Edgar Filing: INTERNATIONAL PAPER CO /NEW/

IP-9.30.2013-FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2013

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

_________________________________________

Commission File Number 1-3157

INTERNATIONAL PAPER COMPANY

(Exact name of registrant as specified in its charter)



New York	13-0872805
(State or other jurisdiction of	(I.R.S. Employer
incorporation of organization)	Identification No.)

6400 Poplar Avenue, Memphis, TN	38197
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (901) 419-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of October 31, 2013 was 443,623,335.

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INDEX



		PAGE NO.
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statement of Operations - Three Months and Nine Months Ended September 30, 2013 and 2012	1

	Consolidated Statement of Comprehensive Income - Three Months and Nine Months Ended September 30, 2013 and 2012	2

	Consolidated Balance Sheet - September 30, 2013 and December 31, 2012	3

	Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2013 and 2012	4

	Condensed Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	48

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 6.	Exhibits	50

Signatures		51

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PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

INTERNATIONAL PAPER COMPANY

Consolidated Statement of Operations

(Unaudited)

(In millions, except per share amounts)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Net Sales	$	7,406		$	7,026	$	21,831		$	20,758
Costs and Expenses
Cost of products sold	5,313			5,140		15,947			15,394
Selling and administrative expenses	572			527		1,654			1,514
Depreciation, amortization and cost of timber harvested	401			383		1,176			1,111
Distribution expenses	438			403		1,309			1,198
Taxes other than payroll and income taxes	47			39		143			124
Restructuring and other charges	76			33		131			88
Net (gains) losses on sales and impairments of businesses	1			18		1			89
Net bargain purchase gain on acquisition of business	—			—		(13		)	—
Interest expense, net	147			163		479			503
Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings	411			320		1,004			737
Income tax provision (benefit)	41			130		66			257
Equity earnings (losses), net of taxes	16			34		(30		)	52
Earnings (Loss) From Continuing Operations	386			224		908			532
Discontinued operations, net of taxes	(10		)	14		40			35
Net Earnings (Loss)	376			238		948			567
Less: Net earnings (loss) attributable to noncontrolling interests	(6		)	1		(11		)	8
Net Earnings (Loss) Attributable to International Paper Company	$	382		$	237	$	959		$	559
Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	0.88		$	0.51	$	2.07		$	1.20
Discontinued operations, net of taxes	(0.02		)	0.03		0.09			0.08
Net earnings (loss)	$	0.86		$	0.54	$	2.16		$	1.28
Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	0.87		$	0.51	$	2.05		$	1.19
Discontinued operations, net of taxes	(0.02		)	0.03		0.09			0.08
Net earnings (loss)	$	0.85		$	0.54	$	2.14		$	1.27
Average Shares of Common Stock Outstanding – assuming dilution	449.7			439.8		448.7			439.7
Cash Dividends Per Common Share	$	0.3000		$	0.2625	$	0.9000		$	0.7875
Amounts Attributable to International Paper Company Common Shareholders
Earnings (loss) from continuing operations	$	392		$	223	$	919		$	524
Discontinued operations, net of taxes	(10		)	14		40			35
Net earnings (loss)	$	382		$	237	$	959		$	559

The accompanying notes are an integral part of these consolidated financial statements.

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INTERNATIONAL PAPER COMPANY

Consolidated Statement of Comprehensive Income

(Unaudited)

(In millions)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013			2012
Net Earnings (Loss)	$	376	$	238		$	948		$	567
Other Comprehensive Income (Loss), Net of Tax:
Amortization of pension and post-retirement prior service costs and net loss:
U.S. plans	76		48			230			146
Pension and postretirement liability adjustments:
U.S. plans	103		4			103			28
Change in cumulative foreign currency translation adjustment	34		114			(312		)	(161		)
Net gains/losses on cash flow hedging derivatives:
Net gains (losses) arising during the period	7		7			(3		)	13
Reclassification adjustment for (gains) losses included in net earnings (loss)	4		4			(5		)	17
Total Other Comprehensive Income (Loss), Net of Tax	224		177			13			43
Comprehensive Income (Loss)	600		415			961			610
Net (earnings) loss attributable to noncontrolling interests	6		(1		)	11			(8		)
Other comprehensive (income) loss attributable to noncontrolling interests	—		(12		)	15			3
Comprehensive Income (Loss) Attributable to International Paper Company	$	606	$	402		$	987		$	605

The accompanying notes are an integral part of these consolidated financial statements.

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INTERNATIONAL PAPER COMPANY

Consolidated Balance Sheet

(In millions)



	September 30, 2013			December 31, 2012
	(unaudited)
Assets
Current Assets
Cash and temporary investments	$	1,946		$	1,302
Accounts and notes receivable, net	4,024			3,562
Inventories	2,841			2,730
Deferred income tax assets	421			323
Assets of businesses held for sale	—			759
Other current assets	243			229
Total Current Assets	9,475			8,905
Plants, Properties and Equipment, net	13,697			13,949
Forestlands	580			622
Investments	755			887
Financial Assets of Special Purpose Entities (Note 13)	2,122			2,108
Goodwill	4,491			4,315
Deferred Charges and Other Assets	1,469			1,367
Total Assets	$	32,589		$	32,153
Liabilities and Equity
Current Liabilities
Notes payable and current maturities of long-term debt	$	783		$	444
Accounts payable	2,904			2,775
Accrued payroll and benefits	513			508
Liabilities of businesses held for sale	—			44
Other accrued liabilities	1,195			1,227
Total Current Liabilities	5,395			4,998
Long-Term Debt	8,900			9,696
Nonrecourse Financial Liabilities of Special Purpose Entities (Note 13)	2,042			2,036
Deferred Income Taxes	3,330			3,026
Pension Benefit Obligation	3,932			4,112
Postretirement and Postemployment Benefit Obligation	435			473
Other Liabilities	1,013			1,176
Equity
Common stock, $1 par value, 2013 – 447.0 shares and 2012 – 439.9 shares	447			440
Paid-in capital	6,432			6,042
Retained earnings	4,212			3,662
Accumulated other comprehensive loss	(3,812		)	(3,840		)
	7,279			6,304
Less: Common stock held in treasury, at cost, 2013 – 1.1 shares and 2012 – 0.013 shares	49			—
Total Shareholders’ Equity	7,230			6,304
Noncontrolling interests	312			332
Total Equity	7,542			6,636
Total Liabilities and Equity	$	32,589		$	32,153

The accompanying notes are an integral part of these consolidated financial statements.

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INTERNATIONAL PAPER COMPANY

Consolidated Statement of Cash Flows

(Unaudited)

(In millions)



	Nine Months Ended September 30,
	2013			2012
Operating Activities
Net earnings (loss)	$	948		$	567
Discontinued operations, net of taxes	(40		)	(35		)
Earnings (loss) from continuing operations	908			532
Depreciation, amortization and cost of timber harvested	1,176			1,111
Deferred income tax provision, net	55			192
Restructuring and other charges	131			88
Pension plan contribution	(31		)	(44		)
Net (gains) losses on sales and impairments of businesses	1			89
Net bargain purchase gain on acquisition of business	(13		)	—
Equity (earnings) losses, net	30			(52		)
Periodic pension expense, net	413			256
Other, net	(112		)	(66		)
Changes in current assets and liabilities
Accounts and notes receivable	(357		)	226
Inventories	(121		)	23
Accounts payable and accrued liabilities	(19		)	(125		)
Interest payable	(8		)	65
Other	(89		)	(21		)
Cash Provided By (Used For) Operations – Continuing Operations	1,964			2,274
Cash Provided By (Used For) Operations – Discontinued Operations	27			(20		)
Cash Provided By (Used For) Operations	1,991			2,254
Investment Activities
Invested in capital projects	(759		)	(1,001		)
Acquisitions, net of cash acquired	(507		)	(3,734		)
Proceeds from divestitures	733			474
Equity investment in Ilim	—			(45		)
Proceeds from sale of fixed assets	76			—
Other	(33		)	(115		)
Cash Provided By (Used For) Investment Activities – Continuing Operations	(490		)	(4,421		)
Cash Provided By (Used For) Investment Activities – Discontinued Operations	1			(61		)
Cash Provided By (Used For) Investment Activities	(489		)	(4,482		)
Financing Activities
Repurchases of common stock and payments of restricted stock tax withholding	(70		)	(35		)
Issuance of common stock	288			60
Issuance of debt	212			2,052
Reduction of debt	(637		)	(2,123		)
Change in book overdrafts	(65		)	(52		)
Dividends paid	(400		)	(344		)
Redemption of securities	(150		)	—
Other	(28		)	(38		)
Cash Provided By (Used For) Financing Activities	(850		)	(480		)
Effect of Exchange Rate Changes on Cash	(8		)	(11		)
Change in Cash and Temporary Investments	644			(2,719		)
Cash and Temporary Investments
Beginning of period	1,302			3,994
End of period	$	1,946		$	1,275

