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IP > SEC Filings for IP > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for INTERNATIONAL PAPER CO /NEW/


7-Nov-2012

Quarterly Report


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 before special items of $0.75 in the third quarter of 2012, compared with 2012 second quarter earnings of $0.46 and 2011 third quarter earnings of $0.81. Diluted earnings per share attributable to International Paper common shareholders were $0.54 in the third quarter of 2012, compared with $0.31 in the second quarter of 2012 and $1.08 in the third quarter of 2011.
We delivered strong results in the 2012 third quarter, despite continued global economic headwinds and the absence of three containerboard mills divested as required for regulatory approval for the Temple-Inland acquisition. We also generated excellent cash from operations, reduced balance sheet debt by $800 million, and increased our dividend 14%. Within our North America Industrial Packaging business, we implemented a $50 per ton containerboard price increase and achieved our original run rate target of $300 million in Temple-Inland synergies, fifteen months ahead of our original plan. While maintenance outages were lower in the third quarter across our mill businesses, seasonally softer box demand and continued slow overall growth in our North American packaging businesses resulted in higher sequential market-related downtime in the quarter as we matched our production to our customer's demand. On the strategic project front, our Franklin mill continued its accelerated successful production ramp-up and qualification process for fluff pulp, and the Sun joint venture in China started up their new coated paperboard machine late in the quarter. Subsequent to the end of the third quarter, we also announced our entrance into the Brazilian corrugated packaging market with an agreement to purchase 75% of a newly-formed joint venture containing Grupo Orsa's industrial packaging assets, including three mills and four box plants.
The primary headwind we faced during the 2012 third quarter, besides the expected loss of operating profit associated with the divested mills, was volume, which was down compared to the 2012 second quarter largely due to seasonally lower box sales, continued overall slow growth across our North American packaging businesses and weaker Asian demand. Unfavorable LIFO inventory valuation adjustments and purchase accounting true-ups impacted operating costs during the quarter, but were more than offset by favorable operations, incremental Temple-Inland synergies and improved results after Franklin's startup. Finally, the quarter was favorably impacted by an increase in equity earnings from our Ilim joint venture in Russia, mainly due to a positive foreign currency adjustment.
Looking ahead to the fourth quarter, we expect seasonally stronger volume in our EMEA box business and our Brazilian papers business to offset normal seasonal declines in packaging in North America. Box price realizations associated with the pass through of the North American containerboard increase and mix improvement from higher domestic sales in Brazil are expected to more than offset negative North American papers mix due to price leakage and higher volumes in export markets. Operations are expected to be relatively stable quarter over quarter. As to input costs, we expect higher wood, recycled fiber and energy costs, and we are moving from our lightest maintenance outage quarter to a more average quarter, so our expenses will increase as we move to a normalized level. Fourth-quarter earnings will also be impacted due to business interruptions at our box plants and distribution centers throughout the Northeast caused by Hurricane Sandy. Finally, the contribution from our Ilim joint venture is expected to decrease as we are not expecting another large positive currency adjustment like that experienced in the third quarter. Earnings per share attributable to International Paper shareholders before special items is a non-GAAP measure. Diluted earnings (loss) per share attributable to International Paper shareholders is the most direct comparable GAAP measure. The Company calculates earnings per share before special items by excluding the 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.


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                                                   Three Months Ended          Three Months Ended
                                                     September 30,                  June 30,
                                                  2012             2011               2012
Earnings Per Share Before Special Items      $      0.75       $     0.81     $           0.46
Restructuring and other charges                    (0.13 )          (0.07 )              (0.08 )
Net gains (losses) on sales and impairments
of businesses                                      (0.11 )           0.34                (0.11 )
Earnings Per Common Share from Continuing
Operations                                          0.51             1.08                 0.27
Discontinued operations                             0.03                -                 0.04
Diluted Earnings (Loss) Per Common Share as
Reported                                     $      0.54       $     1.08     $           0.31

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. 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 third quarter of 2012, International Paper Company reported net sales of $7.0 billion, compared with $7.1 billion in the second quarter of 2012 and $6.6 billion in the third quarter of 2011. The results of operations of Temple-Inland are included since the acquisition in February 2012.
Net earnings attributable to International Paper totaled $237 million, or $0.54 per share, in the 2012 third quarter. This compared with $468 million, or $1.08 per share, in the third quarter of 2011 and $134 million, or $0.31 per share, in the second quarter of 2012.

