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2012 ANNUAL REPORT
OUR PATH FORWARD

Table of contents

  • Page 1
    OUR PATH FORWARD 2012 ANNUAL REPORT

  • Page 2
    IN WE MADE PROGRESS TOWARD OUR KEY STRATEGIC INITIATIVES AROUND THE GLOBE. WE ARE WELL-POSITIONED TO DELIVER SIGNIFICANT PROGRESS ON OUR EARNINGS AND CASH FLOW IN 2013 AND BEYOND. 2012,

  • Page 3
    ... AND PAPER." John V. Faraci Chairman and Chief Executive Officer International Paper TO THE SHAREOWNERS AND EMPLOYEES OF INTERNATIONAL PAPER, For International Paper, 2012 was marked by strong execution and good results against a challenging global economic backdrop. We delivered our second best...

  • Page 4
    ...India also stands poised for double digit volume and earnings growth over the next several years. Finally, the Ilim joint venture in Russia is close to completing the largest build out in the Russian pulp and paper industry in the last 30 years-and the largest project in the history of International...

  • Page 5
    International Paper / 2012 Annual Report 2/3 INTERNATIONAL PAPER 1 2 1 1 2 4 in corrugated packaging, coated paperboard and distribution IN NORTH AMERICA in uncoated papers IN NORTH AMERICA in uncoated papers IN BRAZIL in paper, pulp and packaging IN RUSSIA in coated paperboard IN CHINA...

  • Page 6
    ...countries around the world. Across North America, International Paper has nearly 1,000 different facilities from coast to coast. International Paper is the premier manufacturer of containerboard and corrugated packaging products, uncoated free sheet, coated paperboard and fluff pulp. We also deliver...

  • Page 7
    ... Paperboard and distribution operations are all found beneath the umbrella of IP Asia. The coated paperboard business is a joint venture that International Paper formed in 2006 with Sun Paper-one of the largest paper manufacturing companies in China. INDIA EMEA/RUSSIA With regional headquarters in...

  • Page 8
    ... centers across North America, South America, Europe and Asia. In February 2012, International Paper finalized the $4.4 billion acquisition of competitor Temple-Inland and gained five mills, nearly 60 container facilities, extensive employee talent and a host of world-class customers. The year was...

  • Page 9
    ... from Brazil, our industrial packaging operations in Asia and Europe are providing total packaging solutions across each region and assisting customers in meeting packaging-related needs. At the end of fourth quarter 2012, International Paper acquired all the shares of joint venture partner Sabanci...

  • Page 10
    ...-neutral renewable energy. RECYCLING BUSINESS International Paper is one of North America's largest recyclers of recovered office paper and corrugated boxes. Each year, International Paper collects, consumes, or markets more than 6 million tons of paper in the United States, contributing to the...

  • Page 11
    International Paper / 2012 Annual Report 6/7 INDUSTRIAL PACKAGING BUSINESS Our Industrial Packaging business in North America is comprised of more than 25,000 employees; the business group includes 17 containerboard mills, 190 converting plants (including 130 box plants) and 20 recycling centers, ...

  • Page 12
    ...Central and Eastern Europe, and Russia. In Asia, International Paper and our joint venture partner, Sun Paper, manufacture high quality paperboard to meet growing demand in the world's largest marketplace. 2012 was an exciting year with the successful startup of PM-26-a new coated paperboard machine...

  • Page 13
    ... Paper / 2012 Annual Report 8/9 FOODSERVICE DELIVERS INNOVATIVE SINGLE-USE PACKAGING SOLUTIONS TO THE FOODSERVICE INDUSTRY. The Foodservice business continues to capitalize on increasing demand for convenience food options and achieved another year of record growth, outpacing the market in sales...

  • Page 14
    ... Printing Papers business spans North America, Latin America, Europe, Russia and India. Within this business, International Paper also produces fluff and market pulp for a variety of uses around the globe including diapers and personal hygiene products. 2012 was a significant year for the Printing...

  • Page 15
    International Paper / 2012 Annual Report 10/11 BRAZIL-MOGI GUAÇU BOILER The new boiler at the Mogi Guaçu Mill will generate 210 tons of steam per hour, which can be converted into enough electricity to supply around 40,000 households. This boiler complements the steam generators in the pulp ...

