IP-6.30.2014-FORM 10-Q
Table of Contents

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 June 30, 2014
 
¨ 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 July 31, 2014 was 427,022,310.


Table of Contents

INDEX
 
 
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
Consolidated Statement of Operations - Three Months and Six Months Ended June 30, 2014 and 2013
 
 
 
 
Consolidated Statement of Comprehensive Income - Three Months and Six Months Ended June 30, 2014 and 2013
 
 
 
 
Consolidated Balance Sheet - June 30, 2014 and December 31, 2013
 
 
 
 
Consolidated Statement of Cash Flows - Six Months Ended June 30, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 

Table of Contents

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
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Net Sales
$
7,213

 
$
7,335

 
$
14,227

 
$
14,425

Costs and Expenses
 
 
 
 
 
 
 
Cost of products sold
5,228

 
5,414

 
10,403

 
10,634

Selling and administrative expenses
527

 
515

 
1,055

 
1,082

Depreciation, amortization and cost of timber harvested
359

 
396

 
711

 
775

Distribution expenses
412

 
449

 
812

 
871

Taxes other than payroll and income taxes
50

 
47

 
97

 
96

Restructuring and other charges
324

 
(4
)
 
841

 
55

Net bargain purchase gain on acquisition of business
—

 
(13
)
 
—

 
(13
)
Interest expense, net
165

 
168

 
307

 
332

Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings
148

 
363

 
1

 
593

Income tax provision (benefit)
28

 
94

 
(55
)
 
25

Equity earnings (loss), net of taxes
41

 
(36
)
 
8

 
(46
)
Earnings (Loss) From Continuing Operations
161

 
233

 
64

 
522

Discontinued operations, net of taxes
(3
)
 
24

 
(5
)
 
50

Net Earnings (Loss)
158

 
257

 
59

 
572

Less: Net earnings (loss) attributable to noncontrolling interests
(3
)
 
(2
)
 
(7
)
 
(5
)
Net Earnings (Loss) Attributable to International Paper Company
$
161

 
$
259

 
$
66

 
$
577

Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
0.38

 
$
0.53

 
$
0.16

 
$
1.19

Discontinued operations, net of taxes
(0.01
)
 
0.05

 
(0.01
)
 
0.11

Net earnings (loss)
$
0.37

 
$
0.58

 
$
0.15

 
$
1.30

Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
0.38

 
$
0.52

 
$
0.16

 
$
1.18

Discontinued operations, net of taxes
(0.01
)
 
0.05

 
(0.01
)
 
0.11

Net earnings (loss)
$
0.37

 
$
0.57

 
$
0.15

 
$
1.29

Average Shares of Common Stock Outstanding – assuming dilution
432.1

 
448.5

 
435.9

 
447.9

Cash Dividends Per Common Share
$
0.3500

 
$
0.3000

 
$
0.7000

 
$
0.6000

Amounts Attributable to International Paper Company Common Shareholders
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
164

 
$
235

 
$
71

 
$
527

Discontinued operations, net of taxes
(3
)
 
24

 
(5
)
 
50

Net earnings (loss)
$
161

 
$
259

 
$
66

 
$
577

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

1
Table of Contents

INTERNATIONAL PAPER COMPANY
Consolidated Statement of Comprehensive Income
(Unaudited)
(In millions)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Net Earnings (Loss)
$
158

 
$
257

 
$
59

 
$
572

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
Amortization of pension and post-retirement prior service costs and net loss:
 
 
 
 
 
 
 
U.S. plans
69

 
76

 
121

 
154

Pension and postretirement liability adjustments:
 
 
 
 
 
 
 
U.S. plans
(3
)
 
—

 
(106
)
 
—

Non-U.S. plans
—

 
—

 
3

 
—

Change in cumulative foreign currency translation adjustment
75

 
(337
)
 
93

 
(346
)
Net gains/losses on cash flow hedging derivatives:
 
 
 
 
 
 
 
Net gains (losses) arising during the period
12

 
(15
)
 
16

 
(10
)
Reclassification adjustment for (gains) losses included in net earnings (loss)
(4
)
 
(12
)
 
1

 
(9
)
Total Other Comprehensive Income (Loss), Net of Tax
149

 
(288
)
 
128

 
(211
)
Comprehensive Income (Loss)
307

 
(31
)
 
187

 
361

Net (earnings) loss attributable to noncontrolling interests
3

 
2

 
7

 
5

Other comprehensive (income) loss attributable to noncontrolling interests
1

 
14

 
3

 
15

Comprehensive Income (Loss) Attributable to International Paper Company
$
311

 
$
(15
)
 
$
197

 
$
381

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

2
Table of Contents

INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(In millions)
 
June 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and temporary investments
$
1,293

