovered fiber are expected to be partially offset by seasonally higher wood prices. At Ilim, we expect to see a significant negative currency impact in our fourth quarter associated with the revaluation of their U.S. dollar-denominated debt. Overall, based primarily on seasonality, increased outages and the currency impact from Ilim, we expect fourth quarter earnings to decrease meaningfully from third quarter levels.
Earnings per share attributable to International Paper shareholders before special items is a non-GAAP measure. Diluted earnings (loss) per share attributable to International Paper shareholders is the most direct comparable GAAP measure. The Company calculates earnings per share before special items by excluding
the after-tax effect of items considered by management to be unusual from the earnings reported under GAAP. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. The Company believes that using this information, along with diluted earnings (loss) per share, provides for a more complete analysis of the results of operations by quarter. The following is a reconciliation of earnings per share attributable to International Paper shareholders before special items to diluted earnings (loss) per share attributable to International Paper shareholders.
Three Months Ended September 30, | Three Months Ended June 30, | Three Months Ended March 31, | Three Months Ended December 31, | |||||||||||||||||||||
2011 | 2010 | 2011 | 2012 | 2011 | 2011 | |||||||||||||||||||
Earnings Per Share Before Special Items | $ | 0.92 | $ | 0.91 | $ | 0.80 | $ | 0.57 | $ | 0.77 | $ | 0.72 | ||||||||||||
Restructuring and other charges | (0.07 | ) | 0 | (0.03 | ) | (0.16 | ) | (0.07 | ) | (0.03 | ) | |||||||||||||
Net gains (losses) on sales and impairments of businesses | 0.34 | 0 | (0.24 | ) | 0.01 | (0.02 | ) | 0 | ||||||||||||||||
Interest income | 0 | 0 | 0.01 | |||||||||||||||||||||
Income tax items | 0 | 0 | (0.01 | ) | 0 | 0 | (0.05 | ) | ||||||||||||||||
Bargain purchase price adjustment recorded in equity earnings | 0 | 0.02 | 0 | |||||||||||||||||||||
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Diluted Earnings Per Common Share from Continuing Operations | $ | 1.19 | $ | 0.91 | $ | 0.52 | ||||||||||||||||||
Earnings Per Common Share from Continuing Operations | 0.42 | 0.70 | 0.65 | |||||||||||||||||||||
Discontinued operations | 0.01 | 0.11 | 0 | |||||||||||||||||||||
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Diluted Earnings (Loss) Per Common Share as Reported | $ | 0.43 | $ | 0.81 | $ | 0.65 | ||||||||||||||||||
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In the first quarter of 2012, we eliminated the one-quarter lag in reporting our share of equity earnings from the Ilim joint venture in Russia. First quarter 2012 equity earnings for Ilim are included in our first quarter 2012 results. Prior year results have been adjusted to reflect the amounts that would have been reported had the one-quarter lag not existed.
RESULTS OF OPERATIONS
For the thirdfirst quarter of 2011,2012, International Paper Company reported net sales of $6.6$6.7 billion, compared with $6.7$6.4 billion in both the thirdfirst quarter of 20102011 and $6.6 billion in the secondfourth quarter of 2011.
Net earnings attributable to International Paper totaled $518$188 million, or $1.19$0.43 per share, in the 2011 third2012 first quarter. This compared with $397$354 million, or $0.91$0.81 per share, in the thirdfirst quarter of 20102011 and $224$281 million, or $0.52$0.65 per share, in the secondfourth quarter of 2011.
Earnings from continuing operations attributable to International Paper Company were $518$183 million in the thirdfirst quarter of 2012 compared with $305 million in the first quarter of 2011 compared with $397and $281 million in the third quarter of 2010 and $224 million in the secondfourth quarter of 2011. Compared with the thirdfirst quarter of 2010,2011, earnings in the 2011 third2012 first quarter benefited from higher average sales price realizationsvolumes ($31 million), the impact of lower operating costs and a more favorable mix of products sold ($807 million), lower net interest expenseraw material and freight costs ($168 million), earnings from the Temple-Inland packaging operations acquired during the quarter ($22 million) and a lower income tax expense ($54 million) reflecting a lower estimated tax rate. These benefits were offset by lower average sales volumesprice realizations ($2580 million), the net impact of a less favorable mix of products sold and lower operating costs ($2 million), higher mill outage costs ($52 million), higher raw material and freight costs ($96 million), and lower earnings from land sales ($34 million). Corporatecorporate and other items were $4 million lower in the third quarter of 2011.costs ($7 million) and higher interest expense ($21 million). Equity earnings, net of taxes, relating to International Paper’s investment in Ilim Holding S.A. were $29$16 million higherlower in the 2011 third2012 first quarter than in the 2010 third2011 first quarter. Net special items were a gainloss of $116$64 million in the 2012 first quarter, compared with a loss of $29 million in the 2011 third quarter, compared with no net special items in the 2010 thirdfirst quarter.
Compared with the secondfourth quarter of 2011, earnings benefited from higher sales volumes ($30 million), lower mill maintenance outage costs ($11 million), lower raw material and freight costs ($18 million), and earnings from the Temple-Inland packaging operations ($22 million). These benefits were offset by lower sales price realizations ($41 million), the impact of lower operating costs and a moreless favorable mix of products sold and higher operating costs ($881 million), lower mill outage costshigher corporate and other expenses ($5023 million), and a lower income tax provision ($14 million). These benefits were partially offset by lower average sales price realizations ($5 million), lower sales volumes ($11 million), and higher raw material and freight costs ($23 million). Corporate and other items were $30 million lower in the third quarter of 2011 which includes $18 million less expense as the Vicksburg mill resumed production after the flooding of the Yazoo River. Net interest expense decreased slightly ($216 million). Equity earnings, net of taxes for Ilim Holding, S.A.
decreased increased by $6$15 million versus the second2011 fourth quarter. Net special items were a gainloss of $116$64 million in the 2011 third2012 first quarter, compared with a loss of $119$31 million in the 2011 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 industry segment operating profit. This is defined as earnings from continuing operations before taxes, equity earnings and noncontrolling interests net of taxes, excluding interest expense, corporate charges and corporate special items which may include restructuring charges and (gains) losses on sales and impairments of businesses.
The following table presents a reconciliation of net earnings attributable to International Paper Company to its total industry segment operating profit:
Three Months Ended | ||||||||||||
September 30, | June 30, | |||||||||||
In millions | 2011 | 2010 | 2011 | |||||||||
Earnings (Loss) From Continuing Operations Attributable to International Paper Company | $ | 518 | $ | 397 | $ | 224 | ||||||
Add back (deduct): | ||||||||||||
Income tax provision (benefit) | (84 | ) | 170 | 118 | ||||||||
Equity (earnings) loss, net of taxes | (50 | ) | (22 | ) | (57 | ) | ||||||
Noncontrolling interests, net of taxes | (3 | ) | 2 | 8 | ||||||||
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Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 381 | 547 | 293 | |||||||||
Interest expense, net | 130 | 152 | 137 | |||||||||
Noncontrolling interests / equity earnings included in operations | 1 | (5 | ) | (9 | ) | |||||||
Corporate items | 34 | 58 | 36 | |||||||||
Special items: | ||||||||||||
Restructuring and other charges | 25 | 0 | 26 | |||||||||
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$ | 571 | $ | 752 | $ | 483 | |||||||
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Industry Segment Operating Profit | ||||||||||||
Industrial Packaging | $ | 293 | $ | 332 | $ | 269 | ||||||
Printing Papers | 239 | 278 | 243 | |||||||||
Consumer Packaging | 30 | 71 | (33 | ) | ||||||||
Distribution | 9 | 22 | 4 | |||||||||
Forest Products (1) | 0 | 49 | 0 | |||||||||
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Total Industry Segment Operating Profit | $ | 571 | $ | 752 | $ | 483 | ||||||
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Three Months Ended | ||||||||||||
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In millions | 2012 | 2011 | 2011 | |||||||||
Earnings (Loss) From Continuing Operations Attributable to International Paper Company | $ | 183 | $ | 305 | $ | 281 | ||||||
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Income tax provision (benefit) | 70 | 123 | 154 | |||||||||
Equity (earnings) loss, net of taxes | (44 | ) | (65 | ) | (23 | ) | ||||||
Noncontrolling interests, net of taxes | 4 | 5 | 4 | |||||||||
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Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 213 | 368 | 416 | |||||||||
Interest expense, net | 168 | 136 | 138 | |||||||||
Noncontrolling interests / equity earnings included in operations | (4 | ) | 2 | (4 | ) | |||||||
Corporate items | 69 | 44 | 31 | |||||||||
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Restructuring and other charges | 16 | 35 | (4 | ) | ||||||||
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$ | 462 | $ | 585 | $ | 577 | |||||||
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Industry Segment Operating Profit | ||||||||||||
Industrial Packaging | $ | 215 | $ | 279 | $ | 306 | ||||||
Printing Papers | 146 | 201 | 189 | |||||||||
Consumer Packaging | 103 | 100 | 66 | |||||||||
Distribution | (2 | ) | 5 | 16 | ||||||||
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Total Industry Segment Operating Profit | $ | 462 | $ | 585 | $ | 577 | ||||||
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Industry Segment Operating Profit
Total industry segment operating profits of $571$462 million in the 2011 third2012 first quarter were lower than the $752 million in the 2010 third quarter, but higher than the $483$585 million in the 2011 secondfirst quarter and the $577 million in the 2011 fourth quarter. Compared with the thirdfirst quarter of 2010,2011, operating profits in the current quarter benefited from higher average sales price realizationsvolumes ($4610 million), lower raw material and freight costs ($12 million), earnings from the Temple-Inland packaging operations ($33 million) and the impact of lower operatingcorporate and other costs and a more favorable mix of products sold ($11710 million). These benefits were offset by lower average sales volumesprice realizations ($36119 million), the net impact of a less favorable product mix and lower operating costs ($1 million), and higher mill outage costs ($73 million). Special items were a loss of $76 million in the 2012 first quarter, compared with a loss of $11 million in the 2011 first quarter.
Compared with the fourth quarter of 2011, operating profits benefited from higher sales volumes ($45 million), higherlower mill maintenance outage costs ($16 million), lower raw material and freight costs ($13927 million), and lower gains from land sales ($49 million). Corporate and other items were $15 million higher in the third quarter of 2011. Special items were a loss of $98 million in the 2011 third quarter, compared with no special items in the 2010 third quarter.
Compared with the 2011 second quarter, operating profits benefitedearnings from the impact of lower operating costs and a more favorable mix of products soldTemple-Inland packaging operations ($12 million), and lower mill outage costs ($7533 million). These benefits were partially offset by lower average sales price realizations ($860 million), lower sales volumesa less favorable product mix and higher operating costs ($16120 million), and higher raw material and freightother costs ($344 million). Corporate and other items were $38 million lower in the third quarter of 2011 which includes $18 million less expense as the Vicksburg mill resumed production after the flooding of the Yazoo River. Special items were a loss of $98$76 million in the 2011 third2012 first quarter, compared with a special item loss of $119$24 million in the 2011 secondfourth quarter.
During the 2011 third2012 first quarter, International Paper took approximately 185,000251,000 tons of downtime of which approximately 68,00093,000 tons were market-related compared with approximately 144,000191,000 tons of downtime, which included 29,000approximately 93,000 tons that were market-related, in the 2010 third2011 first quarter. During the 2011 secondfourth quarter, International Paper took approximately 325,000353,000 tons of downtime of which approximately 80,000 tons were related to production outages at the Vicksburg mill caused by the flooding of the Yazoo River, and about 25,000237,000 tons were market-related. Market-related downtime is taken to balance internal supply with our customer demand to help manage inventory levels, while maintenance downtime, which makes up the majority of the difference between total downtime and market-related downtime, is taken periodically during the year.