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Earnings from continuing operations attributable to International Paper Company were $223 million in the third quarter of 2012 compared with $468 million in the third quarter of 2011 and $118 million in the second quarter of 2012. Compared with the third quarter of 2011, earnings in the 2012 third quarter benefited from higher sales volumes ($26 million), lower mill outage costs ($19 million), lower raw material and freight costs ($43 million), and Temple-Inland synergies ($52 million). These benefits were offset by lower average sales price realizations ($66 million), the net impact of a more favorable mix of products sold and higher operating costs ($78 million), higher corporate and other costs ($24 million), higher interest expense ($23


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million) and higher tax expense ($2 million). Equity earnings, net of taxes, relating to International Paper's investment in Ilim Holding S.A. were $31 million higher in the 2012 third quarter than in the 2011 third quarter. Net special items were a loss of $107 million in the 2012 third quarter, compared with a gain of $116 million in the 2011 third quarter.
Compared with the second quarter of 2012, earnings benefited from higher average sales price realizations ($4 million), lower mill outage costs ($96 million), lower raw material and freight costs ($5 million), lower interest expense ($6 million), and lower tax expense ($5 million). These benefits were offset by lower sales volumes ($21 million), the net impact of a less favorable mix of products sold and lower operating costs ($2 million), the impact of the divestiture of three containerboard mills ($22 million), and higher corporate and other costs ($2 million). Equity earnings, net of taxes, for Ilim Holding, S.A. increased by $58 million versus the 2012 second quarter. Net special items were a loss of $107 million in the 2012 third quarter, compared with a loss of $85 million in the 2012 second quarter.
To measure the performance of the Company's business segments from period to period without variations caused by special or unusual items, International Paper's management focuses on industry segment operating profit. This is defined as earnings from continuing operations before taxes, equity earnings and noncontrolling interests net of taxes, excluding interest expense, corporate charges and corporate special items which may include restructuring charges and
(gains) losses on sales and impairments of businesses. The following table presents a reconciliation of net earnings attributable to International Paper Company to its operating profit:

                                                             Three Months Ended
                                                        September 30,             June 30,
In millions                                          2012            2011           2012
Earnings (Loss) From Continuing Operations
Attributable to International Paper Company     $        223     $      468     $       118
Add back (deduct):
Income tax provision (benefit)                           130            (84 )            57
Equity (earnings) loss, net of taxes                     (34 )            -              26
Noncontrolling interests, net of taxes                     1             (3 )             3
Earnings (Loss) From Continuing Operations
Before Income Taxes and Equity Earnings                  320            381             204
Interest expense, net                                    163            130             172
Noncontrolling interests / equity earnings
included in operations                                     -              1              (4 )
Corporate items                                           41             34              45
Special items:
Restructuring and other charges                           15             25               9
                                                $        539     $      571     $       426
Industry Segment Operating Profit:
Industrial Packaging                            $        255     $      293     $       260
Printing Papers                                          202            239             104
Consumer Packaging                                        67             30              57
Distribution                                              15              9               5
Total Industry Segment Operating Profit         $        539     $      571     $       426


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Industry Segment Operating Profit
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Total industry segment operating profits of $539 million in the 2012 third quarter were lower than the $571 million in the 2011 third quarter, but higher than the $426 million in the 2012 second quarter. Compared with the third quarter of 2011, operating profits in the current quarter benefited from higher sales volumes ($37 million), lower mill outage costs ($27 million), lower raw material and freight costs ($61 million), and Temple-Inland synergies ($75 million). These benefits were offset by lower average sales price realizations ($95 million), the net impact of a more favorable mix of products sold and higher operating costs ($112 million) and lower corporate and other items ($28 million). Special items were a loss of $95 million in the 2012 third quarter, compared with a loss of $98 million in the 2011 third quarter. Compared with the second quarter of 2012, operating profits benefited from higher average sales price realizations ($6 million), lower mill outage costs ($141 million), and lower raw material and freight costs ($7 million). These benefits were offset by lower sales volumes ($32 million), the net impact of a more favorable product mix and higher operating costs ($4 million), the impact of the divestiture of three containerboard mills ($33 million), and higher other costs ($4 million). Special items were a loss of $95 million in the 2012 third quarter, compared with a special item loss of $127 million in the 2012 second quarter.
During the 2012 third quarter, International Paper took approximately 399,000 tons of downtime of which approximately 353,000 tons were market-related compared with approximately 140,000 tons of downtime, which included about 68,000 tons that were market-related, in the 2011 third quarter. During the 2012 second quarter, International Paper took approximately 390,000 tons of downtime of which approximately 161,000 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.