  • Page 16
    ... products. Today the Franklin Mill, located in southeast Virginia, is going through its final fluff pulp qualification process. When fully ramped up in 2013, the mill will be capable of producing 300,000 tons of high quality SuperSoft ® Plus fluff pulp for International Paper customers worldwide...

  • Page 17
    ...KORYAZHMA MILL The new paper machine and converting center at Koryazhma, located in the Arkhangelsk Oblast in the Northwest of Russia, will produce 200,000 metric tons annually of cut-size, UFS offset and base papers for coated free sheet, mainly for the Russian domestic market. It is the first site...

  • Page 18
    ...a telltale sign of the progress being made throughout International Paper's Distribution business. Today, xpedx is a leading business-to-business distributor of packaging, print and facility supplies, and equipment in North America. Customers include commercial printers and publishers, manufacturers...

  • Page 19
    International Paper / 2012 Annual Report 14/15 xpedx Paper and print supplies comprise the largest part of the xpedx portfolio. Beyond paper, xpedx distributes facility supplies, such as personal care, food service and commercial cleaning products, packaging materials and equipment, supported by ...

  • Page 20
    ... roughly three times the state of Texas. However, at International Paper, our commitment to sustainability goes beyond the trees and encompasses our whole supply chain-from fiber procurement, operations and products-to our communities, employees and suppliers. In 2012, International Paper announced...

  • Page 21
    ... (BOD, COD) to receiving streams Map water usage through our manufacturing locations by 2013; develop site specific plans by 2015 in strategic watershed areas to reduce use by 2020 15% increase in the recovery of Old Corrugated Containers (OCC) by exploring new sources and diverting useable fiber...

  • Page 22
    ... John Faraci and Carol Roberts topped the list for CEO, CFO respectively, and the Investor Relations team overall placed in top spot in the buy side and sell side categories BLOOMBERG BUSINESSWEEK 50 Ranked 32nd spot for top performing U.S. companies by Bloomberg Businessweek 50 CHIEF EXECUTIVE...

  • Page 23
    OUR PATH FORWARD 2012 FINANCIAL HIGHLIGHTS AND FORM 10-K

  • Page 24
    ... the write-off of a deferred tax liability associated with Shorewood, 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...

  • Page 25
    ...to the closing price as reported on the New York Stock Exchange, as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2012) was approximately $12,533,753,892. The number of shares outstanding of the Company's common stock as of February 21, 2013 was...

  • Page 26
    ... Principal Products Sales Volumes by Product Research and Development Environmental Protection Climate Change Employees Executive Officers of the Registrant Raw Materials Forward-looking Statements RISK FACTORS. UNRESOLVED STAFF COMMENTS. PROPERTIES. Forestlands Mills and Plants Capital Investments...

  • Page 27
    ... PAPER COMPANY INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2012 ITEM 7A. ITEM 8. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Management on Financial Statements, Internal Control over Financial Reporting...

  • Page 28
    ... site. In the United States at December 31, 2012, the Company operated 28 pulp, paper and packaging mills, 187 converting and packaging plants, 18 recycling plants and three bag facilities. Production facilities at December 31, 2012 in Europe, Asia, Latin America and South America included 11 pulp...

  • Page 29
    ... Discussion and Analysis of Financial Condition and Results of Operations. You can find information about the Company's manufacturing capacities on page A-4 of Appendix II. MARKETING AND DISTRIBUTION The Company sells paper, packaging products and other products directly to end users and converters...

  • Page 30
    ... (5) Includes third-party and inter-segment sales and excludes sales of equity investees. Temple-Inland volumes from date of acquisition in February 2012. SCA Packaging volumes from date of acquisition in June 2010. APPM volumes from date of acquisition in October 2011. internal sales to mills. 3

  • Page 31
    ...materials in manufacturing processes; recycling of consumer and packaging paper products; energy conservation; applications of computer controls to manufacturing operations; innovations and improvement of products; and development of various new products. Our development efforts specifically address...

  • Page 32
    ... greenhouse gas reductions. International Paper has two sites covered by the EUETS. These measures did not have a material effect on our European operations in 2012, nor are they expected to have such an impact in 2013 at current market prices for emission credits. Significant swings in market price...

  • Page 33
    ... board of directors of the Kellogg Company. Tim S. Nicholls, 51, senior vice president - printing and communications papers of the Americas since November 2011. Mr. Nicholls previously served as senior vice president and chief financial officer from 2007 until 2011 and vice president and executive...

