Operating Earnings (a non-GAAP measure) is defined as net earnings from continuing operations (a GAAP measure) excluding special items and non-operating pension expense. International Paper generated Operating Earnings per diluted share attributable to common shareholders of $2.65 in 2012, compared with $3.12 in 2011, and $2.30 in 2010. Diluted earnings (loss) per share attributable to common shareholders were $1.80 in 2012, compared with $3.03 in 2011 and $1.59 in 2010.

International Paper delivered strong results during 2012 despite challenging global economic conditions, and generated record cash flow from operations of $3 billion. Our results were primarily driven by the Temple-Inland acquisition and associated integration synergies that exited the year at a run rate above our first-year plan. We also divested three mills required as a condition to close the Temple-Inland acquisition and announced an agreement to divest the building products business acquired with Temple-Inland. These divestitures combined will generate more than $1.2 billion of cash once the building products divestiture closes.

Our global operations continued to execute well and deliver on our cost management objectives, contributing to another year of generating returns above our cost of capital. We reduced our balance sheet debt by $1.9 billion since the Temple-Inland acquisition closed and increased our annual dividend by 14% to $1.20 per share. We also made significant progress on our strategic and cost-reduction projects, including the Franklin fluff pulp mill conversion, the biomass boiler at our Mogi Guacu mill in Brazil, and our new coated paperboard machine in China, among others. We also finalized two acquisitions in Turkey and Brazil during the 2013 first quarter that were announced in 2012. We believe these strategic and cost-saving projects position International Paper well for a step-change in earnings in 2013.

Summarizing our 2012 operations, the Temple-Inland acquisition built a strong foundation for steadily improving, as well as less cyclical, earnings going forward. The acquisition and impressive integration were meaningfully earnings accretive in less than twelve months. While the slower global growth environment took its toll on pricing in pulp, consumer grades and export shipments across all our product lines, the worst seems to be behind us as pulp markets have stabilized and rebounded from the bottom and export markets in containerboard have recovered in the second half of the year. It was another year of excellent execution across

our global operations, as the performance of our mills more than offset ramp-up costs associated with the Franklin fluff pulp mill conversion and the coated paperboard machine start-up at our IP-Sun joint venture in China. Lower average input costs helped us offset the absence of significant favorable inventory valuation adjustments that we experienced in 2011.

Looking ahead to the first quarter of 2013, we expect seasonally weaker volume in our Europe-Russia and Brazil papers businesses and stable demand across our North American businesses. We expect the full benefit of our 2012 fourth quarter North American box price increase to be realized during the 2013 first quarter, but it will be partially offset by unfavorable seasonal mix issues in Brazil. Operationally, we should see the impact of improved performance across our mill businesses as supply chain conditions improve and one-time unfavorable issues from the 2012 fourth quarter do not repeat. Further, lower costs at Franklin and the full impact of the biomass boiler in Brazil should provide additional earnings momentum. As to input costs, we expect higher costs for recycled fiber, wood and energy. The 2013 first quarter will be another heavy maintenance outage quarter with only a modest decrease in expenses expected.

For the 2013 full year, our outlook for end-use demand is based on global economic growth of three to four percent and growth in the U.S. of one to two percent. Our largest lever this year is the trajectory of our North American industrial packaging business, with year-over-year earnings improvement due to pricing and continued system optimization. Further, the ramp-up of our many strategic and cost saving projects during the course of the year is expected to drive significant incremental earnings in 2013 versus 2012. We do, however, expect higher input costs, primarily associated with fiber and energy, and an unfavorable impact associated with the lost earnings and incremental containerboard purchases from the divested mills.
Free cash flow (a non-GAAP measure) of $1.6 billion generated in 2012 was lower than the $1.7 billion generated in both 2011 and 2010 (see reconciliation on page 33).
Operating Earnings per share attributable to common shareholders of $0.69 in the fourth quarter of 2012 were lower than both the $0.81 in the 2012 third quarter and the $0.73 in the 2011 fourth quarter. Diluted earnings (loss) per share attributable to common shareholders were $0.53 in the fourth quarter of 2012, compared with $0.54 in the third quarter of 2012 and $0.65 in the fourth quarter of 2011.
Free cash flow of $384 million generated in the 2012 fourth quarter was lower than the $567 million generated in the 2012 third quarter but slightly higher than the $328 million