The accompanying notes are an integral part of these consolidated financial statements.

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INTERNATIONAL PAPER COMPANY

Condensed Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments that are necessary for the fair presentation of International Paper Company’s (International Paper’s, the Company’s or our) financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed herein, such adjustments are of a normal, recurring nature. Results for the first nine months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 which have previously been filed with the Securities and Exchange Commission.

NOTE 2 - RECENT ACCOUNTING DEVELOPMENTS

Disclosures About Offsetting Assets and Liabilities

In December 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-11, "Disclosures about Offsetting Assets and Liabilities", which amends ASC 210, "Balance Sheet". This ASU requires entities to disclose gross and net information about both instruments and transactions eligible for offset in the statement of financial position and those subject to an agreement similar to a master netting arrangement. This would include derivatives and other financial securities arrangements. This guidance was effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013 and was required to be applied retrospectively. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.

Intangibles – Goodwill and Other

In July 2012, the FASB issued ASU 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment," which amends ASC 350, "Intangibles - Goodwill and Other". This ASU gives an entity the option to first assess qualitative factors if it is more likely than not that the fair value of indefinite-lived intangible assets are less than their carrying amount. If that assessment indicates no impairment, the quantitative impairment test is not required. This amendment was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of the provisions of this guidance did not have a material effect on the Company's consolidated financial statements.

Comprehensive Income

In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. This guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted the provisions of this guidance in the first quarter of 2013.

Hedge Accounting

In July 2013, the FASB issued ASU 2013-10, "Derivatives and Hedging," which amends ASC 815, "Derivatives and Hedging," to allow entities to use the Fed Funds Swap Rate, in addition to U.S. Treasury rates and LIBOR, as a benchmark interest rate in accounting for fair value and cash flow hedges in the United States. The ASU also eliminates the provision that prohibits the use of different benchmark rates for similar hedges except in rare and justifiable circumstances. The ASU is effective prospectively for qualifying new hedging relationships entered into on or after July 17, 2013 and for hedging relationships redesignated on or after that date. The adoption of the provisions of this guidance did not have a material effect on the Company's consolidated financial statements.

Income Taxes

In July 2013, the FASB also issued ASU 2013-11, "Income Taxes," which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance should be applied to all unrealized tax benefits that exist as of the effective date which is fiscal years beginning after December 15, 2013, and interim periods within those years. The Company is currently evaluating the provisions of this guidance.

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NOTE 3 - EQUITY

A summary of the changes in equity for the nine-month periods ended September 30, 2013 and 2012 is provided below:



	Nine Months Ended September 30,
	2013									2012
In millions, except per share amounts	Total International Paper Shareholders’ Equity			Noncontrolling Interests			Total Equity			Total International Paper Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance, January 1	$	6,304		$	332		$	6,636		$	6,645		$	340		$	6,985
Issuance of stock for various plans, net	418			—			418			144			—			144
Repurchase of stock	(70		)	—			(70		)	(35		)	—			(35		)
Common stock dividends ($0.9000 per share in 2013 and $0.7875 per share in 2012)	(409		)	—			(409		)	(353		)	—			(353		)
Dividends paid to noncontrolling interests by subsidiary	—			(1		)	(1		)	—			(4		)	(4		)
Noncontrolling interests of acquired entities, net	—			7			7			—			—			—
Acquisition of noncontrolling interests	—			—			—			—			(2		)	(2		)
Comprehensive income (loss)	987			(26		)	961			605			5			610
Ending Balance, September 30	$	7,230		$	312		$	7,542		$	7,006		$	339		$	7,345

NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)

The following table presents changes in AOCI for the three-month period ended September 30, 2013:



In millions	Defined Benefit Pension and Postretirement Items (a)			Change in Cumulative Foreign Currency Translation Adjustments (a)			Net Gains and Losses on Cash Flow Hedging Derivatives (a)			Total (a)
Balance as of June 30, 2013	$	(3,442	)	$	(592	)	$	(17	)	$	(4,051	)
Other comprehensive income (loss) before reclassifications	103			34			7			144
Amounts reclassified from accumulated other comprehensive income	76			—			4			80
Net Current Period Other Comprehensive Income	179			34			11			224
Balance as of September 30, 2013	$	(3,263	)	$	(558	)	$	(6	)	$	(3,827	)

(a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

The following table presents changes in AOCI for the three-month period ended September 30, 2012:



In millions	Defined Benefit Pension and Postretirement Items (a)			Change in Cumulative Foreign Currency Translation Adjustments (a)			Net Gains and Losses on Cash Flow Hedging Derivatives (a)			Total (a)
Balance as of June 30, 2012	$	(2,730	)	$	(392	)	$	(17	)	$	(3,139	)
Other comprehensive income (loss) before reclassifications	4			114			7			125
Amounts reclassified from accumulated other comprehensive income	48			—			4			52
Net Current Period Other Comprehensive Income	52			114			11			177
Balance as of September 30, 2012	$	(2,678	)	$	(278	)	$	(6	)	$	(2,962	)

(a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

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The following table presents changes in AOCI for the nine-month period ended September 30, 2013:



In millions	Defined Benefit Pension and Postretirement Items (a)			Change in Cumulative Foreign Currency Translation Adjustments (a)			Net Gains and Losses on Cash Flow Hedging Derivatives (a)			Total (a)
Balance as of January 1, 2013	$	(3,596	)	$	(246	)	$	2		$	(3,840	)
Other comprehensive income (loss) before reclassifications	103			(329		)	(3		)	(229		)
Amounts reclassified from accumulated other comprehensive income	230			17			(5		)	242
Net Current Period Other Comprehensive Income	333			(312		)	(8		)	13
Balance as of September 30, 2013	$	(3,263	)	$	(558	)	$	(6	)	$	(3,827	)

(a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

The following table presents changes in AOCI for the nine-month period ended September 30, 2012:



In millions	Defined Benefit Pension and Postretirement Items (a)			Change in Cumulative Foreign Currency Translation Adjustments (a)			Net Gains and Losses on Cash Flow Hedging Derivatives (a)			Total (a)
Balance as of January 1, 2012	$	(2,852	)	$	(117	)	$	(36	)	$	(3,005	)
Other comprehensive income (loss) before reclassifications	28			(126		)	13			(85		)
Amounts reclassified from accumulated other comprehensive income	146			(35		)	17			128
Net Current Period Other Comprehensive Income	174			(161		)	30			43
Balance as of September 30, 2012	$	(2,678	)	$	(278	)	$	(6	)	$	(2,962	)

(a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

The following table presents details of the reclassifications out of AOCI for the three-month period ended September 30, 2013:



Details About Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income (a)				Location of Amount Reclassified from AOCI
In millions:
Defined benefit pension and postretirement items:
Prior-service costs	$	(2	)	(b)	Cost of products sold
Actuarial gains/(losses)	(123		)	(b)	Cost of products sold
Total pre-tax amount	(125		)
Tax (expense)/benefit	49
Net of tax	$	(76	)
Net gains and losses on cash flow hedging derivatives:
Foreign exchange contracts	$	(6	)	(c)	Cost of products sold
Total pre-tax amount	(6		)
Tax (expense)/benefit	2
Net of tax	(4		)
Total reclassifications for the period	$	(80	)

(a) Amounts in parentheses indicate debits to earnings/loss.