  • Page 34
    ...papers of the Americas from 2010 until 2011, senior vice president - supply chain from 2008 to 2009, and vice president - supply chain from 2007 until 2008. Mr. Sutton served as vice president - strategic planning from 2005 until 2007. Mr. Sutton joined International Paper in 1984. RAW MATERIALS Raw...

  • Page 35
    ...in the United States and internationally, in all of our operating segments. Product innovations, manufacturing and operating efficiencies, and marketing, distribution and pricing strategies pursued or achieved by competitors could negatively impact our financial results. RISKS RELATING TO MARKET AND...

  • Page 36
    ... of Accounting Standards Codification (ASC) 715, "Compensation - Retirement Benefits," at December 31, 2012 was $4.1 billion. This includes liability for the International Paper Company pension plans as well as the Temple-Inland Retirement Plan and the Temple-Inland Supplemental Executive Retirement...

  • Page 37
    ... effect on our business and financial results. WE ARE SUBJECT TO CYBER-SECURITY RISKS RELATED TO BREACHES OF SECURITY PERTAINING TO SENSITIVE COMPANY, CUSTOMER, EMPLOYEE AND VENDOR INFORMATION AS WELL AS BREACHES IN THE TECHNOLOGY THAT MANAGES OPERATIONS AND OTHER BUSINESS PROCESSES. International...

  • Page 38
    ... to conduct business with International Paper. Access to internal applications required to plan our operations, source materials, manufacture and ship finished goods and account for orders could be denied or misused. Theft of intellectual property or trade secrets, and inappropriate disclosure...

  • Page 39
    ITEM 3. LEGAL PROCEEDINGS Information concerning the Company's legal proceedings is set forth in Note 10 Commitments and Contingencies on pages 65 through 69 of Item 8. Financial Statements and Supplementary Data. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 12

  • Page 40
    ... four quarters in 2012 and 2011 are set forth on page 88 of Item 8. Financial Statements and Supplementary Data. As of the filing of this Annual Report on Form 10-K, the Company's common shares are traded on the New York Stock Exchange. International Paper options are traded on the Chicago Board of...

  • Page 41
    ... S.A., Klabin S.A., MeadWestvaco Corp., Metsa Board Corporate, Mondi Group, Packaging Corporation of America, Rock-Tenn Company, Smurfit Kappa Group, Stora Enso Group, and UPM-Kymmene Corp. (2) Boise, Inc., Mondi Group and Smurfit Kappa Group became publicly traded companies in June 2007 (Boise, Inc...

  • Page 42
    ... Total shareholders' equity COMMON STOCK PRICES High Low Year-end FINANCIAL RATIOS Current ratio Total debt to capital ratio Return on shareholders' equity Return on investment from continuing operations attributable to International Paper Company CAPITAL EXPENDITURES NUMBER OF EMPLOYEES $ 1.72...

  • Page 43
    ... FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY pursuing the divestiture of the Temple- Inland Building Products business and the operating results of the Temple-Inland Building Products business. (d) Includes a net tax expense of $14 million related to internal restructurings and a $5 million expense to...

  • Page 44
    ... the write-off of a deferred tax liability associated with Shorewood, 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...

  • Page 45
    ... of $9 million ($5 million after taxes) for adjustments to reserves associated with the sale of discontinued businesses, and the operating results of certain wood products facilities. (n) Includes a $40 million tax benefit related to the restructuring of the Company's international operations. 18

  • Page 46
    ...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...

  • Page 47
    ...International Paper Company common shareholders. 2012 Operating Earnings (Loss) Per Share Attributable to Shareholders Non-operating pension expense Restructuring and other charges Net gains (losses) on sales and impairments of businesses Interest income Income tax adjustments Bargain purchase price...

  • Page 48
    ... signing of an agreement to purchase TempleInland. 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...

  • Page 49
    ... $40 million net tax benefit related to cellulosic bio-fuel credits. 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...

  • Page 50
    ...-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...

  • Page 51
    ... 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...

  • Page 52
    ... taxes) for severance and benefit costs associated with the Company's S&A reduction initiative. • 2012: As referenced in Note 5 Acquisitions and Joint Ventures on pages 57 through 60 in Item. 8 Financial Statements and Supplementary Data, on July 2, 2012, International Paper finalized the sales...

  • Page 53
    ... Packaging International Paper is the largest manufacturer of containerboard in the United States. Our production capacity is about 14 million tons annually. Our products include linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. About 80% of our production is...