Sales Volumes by Product (1)
Sales volumes of major products for the three-month and nine-month periods ended September 30,March 31, 2012 and 2011 and 2010 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
In thousands of short tons | 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | ||||||||||||||||||
Industrial Packaging | ||||||||||||||||||||||||
Corrugated Packaging | 1,895 | 1,928 | 5,618 | 5,693 | 2,462 | 1,810 | ||||||||||||||||||
Containerboard | 614 | 634 | 1,789 | 1,867 | 749 | 555 | ||||||||||||||||||
Recycling | 608 | 636 | 1,860 | 1,860 | 537 | 643 | ||||||||||||||||||
Saturated Kraft | 38 | 45 | 122 | 136 | 38 | 39 | ||||||||||||||||||
Bleached Kraft | 27 | 23 | 75 | 66 | 23 | 23 | ||||||||||||||||||
European Industrial Packaging | 244 | 251 | 783 | 768 | 266 | 273 | ||||||||||||||||||
Asian Box | 118 | 114 | 337 | 197 | 98 | 103 | ||||||||||||||||||
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Industrial Packaging | 3,544 | 3,631 | 10,584 | 10,587 | 4,173 | 3,446 | ||||||||||||||||||
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U.S. Uncoated Papers | 657 | 684 | 1,975 | 2,051 | 685 | 662 | ||||||||||||||||||
European and Russian Uncoated Papers | 289 | 311 | 907 | 929 | 311 | 312 | ||||||||||||||||||
Brazilian Uncoated Papers | 283 | 262 | 826 | 792 | 274 | 273 | ||||||||||||||||||
Indian Uncoated Papers (3) | 79 | 0 | ||||||||||||||||||||||
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Uncoated Papers | 1,229 | 1,257 | 3,708 | 3,772 | 1,349 | 1,247 | ||||||||||||||||||
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Market Pulp (3) | 347 | 385 | 1,052 | 1,053 | ||||||||||||||||||||
Market Pulp (4) | 385 | 341 | ||||||||||||||||||||||
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Consumer Packaging | ||||||||||||||||||||||||
U.S. Coated Paperboard | 342 | 364 | 1,070 | 1,057 | ||||||||||||||||||||
North American Consumer Packaging | 373 | 409 | ||||||||||||||||||||||
European Coated Paperboard | 80 | 88 | 244 | 264 | 97 | 84 | ||||||||||||||||||
Asian Coated Paperboard | 257 | 213 | 737 | 651 | 237 | 222 | ||||||||||||||||||
Other Consumer Packaging | 46 | 45 | 138 | 129 | ||||||||||||||||||||
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Consumer Packaging | 725 | 710 | 2,189 | 2,101 | 707 | 715 | ||||||||||||||||||
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(1) | Sales volumes include third party and inter-segment sales and exclude sales of equity investees. |
(2) | Includes |
(3) | Includes APPM volumes from date of acquisition in October 2011. |
(4) | Includes internal sales to mills. |
Discontinued Operations
2012:Upon the acquisition of Temple-Inland, Inc. (Temple-Inland), management committed to a plan to sell the Temple-Inland Business Products business and an active program to market the sale has been initiated. The Company believes such sale can be accomplished within one year. The operating results of this business are included in Discontinued operations from the date of acquisition. The assets of this business, totaling $481 million at March 31, 2012, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet at March 31, 2012. The liabilities of this business, totaling $52 million at March 31, 2012, are included in Liabilities of businesses held for sale in the accompanying consolidated balance sheet at March 31, 2012.
2011:The sale of the Company’s Kraft Papers business that closed in January 2007 contained an earnout provision that could require KapStone to make an additional payment to International Paper in 2012. Based on the results through the first four years of the earnout period, KapStone concluded that the threshold would be attained and the full earnout payment would be due to International Paper in 2012. On January 3, 2011, International Paper signed an agreement with KapStone to allow KapStone to pay the Company on January 4, 2011, the discounted amount of $50 million before taxes ($30 million after taxes) that otherwise would have been owed in full under the agreement in 2012. This amount has been included in Discontinued operations, net of taxes in the accompanying consolidated statement of operations.
In the third quarter of 2006, the Company completed the sale of its Brazilian Coated Papers business and recast its financial statements to reflect this business as a discontinued operation. Included in the results for this business in 2005 and 2006 were local country tax contingency reserves for which the related statute of limitations has now expired.expired in the 2011 first quarter. A $15 million tax benefit for the reversal of these reserves plus associated interest income of $6 million ($4 million after taxes) was recorded during the three months ended March 31, 2011 and is included in Discontinued operations, net of taxes in the accompanying consolidated statement of operations.
Income Taxes
The income tax benefitprovision was $84$70 million for the 2011 third2012 first quarter. Excluding a benefit of $239$28 million related to the tax effects of special items, the effective income tax rate for continuing operations was 30%32% for the quarter.
The income tax provision was $118$154 million for the 2011 secondfourth quarter. Excluding a $24 million tax expense related to internal restructurings, a $9 million tax expense for costs associated with our acquisition of a majority share of Andhra Pradesh Paper Mills Limited in India, a $13 million tax benefit related to the release of $27a deferred tax asset valuation allowance, a $2 million expense for other items and a $5 million benefit for the tax effects of other special items, the effective income tax rate for continuing operations was 32% for the quarter.
An income tax provision of $123 million was recorded for the 2011 first quarter. Excluding a $17 million tax benefit related to the tax effects of special items, the effective income tax rate for continuing operations was 33% for the quarter.
The income tax provision was $170 million for the 2010 third quarter reflecting an effective income tax rate for continuing operations of 31% for the quarter..
Interest Expense and Corporate Items
Net interest expense for the 2011 third2012 first quarter was $130$168 million compared with $137$138 million in the second2011 fourth quarter of 2011 and $152$136 million in the third quarter of 2010.2011 first quarter. The lowerhigher net expense compared with the prior yearboth periods is due to debt reduction.interest expense associated with the Temple-Inland acquisition.
Corporate items, net, of $34$69 million in the third2012 first quarter of 2011 were lowerhigher than $36the $31 million of net expense in the 2011 second quarter and $58 million in the 2010 third quarter. The decrease compared with both the 2011 secondfourth quarter and the 2010 third$44 million of net expense in the 2011 first quarter. The increase compared to both the prior quarter and the prior year reflects lowerhigher pension costs. The decrease compared with the third quarter of 2010 also reflects lower supply chain project costs.
Special Items
Restructuring and Other Charges
2011:2012:During the thirdfirst quarter of 2011,2012, restructuring and other charges totaling $49$34 million before taxes ($3223 million after taxes) were recorded, including an $18a $19 million pre-tax charge ($1314 million after taxes) for restructuring costs related to the Company’s xpedx business, a $16 million pre-tax charge ($10 million after taxes) for costs related to International Paper’s acquisitionthe early extinguishment of a majority share of APPM in India, an $8 million pre-tax charge ($5 million after taxes) for costs associated with the signing of an agreement to acquire Temple-Inland, a $6 million pre-tax charge ($4 million after taxes) for costs associated with the sale of the Company’s Shorewood businessdebt and a pre-tax charge of $1 million ($0 milliongain (before and after taxes) for other items.
During the second quarter of 2011, restructuring and other charges totaling a gain of $10 million before taxes (a gain of $7 million after taxes) were recorded, including a $10 million pre-tax charge ($6 million after taxes) for restructuring costs related to the Company’s xpedx business, a $21 million pre-tax gain (a $13 million gain after taxes) related to a change in the estimate of closure costs related to the Franklin, Virginia mill due to the Company’s decision to repurpose a portion of the mill to produce fluff pulp and a $1 million pre-tax charge ($0 million after taxes) for other items. Additionally during the quarter, a $5 million after-tax charge was recorded for tax adjustments related to legislative changes and audit settlements.
2011:During the first quarter of 2011, restructuring and other charges totaling $45 million before taxes ($28 million after taxes) were recorded, including a $32 million pre-tax charge ($19 million after taxes) for costs related to the early extinguishment of debt, a $7 million pre-tax charge ($4 million after taxes) for restructuring costs related to the Company’s xpedx business, $3 million before taxes ($2 million after taxes) for costs associated with the Company’s S&A reduction initiative and a charge of $3$6 million (before and after taxes) for other items. Additionally, during the first quarter of 2011, the Company recorded a gain of $7 million (before and after taxes) related to a bargain purchase price adjustment on an acquisition by our joint venture in Turkey. This gain is included in Equity earnings (losses), net of taxes, in the accompanying consolidated statement of operations.
2010:During the second quarter of 2010, restructuring and other charges totaling $144 million before taxes ($88 million after taxes) were recorded, including a $111 million pre-tax charge ($68 million after taxes) for closure costs related to the paper mill and associated operations in Franklin, Virginia (including $46 million of accelerated depreciation and $36 million of environmental closure costs), a $2 million pre-tax charge ($1 million after taxes) for costs associated with the Company’s S&A reduction initiative, and $18 million pre-tax charge ($11 million after taxes) for costs related to the early extinguishment of debt, an $11 million pre-tax charge ($7 million after taxes) to write off an Ohio Commercial Activity tax receivable and a $2 million pre-tax charge ($15 million after taxes) for other items.
During the first quarter of 2010, restructuring and other charges totaling $215 million before taxes ($132 million after taxes) were recorded, including a $204 million pre-tax charge ($124 million after taxes) for closure costs related to the paper mill and associated operations in Franklin, Virginia (including accelerated depreciation of $190 million), a $4 million pre-tax charge ($2 million after taxes) for costs related to the early extinguishment of debt, a $3 million pre-tax charge ($2 million after taxes) for costs associated with the reorganization of the Company’s Shorewood Packaging operations and charges of $4 million (before and after taxes) for other items. Additionally, a $46 million after-tax charge was recorded for tax adjustments related to incentive compensation and postretirement prescription drug coverage.
Net (Gains) Losses on Sales and Impairments of Businesses
2011:2012:On August 22, 2011, International Paper announced that it had signed an agreement to sell its Shorewood business to Atlas Holdings, pending regulatory approval and other customary closing conditions. During the three months ended September 30, 2011,March 31, 2012, the Company recorded a pre-tax charge of $82 million (after a $222 million tax benefit and a gain of $8$7 million related($6 million after taxes) to noncontrolling interest, a gain of $148 million) was recorded to reduceadjust the carrying valuepreviously estimated loss on the sale of the Company’s Shorewood business to fair market value. As part of the transaction, International Paper will retain a minority interest of approximately 40% in the newly combined AGI-Shorewood business outside the U.S. Since the interest retained represents significant continuing involvement in the operations of the business, the operating results of Shorewood business have beenbusiness. This charge is included in continuing operationsNet (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations. The transaction will close in stages and is expected to be completed by the end of 2011.
During the second quarter of 2011, a determination was made that the current book valueThe sale of the Shorewood North American asset group exceeded its estimated fair value, calculated usingnon-U.S. business was completed in January 2012.
As referenced in Note 6, pursuant to a Proposed Final Judgment with the probability-weighted present value of projected future cash flows. As a result, a $129 million charge ($104 million after taxes) was recordedDOJ in connection with the Company’s Consumer Packaging segmentacquisition of Temple-Inland, the Company is marketing for sale its containerboard mills located in Oxnard (Hueneme), California; Ontario, California; and New Johnsonville, Tennessee (the Divestiture Mills). Under the terms of the Proposed Final Judgment, we are required to write downaccomplish the divestiture of the Divestiture Mills by June 11, 2012 (with the possibility of two 30-day extensions). The long-lived assets of the asset group to their estimated fair value.Divestiture Mills, totaling $187 million at March 31, 2012, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet at March 31, 2012.
