# International Paper Co: Form 10-Q for the period ended Jun 30, 2016

- Company: [International Paper Co](/companies/ip.md) (CIK 51434)
- Form: 10-Q
- Filed: 2016-08-05
- Accepted by EDGAR: Aug 4, 2016, 17:46 ET
- Period: 2016-06-30
- Accession: 0000051434-16-000063
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/51434/000005143416000063/ip-6302016xform10xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/51434/000005143416000063/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-04-01 to 2016-06-30 | $5.32bn | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2016-01-01 to 2016-06-30 | $10.43bn | us-gaap:SalesRevenueNet |
| Selling, general and administrative | 3 months, 2016-04-01 to 2016-06-30 | $386.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2016-01-01 to 2016-06-30 | $762.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-04-01 to 2016-06-30 | $628.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-01-01 to 2016-06-30 | $1.13bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-04-01 to 2016-06-30 | $172.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2016-01-01 to 2016-06-30 | $332.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-04-01 to 2016-06-30 | −$9.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-01-01 to 2016-06-30 | $32.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | $40.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-01 to 2016-06-30 | $374.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.10 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2016-01-01 to 2016-06-30 | $0.90 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.10 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2016-01-01 to 2016-06-30 | $0.91 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-04-01 to 2016-06-30 | 414,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-01-01 to 2016-06-30 | 415,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2016-01-01 to 2016-06-30 | $1.23bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2016-01-01 to 2016-06-30 | $637.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2016-01-01 to 2016-06-30 | $362.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2016-01-01 to 2016-06-30 | $132.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-06-30 | $1.25bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-06-30 | $6.87bn | us-gaap:AssetsCurrent |
| Total assets | at 2016-06-30 | $31.39bn | us-gaap:Assets |
| Current liabilities | at 2016-06-30 | $4.08bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2016-06-30 | $8.82bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-06-30 | $626.0m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2016-06-30 | $4.02bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 62,258 characters.

### EXECUTIVE SUMMARY

Operating Earnings (a non-GAAP measure) is defined as net earnings from continuing operations (a GAAP measure) excluding special items and non-operating pension expense. International Paper generated Operating Earnings per share attributable to International Paper common shareholders of $0.92 in the second quarter of 2016, compared with 2016 first-quarter earnings of $0.80 and 2015 second-quarter earnings of $0.97. Diluted earnings (loss) per share attributable to International Paper common shareholders were $0.10 in the second quarter of 2016, compared with $0.81 in the first quarter of 2016 and $0.54 in the second quarter of 2015.

International Paper delivered strong results in the 2016 second quarter with solid contributions from our key businesses across the enterprise. The 2016 second quarter results reflected continued operating performance improvements and effective outage execution in what was a heavy maintenance outage quarter. We also completed several actions during the 2016 second quarter geared toward strengthening our portfolio including completion of the sale of our Asia Industrial Packaging business, closing on the Madrid mill acquisition and reaching an agreement to acquire Weyerhaeuser’s pulp business. Finally, during the 2016 second quarter, we successfully completed the previously announced voluntary pension buyout for term vested former employees. The $1.2 billion dollar buy-out triggered a plan remeasurement and resulted in a non-cash $439 million settlement accounting charge.

Volume was higher than the 2016 first quarter due to seasonality along with favorable sequential quarter operational performance, particularly in our North American mills. Price was down in our North American Industrial Packaging business versus the 2016 first quarter, primarily driven by lower containerboard and export prices due to the impact of the 2016 first quarter pricing index changes, contract renewals and a less favorable mix. Mix was unfavorable in our North American Pulp business due to the ramp up and qualification of the newly converted machine at our Riegelwood mill. The 2016 second quarter results reflect the successful execution of a heavy maintenance outage quarter along with less cost associated with the conversion project at Riegelwood. Input costs were slightly favorable compared to the 2016 first quarter with favorable wood and energy costs being partly offset by higher recycled fiber and freight costs. Results for our Ilim joint venture were slightly lower when compared to the 2016 first quarter primarily due to planned maintenance outages in the quarter and some modest cost inflation.