 
$
1,802

Accounts and notes receivable, net
3,969

 
3,756

Inventories
2,798

 
2,825

Deferred income tax assets
307

 
302

Other current assets
384

 
340

Total Current Assets
8,751

 
9,025

Plants, Properties and Equipment, net
13,204

 
13,672

Forestlands
598

 
557

Investments
727

 
733

Financial Assets of Special Purpose Entities (Note 13)
2,136

 
2,127

Goodwill
4,007

 
3,987

Deferred Charges and Other Assets
1,379

 
1,427

Total Assets
$
30,802

 
$
31,528

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
952

 
$
661

Accounts payable
2,918

 
2,900

Accrued payroll and benefits
454

 
511

Other accrued liabilities
1,069

 
1,055

Total Current Liabilities
5,393

 
5,127

Long-Term Debt
8,997

 
8,827

Nonrecourse Financial Liabilities of Special Purpose Entities (Note 13)
2,047

 
2,043

Deferred Income Taxes
3,587

 
3,765

Pension Benefit Obligation
2,099

 
2,205

Postretirement and Postemployment Benefit Obligation
389

 
412

Other Liabilities
599

 
702

Redeemable Noncontrolling Interest
—

 
163

Equity
 
 
 
Common stock, $1 par value, 2014 – 448.3 shares and 2013 – 447.2 shares
448

 
447

Paid-in capital
6,435

 
6,463

Retained earnings
4,235

 
4,446

Accumulated other comprehensive loss
(2,628
)
 
(2,759
)
 
8,490

 
8,597

Less: Common stock held in treasury, at cost, 2014 – 20.980 shares and 2013 – 10.868 shares
968

 
492

Total Shareholders’ Equity
7,522

 
8,105

Noncontrolling interests
169

 
179

Total Equity
7,691

 
8,284

Total Liabilities and Equity
$
30,802

 
$
31,528

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

3
Table of Contents

INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
 
 
Six Months Ended
June 30,
 
2014
 
2013
Operating Activities
 
 
 
Net earnings (loss)
$
59

 
$
572

Discontinued operations, net of taxes
5

 
(50
)
Earnings (loss) from continuing operations
64

 
522

Depreciation, amortization and cost of timber harvested
711

 
775

Deferred income tax provision, net
(162
)
 
36

Restructuring and other charges
841

 
55

Pension plan contributions
(263
)
 
(31
)
Net bargain purchase gain on acquisition of business
—

 
(13
)
Equity (earnings) loss, net
(8
)
 
46

Periodic pension expense, net
194

 
279

Other, net
(18
)
 
(36
)
Changes in current assets and liabilities
 
 
 
Accounts and notes receivable
(207
)
 
(334
)
Inventories
8

 
(32
)
Accounts payable and accrued liabilities
(68
)
 
78

Interest payable
(12
)
 
(17
)
Other
(75
)
 
(89
)
Cash Provided By (Used For) Operations – Continuing Operations
1,005

 
1,239

Cash Provided By (Used For) Operations – Discontinued Operations
(5
)
 
40

Cash Provided By (Used For) Operations
1,000

 
1,279

Investment Activities
 
 
 
Invested in capital projects
(634
)
 
(488
)
Acquisitions, net of cash acquired
—

 
(501
)
Proceeds from sale of fixed assets
28

 
—

Other
(96
)
 
(61
)
Cash Provided By (Used For) Investment Activities – Continuing Operations
(702
)
 
(1,050
)
Cash Provided By (Used For) Investment Activities – Discontinued Operations
—

 
(3
)
Cash Provided By (Used For) Investment Activities
(702
)
 
(1,053
)
Financing Activities
 
 
 
Repurchases of common stock and payments of restricted stock tax withholding
(685
)
 
(51
)
Issuance of common stock
40

 
243

Issuance of debt
1,920

 
168

Reduction of debt
(1,435
)
 
(160
)
Change in book overdrafts
23

 
(79
)
Dividends paid
(302
)
 
(266
)
Acquisition of redeemable noncontrolling interest
(105
)
 
—

Debt tender premiums paid
(257
)
 
—

Redemption of preferred securities
—

 
(150
)
Other
(12
)
 
(12
)
Cash Provided By (Used For) Financing Activities
(813
)
 
(307
)
Effect of Exchange Rate Changes on Cash
6

 
(16
)
Change in Cash and Temporary Investments
(509
)
 
(97
)
Cash and Temporary Investments
 
 
 
Beginning of period
1,802

 
1,302

End of period
$
1,293

 
$
1,205

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

4
Table of Contents

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 six 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, 2013 which have previously been filed with the Securities and Exchange Commission.
NOTE 2 - RECENT ACCOUNTING DEVELOPMENTS
Share-Based Payment
In June 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That Performance Target Could Be Achieved After the Requisite Service Period." This guidance provides that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. As such, an entity should not record compensation expense related to an award for which transfer to the employee is contingent on the entity's satisfaction of a performance target until it becomes probable that the performance target will be met. This ASU is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those years. The Company is currently evaluating the provisions of this guidance.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." The guidance replaces most existing revenue recognition guidance and provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, and permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the provisions of this guidance.
Discontinued Operations
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. This guidance should be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date which is fiscal years beginning on or after December 15, 2014, and interim periods within those annual periods. The Company is currently evaluating the provisions of this guidance. Early adoption is permitted.
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 adoption of the provisions of this guidance did not have a material effect on the Company's consolidated financial statements.