2011:During the first quarter of 2011, the Company recorded an $8 million charge (before and after taxes) to further write down the long-lived assets of its Inverurie, Scotland mill to their estimated fair value.
The charges discussed above are This charge is included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations.
On August 22, 2011, International Paper announced that it had signed an agreement to sell its Shorewood business to Atlas Holdings. The sale of the U.S. portion of the Shorewood business to Atlas Holdings closed on December 31, 2011; however, the sale of the remainder of the Shorewood business occurred during January 2012. The assets of the remainder of the Shorewood business, totaling $196 million at December 31, 2011, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet. The liabilities of the remainder of the Shorewood business totaling $43 million at December 31, 2011 are included in Liabilities of businesses held for sale in the accompanying consolidated balance sheet.
BUSINESS SEGMENT OPERATING RESULTS
The following presents business segment discussions for the thirdfirst quarter of 2011.2012.
Industrial Packaging
2011 | 2010 | 2012 | 2011 | |||||||||||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||||||||||||
Sales | $ | 2,660 | $ | 2,705 | $ | 7,920 | $ | 2,610 | $ | 2,440 | $ | 7,270 | $ | 3,115 | $ | 2,555 | $ | 2,510 | ||||||||||||||||||
Operating Profit | 293 | 269 | 841 | 332 | 192 | 565 | 215 | 279 | 306 |
Industrial Packaging net sales and operating profit in the first quarter of 2012 included the results from the Temple-Inland packaging operations from the date of acquisition. Net sales for the thirdfirst quarter of 2012 were 24% higher than in the fourth quarter of 2011, and 22% higher than in the first quarter of 2011. Operating profits in the first quarter of 2012 included $43 million of integration costs associated with the acquisition of Temple-Inland and a $20 million charge to write-up the Temple-Inland inventories to fair value. Operating earnings in the fourth quarter of 2011 included $12 million of costs associated with the signing of an agreement to acquire Temple-Inland, and a $2 million gain related to the closure of a mill in 2009, while operating profits in the first quarter of 2011 included a $7 million gain for a bargain purchase price adjustment on an acquisition by our joint venture in Turkey and $2 million of additional expenses related to the closure of the Etienne mill in France. Excluding these items, operating profits in the first quarter of 2012 were 2%12% lower than in the secondfourth quarter of 2011, but 2%and 1% higher than in the thirdfirst quarter of 2010. Operating profits in the third quarter of 2011 included an $8 million charge for costs associated with the agreement to acquire Temple-Inland. Excluding this item, operating profits in the third quarter of 2011 were 12% higher than in the second quarter of 2011, but were 9% lower than in the third quarter of 2010.2011.
North American Industrial Packagingnet sales were $2.2$2.7 billion in the 2011 third quarter, 2011 second quarter and 2010 third quarter. Operating earnings were $283 million ($291 million excluding costs associated with the agreement to acquire Temple-Inland) in the thirdfirst quarter of 20112012 compared with $253 million$2.1 billion in both the secondfourth quarter of 2011 and $320the first quarter of 2011. Operating earnings were $195 million ($258 million excluding integration and inventory write-up costs related to Temple-Inland) in the first quarter of 2012 compared with $284 million ($294 million excluding acquisition and facility closure costs) in the fourth quarter of 2011 and $256 million in the thirdfirst quarter of 2010.2011.
Excluding the effect of the Temple-Inland acquisition, sales volumes in the first quarter of 2012 increased compared with the fourth quarter of 2011 due to steady market demand for boxes coupled with a higher number of shipping days. Average sales price realizations were stable for domestic containerboard, but export prices declined. Box sales price realizations experienced slight erosion. Input costs were lower, primarily for recycled fiber and energy, partially offset by higher wood costs. Planned maintenance downtime costs were about $25 million higher with first-quarter 2012 outages at the Vicksburg and Savannah mills. In addition, planned maintenance downtime costs were about $22 million for the Temple-Inland operations which had an outage at the Bogalusa mill. Operating costs were unfavorable reflecting reliability issues at several mills. The legacy business took about 68,000 tons and the Temple-Inland operations took about 10,000 tons of market-related downtime in the first quarter of 2012 compared with approximately 214,000 tons for the legacy business in the fourth quarter of 2011.
Compared with the secondfirst quarter of 2011, excluding the effect of the Temple-Inland acquisition, sales volumes were moderately lower in the third2012 first quarter increased due to solid market demand and because the first quarter of 2011 reflecting flat market demand for boxes and decreased demand for containerboard in both domestic and export markets.was affected by adverse weather events. Average sales price realizations increased slightlywere significantly lower for domestic andsales to export sales of containerboard markets, while box prices declined slightly. Input costs for recycled fiber and energy were significantly higher and starchlower, but freight costs were also higher, while wood costs were lower.higher. Planned maintenance downtime costs were $59about $14 million lowermore than in the thirdfirst quarter of 2011. In addition, the Vicksburg mill was producing in the third quarter after having been down for 49 days in the second quarter2011 due to the floodingtiming of the Yazoo River.mill outages. Operating costs were unfavorable. The business took 52,000about 93,000 tons of market-related downtime in the 2011 third quarter.
Sales volumes in the thirdfirst quarter of 2011 were lower than in2011.
Entering the thirdsecond quarter of 2010 for boxes and containerboard due to slower economic conditions. Average sales price realizations were about flat reflecting market pressures. Input costs were significantly higher, particularly for recycled fiber, but also for chemicals and freight, while wood costs were lower. Planned maintenance downtime costs were $10 million higher in the 2011 third quarter. Operating costs were favorable year-over-year primarily due to routine inventory valuation adjustments.
Looking ahead to the fourth quarter of 2011,2012, sales volumes are expected to be seasonally lower with four fewer shipping days in the quarterhigher for the box business. Containerboard shipments to both domesticboxes and export marketsabout flat for containerboard. Recycled fiber costs are expected to be flat. Input costs should be lower for recycled fiber,increase, but be partially offset by higher wood costs. Planned maintenance downtime costs should be about $13 million higher with outages scheduled at the Pine Hill and Prattville mills. Manufacturing operating costs are expected to be favorable.lower. Planned maintenance outage costs should be about $5 million higher.
European Industrial Packagingnet sales were $275$270 million in the thirdfirst quarter of 20112012 compared with $295$280 million in both the secondfourth quarter of 2011 and $235the first quarter of 2011. Operating earnings were $19 million compared with $19 million in the third quarter of 2010. Operating profits in the third quarter of 2011 were $9 million compared with $16 million in the secondfourth quarter of 2011 and $14$22 million ($17 million excluding a bargain purchase price adjustment in Turkey and facility closure costs for the Etienne mill in France) in the thirdfirst quarter of 2010.2011.
Sales volumes in the thirdfirst quarter of 2011 decreased from2012 were higher than in the secondfourth quarter of 2011 reflecting lower market demand for packaging in the French fruit and vegetable market segment due to poor weather conditions. Demand for packaging in the industrial market segment in Spain and Italy was seasonally weaker and was further impacted by overall slow economic conditions. Average sales margins increased due to higher box sales prices. Input costs for energy were slightly higher, while manufacturing costs were favorable
Compared with the third quarter of 2010, sales volumes were lower in the third quarter of 2011 primarily due to weakerimproved demand for packaging in the industrial markets resulting from the slow economic conditions.in France and Morocco, partially offset by seasonally weaker demand for fruit and vegetable packaging. Average sales margins decreased as cost increases for board have exceeded box sales price increases. Input costs were higher primarily due to energy costs, and manufacturing operating costs were higher due to inflation.lower board costs. Other input costs were slightly lower, primarily for energy, while operating costs were higher.
Entering
Compared with the fourthfirst quarter of 2011, sales volumes in the first quarter of 2012 decreased reflecting the overall weak economic industrial environment in southern Europe and the impact on demand for fruit and vegetable packaging of adverse weather conditions in Italy and a slow citrus season in Morocco. Average sales margins were significantly higher due to sales price increases for boxes implemented during 2011 and lower board costs. Energy costs were higher, and operating costs were unfavorable.
Looking ahead to the second quarter of 2012, sales volumes are expected to be seasonally stronger as Morocco, Spain and Italy sales tolower in the fruit and vegetable packaging market should be highermarkets, and the demand in the industrial markets is expected to improve.remain weak. Average sales margins are expected to increase asdecrease reflecting board cost increases announced in the first quarter. Other input costs are decreasing across Europe and box sales pricesoperating costs should continue to increase.be about flat.
Asian Industrial Packagingnet sales for the packaging operations were $110$95 million in the thirdfirst quarter of 20112012 compared with $105$100 million in the secondfourth quarter of 2011 and $100$95 million in the thirdfirst quarter of 2010.2011. Operating earnings for the packaging operations were about breakeven in the thirdfirst quarter of 20112012 compared with a lossgain of $1$3 million in the secondfourth quarter of 2011 and a loss of $2 millionabout breakeven in the thirdfirst quarter of 2010.2011.
Net sales for the distribution operations were $65$60 million in the thirdfirst quarter of 20112012 compared with $85$70 million in the secondfourth quarter of 2011 and $65 million in the thirdfirst quarter of 2010.2011. Operating earnings for the distribution operations were about $1 million in the third and second quartersfirst quarter of 2012, about breakeven in the fourth quarter of 2011 and about breakeven$1 million in the thirdfirst quarter of 2010.2011.
Compared with the secondfourth quarter of 2011, sales volumes in the third quarter of 2011 for the packaging business were slightly higherdecreased reflecting solidsofter market demand.demand partially due to the holiday season. Average sales margins were favorable, but were more than offset by higher operating costs. Earnings in the fourthsecond quarter of 20112012 are expected to reflect continuing improvement in sales volumes, andbut less favorable average sales margins.
Printing Papers
2011 | 2010 | 2012 | 2011 | |||||||||||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||||||||||||
Sales | $ | 1,550 | $ | 1,585 | $ | 4,665 | $1,550 | $ | 1,445 | $ | 4,400 | $ | 1,560 | $ | 1,530 | $ | 1,550 | |||||||||||||||||||
Operating Profit | 239 | 243 | 683 | 278 | 47 | 247 | 146 | 201 | 189 |
Printing Papers net sales for the thirdfirst quarter of 20112012 were 2% lower1% higher than in the secondfourth quarter of 2011 and were even with2% higher than in the thirdfirst quarter of 2010.2011. Operating profits included a gain of $1 million gain in the thirdfirst quarter of 2012 associated with the acquisition of Andhra Pradesh Papers Mills Limited and a net $1 million charge in the fourth quarter of 2011 andfor a gain of $21 million inassociated with the second quarter of 2011 related to a change in estimate of closure costs related to the announced repurposing of the Franklin mill and impairment charges related to produce fluff pulp.the Inverurie, Scotland mill. Operating profits in the first quarter of 2011 included $8 million of impairment charges related to the Inverurie, Scotland mill. Excluding these items, operating profits in the thirdfirst quarter of 20112012 were 7% higher24% lower than in the secondfourth quarter of 2011, and 14%31% lower than in the thirdfirst quarter of 2010.2011.
North American Printing Papersnet sales were $705$700 million in the thirdfirst quarter of 20112012 compared with $695$670 million in the secondfourth quarter of 2011 and $715$690 million in the thirdfirst quarter of 2010.2011. Operating earnings were $128$100 million in the first quarter of 2012 compared with $85 million ($12783 million excluding a gain related toassociated with the reversal of a reserve at the Franklin mill) in the third quarter of 2011 compared with $122 million ($101 million excluding a gain for a change in estimate of closure costs related to the announced repurposing of the Franklin mill) in the secondfourth quarter of 2011 and $125 million$88 in the thirdfirst quarter of 2010.2011.