Looking ahead to the 2016 third quarter, we expect relatively stable volume across most our businesses with some decrease in our EMEA Industrial Packaging business due to normal seasonality. Mix is expected to be unfavorable in our North American Pulp business as the majority of tons coming from the new capacity at the Riegelwood mill during ramp up will be market softwood rolls. Pricing is expected to be modestly unfavorable in our North American Industrial Packaging business due to the remaining flow through effect of 2016 first quarter pricing index changes. Pricing across the rest of our businesses is expected to be stable. The solid operational performance noted in the 2016 second quarter is expected to continue during the 2016 third quarter. Input costs are expected to be higher in the 2016 third quarter in our North American Industrial Packaging business including higher recycled fiber and energy costs. Additionally, we expect higher energy costs in our North American Printing Papers business. Planned maintenance outage costs will be lower coming off of the heavy 2016 second quarter outage activity. For our Ilim joint venture, the 2016 third quarter will likely be in line with the 2016 second quarter absent the repeat of the positive impact from foreign currency movements driven by Ilim’s U.S. dollar denominated debt as we assume no change in foreign currency rates in our outlook.

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

The following are reconciliations of Operating Earnings per share attributable to International Paper Company common shareholders to diluted earnings (loss) per share attributable to International Paper Company common shareholders.

|  | Three Months Ended June 30, 2016 | 2015 | Three Months Ended March 31, 2016 |
| --- | ---: | ---: | ---: |
| Operating Earnings (Loss) Per Share Attributable to Shareholders | **$0.92** | $0.97 | $0.80 |
| Non-operating pension per share | **(0.72)** | (0.07) | (0.07) |
| Special items per share | **(0.10)** | (0.36) | 0.09 |
| Diluted Earnings (Loss) Per Share from Continuing Operations | **0.10** | 0.54 | 0.82 |
| Discontinued operations per share | **—** | — | (0.01) |
| Diluted Earnings (Loss) Per Share Attributable to Shareholders | **$0.10** | $0.54 | $0.81 |

### RESULTS OF OPERATIONS

For the second quarter of 2016, International Paper Company reported net sales of $5.3 billion, compared with $5.1 billion in the first quarter of 2016 and $5.7 billion in the second quarter of 2015.

Net earnings attributable to International Paper totaled $40 million, or $0.10 per share, in the 2016 second quarter. This compared with $227 million, or $0.54 per share, in the second quarter of 2015 and $334 million or $0.81 per share, in the first quarter of 2016.

Earnings from continuing operations attributable to International Paper Company were $40 million in the second quarter of 2016 compared with $227 million in the second quarter of 2015 and $339 million in the first quarter of 2016. Compared with the second quarter of 2015, the 2016 second quarter reflects higher sales volumes ($14 million), lower mill maintenance outage costs ($23 million), lower raw material and freight costs ($25 million) and lower net interest expense ($11 million). These benefits were offset by the net impact of lower average sales price realizations and mix ($77 million), higher operating costs ($1 million), higher corporate and other costs ($1 million), higher tax expense ($3 million) reflecting a higher estimated tax rate and higher non-operating pension expense ($268 million). Equity earnings, net of taxes, relating to International Paper’s investment in Ilim Holding S.A. were $21 million lower in the 2016 second quarter than in the 2015 second quarter. Net special items in the 2016 second quarter were a loss of $40 million compared with a loss of $151 million in the 2015 second quarter.