5
Table of Contents

NOTE 3 - EQUITY
A summary of the changes in equity for the six-month periods ended June 30, 2014 and 2013 is provided below:
 
Six Months Ended
June 30,
 
2014
 
2013
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
$
8,105

 
$
179

 
$
8,284

 
$
6,304

 
$
332

 
$
6,636

Issuance of stock for various plans, net
182

 
—

 
182

 
345

 
—

 
345

Repurchase of stock
(685
)
 
—

 
(685
)
 
(51
)
 
—

 
(51
)
Common stock dividends ($0.7000 per share in 2014 and $0.6000 per share in 2013)
(312
)
 
—

 
(312
)
 
(272
)
 
—

 
(272
)
Dividends paid to noncontrolling interests by subsidiary
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Noncontrolling interests of acquired entities, net
—

 
—

 
—

 
—

 
7

 
7

Acquisition of redeemable noncontrolling interests
41

 
—

 
41

 
—

 
—

 
—

Remeasurement of redeemable noncontrolling interest
(6
)
 
—

 
(6
)
 
—

 
—

 
—

Comprehensive income (loss)
197

 
(10
)
 
187

 
381

 
(20
)
 
361

Ending Balance, June 30
$
7,522

 
$
169

 
$
7,691

 
$
6,707

 
$
318

 
$
7,025

NOTE 4 - OTHER COMPREHENSIVE INCOME
The following table presents changes in AOCI for the three-month period ended June 30, 2014:
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, April 1, 2014
 
$
(2,153
)
 
$
(629
)
 
$
4

 
$
(2,778
)
Other comprehensive income (loss) before reclassifications
 
(3
)
 
75

 
12

 
84

Amounts reclassified from accumulated other comprehensive income
 
69

 
—

 
(4
)
 
65

Net Current Period Other Comprehensive Income (Loss)
 
66

 
75

 
8

 
149

Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest
 
—

 
1

 
—

 
1

Balance, June 30, 2014
 
$
(2,087
)
 
$
(553
)
 
$
12

 
$
(2,628
)
(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 June 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, April 1, 2013
 
$
(3,518
)
 
$
(254
)
 
$
10

 
$
(3,762
)
Other comprehensive income (loss) before reclassifications
 
—

 
(337
)
 
(15
)
 
(352
)
Amounts reclassified from accumulated other comprehensive income
 
76

 
—

 
(12
)
 
64

Net Current Period Other Comprehensive Income (Loss)
 
76

 
(337
)
 
(27
)
 
(288
)
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest
 
—

 
14

 
—

 
14

Balance, June 30, 2013
 
$
(3,442
)
 
$
(577
)
 
$
(17
)
 
$
(4,036
)
(a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

6
Table of Contents


The following table presents changes in AOCI for the six-month period ended June 30, 2014:
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, January 1, 2014
 
$
(2,105
)
 
$
(649
)
 
$
(5
)
 
$
(2,759
)
Other comprehensive income (loss) before reclassifications
 
(103
)
 
93

 
16

 
6

Amounts reclassified from accumulated other comprehensive income
 
121

 
—

 
1

 
122

Net Current Period Other Comprehensive Income (Loss)
 
18

 
93

 
17

 
128

Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest
 
—

 
3

 
—

 
3

Balance, June 30, 2014
 
$
(2,087
)
 
$
(553
)
 
$
12

 
$
(2,628
)
(a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.
The following table presents changes in AOCI for the six-month period ended June 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, January 1, 2013
 
$
(3,596
)
 
$
(246
)
 
$
2

 
$
(3,840
)
Other comprehensive income (loss) before reclassifications
 
—

 
(363
)
 
(10
)
 
(373
)
Amounts reclassified from accumulated other comprehensive income
 
154

 
17

 
(9
)
 
162

Net Current Period Other Comprehensive Income (Loss)
 
154

 
(346
)
 
(19
)
 
(211
)
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest
 
—

 
15

 
—

 
15

Balance, June 30, 2013
 
$
(3,442
)
 
$
(577
)
 
$
(17
)
 
$
(4,036
)
(a) All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

7
Table of Contents

The following table presents details of the reclassifications out of AOCI for the three-month and six-month periods ended June 30:
Details About Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (a)
 