Compared with the fourth quarter of 2011, sales volumes in the first quarter of 2012 improved due to seasonally higher demand for uncoated freesheet paper. Average sales price realizations decreased primarily due to lower sales prices to export markets. Input costs were higher for wood, energy and chemicals, but were partially offset by lower costs for purchased fiber. Freight costs also increased due to higher oil prices.
Planned maintenance downtime costs were $23 million lower with an outage in the first quarter of 2012 at the Georgetown mill compared with outages at the Eastover and Courtland mills in the fourth quarter of 2011. Operating costs were flat as seasonally higher energy costs were offset by excellent mill performance.
Sales volumes in the thirdfirst quarter of 2012 increased compared with the first quarter of 2011 primarily due to higher export shipments. Average sales price realizations were lower primarily due to lower export sales prices. Input costs increased for chemicals, wood and energy, but were partially offset by lower fiber costs. Freight costs also increased. Planned maintenance downtime costs were about $4 million lower. Operating costs were favorable due to strong performance at every mill.
Entering the second quarter of 2012, sales volumes for uncoated freesheet paper are expected to be flat. Average sales price realizations are expected to increase due to an announced price increase for domestic sales of uncoated freesheet paper rolls and cutsize paper and higher export prices. Planned maintenance downtime costs should be about $37 million higher with outages scheduled for the Eastover, Ticonderoga and Riverdale mills. Input costs for chemicals and fuel are expected to be higher.
European Printing Papersnet sales were $335 million in the first quarter of 2012, down from $340 million in the fourth quarter of 2011 and $360 million in the first quarter of 2011. Operating earnings in the first quarter of 2012 were $44 million compared with $52 million ($55 million excluding an asset impairment charge associated with the Inverurie, Scotland mill) in the fourth quarter of 2011 and $49 million ($57 million excluding an asset impairment charge associated with the Inverurie, Scotland mill) in the first quarter of 2011.
Compared with the fourth quarter of 2011, sales volumes in the first quarter of 2012 were seasonally higher in Europe for uncoated freesheet paper, but decreased in Russia due to the January holiday season. Average sales price realizations for paper decreased in Europe, but were slightly higher in Russia, while pulp sales price realizations were lower in both regions. Input costs decreased in Europe for wood and purchased pulp, partially offset by higher energy and freight costs, and in Russia energy and freight costs decreased. Operating costs were unfavorable driven mainly by difficulties at the Saillat mill in France related to the record cold weather experienced in February.
Sales volumes in the first quarter of 2012 compared with the first quarter of 2011 were about flat compared with the second quarter of 2011 reflecting increased domestic shipments of uncoated freesheetfor paper, offset bybut sales volumes for pulp decreased, shipments to export markets.primarily in Europe. Average sales price realizations for uncoated freesheet paper were lower in Europe reflecting the impact of sales price declines in the fourth quarter of 2011. Average sales price realizations were higher in Russia due to the realization of an announced price increase for uncoated freesheet paper. Pulp sales price realizations decreased in both Europe and Russia. Input costs for wood, energy, packaging, chemicals and freight were higher in Europe, but in Russia lower energy costs were offset by higher chemical and freight costs. Manufacturing operating costs were favorable in Russia, offset by higher costs in Europe.
Entering the 2012 second quarter, sales volumes are expected to be higher reflecting solid market demand in Russia. Average sales price realizations should be higher due to the full-quarter impact of the realization of first quarter price increases effective in the second quarter for converting grades and cutsize paper. Average sales margins were also favorably impacted by an increased proportion of higher-margin domestic sales.Russia. Input costs were higher for energy, chemicals and purchased pulp, but were lower for wood. Planned maintenance downtime costs were $1 million lower in the third quarter of 2011. Manufacturing operating costs were favorable due to excellent mill operations and the intra-segment transfer of the Franklin mill indirect costs which have previously been reported in the North American Printing Papers business to the U.S. Market Pulp business due to the repurposing of the Franklin mill to produce fluff pulp.
Compared with the third quarter of 2010, sales volumes were lower in the third quarter of 2011, but included a more favorable product mix and increased sheeter plant activity. Average sales price realizations were higher reflecting the continued realization of increased average sales prices for sales to both domestic and export markets that began in the second half of 2010. Significantly higher input costs included increased costs for chemicals, energy, freight, and purchased pulp partially offset by decreased costs for wood. Planned maintenance downtime costs were $10 million lower in the 2011 third quarter. Manufacturing operating costs were favorable due to strong mill performance and the intra-segment transfer of the Franklin mill indirect costs to the U.S. Pulp business. Operating earnings in the third quarter of 2010 also included the reversal of a $16 million bad debt expense.
Entering the fourth quarter of 2011, sales volumeswood are expected to be seasonally lower for domestic uncoated freesheet paper. Average sales price realizations are expectedcontinue to be about flat. Input costs should be lower for energy and chemicals, partially offset by higher wood costs.increase. Planned maintenance downtime costs will be about $16up approximately $37 million higher withfor scheduled outages scheduled at the Courtland and Eastover mills. Manufacturing operating costs are expected to increase due to seasonally higher energy usage costs.
European Printing Papersnet sales in the third quarter of 2011 were $350 million compared with $380 million in the second quarter of 2011 and $325 million in the third quarter of 2010. Operating earnings were $48 million in the 2011 third quarter compared with $47 million in the 2011 second quarter and $58 million in the 2010 third quarter.
Compared with the second quarter of 2011, sales volumes in the third quarter of 2011 were lower reflecting slow market demand for uncoated freesheet paper in Europe due to the economic conditions. Market demand in Russia, however, remains strong. Average sales price realizations in Europe decreased in U.S. dollars, but remained stable in local currencies despite strong competitive pressures. In Russia, average sales price realizations have increased for uncoated freesheet paper reflecting a sales price increase implemented in August. Input costs were higher in the third quarter of 2011 for chemicals and also for energy due to a prior quarter adjustment that was booked in the second quarter of 2011. Wood costs decreased in Russia, but were slightly higher in Europe. Planned maintenance downtime costs were $12 million in the third quarter of 2011 for an outage at the Kwidzyn mill in Poland compared with $13 million in the second quarter of 2011 for an outage at the Svetogorsk mill. Manufacturing operating costs were favorable in Russia, but were partially offset by higher costs in Europe.
Sales volumes in the third quarter of 2011 decreased compared with the third quarter of 2010 for uncoated freesheet paper in both Europe and Russia, but were higher for pulp in Europe. Average sales price realizations for uncoated freesheet paper increased reflecting the realization of price increases during late 2010 and early 2011, but pulp sales price realizations have decreased. Input costs were significantly higher for wood, chemicals, energy and freight. Planned maintenance downtime costs for an outage at the Kwidzyn mill were $7 million higher in the 2011 third quarter than in the 2010 third quarter. Manufacturing operating costs were unfavorable.
Looking ahead to the fourth quarter of 2011, sales volumes are expected to be seasonally higher despite continued soft market conditions. Average sales price realizations are expected to be down slightly due to competitive pressure on prices, but this will be offset by the impact of the weakening of the Polish Zloty and Russian Ruble. Input costs for wood, energy and chemicals are expected to increase in Russia, but decrease in Europe. Planned maintenance downtime costs should be $12 million lower in the fourth quarter of 2011 with no outages scheduled.Saillat mills.
Brazilian Printing Papersnet sales were $290$270 million in the thirdfirst quarter of 20112012 compared with $295$320 million in the secondfourth quarter of 2011 and $275$285 million in the thirdfirst quarter of 2010.2011. Operating earnings were $37$23 million in the thirdfirst quarter of 20112012 compared with $39$45 million in the secondfourth quarter of 2011 and $46$48 million in the thirdfirst quarter of 2010.2011.
Sales volumes in the thirdfirst quarter of 2012 were lower than in the fourth quarter of 2011 reflecting seasonally weaker demand for uncoated freesheet paper were higher than in the second quarter of 2011 due to seasonally stronger market demand in both the Brazilian domestic market, andpartially offset by increased sales to export markets. Average sales price realizations for paper increased in the Brazilian market, but decreased in the Latin American export market. Salesmarkets mainly due to country and product mix, and for pulp. Average sales margins were negatively impacted by an increased proportion of sales to lower-margin export markets. Input costs for electricity and purchased pulp were lower, but were partially offset by higher costs for natural gas and pulp wood. Manufacturing operating costs were lower than in the fourth quarter.
Compared with the first quarter of 2011, sales volumes for pulp, however, decreased fromin the prior quarter.first quarter of 2012 were about flat. Average sales price realizations were lower in the Brazilian domestic market but were highermainly due to foreign exchange rates and in export markets due to price erosion in Latin America, Europe and Asia.the second half of 2011. Average sales margins improveddecreased reflecting a more favorable geographic mix.an increase in the proportion of sales to lower-margin export markets. Input costs were higher for pulp wood and packaging, materials and energy. Planned maintenance downtimepartially offset by lower costs for electricity. Operating costs were $3 million higher due to outages at the Luis Antonio and Tres Lagoas mills in the 2011 third quarter. Manufacturing operating costs were higher.
Compared with the third quarter of 2010, sales volumes were higher for uncoated freesheet paper reflecting increased demand in export markets. Average sales price realizations were lower in the Brazilian domestic market, but were more than offset by higher sales price realizations in export markets. Average sales margins improved due to a greater proportion of higher-margin sales to the domestic market. Input costs increased for chemicals, packaging materials, wood and energy. Planned maintenance downtime costs were $2 million higher in the 2011 third quarter. Manufacturing operating costs were higher.slightly unfavorable.
Entering the fourthsecond quarter of 2011,2012, sales volumes are expected to be higher reflecting seasonally stronger marketdomestic customer demand in the Brazilian domestic market.for uncoated freesheet paper. Shipments to Latin American export markets are expected to increase, more than offsetting lower margin shipments to overseas spot markets. Average sales price realizations should be higher due to the full-quarter impact of the realization of domestic sales price increases and the recovery of prices in Latin America. Input costs should be lower, while operating expenses are expected to be slightly higher due tohigher.
Indian Printing Papersincludes the results of Andhra Pradesh Paper Mills (APPM) of which a 75% interest was acquired October 14, 2011. Net sales price increases for uncoated freesheet paperwere $58 million in the domestic market and for pulp, partially offset by lower sales price realizations in export markets. Average margins should be higher resultingfirst quarter of 2012 compared with $35 million from a more favorable geographic mix. Input costs, particularly for wood and packaging materials, are expected to decrease. Planned maintenance downtime costs will be $10 million lower with no outages plannedthe date of acquisition for the fourth quarter.quarter of 2011. Operating profits in the first quarter of 2012 were $2 million which includes a gain $1 million related to the write-off of financing fees compared with a loss of $3 million in the fourth quarter of 2011.
Asian Printing Papersnet sales were $20 million in both the third and second quartersfirst quarter of 2012 compared with $15 million in the fourth quarter of 2011 and were $25$20 million in the thirdfirst quarter of 2010.2011. Operating earnings were approximately breakeven in all periods presented.
U.S. Market Pulpnet sales in the first quarter of 2012 were $185$175 million compared with $170 million in the third quarter of 2011 compared with $195 million in the secondfourth quarter of 2011 and $210$175 million in the thirdfirst quarter of 2010.2011. Operating earnings in the third quarterwere a loss of 2011 were $26 million, down from $35$23 million in the secondfirst quarter of 2012 compared with gains of $10 million in the fourth quarter of 2011 and $49$16 million in the thirdfirst quarter of 2010.2011.