  • Page 54
    ...building services and away-from-home markets with facility supplies; manufacturers with packaging supplies and equipment; and to a growing number of customers, 27 profits for 2012 include the results of the TempleInland packaging operations from the date of acquisition. Net sales for 2012 increased...

  • Page 55
    ... of $20 million for costs associated with the signing of the agreement to acquire TempleInland. Looking ahead to 2013, sales volumes in the first quarter compared with the fourth quarter of 2012 are expected to increase slightly for boxes due to a higher number of shipping days. Average sales price...

  • Page 56
    ...by lower purchased pulp costs. Freight costs increased due to higher oil prices. Manufacturing operating costs were favorable reflecting strong mill performance. Planned maintenance downtime costs were slightly higher in 2012. No market-related downtime was taken in either 2012 or 2011. Entering the...

  • Page 57
    ... $725 million in 2012 Benefits from lower raw material costs ($22 million), lower maintenance outage costs ($5 million) and other items ($2 million) were more than offset by lower sales price realizations and an unfavorable product mix ($66 million), lower sales volumes and increased market-related...

  • Page 58
    ... the successful execution of strategic sourcing initiatives. Facility supplies annual revenue was $0.9 billion in 2012, down compared to $1.0 billion in 2011 and 2010. Operating profits in 2012 included $49 million of reorganization costs for severance, professional services and asset write-downs...

  • Page 59
    ... market and in export markets. Input costs increased yearover-year, primarily for wood. Freight costs also increased. The Company received cash dividends from the joint venture of $86 million in 2011 and $33 million in 2010. No dividends were paid in 2012. Entering the first quarter of 2013, sales...

  • Page 60
    ..., 2011 the Company filed an amended 2009 tax return claiming alternative fuel mixture tax credits as non33 2012 $ 2,960 (1,383) 44 2011 $ 2,675 (1,159) 300 2010 $1,631 (775) 1,042 Cash provided by operations (Less)/Add: Cash invested in capital projects Cash contribution to pension plan, net of...

  • Page 61
    ... divestitures, as well as the planned divestiture of Temple-Inland's Building Products business. Temple-Inland's results of operations are included in the consolidated financial statements from the date of acquisition on February 13, 2012. Capital expenditures in 2013 are currently expected to be...

  • Page 62
    ...build and operate a new production line to manufacture coated paperboard for food packaging with a designed annual production capacity of 500,000 tons. The financial position and results of operations of this joint venture have been included in International Paper's consolidated financial statements...

  • Page 63
    ... amount of $150 million and maturities in 2013 (see Note 13 Derivatives and Hedging Activities on pages 73 through 77 of Item 8. Financial Statements and Supplementary Data). During 2011, existing swaps decreased the weighted average cost of debt from 7.1% to an effective rate of 6.9%. The inclusion...

  • Page 64
    ... global public capital markets where we have a wide base of investors. Maintaining an investment grade credit rating is an important element of International Paper's financing strategy. At December 31, 2012, the Company held long-term credit ratings of BBB (stable outlook) and Baa3 (stable outlook...

  • Page 65
    ...amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management's best estimates of certain key factors, including future selling prices and volumes, operating, raw material, energy...

  • Page 66
    ... pension expenses for the years shown: 2012 Discount rate Expected long-term rate of return on plan assets Rate of compensation increase 5.10% 2011 5.60% 2010 5.80% 8.25% 3.75% 8.00%(a) 8.25% 3.75% 3.75% The 2012 return above represents a weighted average of International Paper and Temple-Inland...

  • Page 67
    ... Temple-Inland plan. Assuming that discount rates, expected long-term returns on plan assets and rates of future compensation increases remain the same as in 2012 , projected future net periodic pension and postretirement plan expenses would be as follows: Accounting for Stock Options International...

  • Page 68
    ... operating results in each of the last three years. Sales prices and volumes are more strongly influenced by economic supply and demand factors in specific markets and by exchange rate fluctuations than by inflationary factors. FOREIGN CURRENCY EFFECTS International Paper has operations in a number...

  • Page 69
    ... are stated at cost, which approximates market due to their short-term nature. Our interest rate risk exposure related to these investments was not material. We issue fixed and floating rate debt in a proportion consistent with International Paper's targeted capital structure, while at the same time...