Location of Amount Reclassified from AOCI
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
In millions:
 
 
 
 
 
 
 
 
 
 
Defined benefit pension and postretirement items:
 
 
 
 
 
 
 
 
 
 
Prior-service costs
 
$
(5
)
 
$
(3
)
 
$
(9
)
 
$
(5
)
(b)
Cost of products sold
Actuarial gains/(losses)
 
(108
)
 
(122
)
 
(189
)
 
(247
)
(b)
Cost of products sold
Total pre-tax amount
 
(113
)
 
(125
)
 
(198
)
 
(252
)
 
 
Tax (expense)/benefit
 
44

 
49

 
77

 
98

 
 
Net of tax
 
(69
)
 
(76
)
 
(121
)
 
(154
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in cumulative foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
Business acquisition/divestitures
 
—

 
—

 
—

 
(17
)
 
Net (gains) losses on sales and impairments of businesses
Tax (expense)/benefit
 
—

 
—

 
—

 
—

 
 
Net of tax
 
—

 
—

 
—

 
(17
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains and losses on cash flow hedging derivatives:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
4

 
18

 
(4
)
 
13

(c)
Cost of products sold
Total pre-tax amount
 
4

 
18

 
(4
)
 
13

 
 
Tax (expense)/benefit
 
—

 
(6
)
 
3

 
(4
)
 
 
Net of tax
 
4

 
12

 
(1
)
 
9

 
 
Total reclassifications for the period
 
$
(65
)
 
$
(64
)
 
$
(122
)
 
$
(162
)
 
 
(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
June 30,
 
Six Months Ended
June 30,
In millions, except per share amounts
2014
 
2013
 
2014
 
2013
Earnings (loss) from continuing operations
$
164

 
$
235

 
$
71

 
$
527

Effect of dilutive securities (a)
—

 
—

 
—

 
—

Earnings (loss) from continuing operations – assuming dilution
$
164

 
$
235

 
$
71

 
$
527

Average common shares outstanding
428.9

 
444.9

 
432.2

 
443.2

Effect of dilutive securities (a)
 
 
 
 
 
 
 
Restricted stock performance share plan
3.1

 
3.3

 
3.6

 
4.3

Stock options
0.1

 
0.3

 
0.1

 
0.4

Average common shares outstanding – assuming dilution
432.1

 
448.5

 
435.9

 
447.9

Basic earnings (loss) from continuing operations per common share
$
0.38

 
$
0.53

 
$
0.16

 
$
1.19

Diluted earnings (loss) from continuing operations per common share
$
0.38

 
$
0.52

 
$
0.16

 
$
1.18

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

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NOTE 6 - RESTRUCTURING AND OTHER CHARGES
2014: During the three months ended June 30, 2014, restructuring and other charges totaling $324 million before taxes ($207 million after taxes) were recorded. Details of these charges were as follows:
 
Three Months Ended
June 30, 2014
In millions
Before-Tax
Charges
 
After-Tax
Charges
Courtland mill shutdown (a)
$
49

 
$
30

Early debt extinguishment costs
262

 
160

xpedx transaction costs
18

 
20

Brazil packaging
(7
)
 
(5
)
Other
2

 
2

Total
$
324

 
$
207

During the three months ended March 31, 2014, restructuring and other charges totaling $517 million before taxes ($315 million after taxes) were recorded. Details of these charges were as follows:
 
Three Months Ended
March 31, 2014
In millions
Before-Tax
Charges
 
After-Tax
Charges
Courtland mill shutdown (a)
$
495

 
$
302

xpedx restructuring
2

 
—

xpedx transaction costs
16

 
10

Other
4

 
3

Total
$
517

 
$
315


(a) During 2013, the Company deferred accelerating depreciation for certain assets as we evaluated possible alternative uses by one of our other businesses. The net book value of these assets at December 31, 2013 was approximately $470 million. During the first quarter of 2014, we completed our evaluation and concluded that there were no alternative uses for these assets. We recognized approximately $430 million and approximately $36 million of accelerated depreciation related to these assets during the first quarter of 2014 and second quarter of 2014, respectively. Other components of the second quarter of 2014 Courtland mill shutdown cost include site closure costs of $7 million, and severance charges of $6 million. Other components of the first quarter of 2014 Courtland mill shutdown cost include site closure costs of $30 million, severance charges of $15 million and $20 million of other non-cash charges.
2013: 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
)



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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

NOTE 7 - ACQUISITIONS AND JOINT VENTURES
Olmuksan
2014: In May 2014, the Company launched a voluntary tender offer for the remaining outstanding 12.6% public shares of Olmuksan. The tender offer was completed in June 2014. As of June 30, 2014, the Company owned 89.6% of Olmuksan's outstanding and issued shares.
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 Ambalaj Sanayi ve Ticaret A.S. (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. As a result, the remaining 12.6% owned by other parties have been considered noncontrolling interests. 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 which was recognized in the second quarter of 2013. In addition, the cumulative translation adjustment balance of $17 million relating to the previously held equity interest was reclassified as expense in the first quarter of 2013 from accumulated other comprehensive income. The $17 million reclassification of the cumulative translation balance was offset by the initial estimate of a bargain purchase gain of $21 million which was recorded in the 2013 first-quarter and second-quarter earnings.