ComparedSales volumes were seasonally higher in the first quarter of 2012 compared with the secondfourth quarter of 2011 sales volumes in the third quarter of 2011 increased despite weakeningfor both market demand.pulp and fluff pulp. Average sales price realizations were lower reflecting softening market demanddecreased, but began to recover late in the quarter as the result of announced price increases for softwood pulp, hardwood pulp and fluff pulp. Input costs were lower for wood and freight, but energy costs were slightly higher.about flat. Planned maintenance downtime costs were $7about $10 million lowerhigher in the 2011 third quarter. Manufacturing operatingfirst quarter of 2012. Operating costs were higherincreased primarily due to indirect costs atassociated with the conversion of the Franklin mill which had previously been reported into fluff pulp production.
Compared with the North American Printing Papers business now being reported in the U.S. Market Pulp business due to the repurposing of the mill to produce fluff pulp.
Sales volumes in the thirdfirst quarter of 2011, sales volumes were lower thanhigher, but average sales margins decreased, reflecting an increase in the third quartershipments of 2010 reflecting weaker market demand.lower-margin roll pulp. Average sales price realizations also decreased.were significantly lower for both market pulp and fluff pulp. Input costs were higherlower for chemicalswood, energy and energy, but wood costs were lower.chemicals. Planned maintenance downtime costs were $1$8 million higherlower in the 2011 third quarter. Manufacturing operatingfirst quarter of 2012. Operating costs were higherincreased primarily due to costs associated with the conversion of the Franklin mill indirect costs and cost inflation.to fluff pulp production.
Looking ahead to the fourthsecond quarter of 2011,2012, sales volumes are expected to decrease reflecting weakerbe flat as market demand for hardwoodremains relatively stable. Average sales price realizations should be relatively flat due to higher market pulp but stable demand for softwoodpricing. Fluff pulp and fluff pulp. Average sales price realizations are expected to decreasebe flat in the second quarter with prices trending downward during the realization of price increases lagging into the third quarter due to market pressure.contractual delays. Sales margins should improve due to a more favorable fluff pulp product mix. Planned maintenance downtime costs are expected to be flat with outages scheduled for the Riegelwood, Eastover and Pensacola mills. Input costs are expected to be lower. Planned maintenance downtime costs should be $4 million higher with outages plannedremain at the Pensacola and Eastover mills. Manufacturing operating costs are expected to be higher.first-quarter levels.
Consumer Packaging
2011 | 2010 | 2012 | 2011 | |||||||||||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||||||||||||
Sales | $ | 955 | $ | 945 | $ | 2,805 | $ | 870 | $ | 845 | $ | 2,520 | $ | 810 | $ | 905 | $ | 905 | ||||||||||||||||||
Operating Profit | 30 | (33 | ) | 97 | 71 | 48 | 147 | 103 | 100 | 66 |
Consumer Packaging net sales in the third quarter of 2011 were 1% higher10% lower than in both the secondfourth quarter of 2011 and 10% higher than in the thirdfirst quarter of 2010.2011. Operating earnings included a chargegains of $82$7 million to reduce the fair market value of the Shorewood business and a gain of $8$4 million for a noncontrolling interest adjustment related to a 2011 second quarter fixed asset impairment at Shorewood Mexico in the thirdfirst quarter of 2012 and the fourth quarter of 2011, respectively, and a charge of $129 million to impair the fixed assets in the North American Shorewood operations in the second quarter of 2011. In addition, operating earnings included a gain of $1 million in the first quarter of 2011 third quarterrelated to the sale and a charge of $2 million in the 2011 second quarter associated with the reorganization of the Company’s Shorewood business.operations. Excluding these items, operating earnings in the thirdfirst quarter of 20112012 were 5%55% higher than in the secondfourth quarter of 2011 and 45% higher5% lower than in the thirdfirst quarter of 2010.2011.
North American Consumer Packagingnet sales were $640$520 million in the thirdfirst quarter of 20112012 compared with $625$595 million in the secondfourth quarter of 2011 and $615$620 million in the thirdfirst quarter of 2010.2011. Operating earnings were $3$70 million ($7663 million excluding adjustments for Shorewood’s fair valuation and reserves)a gain related to the sale of Shorewood) in the thirdfirst quarter of 2012 compared with $37 million ($33 million excluding a gain related to the sale of Shorewood) in the fourth quarter of 2011 compared with a loss of $69and $64 million (a gain of $62($65 million excluding Shorewood asset impairment and reorganization costs) in the secondfirst quarter of 2011 and earnings of $51 million in the third quarter of 2010.2011.
Coated Paperboard sales volumes in the thirdfirst quarter of 20112012 were lowerhigher than in the secondfourth quarter of 2011 reflecting a softeningseasonal increases in market demand. The business took approximately 15,000 tons of market demand due to overall economic conditions.market-related downtime in the first quarter of 2012 compared with about 23,000 tons in the fourth quarter of 2011. Average sales price realizations increased as a result of the full-quarter impact of the realization of a second-quarter sales price increase for cupstock plus the partial realization of a third-quarter increase in folding carton board sales prices.eroded slightly. Input costs for chemicalsenergy were lower, but chemical and freight costs were slightly higher. Planned maintenance downtime costs were $17about $29 million lower than in the thirdfourth quarter with no outages occurring in the first quarter of 2011 as there were no outages during2012. Operating costs decreased due to improved reliability at the quarter. Manufacturing operating costs were unfavorable. The business took 15,000 tons of market-related downtime in the 2011 third quarter compared with none in the 2011 second quarter.mills.
Compared with the third quarter of 2010, sales volumes decreased in the thirdfirst quarter of 2011, due to weakeningsales volumes in the first quarter of 2012 decreased, reflecting weaker market demand associated withdemand. No market-related downtime was taken in the current economic environment.2011 first quarter. Average sales price realizations were higher reflecting the realization of sales price increases which began in the fourth quarter of 2010 and have continued inthroughout 2011. Input costs were about flat as higher costs for chemicals were offset by lower energy and freight, but woodcosts. Freight costs were lower. Manufacturing operating costs were favorable and there wereincreased slightly. There was no planned maintenance outages in the third quarter of either year. The business took no market-related downtime in the third quarter of 2010.
Shorewood revenues in the third quarter of 2011 were significantly higher than in the second quarter of 2011 due to seasonal growth in the home entertainment segmenteither period, and increases in both the consumer and tobacco product segments. Margins increased reflecting the favorable impact of improvement initiatives and cost reduction efforts. Operating earnings for the quarter were $4 million higher due to the absence of depreciation expense for the North American business that was impaired in the second quarter. Compared with the third quarter of 2010, revenues increased in the third quarter of 2011 in all product segments. Margins decreased due to higher input costs. Operatingoperating costs were favorable.
Foodservice sales volumes in the thirdfirst quarter of 20112012 were slightly lower thanabout the same as in the secondfourth quarter of 2011 due to customer promotional activities which utilized plastic cups instead of our paper cups.2011. Average sales margins improved reflectingdue to the realization of price increases effective with our JulyJanuary 1 contract openers. Input costs increased for board and resin and manufacturing operating costs were also higher. Compared with the third quarter of 2010, sales volumes were about flat, but average sales margins were significantly higher reflecting the realization of sales price increases and a more favorable mix of products sold. Input costs increased for board and resins.
Looking ahead toresins increased, but operating costs were favorable. Compared with the fourthfirst quarter of 2011, sales volumes increased in the first quarter of 2012. Average sales margins improved as average sales price realizations outpaced increases in board and resin costs and the mix of products sold was more favorable.
The U.S. Shorewood business was sold December 31, 2011 and the non-U.S. business was sold in January 2012.
Looking forward to the second quarter of 2012, coated paperboard sales volumes are expected to be slightly lower than in the third quarter of 2011. Average sales price realizationshigher. Operating earnings are expected to be about flat. Inputdecrease slightly due to increased costs shouldfor chemicals, energy and freight, coupled with decreased sales price realizations. Costs are expected to increase for woodchemicals, energy and chemicals, but be partially offset by lower energy costs.freight. Planned maintenance downtime costs willshould be about $27$19 million higher in the fourth quarter with outages scheduled at the TexarkanaRiegelwood and Augusta mills. Manufacturing operating costs are expected to be higher. Shorewood’s revenues are expected to decrease, but margins are expected to reflect improved pricing. The sale of the Shorewood business is expected to be substantially completed during the fourth quarter. Foodservice productionsales volumes are expected to be seasonally lowerimprove due to the shift fromseasonal increases in cold cups to hot cups.cup demand. Average sales margins are expected to improve slightly,decrease reflecting stable average sales price realizations, but this impact will be offset by further increases inhigher input costs for board and resin. Operating costs are expected to be unfavorable.resins.
European Consumer Packagingnet sales were $90$100 million in the thirdfirst quarter of 2011 compared with2012 and were $95 million in both the secondfourth quarter of 2011 and $85the first quarter of 2011. Operating earnings were $28 million in the thirdfirst quarter of 2010. Operating earnings were $192012 compared with $24 million in the third quarter of 2011, $23 million in the secondfourth quarter of 2011 and $17$27 million in the thirdfirst quarter of 2010.2011.
Sales volumes in the thirdfirst quarter of 20112012 were about flat withhigher than in the secondfourth quarter of 2011 reflecting solid market demand.2011. Average sales price realizations decreasedincreased in Europe’s weak economic environment,Europe, but were positivedown in Russia. Input costs were steady. Planned maintenance downtime costs were $7 million higherdecreased for an outage at the Kwidzyn mill in the 2011 third quarter than for an outage at the Svetogorsk mill in the 2011 second quarter. Manufacturingwood, chemicals and energy, and operating costs were favorable. Compared with the thirdfirst quarter of 2010,2011, sales volumes in the first quarter of 2012 were lower.higher. Average sales price realizations decreased in Europe, but were higherabout flat in both Russia and Europe.Russia. Input costs were significantly higher, primarily for wood, chemicals and energy. Planned maintenance downtimeoperating costs were $2 million higherhigher.
Operating results in the thirdsecond quarter of 2011.
Earnings in the fourth quarter of 2011 are expected to2012 will reflect higherlower sales volumes and noaverage sales price realizations as well as about $2 million of costs associated with the planned maintenance downtime costs.shutdown at the Svetogorsk mill.
Asian Consumer Packagingnet sales were $225$190 million in the first quarter of 2012, $215 million in the fourth quarter of 2011 and $190 million in the first quarter of 2011. Operating earnings were $5 million in both the third quarter and secondfirst quarter of 2011 compared with $170 million in2012 and the third quarter of 2010. Operating earnings were $8 million in the third quarter of 2011 compared with $13 million in the secondfourth quarter of 2011 and $3$9 million in the thirdfirst quarter of 2010.
2011. Compared with the secondfourth quarter of 2011, sales volumes were seasonally lower. Average sales price decreased in the thirdfirst two months, but began to recover in March. Average sales margins, however, increased due to lower input costs for pulp. Compared with the first quarter of 2011, were about flat. Averageoperating earnings declined in the first quarter of 2012 as lower average sales price realizations were slightly loweronly partially offset by decreased input costs for folding carton board and bristols board due to increased market supply from competitors’ additional capacity. Input costs were higher, primarily for
chemicals and utilities. Compared with the third quarter of 2010, sales volumes increased. Average sales price realizations were higher across all product lines.pulp.
Looking ahead to the fourthsecond quarter sales volumes are expected to remain steady, butof 2012, average sales price realizations are expected to decrease due to competitive price pressures which will squeeze margins.improve, along with some increase in sales volumes, reflecting improving market demand. Input costs primarily for pulp will be lower.should remain favorable at a level similar to that of the first quarter.