  • Page 70
    .... The Company completed the acquisition of TempleInland in February 2012. Due to the timing of the acquisition, we have excluded Temple-Inland from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2012, Temple-Inland net sales and...

  • Page 71
    ... management and the independent auditors. The Committee's report recommending the inclusion of such financial statements in this Annual Report on Form 10-K will be set forth in our Proxy Statement. JOHN V. FARACI CHAIRMAN AND CHIEF EXECUTIVE OFFICER CAROL L. ROBERTS SENIOR VICE PRESIDENT AND CHIEF...

  • Page 72
    ... net sales and 25% of total assets of the consolidated financial statements as of and for the year ended December 31, 2012. Accordingly our audit did not include internal control over financial reporting at Temple-Inland. The Company's management is responsible for maintaining effective internal...

  • Page 73
    ... with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2012 of the Company and our report dated February 26, 2013 expressed an unqualified opinion on...

  • Page 74
    ... (LOSS) PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS $ Earnings (loss) from continuing operations Discontinued operations, net of taxes Net earnings (loss) DILUTED EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS $ $ 1.72 0.10...

  • Page 75
    ... OF COMPREHENSIVE INCOME In millions for the years ended December 31 2012 $ 799 2011 $ 1,336 2010 $712 Net Earnings (Loss) Other Comprehensive Income (Loss), Net of Tax: Amortization of pension and post-retirement prior service costs and net loss: U.S. plans (less tax of $124, $88 and $73...

  • Page 76
    ... temporary investments Accounts and notes receivable, less allowances of $119 in 2012 and $126 in 2011 Inventories Deferred income tax assets Assets of businesses held for sale Other current assets Total Current Assets Plants, Properties and Equipment, net Forestlands Investments Financial Assets of...

  • Page 77
    ... charges Pension plan contribution Cost of forestlands sold Periodic pension expense, net Net (gains) losses on sales and impairments of businesses Equity (earnings) losses, net of taxes Other, net Changes in current assets and liabilities Accounts and notes receivable Inventories Accounts payable...

  • Page 78
    ... Total Accumulated International Other Paper Retained Comprehensive Treasury Shareholders' Noncontrolling Earnings Income (Loss) Stock Equity Interests In millions Common Stock Paid-in Issued Capital Total Equity BALANCE, JANUARY 1, 2010 Issuance of stock for various plans, net Repurchase of...

  • Page 79
    ... one-quarter reporting lag for Ilim had the following impact: 52 Consolidated Statement of Operations In millions 2011 2010 Equity earnings (loss), net of taxes Earnings (loss) from continuing operations Net earnings (loss) attributable to International Paper Company Basic earnings (loss) per share...

  • Page 80
    ... of cost or market and include all costs directly associated with manufacturing products: materials, labor and manufacturing overhead. In the United States, costs of raw materials and finished pulp and paper products, other than newly acquired inventory from the Temple-Inland, Inc. acquisition, are...

  • Page 81
    ... the timing of such remediation. 54 TRANSLATION OF FINANCIAL STATEMENTS Balance sheets of international operations are translated into U.S. dollars at year-end exchange rates, while statements of operations are translated at average rates. Adjustments resulting from financial statement translations...

  • Page 82
    ... did not have a material effect on the consolidated financial statements. NOTE 3 EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings...

  • Page 83
    ... Other $ 7 24 (15) $ 16 In millions Opening balance (recorded first quarter 2012) Additions and adjustments Cash charges in 2012 Balance, December 31, 2012 As of December 31, 2012 , 432 employees had left the Company under these programs. 2011 : During 2011 , total restructuring and other charges...

  • Page 84
    ...January 1, 2013. Pro forma information related to the acquisition of Olmuksa has not been included as it does not have a material effect on the Company's consolidated results of operations. 2012: On February 13, 2012, International Paper completed the acquisition of Temple-Inland, Inc. (TempleInland...

  • Page 85
    ... continuing operations per share (a) Diluted net earnings (loss) per share (a) The purchase price allocation was finalized in the fourth quarter of 2012. (a) Attributable to International Paper Company common shareholders. 2011: On October 14, 2011, International Paper completed the acquisition...

  • Page 86
    ...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. 2010: On June 30, 2010, International Paper completed the acquisition of SCA Packaging Asia (SCA) for a purchase price of $202...