generated in the 2011 fourth quarter (see reconciliation on page 33). Operating Earnings is a non-GAAP measure. Diluted earnings (loss) per share attributable to International Paper Company common shareholders is the most direct comparable GAAP measure. The Company calculates Operating Earnings by excluding the after-tax effect of items considered by management to be unusual from the earnings reported under GAAP, and non-operating pension expense. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. The Company believes that using this information, along with the most direct comparable GAAP measure, provides for a more complete analysis of the results of operations. The following are reconciliations of Operating Earnings per share attributable to International Paper Company common shareholders to diluted earnings (loss) per share attributable to International Paper Company common shareholders.

                                                          2012         2011        2010
Operating Earnings (Loss) Per Share Attributable to
Shareholders                                         $    2.65   $     3.12   $    2.30
Non-operating pension expense                            (0.26 )      (0.06 )     (0.14 )
Restructuring and other charges                          (0.45 )      (0.19 )     (0.59 )
Net gains (losses) on sales and impairments of
businesses                                               (0.20 )       0.08        0.03
Interest income                                              -         0.01           -
Income tax adjustments                                   (0.04 )      (0.06 )     (0.01 )
Bargain purchase price adjustment                            -         0.02           -
Diluted Earnings (Loss) Per Share from Continuing
Operations                                                1.70         2.92        1.59
Discontinued operations                                   0.10         0.11           -
Diluted Earnings (Loss)Per Share Attributable to
Shareholders                                         $    1.80   $     3.03   $    1.59



                       Three Months Ended       Three Months Ended      Three Months Ended
                        December 31, 2012       September 30, 2012       December 31, 2011
Operating Earnings
(Loss) Per Share
Attributable to
Shareholders         $               0.69     $               0.81     $              0.73
Non-operating
pension expense                     (0.07 )                  (0.06 )                 (0.01 )
Restructuring and
other charges                       (0.08 )                  (0.13 )                 (0.03 )
Net gains (losses)
on sales and
impairments of
businesses                           0.01                    (0.11 )                     -
Interest income                         -                        -                    0.01
Income tax
adjustments                         (0.04 )                      -                   (0.05 )
Diluted Earnings
(Loss) Per Share
from Continuing
Operations                           0.51                     0.51                    0.65
Discontinued
operations                           0.02                     0.03                       -
Diluted Earnings
(Loss) Per Share
Attributable to
Shareholders         $               0.53     $               0.54     $              0.65

Results of Operations
Industry segment operating profits are used by International Paper's management to measure the earnings performance of its businesses. Management believes that this measure allows a better understanding of trends in costs, operating efficiencies, prices and volumes. Industry segment operating profits are defined as earnings before taxes, equity earnings, noncontrolling interests, interest expense, corporate items and corporate special items. Industry segment operating profits are defined by the Securities and Exchange Commission as a non-GAAP financial measure, and are not GAAP alternatives to net income or any other operating measure prescribed by accounting principles generally accepted in the United States.
International Paper operates in four segments: Industrial Packaging, Printing Papers, Consumer Packaging and Distribution. 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.

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

In millions                                             2012         2011         2010
Net Earnings (Loss) Attributable to
International Paper Company                      $       794   $    1,322   $      691
Deduct - Discontinued operations:
(Earnings) from operations                               (54 )          -            -
(Gain) loss on sales or impairment                         9          (49 )          -
Earnings (Loss) From Continuing Operations
Attributable to International Paper Company              749        1,273          691
Add back (deduct):
Income tax provision                                     331          311          221
Equity (earnings) loss, net of taxes                     (61 )       (140 )       (111 )
Net earnings attributable to noncontrolling
interests                                                  5           14           21
Earnings (Loss) From Continuing Operations
Before Income Taxes and Equity Earnings                1,024        1,458          822
Interest expense, net                                    672          541          608
Noncontrolling interests / equity earnings
included in operations                                     -          (10 )        (15 )
Corporate items                                           51          102          142
Special items:
Restructuring and other charges                           51           82           70
Net losses (gains) on sales and impairments of
businesses                                                (2 )          -          (25 )
Non-Operating Pension Expense                    $       159   $       43   $       84
                                                 $     1,955   $    2,216   $    1,686
Industry Segment Operating Profit
Industrial Packaging                             $     1,066   $    1,147   $      826
Printing Papers                                          599          872          481
Consumer Packaging                                       268          163          207
Distribution                                              22           34           78
Forest Products                                            -            -           94
Total Industry Segment Operating Profit          $     1,955   $    2,216   $    1,686