Distribution
2011 | 2010 | 2012 | 2011 | |||||||||||||||||||||||||||||||||
In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||||||||||||
Sales | $ | 1,710 | $ | 1,655 | $ | 5,005 | $ | 1,755 | $ | 1,630 | $ | 4,965 | $ | 1,475 | $ | 1,640 | $ | 1,625 | ||||||||||||||||||
Operating Profit | 9 | 4 | 18 | 22 | 26 | 69 | (2 | ) | 5 | 16 |
Distribution net sales in the third quarter of 2011 were 3% higher than in the second quarter of 2011, but 3%9% lower than in the third quarter of 2010. Operating earnings included $18 million and $10 million in the thirdfourth quarter of 2011, and 10% lower than in the secondfirst quarter of 2011. Operating earnings included $21 million, $17 million and $7 million in the first quarter of 2012, fourth quarter of 2011 and first quarter of 2011, respectively, forof costs related to the reorganization of the Company’s xpedx operations. Excluding these items, operating earnings in the thirdfirst quarter of 2012 were 42% lower than in the fourth quarter of 2011 were 93%and 58% higher than in the secondfirst quarter of 2011 and 23% higher than in the third quarter of 2010.2011.
Sales of papers and graphic arts suppliesproducts in the first quarter of 2012 totaled $850 million compared to $975 million in the fourth quarter of 2011 and equipment totaled $1.0 billion in both the third quarter and secondfirst quarter of 2011 compared to $1.1 billion in the third quarter of 2010.2011. Trade margins as a percent of sales for printing papers decreasedincreased from the second quarterfourth and first quarters of 2011 due to shifts between warehouse sales and lower-margin sales shipped directly from the manufacturer, but remain unchanged from the third quarter of 2010.manufacturer. Packaging sales were $400 million in the thirdfirst quarter of 2011,2012, unchanged from the second quarterfourth and first quarters of 2011 and the third quarter of 2010.2011. Trade margins as a percent of sales for packaging products were downincreased from both the second quarterfourth and first quarters of 2011 and the third quarter of 2010 reflecting increased sales of commodity products.a change in mix. Sales of facility supply products totaled $225 million in the first quarter of 2012, compared to $250 million in both the third quarterfourth and second quarterfirst quarters of 2011, compared to $300 million in the third quarter of 2010.2011.
Operating earnings before special itemsreorganization costs in first quarter of 2012 were $14 million lower than in the thirdfourth quarter of 20112011. Decreased sales volume led to the lower earnings. Operating earnings before reorganization costs in the first quarter of 2012 were $13$7 million higher than in the secondfirst quarter of 2011. Increased sales volumes and lowerLower costs resulting fromrelated to xpedx’s reorganization efforts led to the higher earnings. Operating earnings before special items in the third quarter of 2011 were $5 million higherand a routine inventory valuation adjustment more than in the third quarter of 2010. Higher resale prices and lower costs resulting from xpedx’s reorganization efforts contributed to the higher earnings.offset decreased sales volume.
Looking ahead to the 2011 fourth2012 second quarter, operating results are expected to be higher on seasonally more volume and will continue to reflect the benefit from lower costs resulting fromof the continued reorganization efforts while reflecting seasonally lower volume.ongoing transformation.
Equity Earnings, Net of Taxes – Ilim
OnSince October 5, 2007, International Paper and Ilim Holding S.A. (Ilim) announced the completion ofhave operated a 50:50 joint venture to operate in Russia. DueIlim is a separate reportable industry segment and prior to 2012, due to the complex organizational structure of Ilim’s operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reportsreported its share of Ilim’s operating results on a one-quarter lag basis. Accordingly,In 2012, the accompanying consolidated statementCompany determined that the elimination of operationsthe one-quarter lag was preferable because the same period-end reporting date improves overall financial reporting as the impact of current events, economic conditions and global trends are consistently reflected in the financial statements. Beginning January 1, 2012, the Company has applied this change in accounting principle retrospectively to all prior financial periods presented.
The elimination of the one-quarter reporting lag for Ilim had the three months ended September 30, 2011 includes the Company’s 50% sharefollowing impact:
Consolidated Statement of Ilim’s operating results for the three-month period ended June 30, 2011 under the caption “Equity earnings (losses) net of taxes.” Ilim is reported as a separate reportable industry segment.Operations
In millions | Three Months Ended March 31, 2011 | |||
Equity earnings (loss) | $ | 12 | ||
Earnings (loss) from continuing operations | 12 | |||
Net earnings (loss) attributable to International Paper Company | 12 | |||
Basic earnings (loss) per share from continuing operations | 0.03 | |||
Basic earnings (loss) per share | 0.03 | |||
Diluted earnings (loss) per share from continuing operations | 0.03 | |||
Diluted net earnings (loss) per share | 0.03 |
Consolidated Balance Sheet
In millions | December 31, 2011 | |||
Investments | $ | 25 | ||
Retained earnings | 25 |
The Company recorded equity earnings, net of taxes, of $51$40 million in the thirdfirst quarter of 2011 related to operations in the second quarter of 20112012 compared with $57$25 million recorded in the secondfourth quarter of 2011 related to operationsand $56 million in the first quarter of 2011. Sales volumes in the secondfirst quarter of 2012 increased from the prior quarter reflecting higher market demand for softwood and hardwood pulp in China while Russian domestic linerboard demand remained weak. Average sales price realizations decreased for both domestic and export markets and for almost all product lines, however, pulp prices began to recover during the quarter and were trending upward exiting the quarter. Input costs were slightly higher due to fuel price increases. Additionally, in the first quarter of 2012, the after-tax foreign exchange impact was a gain of $30 million compared with a loss of $8 million in the fourth quarter of 2011.
Compared to the first quarter of 2011, decreased from the prior quarter. Market demand for softwood pulp was strong duringsales volumes in the first two monthsquarter of 2012 were about flat, but reflected a decrease in shipments of linerboard and paper to the quarter, but
in June the demand forRussian domestic market offset by higher shipments of pulp, inlinerboard and paper to export markets particularly China, decreased sharply. Market demand for linerboard was stable.other than China. Average sales price realizations were higher quarter-over-quarter due to the realization of sales price increasessignificantly lower for pulp and linerboardfor containerboard in both domestic and export markets, although softwood pulp prices decreased significantly in the last weeks of the quarter. Input costs increased slightly, reflecting a seasonal increase in wood costs, partially offset by a decrease in energy tariffs. After-taxmarkets. A foreign exchange gainsgain of $9 million on the remeasurement of U.S. dollar-denominated debt werewas recorded in both the second quarter and first quarter of 2011. The Company received a cash dividend from the joint venture of $44 million in July 2011.
In the third quarter of 2010, the Company recorded equity earnings, net of taxes, for Ilim of $22 million related to operations in the second quarter of 2010. Compared
Looking forward to the second quarter of 2010, sales volumes in the second quarter of 2011 increased, reflecting higher sales of both pulp and linerboard. Export shipments were higher, while domestic shipments were lower. Average sales price realizations were significantly higher for pulp and linerboard in the domestic market, but in export markets sales prices for hardwood pulp decreased. In the second quarter of 2010, the after-tax foreign exchange impact on the remeasurement of U.S. dollar-denominated debt was a loss of $6 million.
Looking forward to the results we expect to record in the Company’s fourth quarter 2011 for Ilim’s third quarter,2012, sales volumes are expected to increase reflecting improvedslightly as market pulp demand for pulp in China toward the end of the quarter.continues to recover. Average sales price realizations are expected to decrease due to sharply lower sales pricesbe higher for softwood and hardwood pulp and flat prices for linerboard, although pulp contract prices improved in September. A planned maintenance outage was performed at the Ust-Ilimsk mill during the quarter. The foreign exchange impact in the third quarter is expected to be a significant lossdomestic and Chinese export markets as well as for linerboard. Input costs should increase primarily due to the devaluation of the Russian ruble to the U.S. dollar.seasonally higher wood costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations totaled $2.0 billion$633 million for the first ninethree months of 2011,2012, compared with $587$514 million for the comparable 2010 nine-monththree-month period. Earnings from operations adjusted for non-cash charges were $2.5 billion$699 million for the first ninethree months of 20112012 compared to $1.3 billion$741 million for the first ninethree months of 2010.2011. Cash used for working capital components totaled $475$66 million for the first ninethree months of 20112012 compared to a use of $692$227 million for the comparable 2010 nine-month period.first three months of 2011.
The Company generated free cash flow of approximately $1.4 billion$357 million and $1.1 billion$419 million in the first ninethree months of 20112012 and 2010,2011, respectively. Free cash flow is a non-GAAP measure and the most comparable GAAP measure is cash provided by continuing operations. Management uses free cash flow as a liquidity metric because it measures the amount of cash generated that is available to maintain our assets, make investments or acquisitions, pay dividends and reduce debt, make investments and fund other activities. The following is a reconciliation of cash provided by continuing operations to free cash flow:
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
In millions | 2011 | 2010 | 2012 | 2011 | ||||||||||||
Cash provided by operations | $ | 2,038 | $ | 587 | ||||||||||||
Less: | ||||||||||||||||
Cash provided by continuing operations Less: | $ | 633 | $ | 514 | ||||||||||||
Cash invested in capital projects | (725 | ) | (457 | ) | (285 | ) | (181 | ) | ||||||||
Cash contribution to pension plan | 0 | 1,150 | ||||||||||||||
Cash received from alternative fuel mixture credits | 0 | (132 | ) | |||||||||||||
European A/R securitization program cessation | 209 | 0 | 0 | 209 | ||||||||||||
Tax receivable collected related to pension contributions | (123 | ) | 0 | 0 | (123 | ) | ||||||||||
Cash received from unwinding a timber monetization | (111 | ) | 0 | |||||||||||||
Change in control payments related to Temple-Inland acquisition | 120 | 0 | ||||||||||||||
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Free Cash Flow | $ | 1,399 | $ | 1,148 | $ | 357 | $ | 419 | ||||||||
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Investments in capital projects related to continuing operations totaled $725$285 million in the first ninethree months of 20112012 compared to $457$181 million in the first ninethree months of 2010.2011. Full-year 20112012 capital spending is currently expected to be
approximately $1.2 to $1.3$1.5 billion, or about 86% to 93%102% of depreciation and amortization expense for our current businesses.
Financing activities for the first ninethree months of 20112012 included a $112 million$1.1 billion net reductionincrease in debt versus a $328$103 million net reduction in debt during the comparable 2010 nine-month2011 three-month period.
In the third quarter of 2011, approximately $464 million fixed-to-floatingFebruary 2012, International Paper issued a $1.2 billion term loan with an initial interest rate swaps were terminated. These terminations were not in connection with early debt retirements. The resulting $27 million gain was deferred and will be amortized overof LIBOR plus a margin of 138 basis points that varies depending on the lifecredit rating of the associated debt.company and a $200 million term loan with an interest rate of LIBOR plus a margin of 175 basis points, both with maturity dates in 2017. The proceeds from these borrowings were used, along with available cash, to fund the acquisition of Temple-Inland.
During the third and second quartersfirst quarter of 2011,2012, International Paper had norepaid approximately $30 million of notes with interest rates ranging from 7.82% to 7.95% and original maturities from 2012 to 2018. Pre-tax early debt extinguishment.retirement costs of $4 million related to these debt repayments are included in Restructuring and other charges in the accompanying consolidated statement of operations.
During the first quarter of 2011, International Paper repaid approximately $129 million of notes with interest rates ranging from 6.20% to 9.375% and original maturities from 2018 to 2025. Pre-tax early debt retirement costs of $32 million related to these debt repayments, net of gains on swap terminations, are included in Restructuring and other charges in the accompanying consolidated statement of operations.