  • Page 87
    ...) 39 years 16 years In millions build and operate a new production line to manufacture coated paperboard for food packaging with a designed annual production capacity of 500,000 tons. The financial position and results of operations of this joint venture have been included in International Paper...

  • Page 88
    ... 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 2012, the Company recorded pre-tax charges of $29 million...

  • Page 89
    ... of two Temple-Inland mills (Ontario, California and New Johnsonville, Tennessee) and one International Paper mill (Oxnard (Hueneme), California). Also excludes the goodwill for Building Products which was reclassified to Businesses Held for Sale. (d) Reflects an increase related to a purchase price...

  • Page 90
    ... the acquisition of Temple-Inland. The Company's deferred income tax provision (benefit) includes a $25 million provision, an $8 million benefit and a $0 million provision for 2012, 2011 and 2010, respectively, for the effect of changes in non-U.S. and U.S. state tax rates. International Paper made...

  • Page 91
    ... taxes. The acquisition of Temple-Inland in 2012 resulted in additional deferred tax assets of $600 million and deferred income tax liabilities of $1.8 billion. In addition, there is an increase in deferred income tax assets principally relating to the tax impact of changes in qualified pension...

  • Page 92
    ... 2012, unrecognized tax benefits increased by $115 million primarily driven by the acquisition of Temple-Inland. While the Company believes that it is adequately accrued for possible audit adjustments, the final resolution of these examinations cannot be determined at this time and could result...

  • Page 93
    ... 31, 2012. Other than as described above, completion of required remedial actions is not expected to have a material effect on our consolidated financial statements. The Company is a potentially responsible party with respect to the Allied Paper, Inc./Portage Creek/ Kalamazoo River Superfund Site...

  • Page 94
    ...for a financial penalty, which is not material, and a two-year corporate probation period for TIN Inc. Temple-Inland (or its affiliates) is a defendant in 23 civil lawsuits in Louisiana and Mississippi related to the Bogalusa Incident. Fifteen of these civil cases were filed in Louisiana state court...

  • Page 95
    ... that International 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 state court action seek certification of a class of Tennessee indirect purchasers of containerboard products, damages and costs...

  • Page 96
    ... 12. Additional debt related to the above transaction of $79 million and $38 million is included in short-term notes in the summary of longterm debt in Note 12 at December 31, 2012 and 2011, respectively. On February 5, 2010, Moody's Investor Services reduced its credit rating of senior unsecured...

  • Page 97
    ... Moody's Investor Services reduced its credit rating of senior unsecured longterm debt of BNP Paribas, which issued letters of credit that support $707 million of Timber Notes, below the specified threshold. On December 19, 2012, the Company and the third-party managing member agreed to a continuing...

  • Page 98
    ... 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...

  • Page 99
    ... of special purpose entities. 2012 $1,272 48 2011 $129 32 2010 $393 39 Debt reductions (a) Pre-tax early debt extinguishment costs (b) Based on the analysis performed by the Company after the purchase of Temple-Inland and completed in the third quarter of 2012, under guidance that considers...

  • Page 100
    ... the $250 million receivable securitization facility previously acquired from Temple-Inland. Maintaining an investment grade credit rating is an important element of International Paper's financing strategy. At December 31, 2012, the Company held long-term credit ratings of BBB (stable outlook) and...

  • Page 101
    ... in AOCI, net of tax, related to derivative instruments: Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) 2012 2011 2010 $ 16 - (1) $ 15 $(39) 2 (6) $(43) $ 37 (1) (13) $ 23 In millions Certain raw materials used in our production processes are subject to price volatility caused...

  • Page 102
    ...Statement of Operations Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) In millions Derivatives in Cash Flow Hedging Relationships: Foreign exchange contracts Fuel oil contracts Natural gas contracts Total Cost of products sold Cost of products sold Cost of products...

  • Page 103
    ... the corresponding fuel oil contract and present valued using the appropriate interest rate curve. Natural Gas Contracts Natural gas contracts are traded over-the-counter and settled using the NYMEX last day settle price; therefore, forward contracts are valued using the closing prices of the NYMEX...

  • Page 104
    ... lower of the Company's credit rating by Moody's or S&P were to drop below investment The authorized capital stock at both December 31, 2012 and 2011, consisted of 990,850,000 shares of common stock, $1 par value; 400,000 shares of cumulative $4 preferred stock, without par value (stated value $100...

  • Page 105
    ... 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). In connection with the Temple-Inland acquisition in February 2012, International Paper assumed...