Industry segment operating profits of $2.0 billion in 2012 included a net loss from special items of $335 million compared with $253 million in 2011 and $344 million in 2010. Operationally, compared with 2011, the impacts of Temple-Inland volumes and synergies ($379 million) and lower input costs ($113 million) were offset by higher costs associated with Temple-Inland step-up depreciation and the impact of divesting three containerboard mills ($141 million), lower average sales price realizations and an unfavorable mix ($313 million), higher operating costs ($186 million) and higher mill maintenance outage costs($31 million).

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The principal changes in operating profit by segment were as follows:

• Industrial Packaging's profits of $1.1 billion were $81 million higher as the benefits of Temple-Inland sales volumes and synergies and lower input costs were partially offset by additional costs associated with Temple-Inland step-up depreciation and the impact of the divestiture of three containerboard mills, lower average sales price realizations and unfavorable mix, higher operating costs and higher maintenance outage costs. In addition, 2012 operating profits included $184 million of costs associated with the integration of Temple-Inland, a $62 million charge to adjust the long-lived assets of the Hueneme mill to their fair value, and $29 million of costs associated with the divestiture of three containerboard mills. Operating profits in 2011 included $20 million of costs associated with the signing of an agreement to purchase Temple-Inland.

• Printing Papers' profits of $599 million were $273 million lower than in 2011. The benefits of higher sales volumes were more than offset by lower sales price realizations, higher operating costs, higher maintenance outage costs, higher raw material and freight costs and other items. Operating profits in 2011 included a gain of $21 million related to the reversal of environmental reserves due to the announced repurposing of the Franklin, Virginia mill and $11 million of asset impairment costs associated with the Inverurie, Scotland mill which was closed in 2009.

• Consumer Packaging's profits of $268 million, were $105 million higher than in 2011. The benefits from lower raw material and freight costs, lower maintenance outage costs and lower other items were more than offset by lower sales price

realizations and a less favorable product mix, lower sales volumes and higher market-related downtime, and higher operating expenses. Operating profits in 2011 included costs of $201 million associated with the fixed asset impairment and sale of the Shorewood business.

• Distribution's profits of $22 million were $12 million lower than 2011. Higher sales price realizations and lower operating costs were more than offset by lower sales volumes. Reorganization expenses were $49 million in 2012 and $52 million in 2011.

Corporate items, net, of $51 million of expense in 2012 were lower than the $102 million of expense in 2011 due to lower supply chain initiative expenses. The decrease in 2011 from 2010 primarily reflects lower supply chain initiative expenses.
Corporate special items, including restructuring and other items and net losses on sales and impairments of businesses were a loss of $49 million in 2012 compared with a loss of $76 million in 2011 and a loss of $45 million in 2010. Interest expense, net, was $672 million in 2012 compared with $541 million in 2011 and $608 million in 2010. The increase in 2012 reflects higher interest expense associated with the Temple-Inland acquisition, while the decrease in 2011 reflects lower debt levels throughout much of the year.
A net income tax provision of $331 million was recorded for 2012, including a net expense of $14 million related to internal restructurings and an expense of $5 million to adjust deferred tax assets related to post-retirement prescription drug coverage (Medicare Part D reimbursements). The 2011 income tax provision of $311 million includes a tax benefit of $222 million related to the reduction of the carrying value of the Shorewood business and the write-off of a deferred tax liability associated with Shorewood, a $24 million expense related to internal restructurings, a $9 million expense for costs associated with our acquisition of a majority interest in Andhra Pradesh Paper Mills Limited, a $13 million benefit related to the release of a deferred tax asset valuation allowance and a $2 million expense for other items. The 2010 income tax provision of $221 million includes a $14 million tax expense for an incentive compensation deferred tax write-off, a $32 million tax expense for a Medicare Part D deferred tax write-off and a $40 million net tax benefit related to cellulosic bio-fuel credits.
Discontinued Operations
In 2012, $54 million of operating profits for the Temple-Inland Building Products business were recorded in discontinued operations. In addition, $9 million of after-