During the third quarterfirst three months of 2010,2012, International Paper repaidissued approximately $111 million of notes with interest rates ranging from 5.375% to 6.8% and original maturities from 2016 to 2024.
In the second quarter of 2010, International Paper repaid approximately $108 million of notes with interest rates ranging from 5.3% to 9.375% and original maturities from 2015 to 2019. Pre-tax early debt retirement costs of $18 million related to these debt repayments, net of gains on swap terminations, are included in Restructuring and other charges in the accompanying consolidated statement of operations.
In June 2010, interest rate swap agreements designated as fair value hedges with a notional value of $100 million were terminated. The termination was not in connection with early retirement of debt. The resulting gain was immaterial.
In the first quarter of 2010, International Paper repaid approximately $120 million of notes with interest rates ranging from 5.25% to 7.4% and original maturities from 2010 to 2027. Pre-tax early debt retirement costs of $4 million related to these debt repayments, net of gains on swap terminations, are included in Restructuring and other charges in the accompanying consolidated statement of operations.
Also in the first quarter of 2010, approximately $700 million fixed-to-floating interest rate swaps issued in 2009 were terminated. These terminations were not in connection with early debt retirements. The resulting gain was immaterial.
At September 30, 2011 and December 31, 2010, International Paper classified $158 million and $100 million, respectively, of current maturities of long-term debt as Long-term debt. International Paper has the intent and ability, as evidenced by its fully committed credit facility, to renew or convert these obligations.
During the first nine months of 2011, International Paper used approximately 0.41.5 million shares of treasury stock for various incentive plans. Also in the first nine months of 2011, International Paper acquired 1.0 million shares of treasury stock primarily related to restricted stock tax withholding. Payments of restricted stock withholding taxes totaled $30 million. During the first nine months of 2010, International Paper used approximately 2.7 million shares of treasury stock, net of restricted stock withholding, and 1.4 million shares of newly issued common stock for various incentive plans. Payments of restricted stock withholding taxes totaled $26$35 million. During the first three 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. Common stock dividend payments totaled $312$115 million and $120$82 million for the first ninethree months of 20112012 and 2010,2011, respectively. Dividends were $0.7125$0.2625 per share and $0.275$0.1875 per share for the first ninethree months in 2012 and 2011, and 2010, respectively. The quarterly dividend was increased to $0.2625 per share in the 2011 second quarter.
At September 30, 2011,March 31, 2012, contractual obligations for future payments of debt maturities by calendar year were as follows: $409 million in 2011; $549$720 million in 2012; $157$281 million in 2013; $558$713 million in 2014; $448$598 million in 2015; $432$716 million in 2016; $872 million in 2017; and $5.9$7.7 billion thereafter.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2011,March 31, 2012, the Company held long-term credit ratings of BBB (stable outlook) and Baa3 (stable outlook) by S&P and Moody’s, respectively.
At September 30, 2011,March 31, 2012, International Paper’s contractually committed credit agreements totaled $2.5$2.75 billion, which management believes are adequate to cover expected operating cash flow variability during the current economic cycle. The credit agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. The committed liquidity facilities include a $1.5 billion contractually committed bank credit agreement that expires in August 2016 and has a facility fee of 0.175% payable quarterly. The liquidity facilities also include two receivable securitization facilities that expire in 2013 with up to $1.0$1.25 billion of commercial paper-based financings based on eligible receivable balances ($1.01.2 billion at September 30, 2011) under a receivables securitization program.March 31, 2012). On January 12, 2011,11, 2012, the Company amended theits $1.0 billion receivables securitization programfacility to extend the maturity date from January 20112012 to January 2012. The amended agreement has2013. A $250 million facility was inherited from Temple-Inland. Both facilities have a facility fee of 0.40%0.35% payable monthly.
Subsequent to At March 31, 2012, there were no borrowings under either the end ofbank facility or the third quarter, on October 7, 2011, Moody’s reduced its credit rating of senior unsecured long-term debt of the Royal Bank of Scotland Group Plc, which issued letters of credit that support $1.6 billion of the Timber Notes below the specified threshold. The Company expects that the issuer of the replacement will be completed within the required 60-day period (see Note 12 for additional information).receivables securitization programs.
International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 20112012 through current cash balances and cash from operations, supplemented as required by its existing credit facilities. The Company will continue to rely on debt and capital markets for the majority of any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure planning objectives. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors.
Proposed Temple-Inland AcquisitionAcquisitions
On September 6, 2011,February 13, 2012, upon regulatory approval, International Paper and Temple-Inland Inc. (Temple-Inland) entered into a definitive merger agreement under whichcompleted the acquisition of Temple-Inland. International Paper will acquireacquired all of the outstanding common stock of Temple-Inland for $32.00 per share in cash plus the assumptionand assumed approximately $700 million of $600 million in Temple-Inland’s debt. The totalAs a condition to allowing the transaction is valued at approximately $4.3 billion and is expected to close inproceed, the fourth quarter of 2011 or the first quarter of 2012, subject to regulatory and Temple-Inland shareholders approval. The closingAntitrust Division of the transaction is not conditioned on financing, as International Paper has secured committed financing.U.S. Department of Justice entered into an agreement with the Company that requires us to divest three containerboard mills, with approximately 970,000 tons of aggregate containerboard capacity, within four months of closing (with the possibility of two 30-day extension). We are marketing for sale the Company’s containerboard mills located in Oxnard (Hueneme), California; Ontario, California; and New Johnsonville, Tennessee.
Acquisition of Andhra Pradesh Paper Mills Limited (APPM)
On October 14, 2011, International Paper completed the acquisition of a 75% interest in Andhra Pradesh Paper Mills Limited (APPM). The Company purchased 53.5% of APPM’s outstanding shares from the controlling shareholders for approximately $226 million in cash.cash plus assumed debt from private investors. These sellers have also entered into a covenant not to compete for which they received a cash payment of $57$58 million. International Paper also acquired an additional 21.5% of the outstanding shares of APPM in a public tender offer completed on October 8, 2011 for approximately $105 million in cash which had been placed in an escrow account in the first quarter of 2011.cash.
Joint Ventures
On April 15, 2011, International Paper has appealedand Sun Paper Industry Co. Ltd. entered into a direction fromCooperative Joint Venture agreement to establish Shandong IP & Sun Food Packaging Co., Ltd. in China. During December 2011, the Securities and Exchange Board of India (SEBI) that International Paper pay to the tendering shareholders the same non-compete payment thatbusiness license was paid to the previous controlling shareholders. The appeal is still pending,obtained and International Paper has deposited approximately $23contributed $55 million into an escrow account to fund the additional non-compete paymentsin cash for a 55% interest in the event SEBI’s direction is upheld.joint venture and Sun Paper Industry Co. Ltd. contributed land-use rights valued at approximately $28 million, representing a 45% interest. The Indian Securities Appellate Tribunal is scheduled to hear the appeal on November 16, 2011. APPM is onepurpose of the leading integrated paper manufacturers in India,joint venture is to build and operate a new production line to manufacture coated paperboard for food packaging with two mills that have a combineddesigned annual production capacity of about 250,000 tonnes400,000 tons. The financial position and results of uncoated freesheet papers annually. This transaction positions International Paper as the
first global paper and packaging company with a significant positionoperations of this joint venture have been included in India’s growing economy. Both APPM and the India paper and packaging industry are growing at substantial rates, and this acquisition, along with International Paper’s global operationsconsolidated financial statements from the date of formation in December 2011.
Additionally, during the three months ended March 31, 2011, the Company recorded a gain of $7 million (before and technical expertise can accelerate that growth and create value for International Paper.after taxes) related to a bargain purchase price adjustment on an acquisition by our joint venture in Turkey. This gain is included in Equity earnings (losses), net of taxes in the accompanying consolidated statement of operations.
Ilim Holding S.A. Shareholder’s Agreement
In October 2007, in connection with the formation of the Ilim Holding S.A. joint venture, International Paper entered into a shareholders’ agreement that includes provisions relating to the reconciliation of disputes among the partners. This agreement provides that at any time after the second anniversary of the formation of Ilim, either the Company or its partners may commence procedures specified under the deadlock provisions. Under certain circumstances, the Company would be required to purchase its partners’ 50% interest in Ilim. Any such transaction would be subject to review and approval by Russian and other relevant antitrust authorities. Based on the provisions of the agreement, International Paper estimates that the current purchase price for its partners’ 50% interests would be approximately $800$900 million to $850$950 million, which could be satisfied by payment of cash or International Paper common stock, or some combination of the two, at the Company’s option. Any such purchase by International Paper would result in the consolidation of Ilim’s financial position and results of operations in all subsequent periods. The parties have informed each other that they have no current intention to commence procedures specified under the deadlock provision of the shareholders’ agreement, although they have the right to do so.
Cellulosic Bio-Fuel Tax Credit
In a memorandum dated June 28, 2010, the IRS concluded that black liquor would also qualify for the cellulosic bio-fuel tax credit of $1.01 per gallon produced in 2009. On October 15, 2010, the IRS ruled that companies may qualify in the same year for both the $0.50 per gallon alternative fuel mixture credit and the $1.01 cellulosic bio-fuel tax credit for 2009, but not for the same gallons of fuel produced and consumed. To the extent a taxpayer changes its position and elects the $1.01 credit, it must re-pay the refunds received as alternative fuel mixture credits attributable to the gallons converted to the cellulosic bio-fuel credit. The repayment of this refund must include interest.
One important difference between the two credits is that the $1.01 credit must be credited against a company’s Federal tax liability, and the credit may be carried forward through 2015. In contrast, the $0.50 credit is refundable in cash. The cellulosic bio-fuel credit is required to be included in Federal taxable income.
The Company filed an application with the IRS on November 18, 2010, to receive the required registration code to become a registered cellulosic bio-fuel producer. The Company received this registration code on February 28, 2011.
The Company has evaluated the optimal use of the two credits with respect to gallons produced in 2009. Considerations include uncertainty around future Federal taxable income, the taxability of the alternative fuel mixture credit, future liquidity and uses of cash such as, but not limited to, acquisitions, 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. On July 19, 2011, the Company filed an amended 2009 tax return claiming alternative fuel mixture tax credits as non-taxable income. If that amended position is not upheld, the Company would re-evaluate its position with regard to alternative fuel mixture gallons produced in 2009.
During 2009, the Company produced 64 million gallons of black liquor that were not eligible for the alternative fuel mixture credit. The Company claimed these gallons for the cellulosic bio-fuel tax credit by amending the Company’s 2009 tax return. The impact of this amendment was included in the Company’s 2010 Income tax provision (benefit), resulting in a $40 million net credit to tax expense.
As is the case with other tax credits, taxpayer claims are subject to possible future review by the IRS which has the authority to propose adjustments to the amounts claimed, or credits received.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.
Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include accounting for contingencies, impairment or disposal of long-lived assets, goodwill and other intangible assets, pensions, postretirement benefits other than pensions, stock options and income taxes.
The Company has included in its 20102011 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 2011.
SIGNIFICANT ACCOUNTING ESTIMATES2012.
Pension Accounting
Net pension expense totaled approximately $146$83 million for International Paper’s U.S. plans for the ninethree months ended September 30, 2011,March 31, 2012, or about $28$38 million lessmore than the pension expense for the first ninethree months of 2010.2011. The decreaseincrease 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%5.10% in 20112012 from 5.8%5.60% in 2010 and2011, higher amortization of unrecognized actuarial losses.losses, and the acquisition of Temple-Inland in February 2012. Net pension expense for non-U.S. plans was about $1$0.6 million and $3$0.5 million for the first ninethree months of 20112012 and 2010,2011, respectively.