  • Page 106
    ... and prior service cost that will be amortized from AOCI into net periodic pension cost for the U.S. plans during the next fiscal year are expected to be $490 million and $34 million, respectively. NET PERIODIC PENSION EXPENSE International Paper evaluates its actuarial assumptions annually as of...

  • Page 107
    ...of International Paper, an expected long-term rate of return on plan assets of 5.30% for the Temple-Inland Retirement Plan, a discount rate of 4.10% and an assumed rate of compensation increase of 3.75% . The Company estimates that it will record net pension expense of approximately $561 million for...

  • Page 108
    ... primarily of publicly traded U.S. companies and international companies. Publicly traded equities are valued at the closing prices reported in the active market in which the individual securities are traded. Fixed income consists of government securities, mortgage-backed securities, corporate bonds...

  • Page 109
    ... at December 31, 2011 Temple-Inland Acquisition Actual return on plan assets: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases, sales and settlements Transfers in and/or out of Level 3 Ending balance at December 31, 2012 $ 8 $ 492 $ 503 $1,037...

  • Page 110
    ... International Paper provides certain retiree health care and life insurance benefits covering certain U.S. salaried and hourly employees. These employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. Excluded from company...

  • Page 111
    ... proceeds are credited to equity and issued shares are included in the computation of earnings per common share, with no effect on reported earnings. Equity is also increased by the tax benefit that International Paper will receive in its tax return for income reported by the employees in their...

  • Page 112
    ... vesting period. (b) The table includes options outstanding under an acquired company plan under which options may no longer be granted. PERFORMANCE SHARE PLAN The following summarizes PSP activity for the three years ending December 31, 2012: Weighted Average Grant Date Fair Value $24.28 28.93 33...

  • Page 113
    ... Net Sales In millions 2012 2011 2010 2012 2011 2010 Total stock-based compensation expense (included in selling and administrative expense) Income tax benefits related to stock-based compensation Industrial Packaging Printing Papers Consumer Packaging Distribution Forest Products Corporate...

  • Page 114
    ... corporate assets and assets of businesses held for sale. (c) Excludes accelerated depreciation related to closure of mills. (d) Net sales are attributed to countries based on the location of the seller. (e) Export sales to unaffiliated customers were $2.2 billion in 2012, $2.1 billion in 2011...

  • Page 115
    ...10 235(e,f) Year $27,833 7,246 1,024(b-e) 45 794(b-f) 2012 Net sales Gross margin (a) Earnings (loss) from continuing operations before income taxes and equity earnings Gain from discontinued operations Net earnings (loss) attributable to International Paper Company Basic earnings (loss) per share...

  • Page 116
    ... to Interim Financial Results (a) Gross margin represents net sales less cost of products sold, excluding depreciation, amortization and cost of timber harvested. (b) Includes a pre-tax charge of $20 million ($12 million after taxes) related to the write-up of the Temple-Inland inventories to...

  • Page 117
    ... Paper Mills Limited in India, a pre-tax charge of $18 million ($13 million after taxes) for costs associated with the restructuring of the Company's xpedx operations, a pre-tax charge of $8 million ($5 million after taxes) for costs associated with signing an agreement to acquire Temple-Inland...

  • Page 118
    ... executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting...

  • Page 119
    .... The Company completed the acquisition of TempleInland in February 2012. Due to the timing of the acquisition we have excluded Temple-Inland from our evaluation of the effectiveness of internal control over financial reporting. For the period ended December 31, 2012, Temple-Inland net sales and...

  • Page 120
    ... EXECUTIVE COMPENSATION Information with respect to the compensation of executives and directors of the Company is hereby incorporated by reference to our definitive proxy statement that will be filed with the SEC within 120 days of the close of our fiscal year. Additional Financial Data 2012, 2011...

  • Page 121
    ...-K for the fiscal year ended December 31, 2009). + (10.13) Form of Performance Share Plan award certificate (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011). + (10.14) Pension Restoration Plan for Salaried Employees...

  • Page 122
    ... + (10.28) Amended and Restated Time Sharing Agreement, dated May 31, 2012, by and between John V. Faraci and International Paper Company (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012). + (10.29) Letter of Understanding...

  • Page 123
    ... as borrower, International Paper Company as services, the conduits and Liquidity Banks from time to time parties thereto, and the agents' parties thereto (incorporated by reference to Exhibit 10.1 to Amendment No. 1 on form 10-Q/A (filed August 14, 2012) to the Company's Quarterly Report on Form 10...