tax expenses associated with pursuing the divestiture of this business were included.
In 2011, $49 million of net income adjustments were recorded relating to prior sales of discontinued businesses.
Liquidity and Capital Resources
For the year ended December 31, 2012, International Paper generated $3.0 billion of cash flow from continuing operations compared with $2.7 billion in 2011. Capital spending for 2012 totaled $1.4 billion, or 93% of depreciation and amortization expense. Cash expenditures for acquisitions totaled $3.7 billion, while net decreases in debt totaled $356 million. Our liquidity position remains strong, supported by approximately $2.5 billion of committed credit facilities that we believe are adequate to meet future liquidity requirements. Maintaining an investment-grade credit rating for our long-term debt continues to be an important element in our overall financial strategy.
We expect to generate strong free cash flow again in 2013 and will continue our balanced use of cash through investments in capital projects, the reduction of total debt, including the Company's unfunded pension obligation, returning value to shareholders and strengthening our businesses through acquisitions, as appropriate.
Capital spending for 2013 is targeted at $1.4 billion, or about 93% of depreciation and amortization.
Critical Accounting Policies and Significant Accounting Estimates Accounting policies that may have a significant effect on our reported results of operations and financial position, and that can require judgments by management in their application, include accounting for contingent liabilities, impairments of long-lived assets and goodwill, pension and postretirement benefit obligations, stock options and income taxes. See pages 38 through 41 for a discussion of the Company's critical accounting policies and significant accounting estimates.
Legal
See Note 10 Commitments and Contingent Liabilities on pages 65 through 69 of Item 8. Financial Statements and Supplementary Data for a discussion of legal matters.

CORPORATE OVERVIEW
While the operating results for International Paper's various business segments are driven by a number of business-specific factors, changes in International Paper's operating results are closely tied to changes in general economic conditions in North America, Europe, Russia, Latin America, Asia and North Africa. Factors that impact the demand for our products include industrial non-durable goods production, consumer spending, commercial printing and advertising activity, white-collar employment levels, and movements in currency exchange rates.
Product prices are affected by general economic trends, inventory levels, currency movements and worldwide capacity utilization. In addition to these revenue-related factors, net earnings are impacted by various cost drivers, the more significant of which include changes in raw material costs, principally wood, recycled fiber and chemical costs; energy costs; freight costs; salary and benefits costs, including pensions; and manufacturing conversion costs. The following is a discussion of International Paper's results of operations for the year ended December 31, 2012, and the major factors affecting these results compared to 2011 and 2010.
RESULTS OF OPERATIONS
For the year ended December 31, 2012, International Paper reported net sales of $27.8 billion, compared with $26.0 billion in 2011 and $25.2 billion in 2010. International net sales (including U.S. exports) totaled $8.5 billion or 31% of total sales in 2012. This compares with international net sales of $8.7 billion in 2011 and $7.5 billion in 2010.
Full year 2012 net earnings attributable to International Paper Company totaled $794 million ($1.80 per share), compared with net earnings of $1.3 billion ($3.03 per share) in 2011 and $691 million ($1.59 per share) in 2010. 2012 and 2011 amounts include the results of discontinued operations.
Earnings from continuing operations attributable to International Paper Company after taxes in 2012 were $749 million, including $305 million of net special items charges and $113 million of non-operating pension expense compared with income of $1.3 billion, including $63 million of net special items charges and $29 million of non-operating pension expense in 2011, and $691 million, including $246 million of net special items charges and $59 million of non-operating pension expense in 2010. Compared with 2011, benefits from Temple-Inland synergies, lower input costs and lower income tax expense were more than offset by higher costs associated with Temple-Inland step-up depreciation and the impact of the divestiture of three