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The following table summarizes the final allocation of the purchase price to the fair value of assets and liabilities acquired as of January 1, 2013, which was completed in the fourth quarter of 2013.
In millions
 
Cash and temporary investments
$
5

Accounts and notes receivable
72

Inventory
31

Other current assets
2

Plants, properties and equipment
106

Investments
11

Total assets acquired
227

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
$
155

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.
Orsa IP
2014: On April 8, 2014, the Company acquired the remaining 25% of shares of Orsa International Paper Embalagens S.A. (Orsa IP) from its joint venture partner, Jari Celulose, Papel e Embalagens S.A. (Jari), a Grupo Orsa company, for approximately $127 million, of which $105 million was paid in cash with the remaining $22 million held back pending satisfaction of certain indemnification obligations by Jari. An additional $11 million, which was not included in the purchase price, was placed in an escrow account pending resolution of certain open matters which, if successfully resolved, would then be paid to Jari and added to the final purchase consideration. During the second quarter of 2014, the Company reversed the $168 million of Redeemable noncontrolling interest included on the March 31, 2014 consolidated balance sheet with the net difference between this balance and the 25% purchase price being reflected as an increase to Retained earnings on the consolidated balance sheet.
2013: On January 14, 2013, International Paper and Jari formed Orsa IP with International Paper holding a 75% stake. 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. The 25% owned by Jari was considered a redeemable noncontrolling interest and met the requirements to be classified outside permanent equity. As such, the Company reported $163 million in Redeemable noncontrolling interest in the December 31, 2013 consolidated balance sheet.
The following table summarizes the final allocation of the purchase price to the fair value of assets and liabilities acquired as of January 14, 2013, which was completed in the fourth quarter of 2013.
In millions
 
Cash and temporary investments
$
16

Accounts and notes receivable, net
5

Inventory
27

Plants, properties and equipment
290

Goodwill
260

Other intangible assets
110

Other long-term assets
2

Total assets acquired
710

Accounts payable and accrued liabilities
68

Deferred income tax liability
37

Total liabilities assumed
105

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 - DIVESTITURES
Discontinued Operations
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.
On July 19, 2013, the Company finalized the sale of its Temple-Inland Building Products division to Georgia-Pacific Building Products, LLC for approximately $726 million in cash.
Other
On July 1, 2014, International Paper announced the completion of the previously announced spinoff of its distribution solutions business, xpedx, and xpedx's merger with Unisource Worldwide, Inc., with the combined companies now operating as Veritiv Corporation (Veritiv).
The spinoff was accomplished by the contribution of the xpedx business to Veritiv and the distribution of 8,160,000 shares of Veritiv common stock on a pro-rata basis to International Paper shareholders. International Paper received a payment of approximately $400 million, subject to adjustments, financed with new debt in Veritiv's capital structure. Immediately following the distribution, UWW Holdings, Inc., the parent company of Unisource Worldwide, Inc., merged with and into Veritiv, with the parent company of UWW Holdings, Inc. receiving 7,840,000 unregistered shares of Veritiv common stock as merger consideration.
NOTE 9 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Temporary Investments 
In millions
June 30, 2014
 
December 31, 2013
Temporary investments
$
890

 
$
1,398

     
Accounts and Notes Receivable
In millions
June 30, 2014
 
December 31, 2013
Accounts and notes receivable, net:
 
 
 
Trade
$
3,671

 
$
3,497

Other
298

 
259

Total
$
3,969

 
$
3,756



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Inventories 
In millions
June 30, 2014
 
December 31, 2013
Raw materials
$
363

 
$
372

Finished pulp, paper and packaging
1,840

 
1,834

Operating supplies
566

 
572

Other
29

 
47

Total
$
2,798

 
$
2,825


Depreciation Expense 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2014
 
2013
 
2014
 
2013
Depreciation expense
$
331

 
$
360

 
$
657

 
$
716

Valuation Accounts

Certain valuation accounts were as follows: 
In millions
June 30, 2014
 
December 31, 2013
Accumulated depreciation
$
21,220

 
$
20,074

Allowance for doubtful accounts
104

 
109

There was no material activity related to asset retirement obligations during either of the six months ended June 30, 2014 or 2013.