(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 16 for additional details).

(c) This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 15 for additional details).

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The following table presents details of the reclassifications out of AOCI for the three-month period ended September 30, 2012:



Details About Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income (a)				Location of Amount Reclassified from AOCI
In millions:
Defined benefit pension and postretirement items:
Prior-service costs	$	(1	)	(b)	Cost of products sold
Actuarial gains/(losses)	(78		)	(b)	Cost of products sold
Total pre-tax amount	(79		)
Tax (expense)/benefit	31
Net of tax	$	(48	)
Net gains and losses on cash flow hedging derivatives:
Foreign exchange contracts	$	(6	)	(c)	Cost of products sold
Total pre-tax amount	(6		)
Tax (expense)/benefit	2
Net of tax	(4		)
Total reclassifications for the period	$	(52	)

(a) Amounts in parentheses indicate debits to earnings/loss.

(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 16 for additional details).

(c) This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 15 for additional details).

The following table presents details of the reclassifications out of AOCI for the nine-month period ended September 30, 2013:



Details About Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income (a)				Location of Amount Reclassified from AOCI
In millions
Defined benefit pension and postretirement items:
Prior-service costs	$	(7	)	(b)	Cost of products sold
Actuarial gains/(losses)	(370		)	(b)	Cost of products sold
Total pre-tax amount	(377		)
Tax (expense)/benefit	147
Net of tax	$	(230	)
Change in cumulative foreign currency translation adjustments:
Business acquisition/divestitures	$	(17	)		Net bargain purchase gain on acquisition of business
Tax (expense)/benefit	—
Net of tax	$	(17	)
Net gains and losses on cash flow hedging derivatives:
Foreign exchange contracts	$	7		(c)	Cost of products sold
Total pre-tax amount	7
Tax (expense)/benefit	(2		)
Net of tax	5
Total reclassifications for the period	$	(242	)

(a) Amounts in parentheses indicate debits to earnings/loss.

(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 16 for additional details).

(c) This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 15 for additional details).

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The following table presents details of the reclassifications out of AOCI for the nine-month period ended September 30, 2012:



Details About Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income (a)				Location of Amount Reclassified from AOCI
In millions
Defined benefit pension and postretirement items:
Prior-service costs	$	(2	)	(b)	Cost of products sold
Actuarial gains/(losses)	(237		)	(b)	Cost of products sold
Total pre-tax amount	(239		)
Tax (expense)/benefit	93
Net of tax	$	(146	)
Change in cumulative foreign currency translation adjustments:
Business acquisitions/divestitures	$	48			Net (gains) losses on sales and impairments of businesses
Tax (expense)/benefit	(13		)
Net of tax	$	35
Net gains and losses on cash flow hedging derivatives:
Foreign exchange contracts	$	(16	)	(c)	Cost of products sold
Natural gas contracts	(11		)	(c)	Cost of products sold
Total pre-tax amount	(27		)
Tax (expense)/benefit	10
Net of tax	(17		)
Total reclassifications for the period	$	(128	)

(a) Amounts in parentheses indicate debits to earnings/loss.

(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 16 for additional details).

(c) This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 15 for additional details).

NOTE 5 - EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS

Basic earnings per common share are computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings per common share are computed assuming that all potentially dilutive securities, including “in-the-money” stock options, were converted into common shares. A reconciliation of the amounts included in the computation of earnings (loss) per common share, and diluted earnings (loss) per common share is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions, except per share amounts	2013		2012		2013		2012
Earnings (loss) from continuing operations	$	392	$	223	$	919	$	524
Effect of dilutive securities (a)	—		—		—		—
Earnings (loss) from continuing operations – assuming dilution	$	392	$	223	$	919	$	524
Average common shares outstanding	445.9		435.1		444.1		434.7
Effect of dilutive securities (a)
Restricted stock performance share plan	3.6		4.7		4.3		5.0
Stock options (b)	0.2		—		0.3		—
Average common shares outstanding – assuming dilution	449.7		439.8		448.7		439.7
Basic earnings (loss) from continuing operations per common share	$	0.88	$	0.51	$	2.07	$	1.20
Diluted earnings (loss) from continuing operations per common share	$	0.87	$	0.51	$	2.05	$	1.19

(a) Securities are not included in the table in periods when antidilutive.


(b)	Options to purchase 10.7 million shares for the three months ended September 30, 2012 and 9.4 million shares for the nine months ended September 30, 2012 were not included in the computation of diluted common shares outstanding because their exercise price exceeded the average market price of the Company’s common stock for each respective reporting period.

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NOTE 6 - RESTRUCTURING AND OTHER CHARGES

2013: During the three months ended September 30, 2013, restructuring and other charges totaling $76 million before taxes ($47 million after taxes) were recorded. Details of these charges were as follows:



	Three Months Ended September 30, 2013
In millions	Before-Tax Charges			After-Tax Charges
Early debt extinguishment costs	$	15		$	9
xpedx restructuring	6			4
xpedx transaction costs	11			7
Courtland mill shutdown	51			31
Bellevue box plant facility sale	(9		)	(6		)
Other	2			2
Total	$	76		$	47

During the three months ended June 30, 2013, restructuring and other charges totaling a gain of $4 million before taxes ($2 million after taxes) were recorded. Details of these charges were as follows:



	Three Months Ended June 30, 2013
In millions	Before-Tax Charges			After-Tax Charges
Early debt extinguishment costs	$	3		$	2
Insurance reimbursements	(30		)	(19		)
xpedx restructuring	17			10
Other	6			5
Total	$	(4	)	$	(2	)

During the three months ended March 31, 2013, restructuring and other charges totaling $59 million before taxes ($36 million after taxes) were recorded. Details of these charges were as follows:



	Three Months Ended March 31, 2013
In millions	Before-Tax Charges		After-Tax Charges
Early debt extinguishment costs	$	6	$	4
xpedx restructuring	7		4
Augusta paper machine shutdown	44		27
Other	2		1
Total	$	59	$	36

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

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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
In millions	Before-Tax Charges		After-Tax Charges
Early debt extinguishment costs	$	10	$	6
xpedx restructuring	10		6
Other	1		1
Total	$	21	$	13

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
In millions	Before-Tax Charges			After-Tax Charges
Early debt extinguishment costs	$	16		$	10
xpedx restructuring	19			14
Other	(1		)	(1		)
Total	$	34		$	23

NOTE 7 - ACQUISITIONS AND JOINT VENTURES

Acquisitions

2013: On January 3, 2013, International Paper completed the acquisition (effective date of acquisition on January 1, 2013) of the shares of its joint venture partner, Sabanci Holding, in the Turkish corrugated packaging company, Olmuksa International Paper Sabanci Ambalaj Sanayi ve Ticaret A.S. (now called Olmuksan International Paper or Olmuksan), for a purchase price of $56 million. The acquired shares represent 43.7% of Olmuksan's shares. Prior to this acquisition, International Paper held a 43.7% equity interest in Olmuksan.