containerboard mills, lower average sales price realizations and unfavorable mix, higher operating costs, higher maintenance outage costs and higher interest expense. In addition, 2012 results included lower equity earnings, net of taxes, relating to the Company's investment in Ilim Holdings, SA.
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See Industry Segment Results on pages 27 through 32 for a discussion of the impact of these factors by segment.
Discontinued Operations
2012:
In 2012, $45 million of net income adjustments were recorded relating to discontinued businesses, including $9 million of costs associated with the announced agreement to sell the Temple-Inland Building Products business. Also included are the operating profits for the Temple-Inland Building Products business.
2011:
In 2011, $49 million of net income adjustments were recorded relating to prior sales of discontinued businesses, including a $30 million earnout payment received by the Company in 2011 associated with the sale of the Kraft Papers businesses in 2007 and a $15 million tax benefit for the reversal of local country tax contingency reserves, for which the related statute of limitations has now expired, plus associated interest income of $4 million recorded in 2011 related to the 2006 sale of the Brazilian Coated Papers business. Income Taxes
A net income tax provision of $331 million was recorded for 2012, including a net tax expense of $14 million related to internal restructurings and a $5 million expense to adjust deferred tax assets related to post-retirement prescription drug coverage (Medicare Part D reimbursements). Excluding these items and the tax effect of other special items, the tax provision was $410 million, or 29% of pre-tax earnings before equity earnings.

A net income tax provision of $311 million was recorded for 2011, including a tax benefit of $222 million related to the reduction of the carrying value of the Shorewood business and the write-off of a deferred tax liability associated with Shorewood, a $24 million expense related to internal restructurings, a $9 million expense for costs associated with our acquisition of a majority share of Andhra Pradesh Paper Mills Limited in India, a $13 million benefit related to the release of a deferred tax asset valuation allowance, and a $2 million expense for other items. Excluding these items and the tax effect of other special items, the tax provision was $577 million, or 32% of pre-tax earnings before equity earnings.
A net income tax provision of $221 million was recorded for 2010, including a $14 million tax expense and a $32 million tax expense for incentive compensation and Medicare Part D deferred tax write-offs, respectively, and a net $40 million tax benefit related to cellulosic bio-fuel tax credits. See discussion on pages 33 and 34. Excluding these items and the tax effect of other special items, the tax provision was $364 million, or 30% of pre-tax earnings before equity earnings.
Equity Earnings, Net of Taxes
Equity earnings, net of taxes in 2012, 2011 and 2010 consisted principally of the Company's share of earnings from its 50% investment in Ilim Holding S.A. in Russia (see page 32).
Corporate Items and Interest Expense
Corporate items totaled $51 million of expense for the year ended December 31, 2012 compared with $102 million in 2011 and $142 million in 2010. The decrease in 2012 from 2011 reflects lower supply chain initiative expenses. The decrease in 2011 from 2010 reflects lower supply chain initiative expenses.
Net interest expense totaled $672 million in 2012, $541 million in 2011 and $608 million in 2010. The increase in 2012 compared with 2011 is due to interest expense associated with the Temple-Inland acquisitions. The decrease in 2011 compared with 2010 reflects lower average debt levels.
Net earnings attributable to noncontrolling interests totaled $5 million in 2012 compared with $14 million in 2011 and $21 million in 2010. The decrease in 2012 primarily reflects lower earnings for the Shandong IP & Sun Food Packaging Co., Ltd. joint venture in China due to start-up costs associated with a new paper machine. The decrease in 2011 reflects lower earnings for Shorewood Mexico due to the impairment of the business' fixed assets.

Special Items
Restructuring and Other Charges
International Paper continually evaluates its operations for improvement opportunities targeted to (a) focus our portfolio on our core businesses,
(b) rationalize and realign capacity to operate fewer facilities with the same revenue capability and close high cost facilities, and (c) reduce costs. Annually, strategic operating plans are developed by each of our businesses. If it subsequently becomes apparent that a facility's plan will not be achieved, a decision is then made to (a) invest additional capital to upgrade the facility,
(b) shut down the facility and record the corresponding charge, or (c) evaluate the expected recovery of the carrying value of the facility to determine if an impairment of the asset value of the facility has occurred. In recent years, this policy has led to the shutdown of a number of facilities and the recording of significant asset impairment charges and severance costs. It is possible that additional charges and costs will be incurred in future periods in our core businesses should such triggering events occur. 2012: During 2012, corporate restructuring and other charges totaling $51 million before taxes ($35 million after taxes) were recorded. These charges included:

• a $48 million charge before taxes ($30 million after taxes) for costs related to the early extinguishment of debt (see Note 12 Debt and Lines of . . .