Interest

Cash payments related to interest were as follows: 
 
Six Months Ended
June 30,
In millions
2014
 
2013
Interest payments
$
354

 
$
384


Amounts related to interest were as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2014
 
2013
 
2014
 
2013
Interest expense (a)
$
177

 
$
181

 
$
340

 
$
358

Interest income (a)
12

 
13

 
33

 
26

Capitalized interest costs
6

 
4

 
12

 
8


(a)
Interest expense and interest income exclude approximately $9 million and $19 million for the three months and six months ended June 30, 2014 and $11 million and $24 million for the three months and six months ended June 30, 2013, respectively, related to investments in and borrowings from variable interest entities for which the Company has a legal right of offset (see Note 13).

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Postretirement Benefit Expense

The components of the Company’s postretirement benefit expense were as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2014
 
2013
 
2014
 
2013
Service cost
$
1

 
$
1

 
$
1

 
$
1

Interest cost
3

 
3

 
7

 
7

Actuarial loss
1

 
—

 
2

 
3

Amortization of prior service credit
(4
)
 
(6
)
 
(7
)
 
(12
)
Net postretirement benefit expense
$
1

 
$
(2
)
 
$
3

 
$
(1
)

Other
Selling and administrative expenses included $2 million ($1 million after taxes) and $14 million ($8 million after taxes) for the three months and six months ended June 30, 2014 and $14 million ($8 million after taxes) and $26 million ($16 million after taxes) for the three months and six months ended June 30, 2013 for integration costs associated with the Temple-Inland acquisition.
NOTE 10 - GOODWILL AND OTHER INTANGIBLES
Goodwill
The following table presents changes in goodwill balances as allocated to each business segment for the six-month period ended June 30, 2014: 
In millions
Industrial
Packaging
 
Printing
Papers
 
Consumer
Packaging
 
Distribution
 
Total
Balance as of January 1, 2014
 
 
 
 
 
 
 
 
 
Goodwill
$
3,430

  
$
2,311

  
$
1,787

  
$
400

 
$
7,928

Accumulated impairment losses (a)
—

  
(1,877
)
 
(1,664
)
 
(400
)
 
(3,941
)
 
3,430

  
434

  
123

  
—

 
3,987

Reclassifications and other (b)
14

 
20

 
(3
)
 
—

 
31

Additions/reductions
—

 
(11
)
(c) 
—

 
—

 
(11
)
Balance as of June 30, 2014
 
 
 
 
 
 
 
 
 
Goodwill
3,444

  
2,320

  
1,784

  
400

 
7,948

Accumulated impairment losses (a)
—

  
(1,877
)
 
(1,664
)
 
(400
)
 
(3,941
)
Total
$
3,444

  
$
443

  
$
120

  
$
—

 
$
4,007

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

Other Intangibles
Identifiable intangible assets comprised the following: 
 
June 30, 2014
 
December 31, 2013
In millions
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Customer relationships and lists
$
646

 
$
175

 
$
602

 
$
139

Non-compete agreements
78

 
52

 
76

 
46

Tradenames, patents and trademarks
62

 
40

 
67

 
33

Land and water rights
80

 
8

 
76

 
5

Fuel and power agreements
6

 
3

 
7

 
2

Software
24

 
22

 
17

 
15

Other
46

 
17

 
75

 
32

Total
$
942

 
$
317

 
$
920

 
$
272


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The Company recognized the following amounts as amortization expense related to intangible assets: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2014
 
2013
 
2014
 
2013
Amortization expense related to intangible assets
$
20

 
$
19

 
$
40

 
$
36

NOTE 11 - INCOME TAXES
International Paper made income tax payments, net of refunds, as follows: 
 
Six Months Ended
June 30,
In millions
2014
 
2013
Income tax payments, net
$
143

 
$
164

The following table presents a rollforward of unrecognized tax benefits and related accrued estimated interest and penalties for the six months ended June 30, 2014: 
In millions
Unrecognized
Tax Benefits
 
Accrued Estimated
Interest and Tax
Penalties
Balance at December 31, 2013
$
(161
)
 
$
(54
)
Activity for three months ended March 31, 2014
5

 
9

Activity for the three months ended June 30, 2014
—

 
2

Balance at June 30, 2014
$
(156
)
 
$
(43
)
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 $5 million during the next 12 months.
Included in the Company’s income tax provisions for the six months ended June 30, 2014 and 2013, are $317 million and $126 million of income tax benefits, respectively, related to special items. The components of the net provision related to special items were as follows: 
 
Six Months Ended
June 30,
In millions
2014
 
2013
Special items
$
(335
)
 
$
(37
)
Tax-related adjustments:
 
 
 
State legislative changes
10

 
—

IRS audit settlement
—

 
(91
)
Internal restructurings
9

 
—

Other
(1
)
 
2

Income tax provision (benefit) related to special items
$
(317
)
 