After consultation with our actuaries, International Paper determines key actuarial assumptions on December 31 of each year that are used to calculate liability information as of that date and pension expense for the following year. Key assumptions affecting pension expense include the discount rate, the expected long-term rate of return on plan assets, the projected rate of future compensation increases, and various demographic assumptions including expected mortality. The discount rate assumption is determined based on approximately 500 Aa-graded bonds appropriate to provide the projected benefit payments of the plan. A bond portfolio is selected and a single rate is determined that equates the market value of the bonds purchased to the discounted value of the plan’s benefit payments. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. At September 30, 2011,March 31, 2012, the market value of plan assets for International Paper’s U.S. plans totaled approximately $7.7$10.0 billion, consisting of approximately 41%42% equity securities, 34%38% fixed income securities, and 25%20% 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 noa cash funding contribution of $26 million will be required for its domestic qualified plans in 2011.2012. The Company continually reassesses the amount and timing of any discretionary contributions and could elect to make such a contribution in 2011.2012. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $29$101 million in 2011.
Accounting for Uncertainty in Income Taxes
The guidance for accounting for uncertainty in income taxes requires management to make judgments regarding the probability that certain income tax positions taken by the Company in filing tax returns in the various jurisdictions in which it operates will be sustained upon examination by the respective tax authorities based on the technical merits of these tax positions, and to make estimates of the amount of tax benefits that will be realized upon the settlement of these positions.2012.
FORWARD-LOOKING STATEMENTS
Certain statements in this report that are not historical in nature may be considered “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar nature. These statements are not guarantees of future performance and reflect management’s current views with respect to future events, which are
subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include but are not limited to: (i) the level of our indebtedness and increases in interest rates; (ii) industry conditions, including but not limited to changes in the cost or availability of raw materials, energy and transportation costs, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products; (iii) global economic conditions and political changes, including but not limited to the impairment of financial institutions, changes in currency exchange rates, credit ratings issued by recognized credit rating organizations, the amount of our future pension funding obligation, changes in tax laws and pension and health care costs; (iv) unanticipated expenditures related to the cost of compliance with existing and new environmental and other governmental regulations and to actual or potential litigation; (v) whether we experience a material disruption at one of our manufacturing facilities; (vi)facilities and risks inherent in conducting business through a joint venture; (vi) risks and uncertainties associated with the divestitures required by the U.S. Department of Justice consent decree that allowed the Temple-Inland transaction to proceed; (vii) the failure to realize synergies and cost savings from the Temple-Inland transaction or delay in realization thereof; and (viii) our ability to achieve the benefits we expect from all other strategic acquisitions, divestitures and divestitures;restructurings; and (viii) other factors you can find in our press releases and filings with the Securities and Exchange Commission, including the risk factors identified in Item 1A (“Risk Factors”) of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as updated by our quarterly reports on Form 10-Q.2011. 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 pages 4650 and 4751 of International Paper’s Annual Report on Form 10-K for the year ended December 31, 2010,2011, which information is incorporated herein by reference. There have been no material changes in the Company’s exposure to market risk since December 31, 2010.2011.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures:
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and completely and accurately reported (and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, 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)13a-15 and 15d-15(e)15d-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2011March 31, 2012 (the end of the period covered by this report).
Changes in Internal Control over Financial Reporting:
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2011March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During the 2010 second2011 third quarter, the Company completed the acquisition of SCA Packaging Asia.Andhra Pradesh Paper Mills Limited (APPM). Integration activities, including a preliminary assessment of internal control over financial reporting, are currently in process. The initial annual assessment of internal control over financial reporting for SCA Packaging Asia businessAPPM will be conducted over the course of our 20112012 assessment cycle.
During the first quarter of 2012, the Company completed the acquisition of Temple-Inland Inc. (Temple-Inland). Integration activities, including a preliminary assessment of internal control over financial reporting, are currently in process. The initial annual assessment of internal control over financial reporting for Temple-Inland will be conducted over the course of our 2013 assessment cycle.
ITEM 1. | LEGAL PROCEEDINGS |
A description of the Company’s material pending legal proceedings, including a discussion of any material developments in such proceedings, is found in Note 11 to the financial statements in this Form 10-Q.
ITEM 1A. | RISK FACTORS |
Our proposed acquisition of Temple-Inland Inc. (“Temple-Inland”) may not be completed within the expected timeframe, or at all, and we may not achieve the expected benefits from this acquisition or from other strategic acquisitions and divestitures.In the third quarter of 2011, we entered into an agreement and plan of merger with Temple-Inland under which we will pay $32.00 in cash for each share of Temple-Inland’s outstanding common stock and assume Temple-Inland’s existing debt (approximately $600 million) and Temple-Inland will become a wholly owned subsidiary of International Paper. The acquisition is valued at approximately $4.3 billion and is expected to close in the fourth quarter of 2011 or the first quarter of 2012. Completion of the acquisition is subject to the satisfaction (or waiver) of certain conditions that are beyond our control and may prevent, delay or otherwise negatively affect its completion. These conditions include the approval of the acquisition by Temple-Inland’s shareholders and U.S. antitrust clearance. The Antitrust Division of the U.S. Department of Justice may refuse approval of the acquisition or seek to make its approval subject to compliance with unanticipated or onerous conditions that could reduce the anticipated benefits of the acquisition.
The success of the Temple-Inland acquisition will depend, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from integrating Temple-Inland with our existing businesses. The integration process may be complex, costly and time-consuming, and we may not accomplish the integration of Temple-Inland smoothly, successfully or within the anticipated costs or timeframe. Potential integration risks include, among other things, our ability to successfully implement our business plan for the combined business, retain key customers, suppliers and employees, and retain and obtain required regulatory approvals, licenses and permits. In addition, Temple-Inland’s obligations and liabilities, some of which may not have not been disclosed to us or may not be reflected or reserved for in Temple-Inland’s financial statements, may be greater than we have anticipated, and we do not have the benefit of any indemnification in the merger agreement with respect to obligations or liabilities of Temple-Inland, whether known or unknown. Potential liabilities of Temple-Inland include, but are not limited to, those relating to:
pending and potential civil proceedings and criminal investigations related to a August 2011 upset condition in an evaporator at Temple-Inland’s Bogalusa, Louisiana paper mill that caused the Biochemical Oxygen Demand (BOD) limits for permitted discharge from the wastewater treatment pond into the Pearl River to be exceeded, resulting in a fish kill;
a pending lawsuit filed by the liquidating trustee for Guaranty Bank, a former subsidiary of Temple-Inland’s financial services business that was spun off by Temple-Inland in 2007, asserting various claims relating to the failure of Guaranty Bank and its parent Guaranty Financial Group (Tepper v. Temple-Inland Inc.); and
pending and potential Temple-Inland shareholder lawsuits alleging breaches of fiduciary duty relating to the acquisition.
More broadly, our strategy for long-term growth, productivity and profitability depends, in part, on our ability to make prudent strategic acquisitions and divestitures and to realize the benefits we expect from them. For example, in October 2011, we completed our acquisition of a 75% interest in Andhra Pradesh Paper Mills Limited, one of the leading integrated paper manufacturers in India, and in the third quarter of 2011, we signed an agreement, subject to regulatory approval and other customary closing conditions, to sell our Shorewood business to Atlas Holdings and retain a minority interest of approximately 40% in the business outside the U.S.
Otherwise, thereThere have been no material changes from the risk factors disclosed in ourthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20102011 in response to Part I, Item 1A of Form 10-K.
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 per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | Maximum Number (or Approximate Dollar Value) Purchased Under the Plans | ||||||||||||||||||||||||
July 1, 2011 – July 31, 2011 | 18 | $ | 29.16 | N/A | N/A | |||||||||||||||||||||||||||
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September 1, 2011 – September 30, 2011 | 1,623 | 24.15 | N/A | N/A | ||||||||||||||||||||||||||||
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January 1, 2012 – January 31, 2012 | 777 | $ | 29.60 | N/A | N/A | |||||||||||||||||||||||||||
February 1, 2012 – February 29, 2012 | 1,083,197 | 31.85 | N/A | N/A | ||||||||||||||||||||||||||||
March 1, 2012 – March 31, 2012 | 80 | 35.94 | N/A | N/A | ||||||||||||||||||||||||||||
Total | 1,641 | N/A | N/A | N/A | 1,084,054 | |||||||||||||||||||||||||||
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(a) | Shares acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs. |
ITEM 6. | EXHIBITS |
10.1 | Amendment No. 5, dated as of January 11, 2012, to the Second Amended and Restated Credit and Security Agreement, dated as of March 13, 2008, by and among Red Bird Receivables, LLC, as Borrower, International Paper Company, as Servicer, the Conduits and Liquidity Banks 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.* | |||
10.2 | Amendment No. 3, dated as of January 11, 2012, to the Receivables Sale and Contribution Agreement, dated as of March 13, 2008, between International Paper Company and Red Bird Receivables, LLC.* | |||
10.3 | Loan Agreement, dated December 3, 2007, by and among TIN Land Financing, LLC, Citibank, N.A., Citicorp North America, Inc., as Agent, and the other Lenders named therein (incorporated by reference to Exhibit 10.1 to Temple-Inland’s Current Report on Form 8-K filed with the Commission on December 4, 2007). | |||
10.4 | Amendment No. 1 dated August 11, 2011 to Loan Agreement, dated December 3, 2007, by and among TIN Land Financing, LLC, Citibank, N.A., Citicorp North America, Inc., as Agent, and the other Lenders named therein (incorporated by reference to Exhibit 10.1 to Temple-Inland’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2011, and filed with the Commission on November 7, 2011). | |||
10.5 | Loan Agreement, dated December 3, 2007, by and among TIN Timber Financing, LLC, Citibank, N.A., Citicorp North America, Inc., as Agent, and the other Lenders named therein (incorporated by reference to Exhibit 10.2 to Temple-Inland’s Current Report on Form 8-K filed with the Commission on December 4, 2007). | |||
10.6 | Amendment No. 1 dated August 11, 2011 to Loan Agreement, dated December 3, 2007, by and among TIN Timber Financing, LLC, Citibank, N.A., Citicorp North America, Inc., as Agent, and the other Lenders named therein (incorporated by reference to Exhibit 10.2 to Temple-Inland’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2011, and filed with the Commission on November 7, 2011). | |||
10.7 | Pulpwood Supply Agreement, dated October 31, 2007, by and between TIN Inc. and CPT LOGCO, LLC. Certain confidential portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment (incorporated by reference to Exhibit 10.25 to Temple-Inland’s Annual Report on Form 10-K for the year ended December 29, 2007, and filed with the Commission on February 27, 2008). | |||
10.8 | Sawtimber Supply Agreement, dated October 31, 2007, by and between TIN Inc. and CPT LOGCO, LLC. Certain confidential portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment (incorporated by reference to Exhibit 10.26 to Temple-Inland’s Annual Report on Form 10-K for the year ended December 29, 2007, and filed with the Commission on February 27, 2008). | |||
10.9 | Form of Timber Note Receivable (incorporated by reference to Exhibit 10.1 to Temple-Inland’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2010, and filed with the Commission on August 9, 2010). |
10.10 | Form of Letter of Credit (incorporated by reference to Exhibit 10.2 to Temple-Inland’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2010, and filed with the Commission on August 9, 2010). | |||
11 | Statement of Computation of Per Share Earnings.* | |||
12 | Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.* | |||
18 | Preferability letter from independent registered public accounting firm.* | |||
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 Document.* | |||
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 Extension Presentation Linkbase.* |
* | filed 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) | ||||||
Date: | By | /s/ CAROL L. ROBERTS | ||||
Carol L. Roberts Senior Vice President and Chief Financial Officer | ||||||
Date: | By | /s/ TERRI L. HERRINGTON | ||||
Terri L. Herrington Vice President – Finance and Controller |
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