  • Page 124
    ... to Exhibit 10.2 to TempleInland's Quarterly Report on Form 10-Q for the quarter ended July 3, 2010, and filed with the Commission on August 9, 2010). (10.51) Purchase Agreement dated as of December 12, 2012, by and among International Paper Company, GeorgiaPacific Building Products LLC and Georgia...

  • Page 125
    .... * Consent of Independent Registered Public Accounting Firm. * Power of Attorney (contained on the signature page to the Company's Annual Report on Form 10-K for the year ended December 31, 2012). Certification by John V. Faraci, Chairman and Chief Executive Officer, pursuant to Section 302 of...

  • Page 126
    ... II - VALUATION AND QUALIFYING ACCOUNTS INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In millions) For the Year Ended December 31, 2012 Balance at Beginning of Period Description Reserves Applied Against Specific Assets Shown on Balance...

  • Page 127
    ..., the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL PAPER COMPANY February 26, 2013 By: / S / SHARON R. RYAN Sharon R. Ryan Senior Vice President, General Counsel and Corporate Secretary POWER OF ATTORNEY KNOW ALL MEN...

  • Page 128
    Signature Title Date /S/ JOHN V. FARACI John V. Faraci Chairman of the Board, Chief Executive Officer and Director Director February 26, 2013 /S/ DAVID J. BRONCZEK David J. Bronczek February 26, 2013 /S/ AHMET C. DORDUNCU Ahmet C. Dorduncu Director February 26, 2013 /S/ ILENE S. GORDON ...

  • Page 129
    ...) Cantonment, Florida (Pensacola Mill) Ticonderoga, New York Riegelwood, North Carolina Eastover, South Carolina Georgetown, South Carolina Sumter, South Carolina Franklin, Virginia International: Yanzhou City, China Veracruz, Mexico Kenitra, Morocco Corrugated Container U.S.: Bay Minette, Alabama...

  • Page 130
    ..., New Jersey Spotswood, New Jersey Thorofare, New Jersey Binghamton, New York Buffalo, New York Rochester, New York Scotia, New York Utica, New York Charlotte, North Carolina (2 locations) (1 leased) Lumberton, North Carolina Manson, North Carolina Newton, North Carolina Statesville, North Carolina...

  • Page 131
    ...) Prosperity, South Carolina Texarkana, Texas (1) Sold July 2012 (2) Closed June 2012 (3) Closed September 2012 International: Mexico (20 locations) (all leased) IP Asia International: China (8 locations) Malaysia Taiwan Thailand Vietnam FOREST PRODUCTS Forest Resources International: Approximately...

  • Page 132
    ... II 2012 CAPACITY INFORMATION CONTINUING OPERATIONS Americas, other than U.S. (in thousands of short tons) U.S. Europe Asia India Total Industrial Packaging Containerboard Printing Papers Uncoated Freesheet Bristols Uncoated Papers and Bristols Dried Pulp Newsprint Total Printing Papers...

  • Page 133
    ... Landau Vice President Investors Relations David A. Liebetreu Vice President Global Sourcing & Fiber Supply Rildo Martini Vice President Pulp Franz Josef Marx Vice President President, International Paper Russia Kevin G. McWilliams Vice President Tax Brett A. Mosley Vice President Global Technology...

  • Page 134
    BOARD OF DIRECTORS John V. Faraci Chairman and Chief Executive Officer International Paper Company SHAREHOLDER INFORMATION Corporate Headquarters International Paper Company 6400 Poplar Avenue Memphis, Tennessee 38197 (901) 419-9000 Annual Meeting The next annual meeting of shareholders will be ...

  • Page 135
    ...Retired Chairman and Chief Executive Officer Phelps Dodge Corporation Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com GLOBAL HEADQUARTERS International Paper Company 6400 Poplar Avenue Memphis, TN 38197, U.S.A. 901-419-9000 REGIONAL HEADQUARTERS International Paper Europe...

  • Page 136
    ..., March 18, 2013 ©2013 Time Inc. FORTUNE and "The World's Most Admired Companies" are registered trademarks of Time Inc. and are used under license. FORTUNE and Time Inc. are not affiliated with, and do not endorse products of or services of International Paper. Printed on Carolina ® Cover C2S...