$
(126
)
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 $98 million in the aggregate at June 30, 2014.
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 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 $50 million to address the selection of an alternative for the soil remediation component of the overall site remedy. In October 2011, the EPA released a public statement

15
Table of Contents

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 in the balance sheet, totaled approximately $42 million at June 30, 2014. 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 Company (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 the Company (as the successor to St. Regis) was not an “operator,” but 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, which has been set for July 2015. 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 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 and the Texas Administrative Code, which provide for the imposition of civil penalties between $50 and $25,000 per day. Trial is currently scheduled for September 2014. The case is in the pre-trial phase and it continues to be 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 approximately 400 local fishermen 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. Trial is currently scheduled for December 2014. 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. Trial is currently scheduled for February 2015. 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, the Bogalusa, Louisiana paper mill experienced an upset condition that resulted in a fish kill on the Pearl River (the Bogalusa Incident). In response to the Bogalusa Incident, Louisiana and Mississippi state regulatory agencies and the U.S. Department of Justice initiated enforcement actions against TIN Inc., the owner of the mill, and since February 2012, a subsidiary of International Paper. Those enforcement matters were resolved in 2011-2013.


16
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In December 2013, the district attorney for Washington Parish, in which the Bogalusa mill is located, filed a lawsuit against TIN Inc. and International Paper in Louisiana state court alleging that there are additional damages arising from the Bogalusa Incident that were not resolved by a November 2011 settlement between TIN Inc. and the Louisiana Fish and Wildlife Department (LDWF). That settlement resolved a LDWF claim for wildlife injury damages caused by the Bogalusa Incident and the validity of the settlement was upheld by the Louisiana Supreme Court. On July 17, 2014, the state court granted TIN's and International Paper's motions to dismiss the December lawsuit.
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 February 2004 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 February 2004 to November 2010. 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 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 is vigorously defending each action. However, because the federal action is in the discovery stage and the Tennessee action is in a preliminary stage, we are unable to predict an outcome or estimate a range of reasonably possible loss.

Beginning in late December 2012, certain purchasers of gypsum board filed a number of purported class action complaints alleging civil violations of Section 1 of the Sherman Act against Temple-Inland and a number of other gypsum manufacturers. The complaints were similar and alleged 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 limiting order fulfillment. The alleged classes are all persons who purchased gypsum board and/or gypsum finishing products directly or indirectly from any defendant. 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 the U.S. District Court for the Eastern District of Pennsylvania 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 actions. 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 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.
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 $27 million.
General: The Company is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, contracts, sales of property, intellectual property, personal injury, labor and employment and other matters, some of which allege substantial monetary damages. While any 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.
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

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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 six months ended June 30, 2014 and the year ended December 31, 2013.
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 $5.4 billion and $5.3 billion of International Paper debt obligations held by these Entities at June 30, 2014 and December 31, 2013, respectively. Despite the offset treatment, these remain debt obligations of International Paper. Remaining borrowings of $59 million and $67 million at June 30, 2014 and December 31, 2013, respectively, are included in Long-term debt in the accompanying consolidated balance sheet. Additional debt related to the above transaction of $107 million and $79 million is included in Notes payable and current maturities of long-term debt at June 30, 2014 and December 31, 2013, respectively.
Activity between the Company and the Entities was as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2014
 
2013
 
2014
 
2013
Revenue (a)
$
9

 
$
11

 
$
19

 
$
24

Expense (a)
18

 
19

 
36

 
41

Cash receipts (b)
—

 
—

 
12

 
19

Cash payments (c)
—

 
—

 
37

 
45

 
(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.
The use of the above entities facilitated the monetization of the credit enhanced Timber 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

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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 June 30, 2014, the fair value of the notes was $2.50 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 June 30, 2014, the fair value of this debt was $2.41 billion.
Activity between the Company and the 2007 financing entities was as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2014
 
2013
 
2014
 
2013
Revenue (a)
$
6

 
$
7

 
$
12

 
$
14

Expense (b)
6

 
7

 
12

 
15

Cash receipts (c)
2

 
2

 
4

 
4

Cash payments (d)
4

 
5

 
9

 
11

 
(a)
The revenue is included in Interest expense, net in the accompanying consolidated statement of operations and includes approximately $4 million and $9 million for the three months and six months ended June 30, 2014 and 2013, 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 $1 million and $3 million for the three months and six months ended June 30, 2014 and 2013, 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 June 30, 2014, 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. Distributions paid to the third-party investor were $1 million for the six months ended June 30, 2013. 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 six months ended June 30, 2014 and 2013 were as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2014
 