Because the transaction resulted in International Paper becoming the majority shareholder, owning 87.4% of Olmuksan's outstanding and issued shares, its completion triggered a mandatory call for tender of the remaining public shares which began in March 2013 and ended in April 2013, with no shares tendered. Also as a result of International Paper taking majority control of the entity, Olmuksan's financial results have been consolidated with the Company's Industrial Packaging segment beginning January 1, 2013, the effective date which International Paper obtained majority control of the entity.

Following the transaction, the Company's previously held 43.7% equity interest in Olmuksan was remeasured to a fair value of $75 million, resulting in a gain of $9 million. The fair value was estimated by applying the discounted cash flow approach, using a 13% discount rate, long-term sustainable growth rates ranging from 6% to 9% and a corporate tax rate of 20%. In addition, the cumulative translation adjustment balance of $17 million relating to the previously held equity interest was reclassified, as expense, to Net bargain purchase gain on acquisition of business in the accompanying consolidated statement of operations, from accumulated other comprehensive income.

The preliminary purchase price allocation indicates that the sum of the cash consideration paid, the fair value of the noncontrolling interest and the fair value of the previously held interest is less than the fair value of the underlying assets by $22 million, resulting in a bargain purchase price gain being recorded on this transaction.

The $17 million reclassification of the cumulative translation balance and $18 million of the estimated bargain purchase gain were recorded in the 2013 first-quarter earnings. The $9 million gain resulting from the measurement of the previously held equity interest and an additional $4 million bargain purchase gain were recorded in 2013 second-quarter earnings and are included in the Net bargain purchase gain on acquisition of business line item in the accompanying consolidated statement of operations.

Due to the timing of the completion of the acquisition, certain assumptions and estimates were used in determining the preliminary purchase price allocation. Those assumptions and estimates primarily relate to the amounts allocated to deferred taxes and contingent liabilities (which are included in Accounts payable and other accrued liabilities in the accompanying consolidated balance sheet), as work is still ongoing as of September 30, 2013 to determine the fair value of those assets and

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liabilities at the acquisition date. Therefore, the amounts disclosed may change as the purchase price allocation is finalized. The purchase price allocation is expected to be finalized in the fourth quarter of 2013.

The following table summarizes the preliminary allocation of the purchase price to the fair value of assets and liabilities acquired as of January 1, 2013.



In millions
Cash and temporary investments	$	5
Accounts and notes receivable	72
Inventory	31
Other current assets	2
Plants, properties and equipment	105
Investments	11
Total assets acquired	226
Notes payable and current maturities of long-term debt	17
Accounts payable and accrued liabilities	27
Deferred income tax liability	4
Postretirement and postemployment benefit obligation	6
Total liabilities assumed	54
Noncontrolling interest	18
Net assets acquired	$	154

Pro forma information related to the acquisition of Olmuksan 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. (Temple-Inland). International Paper acquired all of the outstanding common stock of Temple-Inland for $32.00 per share in cash, totaling approximately $3.7 billion, and assumed approximately $700 million in Temple-Inland’s debt. As a condition to allowing the transaction to proceed, the Company entered into an agreement on a proposed Final Judgment with the Antitrust Division of the U.S. Department of Justice (DOJ) that required the Company to divest three containerboard mills, with approximately 970,000 tons of aggregate containerboard capacity. 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. By completing these transactions, the Company satisfied its divestiture obligations under the Final Judgment. See Note 8 for further details of these divestitures.

Temple-Inland's results of operations are included in the consolidated financial statements from the date of acquisition on February 13, 2012.

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The following summarizes the allocation of the purchase price to the fair value of assets and liabilities acquired as of February 13, 2012, which was finalized in the fourth quarter of 2012.



In millions
Accounts and notes receivable	$	466
Inventory	484
Deferred income tax assets – current	140
Other current assets	57
Plants, properties and equipment	2,911
Financial assets of special purpose entities	2,091
Goodwill	2,139
Other intangible assets	693
Deferred charges and other assets	54
Total assets acquired	9,035
Notes payable and current maturities of long-term debt	130
Accounts payable and accrued liabilities	704
Long-term debt	527
Nonrecourse financial liabilities of special purpose entities	2,030
Deferred income tax liability	1,252
Pension benefit obligation	338
Postretirement and postemployment benefit obligation	99
Other liabilities	221
Total liabilities assumed	5,301
Net assets acquired	$	3,734

The identifiable intangible assets acquired in connection with the Temple-Inland acquisition included the following:



In millions	Estimated Fair Value		Average Remaining Useful Life
			(at acquisition date)
Asset Class:
Customer relationships	$	536	12-17 years
Developed technology	8		5-10 years
Tradenames	109		Indefinite
Favorable contracts	14		4-7 years
Non-compete agreement	26		2 years
Total	$	693

In connection with the purchase price allocation, inventories were written up by approximately $20 million before taxes ($12 million after taxes) to their estimated fair value. As the related inventories were sold in the 2012 first quarter, this amount was expensed in Cost of products sold for the quarter.

Additionally, Selling and administrative expenses included $24 million ($15 million after taxes) and $50 million ($31 million after taxes), for the three months and nine months ended September 30, 2013, respectively, and $58 million ($34 million after taxes) and $136 million ($89 million after taxes), for the three months and nine months ended September 30, 2012, respectively, in charges for integration costs associated with the acquisition.

The following unaudited pro forma information for the nine months ended September 30, 2012 represents the results of operations of International Paper as if the Temple-Inland acquisition had occurred as of January 1, 2012. This information does not purport to represent International Paper’s actual results of operations if the transaction described above would have occurred on January 1, 2012, nor is it necessarily indicative of future results.

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In millions, except per share amounts	Nine Months Ended September 30, 2012
Net sales	$	21,050
Earnings (loss) from continuing operations (a)	567
Net earnings (loss) (a)	602
Diluted earnings (loss) from continuing operations per common share (a)	1.29
Diluted net earnings (loss) per common share (a)	1.37

(a) Attributable to International Paper Company common shareholders.

Joint Ventures

2013: On January 14, 2013, International Paper and Brazilian corrugated packaging producer, Jari Celulose, Papel e Embalagens S.A. (Jari), a Grupo Orsa company, formed Orsa International Paper Embalagens S.A. (Orsa IP). The new entity, in which International Paper holds a 75% stake, includes three containerboard mills and four box plants, which make up Jari's former industrial packaging assets. This acquisition supports the Company's strategy of growing its global packaging presence and better serving its global customer base.

The value of International Paper's investment in Orsa IP is approximately $471 million. Because International Paper acquired majority control of the joint venture, Orsa IP's financial results have been consolidated with our Industrial Packaging segment from the date of formation on January 14, 2013.

Due to the timing of the completion of the acquisition, certain assumptions and estimates were used in determining the preliminary purchase price allocation. Those assumptions and estimates primarily relate to the amounts allocated to deferred taxes and postretirement and postemployment benefit obligations, as work is still ongoing as of September 30, 2013 to determine the fair value of those assets and liabilities at the acquisition date. Therefore, the amount disclosed may change materially as the purchase price allocation is refined. The purchase price allocation is expected to be finalized during the fourth quarter of 2013.

The following table summarizes the preliminary allocation of the purchase price to the fair value of assets and liabilities acquired as of January 14, 2013.



In millions
Cash and temporary investments	$	16
Accounts and notes receivable, net	5
Inventory	27
Plants, properties and equipment	290
Goodwill	220
Other intangible assets	110
Other long-term assets	3
Total assets acquired	671
Accounts payable and accrued liabilities	10
Deferred income tax liability	56
Total liabilities assumed	66
Noncontrolling interest	134
Net assets acquired	$	471

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The identifiable intangible assets acquired in connection with the Orsa IP acquisition included the following:



In millions	Estimated Fair Value		Average Remaining Useful Life
			(at acquisition date)
Asset Class:
Customer relationships	$	88	12 years
Trademark	3		6 years
Wood supply agreement	19		25 years
Total	$	110

Pro forma information related to the acquisition of Orsa IP has not been included as it does not have a material effect on the Company's consolidated results of operations.