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Sales Volumes by Product (1)
Sales volumes of major products for the three months and nine months September
30, 2012 and 2011 were as follows:

                                         Three Months Ended          Nine Months Ended
                                           September 30,               September 30,
In thousands of short tons                 2012           2011        2012         2011
Industrial Packaging
Corrugated Packaging (2)                 2,665           1,895       7,922         5,618
Containerboard (2)                         823             614       2,400         1,789
Recycling                                  620             608       1,754         1,860
Saturated Kraft                             47              38         130           122
Bleached Kraft                              30              27          85            75
European Industrial Packaging              244             244         770           783
Asian Box                                  108             118         306           337
Industrial Packaging                     4,537           3,544      13,367        10,584
Printing Papers
U.S. Uncoated Papers                       668             657       1,990         1,975
European and Russian Uncoated Papers       326             289         948           907
Brazilian Uncoated Papers                  290             283         859           826
Indian Uncoated Papers (3)                  59               -         185             -
Uncoated Papers                          1,343           1,229       3,982         3,708
Market Pulp (4)                            414             347       1,155         1,052
Consumer Packaging
North American Consumer Packaging          378             388       1,139         1,208
European Coated Paperboard                  93              80         278           244
Asian Coated Paperboard                    242             257         719           737
Consumer Packaging                         713             725       2,136         2,189

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

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

(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, management committed to a plan to sell the Temple-Inland Building Products business and is currently marketing the sale, which is probable of being closed. The operating results of this business are included in Discontinued operations from the date of acquisition. The assets of this business, totaling $613 million at September 30, 2012, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet at September 30, 2012. The liabilities of this business, totaling $63 million at September 30, 2012, are included in Liabilities of businesses held for sale in the accompanying consolidated balance sheet at September 30, 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 in the accompanying consolidated statement of operations.
In the third quarter of 2006, the Company completed the sale of its Brazilian Coated Papers business and restated its financial statements to reflect this business as a discontinued operation. Included in the results for this business in 2005 and 2006 were local country tax contingency reserves for which the related statute of limitations has now expired. A $15 million tax benefit for


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the reversal of these reserves plus associated interest income of $6 million ($4 million after taxes) was recorded during the three months ended March 31, 2011, and is included in Discontinued operations in the accompanying consolidated statement of operations.
Income Taxes
The income tax provision was $130 million for the 2012 third quarter. Excluding a benefit of $3 million related to the tax effects of special items, the effective income tax rate for continuing operations was 31% for the quarter. The income tax provision was $57 million for the 2012 second quarter. Excluding a benefit of $51 million related to the tax effects of special items, the effective income tax rate for continuing operations was 32% for the quarter. An income tax benefit of $84 million was recorded for the 2011 third quarter. Excluding a benefit of $239 million related to the tax effects of special items, the effective income tax rate for continuing operations was 30% for the quarter. Interest Expense and Corporate Items
Net interest expense for the 2012 third quarter was $163 million compared with $172 million in the 2012 second quarter and $130 million in the 2011 third quarter. The higher net expense compared with prior year is due to interest expense associated with the Temple-Inland acquisition.
Corporate items, net, of $41 million in the 2012 third quarter were lower than the $45 million of net expense in the 2012 second quarter, but higher than the $34 million of net expense in the 2011 third quarter. The decrease compared with the prior quarter reflects lower supply chain project costs. The increase compared with the 2011 third quarter reflects higher pension costs partially offset by lower supply chain project costs. Special Items
Restructuring and Other Charges
2012: During the three months ended September 30, 2012, restructuring and other charges totaling $33 million before taxes ($24 million after taxes) were recorded. Details of these charges were as follows:

                                    Three Months Ended September 30, 2012
                                      Before-Tax                 After-Tax
In millions                            Charges                    Charges
Early debt extinguishment costs $             13             $              8
xpedx restructuring                            8                            4
EMEA packaging restructuring                  16                           11
Other                                         (4 )                          1
Total                           $             33             $             24

During the three months ended June 30, 2012, restructuring and other charges totaling $21 million before taxes ($13 million after taxes) were recorded. Details of these charges were as follows:

                                                                 Three Months Ended June 30, 2012
                                                                     Before-Tax        After-Tax
In millions                                                           Charges           Charges
Early debt extinguishment costs                                  $             10     $        6
xpedx restructuring                                                            10              6
Other                                                                           1              1
Total                                                            $             21     $       13


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During the three months ended March 31, 2012, restructuring and other charges totaling $34 million before taxes ($23 million after taxes) were recorded. Details of these charges were as follows:

                                   Three Months Ended March 31, 2012
                                    Before-Tax             After-Tax
In millions                          Charges                Charges
Early debt extinguishment costs $          16           $          10
xpedx restructuring                        19                      14
Other                                      (1 )                    (1 )
Total                           $          34           $          23

2011: During the three months ended September 30, 2011, restructuring and other charges totaling $49 million before taxes ($32 million after taxes) were recorded. Details of these charges were as follows:

                                                                  Three Months Ended September 30,
                                                                                2011
                                                                      Before-Tax         After-Tax
In millions                                                            Charges            Charges
xpedx restructuring                                              $               18     $       13
APPM acquisition                                                                 16             10
Temple-Inland merger agreement                                                    8              5
Shorewood                                                                         6              4
Other                                                                             1              -
Total                                                            $               49     $       32

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
                                           Before-Tax             After-Tax
In millions                                 Charges                Charges
xpedx restructuring                   $            10           $          6
Franklin, Virginia mill closure costs             (21 )                  (13 )
Other                                               1                      -
Total                                 $           (10 )         $         (7 )

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 (see Note 10). 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
                                                                     Before-Tax        After-Tax
In millions                                                           Charges           Charges
Early debt extinguishment costs                                  $             32     $       19
xpedx restructuring                                                             7              4
Other                                                                           6              5
Total                                                            $             45     $       28


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Net (Gains) Losses on Sales and Impairments of Businesses 2012: As referenced in Note 6, on July 2, 2012, International Paper finalized the sales of its Ontario and Oxnard (Hueneme), California containerboard mills to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee containerboard mill to Hood Container Corporation. During the three months ended September 30, 2012, the Company recorded a pre-tax charge of $19 million ($49 million after taxes) for additional costs associated with the divestiture of its Ontario and Oxnard (Hueneme), California containerboard mills and its New Johnsonville, Tennessee containerboard mill. Also during the three months ended September 30, 2012, a gain of $1 million, before and after taxes, was recorded for other items.
A pre-tax charge of $9 million ($5 million after taxes) was recorded during the three months ended June 30, 2012 for costs associated with the divestiture of these three containerboard mills. Also, in anticipation of the divestiture of the Hueneme mill in Oxnard, California, a pre-tax charge of $62 million ($38 million after taxes) was recorded during the three months ended June 30, 2012 to adjust the long-lived assets of the mill to their fair value.
During the three months ended June 30, 2012, the Company recorded a pre-tax charge of $6 million ($4 million after taxes) to adjust the previously estimated loss on the sale of the Company's Shorewood business. Also during the three months ended June 30, 2012, charges of $1 million, before and after taxes, were recorded for other items.
During the three months ended March 31, 2012, the Company recorded a pre-tax gain of $7 million ($6 million after taxes) to adjust the previously estimated loss on the sale of the Company's Shorewood business. The sale of the Shorewood non-U.S. business was completed in January 2012.
All of the charges discussed above are included in Net (gains) losses on sales . . .

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