International Paper Company

International Paper Reports Second Quarter Earnings

International Paper reported second-quarter 2012 net earnings attributable to common shareholders totaling $134 million ($0.31 per share) compared with net earnings of $188 million ($0.43 per share) in the first quarter of 2012 and $219 million ($0.51 per share) in the second quarter of 2011. Amounts in all periods include the impact of special items.

Earnings from continuing operations and before special items in the second quarter of 2012 totaled $203 million ($0.46 per share), compared with $247 million ($0.57 per share) in the first quarter of 2012 and $338 million ($0.79 per share) in the second quarter of 2011. Earnings from continuing operations and before special items were impacted by seasonally peak maintenance outage expenses and an unfavorable non-cash foreign exchange swing at our Ilim joint venture in Russia. Partially offsetting these items were Temple-Inland integration benefits and synergies tracking ahead of plan as well as modest improvements in costs and pricing.

Quarterly net sales were $7.1 billion compared with $6.7 billion in the first quarter of 2012 and $6.6 billion in the second quarter of 2011.

Operating profits were $426 million in the second quarter of 2012, down from $462 million in the first quarter of 2012, both of which included special items.

“I’m very encouraged by the speed of the integration efforts related to the Temple-Inland acquisition, as well as the successful start-up of our Franklin, Virginia fluff pulp facility,” said John Faraci, Chairman and Chief Executive Officer. “Despite continued slow growth in North America, uneven global demand and currency headwinds primarily at our Ilim joint venture, we managed to turn in a solid quarter. Looking forward to the third quarter, our strong balanced portfolio is positioned to perform well in this environment.”

SEGMENT INFORMATION

To measure the performance of the company’s business segments from quarter to quarter without variations caused by special items, management focuses on business segment operating profits excluding those items. Second quarter 2012 segment operating profits and business trends, excluding special items, compared with the prior quarter are as follows:

Industrial Packaging operating profit was $367 million ($260 million including special items) compared with an operating profit of $278 million ($215 million including special items) in the first quarter of 2012. Strong results were driven by full quarter Temple-Inland base earnings and incremental synergies, seasonal volume and mix improvements, excellent operations and the pass through of export price increases.

Printing Papers operating profit was $106 million ($104 million including special items) compared with an operating profit of $145 million ($146 million including special items) in the first quarter of 2012. Significantly higher planned maintenance outages in the quarter were partially offset by successful price increases in Brazil and Russia as well as improved price realizations on U.S. exports.

Consumer Packaging operating profit was $63 million ($57 million including special items) compared with an operating profit of $96 million ($103 million including special items) in the first quarter of 2012. The quarter was impacted by higher costs largely attributable to higher annual maintenance expenses and continued soft business conditions. The Foodservice business had a strong quarter, driven by seasonality and continued growth in new product lines.

xpedx the company’s North American distribution business, reported operating earnings of $17 million ($5 million including special items) compared with $19 million (a loss of $2 million including special items) in the first quarter of 2012.

International Paper recorded Ilim Joint Venture equity losses, net of taxes of $25 million in the second quarter of 2012 compared to equity earnings, net of taxes of $40 million in the first quarter of 2012. Results were impacted by after-tax foreign exchange losses of $41 million in the current quarter after realizing an after-tax gain of $30 million in the first quarter, both due to non-cash adjustments associated with the Ilim Group joint venture’s U.S. dollar denominated debt. Pulp pricing recovered briefly in the second quarter of 2012 before receding again as the quarter ended, resulting in modestly better average realizations quarter over quarter.

Net corporate expenses for the 2012 second quarter totaled $45 million, compared with $69 million in the first quarter of 2012 and $36 million in the second quarter of 2011. The decrease compared with the first quarter of 2012 primarily reflects a year-to-date adjustment in the allocation of corporate expenses to the business segments.

EFFECTIVE TAX RATE

The effective tax rate before special items for the second quarter of 2012 was 32 percent, compared with an effective tax rate before special items of 32 percent in the first quarter of 2012.

EFFECTS OF SPECIAL ITEMS

Special items in the second quarter of 2012 included pre-tax charges of $21 million ($13 million after taxes) for restructuring and other charges, a pre-tax charge of $62 million ($38 million after taxes) to adjust the value of the long-lived assets of the Hueneme mill in Oxnard, California to their fair value in anticipation of its divestiture, pre-tax charges of $35 million ($22 million after taxes) for integration costs related to the Temple-Inland acquisition, pre-tax charges of $9 million ($5 million after taxes) for costs associated with the announced third-quarter 2012 divestiture of the Hueneme mill and two other containerboard mills, and pre-tax charges of $9 million ($7 million after taxes) for other items. Restructuring and other charges included pre-tax charges of $10 million ($6 million after taxes) for debt extinguishment costs, pre-tax charges of $10 million ($6 million after taxes) for costs associated with the restructuring of our xpedx operations and charges of $1 million (before and after taxes) for other items.

Special items in the first quarter of 2012 included pre-tax charges of $34 million ($23 million after taxes) for restructuring and other charges, a pre-tax charge of $20 million ($12 million after taxes) related to the write-up of the Temple-Inland inventories to fair value, pre-tax charges of $43 million ($33 million after taxes) for integration costs related to the Temple-Inland acquisition and a net pre-tax gain of $5 million ($4 after taxes) for other items. Restructuring and other charges included pre-tax charges of $16 million ($10 million after taxes) for debt extinguishment costs, pre-tax charges of $19 million ($14 million after taxes) for costs associated with the restructuring of our xpedx operations and a gain of $1 million (before and after taxes) for other items.

Special items in the second quarter of 2011 included a pre-tax gain of $10 million ($7 million after taxes) for restructuring and other charges, a pre-tax charge of $129 million ($104 million after taxes) for a fixed asset impairment of the North American Shorewood business, a $27 million pre-tax charge ($17 million after taxes) for an environmental reserve and a $5 million tax expense related to state tax legislative changes and audit settlements. Restructuring and other charges included a pre-tax gain of $21 million ($13 million after taxes) related to the reversal of an environmental reserve, pre-tax charges of $10 million ($6 million after taxes) for costs associated with the restructuring of our xpedx operations and pre-tax charges of $1 million ($0 million after taxes) for other items.

Discontinued Operations

Discontinued Operations in both the second and first quarters of 2012 included the operating earnings of Temple-Inland’s Building Products business.

EARNINGS WEBCAST

The company will host a webcast to discuss earnings and current market conditions at 9 a.m. EDT (8 a.m. CDT). All interested parties are invited to listen to the webcast via the company's Internet site at www.internationalpaper.com by clicking on the Investors tab and going to the Webcasts and Presentations page. A replay of the webcast will also be on the internet site beginning approximately two hours after the call.

Parties who wish to participate in the webcast via teleconference may dial +1 (706) 679-8242 or, within the U.S. only, (877) 316-2541, and ask to be connected to the International Paper Second Quarter Earnings Call. The conference ID number is 94864556. Participants should call in no later than 8:45 a.m. EDT (7:45 a.m. CDT). An audio-only replay will be available for four weeks following the call. To access the replay, dial +1 404-537-3406 or, within the U.S. only, (855) 859-2056, and when prompted for the conference ID, enter 94864556.

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