Due to the complex organizational structure of Orsa IP's operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reports its share of Orsa IP's operating results on a one-month lag basis.

NOTE 8 - BUSINESSES HELD FOR SALE, DIVESTITURES AND IMPAIRMENTS

Discontinued Operations

On July 19, 2013, the Company finalized the sale of its Temple-Inland Building Products division, which included 15 manufacturing facilities, to Georgia-Pacific Building Products, LLC for approximately $733 million in cash, including preliminary customary closing adjustments.

On April 1, 2013, the Company finalized the sale of Temple-Inland's 50% interest in Del-Tin Fiber L.L.C. (Del-Tin) to joint venture partner Deltic Timber Corporation (Deltic) for $20 million in assumed liabilities and cash. Accordingly, the Del-Tin assets (which included a manufacturing facility) were excluded from the sale to Georgia-Pacific and the purchase price under our sale agreement with Georgia-Pacific was adjusted from $750 million to $710 million.

The operating results of the Temple-Inland Building Products business have been included in Discontinued operations from the date of acquisition. The assets of this business, totaling $759 million at December 31, 2012 are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet at December 31, 2012. Included in this amount is $26 million and $153 million related to goodwill and intangibles, respectively. The liabilities of this business, totaling $44 million at December 31, 2012 are included in Liabilities of businesses held for sale in the accompanying consolidated balance sheet at December 31, 2012.

Other Divestitures and Impairments

2012: 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 net gain of $1 million, before and after taxes, was recorded for other items.

As referenced in Note 7, 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. 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.

Also 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.

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 and impairments of businesses in the accompanying consolidated statement of operations.

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NOTE 9 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Temporary Investments



In millions	September 30, 2013		December 31, 2012
Temporary investments	$	1,545	$	934

Accounts and Notes Receivable



In millions	September 30, 2013		December 31, 2012
Accounts and notes receivable, net:
Trade	$	3,717	$	3,316
Other	307		246
Total	$	4,024	$	3,562

Inventories



In millions	September 30, 2013		December 31, 2012
Raw materials	$	410	$	360
Finished pulp, paper and packaging	1,792		1,728
Operating supplies	571		588
Other	68		54
Total	$	2,841	$	2,730

Depreciation Expense



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2013		2012		2013		2012
Depreciation expense	$	365	$	347	$	1,081	$	1,045

Valuation Accounts

Certain valuation accounts were as follows:



In millions	September 30, 2013		December 31, 2012
Accumulated depreciation	$	19,826	$	18,934
Allowance for doubtful accounts	138		119

During the second quarter of 2013, a reserve of $28 million on $42 million of total receivables from a large envelope company was recorded due to their filing for bankruptcy protection in June 2013. The reserve is based on the Company's estimate of ultimate expected losses associated with the outstanding receivable balance.

There was no material activity related to asset retirement obligations during either of the nine months ended September 30, 2013 or 2012.

Interest

Cash payments related to interest were as follows:



	Nine Months Ended September 30,
In millions	2013		2012
Interest payments	$	537	$	496

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Amounts related to interest were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2013		2012		2013		2012
Interest expense (a)	$	162	$	197	$	520	$	559
Interest income (a)	15		34		41		56
Capitalized interest costs	4		10		12		29


(a)	Interest expense and interest income exclude approximately $11 million and $35 million for the three months and nine months ended September 30, 2013 and $15 million and $35 million for the three months and nine months ended September 30, 2012, respectively, related to investments in and borrowings from variable interest entities for which the Company has a legal right of offset (see Note 13).

Postretirement Benefit Expense

The components of the Company’s postretirement benefit expense were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
In millions	2013			2012			2013			2012
Service cost	$	—		$	1		$	1		$	2
Interest cost	4			5			11			15
Actuarial loss	2			3			5			8
Amortization of prior service credit	(6		)	(8		)	(18		)	(22		)
Net postretirement benefit expense	$	—		$	1		$	(1	)	$	3

NOTE 10 - GOODWILL AND OTHER INTANGIBLES

Goodwill

The following table presents changes in goodwill balances as allocated to each business segment for the nine-month period ended September 30, 2013:



In millions	Industrial Packaging				Printing Papers				Consumer Packaging			Distribution		Total
Balance as of January 1, 2013
Goodwill	$	3,165			$	2,396			$	1,783		$	400	$	7,744
Accumulated impairment losses (a)	—				(1,765		)		(1,664		)	—		(3,429		)
	3,165				631				119			400		4,315
Reclassifications and other (b)	(13		)		(49		)		2			—		(60		)
Additions/reductions	253			(c)	(17		)	(d)	—			—		236
Balance as of September 30, 2013
Goodwill	3,405				2,330				1,785			400		7,920
Accumulated impairment losses (a)	—				(1,765		)		(1,664		)	—		(3,429		)
Total	$	3,405			$	565			$	121		$	400	$	4,491


(a)	Represents accumulated goodwill impairment charges since the adoption of ASC 350, “Intangibles – Goodwill and Other” in 2002.


(b)	Represents the effects of foreign currency translations and reclassifications.


(c)	Reflects $220 million for Orsa IP, the newly formed joint venture in Brazil, and the adjustment of $54 million ($33 million after-tax impact to goodwill) previously included as a trade name intangible asset in Deferred Charges and Other Assets on the balance sheet.


(d)	Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in Brazil.

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Other Intangibles

Identifiable intangible assets comprised the following:



	September 30, 2013				December 31, 2012
In millions	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer relationships and lists	$	634	$	138	$	644	$	112
Non-compete agreements	76		41		83		30
Tradenames, patents and trademarks	77		18		144		16
Land and water rights	75		7		87		6
Fuel and power agreements	11		6		17		12
Software	24		22		22		19
Other	49		27		83		19
Total	$	946	$	259	$	1,080	$	214

The Company recognized the following amounts as amortization expense related to intangible assets:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2013		2012		2013		2012
Amortization expense related to intangible assets	$	30	$	28	$	66	$	43

NOTE 11 - INCOME TAXES

International Paper made income tax payments, net of refunds, as follows:



	Nine Months Ended September 30,
In millions	2013		2012
Income tax payments, net	$	224	$	41

The following table presents a rollforward of unrecognized tax benefits and related accrued estimated interest and penalties for the nine months ended September 30, 2013:



In millions	Unrecognized Tax Benefits			Accrued Estimated Interest and Tax Penalties
Balance at December 31, 2012	$	(972	)	$	(104	)
Activity for three months ended March 31, 2013	99			20
Activity for the three months ended June 30, 2013	6			1
Activity for the three months ended September 30, 2013	29			13
Balance at September 30, 2013	$	(838	)	$	(70	)

The Company currently estimates that, as a result of ongoing discussions, pending tax settlements and expirations of statutes of limitations, the amount of unrecognized tax benefits could be reduced by approximately $720 million during the next 12 months and approximately $650 million of this reduction will positively impact the effective rate.

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Included in the Company’s income tax provisions for the nine months ended September 30, 2013 and 2012, are $197 million and $81 million of income tax benefits, respectively, related to special items. The components of the net provision related to special items were as follows:



	Nine Months Ended September 30,
In millions	2013			2012
Special items	$	(77	)	$	(87	)
Tax-related adjustments:
Temple-Inland acquisition	—			3
IRS audit settlement	(122		)	—
Mexican business restructuring	—			3
Other	2			—
Income tax provision (benefit) related to special items	$	(197	)	$	(81	)

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Environmental Proceedings

International Paper has been named as a potentially responsible party in environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Many of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under CERCLA and equivalent state laws, as a practical matter, liability for CERCLA cleanups is typically allocated among the many potential responsible parties. Remedial costs are recorded in the consolidated financial statements when they become probable and reasonably estimable. International Paper has estimated the probable liability associated with these matters to be approximately $95 million in the aggregate.