2013
 
2014
 
2013
Early debt reductions (a)
$
1,030

 
$
32

 
$
1,039

 
$
58

Pre-tax early debt extinguishment costs (b)
262

 
3

 
262

 
9

 
(a)
Reductions related to notes with interest rates ranging from 5.00% to 9.38% with original maturities from 2018 to 2029 and from 5.20% to 7.95% with original maturities from 2018 to 2027 for the three months ended June 30, 2014 and 2013, respectively, and from 5.00% to 9.38% with original maturities from 2018 to 2029 and from 5.20% to 7.95% with original maturities from 2014 to 2027 for the six months ended June 30, 2014 and 2013, respectively.
(b)
Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations.
In June 2014, International Paper issued $800 million of 3.65% senior unsecured notes with a maturity date in 2024 and $800 million of 4.80% senior unsecured notes with a maturity date in 2044. The proceeds from this borrowing were used to repay approximately $957 million of notes with interest rates ranging from 7.95% to 9.38% and original maturities from 2018 to 2019. Pre-tax early debt retirement costs of $262 million related to these debt repayments, including $257 million of cash premiums, are included in Restructuring and other charges in the accompanying consolidated statement of operations.

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Subsequent to June 30, 2014, the Company repaid approximately $3 million of additional notes with interest rates ranging from 7.95% to 9.38% and original maturities from 2018 to 2019.
During the second quarter of 2014, International Paper borrowed $225 million under a receivable securitization facility at a rate of 0.90%. Prior to June 30, 2014, International Paper fully repaid the $225 million borrowed.
During the first quarter of 2013, International Paper borrowed $260 million under a receivable securitization facility at a rate of 0.95% payable monthly. Prior to June 30, 2013, International Paper fully repaid the $260 million borrowed.
At June 30, 2014, the fair value of International Paper’s $9.9 billion of debt was approximately $11.2 billion. The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues. International Paper’s long-term debt is classified as Level 2 within the fair value hierarchy, which is further defined in Note 13 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At June 30, 2014, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively.
NOTE 15 - DERIVATIVES AND HEDGING ACTIVITIES
As a multinational company we are exposed to market risks, such as changes in interest rates, currency exchanges rates and commodity prices.
For detailed information regarding the Company’s hedging activities and related accounting, refer to Note 14 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The notional amounts of qualifying and non-qualifying financial instruments used in hedging transactions were as follows:
In millions
June 30, 2014
 
December 31, 2013
 
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
Foreign exchange contracts (Sell / Buy; denominated in sell notional): (a)
 
 
 
 
Brazilian real / U.S. dollar - Forward
395

 
502

 
British pounds / Brazilian real – Forward
10

  
17

  
European euro / Brazilian real – Forward
18

  
27

  
European euro / Polish zloty – Forward
258

  
252

  
U.S. dollar / Brazilian real – Forward
178

  
290

  
U.S. dollar / Brazilian real – Zero-cost collar
—

  
18

  
Derivatives in Fair Value Hedging Relationships:
 
 
 
 
Interest rate contracts (in USD)
230

 
175

 
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
Foreign exchange contracts (Sell / Buy; denominated in sell notional): (b)
 
 
 
 
Indian rupee / U.S. dollar
11

  
157

  
Mexican peso / U.S. dollar
187

  
—

  

(a)
These contracts had maturities of three years or less as of June 30, 2014.
(b)
These contracts had maturities of one year or less as of June 30, 2014.

The following table shows gains or losses recognized in AOCI, net of tax, related to derivative instruments: 
 
Gain (Loss)
Recognized in
AOCI
on Derivatives
(Effective Portion)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2014
 
2013
 
2014
 
2013
Foreign exchange contracts
$
12

 
$
(15
)
 
$
16

 
$
(10
)
Total
$
12

 
$
(15
)
 
$
16

 
$
(10
)
During the next 12 months, the amount of the June 30, 2014 AOCI balance, after tax, that is expected to be reclassified to earnings is a gain of $7 million.

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The amounts of gains and losses recognized in the consolidated statement of operations on qualifying and non-qualifying financial instruments used in hedging transactions were as follows:
 
Gain (Loss)
Reclassified from
AOCI
(Effective Portion)
Location of Gain (Loss)
Reclassified from AOCI
(Effective Portion)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
In millions
2014
 
2013
 
2014
 
2013
 
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
4

 
$
12

 
$
(1
)
 
$
9

Cost of products sold
Total
$
4

 
$
12

 
$
(1
)
 
$
9

 
 
Gain (Loss) Recognized
 
Location of Gain (Loss)
In Consolidated
Statement
of Operations
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
In millions
2014
 
2013
 
2014
 
2013
 
 
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Electricity contact
$
2

 
$
—

 
$
3

 
$
2

 
Cost of products sold
Embedded derivatives
—

 
—

 
—

 
(1
)
 
Interest expense, net
Foreign exchange contracts
—

 
(1
)
 
—

 
(5
)
 
Cost of products sold
Interest rate contracts
9

(a)
5

 
12

(a)
10