Cass Lake: One of the matters referenced above is a closed wood treating facility located in Cass Lake, Minnesota. During 2009, in connection with an environmental site remediation action under CERCLA, International Paper submitted to the EPA a site remediation feasibility study. In June 2011, the EPA selected and published a proposed soil remedy at the site with an estimated cost of $46 million. The overall remediation reserve for the site is currently $52 million to address this selection of an alternative for the soil remediation component of the overall site remedy. In October 2011, the EPA released a public statement indicating that the final soil remedy decision would be delayed. In the unlikely event that the EPA changes its proposed soil remedy and approves instead a more expensive clean-up alternative, the remediation costs could be material, and significantly higher than amounts currently recorded. In October 2012, the Natural Resource Trustees for this site provided notice to International Paper and other potentially responsible parties of their intent to perform a Natural Resource Damage Assessment. It is premature to predict the outcome of the assessment or to estimate a loss or range of loss, if any, which may be incurred.

Other: In addition to the above matters, other remediation costs typically associated with the cleanup of hazardous substances at the Company’s current, closed or formerly-owned facilities, and recorded as liabilities on the balance sheet, totaled approximately $43 million at September 30, 2013. Other than as described above, completion of required remedial actions is not expected to have a material effect on our consolidated financial statements.

Kalamazoo River: The Company is a potentially responsible party with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site (Kalamazoo River Superfund Site) in Michigan. The EPA asserts that the site is contaminated primarily by PCBs as a result of discharges from various paper mills located along the Kalamazoo River, including a paper mill formerly owned by St. Regis Paper Co. (St. Regis). The Company is a successor in interest to St. Regis. The Company has not received any orders from the EPA with respect to the site and continues to collect information from the EPA and other parties relative to the site to evaluate the extent of its liability, if any, with respect to the site. Accordingly, it is premature to estimate a loss or range of loss with respect to this site.

Also in connection with the Kalamazoo River Superfund Site, the Company was named as a defendant by Georgia-Pacific Consumer Products LP, Fort James Corporation and Georgia Pacific LLC in a contribution and cost recovery action for alleged pollution at the site. The suit seeks contribution under CERCLA for $79 million in costs purportedly expended by plaintiffs as of the filing of the complaint and for future remediation costs. The suit alleges that a mill, during the time it was allegedly owned and operated by St. Regis, discharged PCB contaminated solids and paper residuals resulting from paper de-inking and recycling. Also named as defendants in the suit are NCR Corporation and Weyerhaeuser Company. In mid-2011, the suit was transferred from the District Court for the Eastern District of Wisconsin to the District Court for the Western District of Michigan. The trial of the initial liability phase took place in February 2013. Weyerhaeuser conceded prior to trial that it was a liable party with respect to the site. In September 2013, an opinion and order was issued in the suit. The order concluded that

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the Company (as the successor to St. Regis) was an "owner" of the mill at issue during a portion of the relevant period and is therefore liable under CERCLA. The order also determined that NCR is a liable party as an "arranger for disposal" of PCBs in waste paper that was de-inked and recycled by mills along the Kalamazoo River. The order did not address the Company's responsibility, if any, for costs for which plaintiffs in the suit are seeking recovery. This will be the subject of a separate trial. The Company thus believes it is premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred.

Harris County: International Paper and McGinnis Industrial Maintenance Corporation, a subsidiary of Waste Management, Inc., are potentially responsible parties at the San Jacinto River Waste Pits Superfund Site (San Jacinto River Superfund Site) in Harris County, Texas, and have been actively participating in investigation and remediation activities at this Superfund site. In December 2011, Harris County, Texas filed a suit against the Company in Harris County District Court seeking civil penalties with regard to the alleged discharge of dioxin into the San Jacinto River since 1965 from waste impoundments that are part of the San Jacinto River Superfund Site. Also named as defendants in this action are McGinnis Industrial Maintenance Corporation, Waste Management, Inc. and Waste Management of Texas Inc. Harris County is seeking civil penalties pursuant to the Texas Water Code, which provides for the imposition of civil penalties between $50 and $25,000 per day. The case is in the discovery phase and it is therefore premature to predict the outcome or to estimate our maximum reasonably possible loss. However, we do not believe that any material loss is probable.

In October 2012, a civil lawsuit was filed against the same defendants, including the Company, in the District Court of Harris County by what are now 659 plaintiffs seeking medical monitoring and damages with regard to the alleged discharge of dioxin into the San Jacinto River since 1965 from waste impoundments that are a part of the San Jacinto Superfund Site. This case is in the discovery phase and it is therefore premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred. In December 2012, residents of an up-river neighborhood filed a civil action against the same defendants, including the Company, in the District Court of Harris County alleging property damage and personal injury from the alleged discharge of dioxin into the San Jacinto River from the San Jacinto Superfund Site. This case is in the discovery phase and it is therefore premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred.

Bogalusa: In August 2011, Temple-Inland's Bogalusa, Louisiana paper mill experienced an upset condition that resulted in a fish kill on the Pearl River (the Bogalusa Incident). Louisiana and Mississippi state regulatory agencies and the U.S. Department of Justice (the DOJ) initiated enforcement actions against Temple-Inland as a result of the Bogalusa Incident. We have resolved the Louisiana and Mississippi enforcement matters and paid approximately $3 million in penalties.

The DOJ investigation into the Bogalusa Incident was resolved in the second quarter of 2013 upon federal court approval of a criminal plea agreement between Temple-Inland subsidiary, TIN Inc., and the DOJ. Under the plea agreement, TIN pleaded guilty to two misdemeanor environmental offenses, paid a $3.3 million financial penalty, and agreed to a two-year corporate probation period.

The Bogalusa mill also expects the LDEQ to levy a civil penalty resulting from (i) alleged environmental violations identified in an LDEQ environmental audit conducted immediately after the Bogalusa Incident, and (ii) air permit deviations self-disclosed by the mill in 2012.

Temple-Inland (or its affiliates) was a defendant in 28 civil lawsuits in Louisiana and Mississippi related to the Bogalusa Incident. Fifteen of these civil cases were filed in Louisiana state court shortly after the incident and were removed and consolidated in an action then pending in the U.S. District Court for the Eastern District of Louisiana along with a civil case originally filed in that court. During August 2012, an additional 13 causes of action were filed in federal or state court in Mississippi and Louisiana. In October 2012, International Paper and the Plaintiffs' Steering Committee, the group of attorneys appointed by the Louisiana federal court to organize and coordinate the efforts of all the plaintiffs in this litigation, reached a tentative understanding on key structural terms and an amount for resolution of the litigation. The court granted preliminary approval for the proposed class action settlement on December 19, 2012. There were no opt-outs and four objections which were all later withdrawn. The Fairness Hearing was held July 10, 2013, and the court issued its Final Order and Judgment Approving Class Action Settlement the same day. Under the terms of the settlement agreement, the class action settlement was deemed final on August 9, 2013. We funded the settlement in September 2013. This settlement did not have a material effect on the Company's consolidated financial statements.

Legal Proceedings

Antitrust: In September 2010, eight containerboard producers, including International Paper and Temple-Inland, were named as defendants in a purported class action complaint that alleged a civil violation of Section 1 of the Sherman Act. The suit is captioned Kleen Products LLC v. Packaging Corp. of America (N.D. Ill.). The complaint alleges that the defendants, beginning in August 2005 through November 2010, conspired to limit the supply and thereby increase prices of containerboard products. The alleged class is all persons who purchased containerboard products directly from any defendant for use or delivery in the United States during the period August 2005 to the present. The complaint seeks to recover an unspecified amount of treble actual damages and attorney’s fees on behalf of the purported class. Four similar complaints were filed and have been

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consolidated in the Northern District of Illinois. Moreover, in January 2011, International Paper was named as a defendant in a lawsuit filed in state court in Cocke County, Tennessee alleging 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, including attorneys’ fees. The Company disputes the allegations made and intends to vigorously defend each action. However, because the Kleen Products case is in the discovery phase and the Tennessee action is in the preliminary stages, we are unable to predict an outcome or estimate a range of reasonably possible loss.

In late December 2012, purchasers of gypsum board filed purported class action complaints alleging civil violations of Section 1 of the Sherman Act against Temple-Inland and a number of other gypsum manufacturers in three separate actions. Two of the actions were filed in the U.S. District Court for the Eastern District of Pennsylvania (E.D. PA) and one in the U.S. District Court for the Northern District of Illinois (N.D. IL). The case in the N.D. IL was voluntarily dismissed in December. Since that time, approximately 25 additional actions were collectively filed between the E.D. PA and the N.D. IL and the U.S. District Court for the Western District of North Carolina (W.D. NC), on behalf of direct and indirect purchasers. The complaints are similar and allege that the gypsum manufacturers conspired or otherwise reached agreements to: (1) raise prices of gypsum board either from 2008 or 2011 through the present; (2) avoid price erosion by ceasing the practice of issuing job quotes; and (3) restrict supply through downtime and limit order fulfillment. The alleged classes are all persons who purchased gypsum board and/or gypsum finishing products directly or indirectly from any defendant and the conspiracy is alleged to have commenced on or before either September 2011 or January 2008. The complainants seek to recover unspecified treble actual damages and attorneys' fees on behalf of the purported classes. On April 8, 2013, the Judicial Panel on Multidistrict Litigation ordered transfer of all pending cases to E.D. PA for coordinated and consolidated pretrial proceedings, and the direct purchaser plaintiffs and indirect purchaser plaintiffs filed their respective amended consolidated complaints in June 2013. The amended consolidated complaints allege a conspiracy or agreement beginning in or before September 2011. The Company disputes the allegations made and intends to vigorously defend the consolidated action. In addition, in September 2013, purported class actions were filed in courts in Quebec, Canada and Ontario, Canada, with each suit alleging violations of the Canadian Competition Act and seeking damages and injunctive relief. The Company has not yet filed an answer in either case, but intends to dispute the allegations made and to vigorously defend the litigation. Because the U.S. cases are in the discovery phase and the Canadian cases are in a preliminary stage, we are unable to predict an outcome or estimate our maximum reasonably possible loss. However, we do not believe that any material loss is probable.

Guaranty Bank: As we have previously disclosed, Temple-Inland was named as a defendant in a lawsuit captioned North Port Firefighters’ Pension v. Temple-Inland Inc., filed in November 2011 in the United States District Court for the Northern District of Texas and subsequently amended. The lawsuit alleges a class action against Temple-Inland and certain individual defendants contending that Temple-Inland and certain individual defendants misrepresented the financial condition of Guaranty Financial Group during the period December 12, 2007 through August 24, 2009. On June 20, 2012, all defendants in the lawsuit filed motions to dismiss the amended complaint. On March 28, 2013, the district court granted Temple-Inland's and the individual defendants' motions to dismiss without prejudice. On April 26, 2013, the plaintiff filed a Second Amended Complaint that asserted claims against the individual defendants, but did not assert any claims against Temple-Inland. On July 30, 2013, the district court dismissed the Second Amended Complaint filed against the individual defendants with prejudice, also noting that since the plaintiff did not seek the court's leave to amend its complaint with respect to the claims against Temple-Inland, all claims against Temple-Inland were dismissed with prejudice. On August 27, 2013, the plaintiff filed a notice of appeal of the district court's ruling.

Certain of the individual defendants in the North Port litigation have requested advancement of their costs of defense from Temple-Inland and have asserted a right to indemnification by Temple-Inland. We believe that all or part of these defense costs would be covered losses under Temple-Inland’s directors and officers insurance. The carriers under the applicable policies have been notified of the claims and each has responded with a reservation of rights letter.

Tax: The Company is currently being challenged by Brazilian tax authorities concerning the statute of limitations related to the use of certain tax credits. The Company is appealing an unfavorable March 2012 administrative court ruling. The potential loss to the Company in the event of a final unfavorable outcome is approximately $29 million.

General: The Company is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, labor and employment, personal injury, property damage, contracts, sales of property, and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, the Company believes that the outcome of any of the lawsuits or claims that are pending or threatened or all of them combined (other than those that cannot be assessed due to their preliminary nature) will not have a material effect on its consolidated financial statements.

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NOTE 13 - VARIABLE INTEREST ENTITIES AND PREFERRED SECURITIES OF SUBSIDIARIES

Variable Interest Entities

In connection with the 2006 sale of approximately 5.6 million acres of forestlands, International Paper received installment notes (the Timber Notes) totaling approximately $4.8 billion. The Timber Notes, which do not require principal payments prior to their August 2016 maturity, are supported by irrevocable letters of credit obtained by the buyers of the forestlands.

During 2006, International Paper contributed the Timber Notes to newly formed entities (the Borrower Entities) in exchange for Class A and Class B interests in these entities. Subsequently, International Paper contributed its $200 million Class A interests in the Borrower Entities, along with approximately $400 million of International Paper promissory notes, to other newly formed entities (the Investor Entities, and together with the Borrower Entities, the Entities) in exchange for Class A and Class B interests in these entities, and simultaneously sold its Class A interest in the Investor Entities to a third party investor. As a result, at December 31, 2006, International Paper held Class B interests in the Borrower Entities and Class B interests in the Investor Entities valued at approximately $5.0 billion. International Paper did not provide any financial support that was not previously contractually required for the nine months ended September 30, 2013 and the year ended December 31, 2012.

Following the 2006 sale of forestlands and creation of the Entities discussed above, the Timber Notes were used as collateral for borrowings from third party lenders, which effectively monetized the Timber Notes. Provisions of certain loan agreements require any bank issuing letters of credit supporting the Timber Notes to maintain a credit rating at or above a specified threshold. In the event the credit rating of a letter of credit bank is downgraded below the specified threshold, the letters of credit must be replaced within 60 days with letters of credit from a qualifying financial institution or for one of the letter of credit banks, collateral must be posted. The Company, retained to provide management services for the third-party entities that hold the Timber Notes, has, as required by the loan agreements, successfully replaced banks that fell below the specified threshold.

Also during 2006, the Entities acquired approximately $4.8 billion of International Paper debt obligations for cash, resulting in a total of approximately $5.2 billion of International Paper debt obligations held by the Entities at December 31, 2006. The various agreements entered into in connection with these transactions provide that International Paper has, and intends to affect, a legal right to offset its obligation under these debt instruments with its investments in the Entities. Accordingly, for financial reporting purposes, International Paper has offset approximately $5.2 billion of Class B interests in the Entities against $5.3 billion of International Paper debt obligations held by these Entities at September 30, 2013 and December 31, 2012. Despite the offset treatment, these remain debt obligations of International Paper. Remaining borrowings of $76 million and $79 million at September 30, 2013 and December 31, 2012, respectively, are included in Long-term debt in the accompanying consolidated balance sheet. Additional debt related to the above transaction of $79 million is included in Notes payable and current maturities of long-term debt at September 30, 2013 and December 31, 2012.

On October 7, 2011, Moody’s Investor Services reduced its credit rating of senior unsecured long-term debt of the Royal Bank of Scotland Group Plc, which issued letters of credit that support $1.6 billion of Timber Notes, below the specified threshold. On November 22, 2011, letters of credit worth $707 million were replaced by another qualifying institution. The Company and the third party managing member agreed to extend the 60 day deadline, and then, on February 10, 2012, letters of credit worth $135 million were replaced by another qualifying institution. Fees of $5 million were incurred in connection with these replacements. The Company and the third party managing member instituted a replacement waiver for the remaining $797 million, and then on July 25, 2012, these letters of credit were successfully replaced by another qualifying institution. In the event the credit rating of the letter of credit bank is downgraded below a specified threshold, the new bank is required to provide credit support for its obligation. Fees of $5 million were incurred in connection with this replacement.

On January 23, 2012, Standard and Poor's reduced its credit rating of senior unsecured long-term debt of Société Générale SA, which issued letters of credit that support $666 million of the Timber Notes, below the specified threshold. The letters of credit were successfully replaced by another qualifying institution. Fees of $5 million were incurred in connection with this replacement.

On June 21, 2012, Moody's Investor Services reduced its credit rating of senior unsecured long-term 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 replacement waiver for these letters of credit, terminable upon 30 days notice.

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Activity between the Company and the Entities was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2013		2012		2013		2012
Revenue (a)	$	11	$	15	$	35	$	35
Expense (a)	20		28		61		68
Cash receipts (b)	14		21		33		36
Cash payments (c)	39		47		84		87


(a)	The net expense related to the Company’s interest in the Entities is included in the accompanying consolidated statement of operations, as International Paper has and intends to affect its legal right to offset as discussed above.


(b)	The cash receipts are equity distributions from the Entities to International Paper.


(c)	The semi-annual payments are related to interest on the associated debt obligations discussed above.

Based on an analysis of the Entities discussed above under guidance that considers the potential magnitude of the variability in the structures and which party has a controlling financial interest, International Paper determined that it is not the primary beneficiary of the Entities, and therefore, does not consolidate its investments in these entities. It was also determined that the source of variability in the structures is the value of the Timber Notes, the assets most significantly impacting the structure’s economic performance. The credit quality of the Timber Notes is supported by irrevocable letters of credit obtained by third party buyers which are 100% cash collateralized. International Paper analyzed which party has control over the economic performance of each entity, and concluded International Paper does not have control over significant decisions surrounding the Timber Notes and letters of credit and therefore is not the primary beneficiary. The Company’s maximum exposure to loss equals the value of the Timber Notes; however, an analysis performed by the Company concluded the likelihood of this exposure is remote.

International Paper also held a variable interest in financing entities that were used to monetize long-term notes received from the sale of forestlands in 2002. International Paper transferred notes (the Monetized Notes, with an original maturity of 10 years from inception) and cash having a value of approximately $500 million to the entities in exchange for preferred interests, and accounted for the transfers as a sale of the notes with no associated gain or loss. In the same period, the entities acquired approximately $500 million of International Paper debt obligations for cash. International Paper has no obligation to make any further capital contributions to these entities and did not provide any financial support that was not previously contractually required during the nine months ended September 30, 2013 and the year ended December 31, 2012.

During 2011 and the six months ended June 30, 2012, the 2002 Monetized Notes matured. Cash receipts upon maturity were used to pay the associated debt obligations. Effective June 1, 2012, International Paper liquidated its interest in the 2002 financing entities.

The use of the above entities facilitated the monetization of the credit enhanced Timber and Monetized Notes in a cost effective manner by increasing the borrowing capacity and lowering the interest rate while continuing to preserve the tax deferral that resulted from the forestlands installment sales and the offset accounting treatment described above.

In connection with the acquisition of Temple-Inland in February 2012, two special purpose entities became wholly-owned subsidiaries of International Paper.

In October 2007, Temple-Inland sold 1.55 million acres of timberland for $2.38 billion. The total consideration consisted almost entirely of notes due in 2027 issued by the buyer of the timberland, which Temple-Inland contributed to two wholly-owned, bankruptcy-remote special purpose entities. The notes are shown in Financial assets of special purpose entities in the accompanying consolidated balance sheet and are supported by $2.38 billion of irrevocable letters of credit issued by three banks, which are required to maintain minimum credit ratings on their long-term debt. In the third quarter of 2012, International Paper completed its preliminary analysis of the acquisition date fair value of the notes and determined it to be$2.09 billion. As of September 30, 2013, the fair value of the notes was $2.51 billion.

In December 2007, Temple-Inland’s two wholly-owned special purpose entities borrowed $2.14 billion shown in Nonrecourse financial liabilities of special purpose entities. The loans are repayable in 2027 and are secured only by the $2.38 billion of notes and the irrevocable letters of credit securing the notes and are nonrecourse to us. The loan agreements provide that if a credit rating of any of the banks issuing the letters of credit is downgraded below the specified threshold, the letters of credit issued by that bank must be replaced within 30 days with letters of credit from another qualifying financial institution. In the third quarter of 2012, International Paper completed its preliminary analysis of the acquisition date fair value of the borrowings and determined it to be $2.03 billion. As of September 30, 2013, the fair value of this debt was $2.39 billion.

On January 23, 2012, Standard and Poor's reduced its credit rating of senior unsecured long-term debt of Société Générale SA, which issued letters of credit that support $506 million of the 2007 Monetized Notes, below the specific threshold. These letters

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of credit were successfully replaced by another qualifying institution. Fees of $2 million were incurred in connection with this replacement.

On June 21, 2012, Moody's Investor Services reduced its credit rating of senior unsecured long-term debt of Barclays Bank PLC, which issued letters of credit that support approximately $500 million of the 2007 Monetized Notes, below the specified threshold. These letters of credit were successfully replaced by another qualifying institution. Fees of $6 million were incurred in connection with this replacement.

Activity between the Company and the 2007 financing entities was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2013		2012		2013		2012
Revenue (a)	$	6	$	15	$	20	$	21
Expense (b)	7		11		22		20
Cash receipts (c)	2		3		6		10
Cash payments (d)	5		6		16		16

(a)

The revenue is included in Interest expense, net in the accompanying consolidated statement of operations and includes approximately $5 million and $14 million for the three months and nine months ended September 30, 2013, respectively, and $12 million for the three months and nine months ended September 30, 2012, respectively, of accretion income for the amortization of the purchase accounting adjustment on the Financial assets of special purpose entities.

(b)

The expense is included in Interest expense, net in the accompanying consolidated statement of operations and includes approximately $2 million and $5 million for the three months and nine months ended September 30, 2013, respectively, and $5 million for the three months and nine months ended September 30, 2012, respectively, of accretion expense for the amortization of the purchase accounting adjustment on the Nonrecourse financial liabilities of special purpose entities.


(c)	The cash receipts are interest received on the Financial assets of special purpose entities.


(d)	The cash payments are interest paid on Nonrecourse financial liabilities of special purpose entities.

Preferred Securities of Subsidiaries

In March 2003, Southeast Timber, Inc. (Southeast Timber), a consolidated subsidiary of International Paper, issued $150 million of preferred securities to a private investor with future dividend payments based on LIBOR. Southeast Timber, which through a subsidiary initially held approximately 1.5 million acres of forestlands in the southern United States, was International Paper’s primary vehicle for sales of southern forestlands. As of September 30, 2013, substantially all of these forestlands have been sold. On March 27, 2013, Southeast Timber redeemed its Class A common shares owned by the private investor for $150 million. As a result, Noncontrolling interests decreased by $150 million in the accompanying consolidated balance sheet. Distributions paid to the third-party investor were $1 million and $4 million for the nine months ended September 30, 2013 and 2012, respectively. The expense related to these preferred securities is shown in Net earnings (loss) attributable to noncontrolling interests in the accompanying consolidated statement of operations.

NOTE 14 - DEBT

Amounts related to early debt extinguishment during the three months and nine months ended September 30, 2013 and 2012 were as follows:

Three Months Ended
September 30,