Compared with the first quarter of 2016, earnings benefited from higher sales volumes ($34 million), lower operating costs ($46 million), lower mill maintenance outage costs ($17 million) and lower raw material and freight costs ($10 million). These benefits were offset by lower average sales price realizations ($26 million), higher corporate and other items ($8 million), higher net interest expense ($3 million), higher tax expense ($5 million) reflecting a higher estimated tax rate and higher non-operating pension expense ($272 million). Equity earnings, net of taxes, for Ilim Holding, S.A. decreased by $16 million versus the 2016 first quarter. Net special items in the 2016 second quarter were a loss of $40 million compared with a gain of $36 million in the 2016 first quarter.

To measure the performance of the Company’s business segments from period to period without variations caused by special or unusual items, International Paper’s management focuses on industry segment operating profit. This is defined as earnings from continuing operations before taxes, equity earnings and noncontrolling interests, net of taxes, excluding interest expense, corporate charges and corporate special items which may include restructuring charges and (gains) losses on sales and impairments of businesses.

The following table presents a reconciliation of net earnings attributable to International Paper Company to its operating profit:

*In millions*

|  | Three Months Ended June 30 2016 | 2015 | March 31, 2016 |
| --- | ---: | ---: | ---: |
| Earnings (Loss) From Continuing Operations Attributable to International Paper Company | **$40** | $227 | $339 |
| Add back (deduct): |  |  |  |
| Income tax provision (benefit) | **(9)** | 110 | 41 |
| Equity (earnings) loss, net of taxes | **(45)** | (62) | (63) |
| Noncontrolling interests, net of taxes | **—** | (9) | — |
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | **(14)** | 266 | 317 |
| Interest expense, net | **129** | 144 | 123 |
| Noncontrolling interests / equity earnings included in operations | **—** | 5 | — |
| Corporate items | **26** | 8 | 21 |
| Special items (income) expense | **—** | 203 | (8) |
| Non-operating pension expense | **487** | 50 | 44 |
|  | **$628** | $676 | $497 |
| Industry Segment Operating Profit: |  |  |  |
| Industrial Packaging | **$459** | $528 | $396 |
| Printing Papers | **96** | 101 | 85 |
| Consumer Packaging | **73** | 47 | 16 |
| Total Industry Segment Operating Profit | **$628** | $676 | $497 |

27

### Industry Segment Operating Profit

Total industry segment operating profits of $628 million in the 2016 second quarter were lower than the $676 million in the 2015 second quarter, but higher than the $497 million in the 2016 first quarter. Compared with the second quarter of 2015, operating profits in the current quarter benefited from higher sales volumes ($22 million), lower mill outage costs ($35 million), lower raw material and freight costs ($38 million) and lower other costs ($20 million). These benefits were offset by the net impact of lower net average sales price realizations and mix ($116 million) and higher operating costs ($1 million). Special items were a loss of $33 million in the 2016 second quarter compared with a gain of $13 million in the 2015 second quarter.

Compared with the first quarter of 2016, operating profits benefited from higher sales volumes ($51 million), lower operating costs ($69 million), lower mill outage costs ($26 million) and lower raw material and freight costs ($15 million). These benefits were offset by lower average sales price realizations and an unfavorable mix ($40 million) and higher other items ($3 million). Special items were a loss of $33 million in the 2016 second quarter compared with a loss of $46 million in the 2016 first quarter.

During the 2016 second quarter, International Paper took approximately 286,000 tons of downtime of which approximately 85,000 tons were economic-related compared with approximately 313,000 tons of downtime, which included about 59,000 tons that were economic-related, in the 2015 second quarter. During the 2016 first quarter, International Paper took approximately 516,000 tons of downtime of which approximately 212,000 tons were economic-related. Economic downtime is taken to balance internal supply with our customer demand, while maintenance downtime is taken periodically during the year.

### Sales Volumes by Product (a)

Sales volumes of major products for the three months ended June 30, 2016 and 2015 were as follows:

*In thousands of short tons*

| Industrial Packaging | Three Months Ended June 30, 2016 | 2015 | Six Months Ended June 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| North American Corrugated Packaging (c) | **2,642** | 2,608 | **5,161** | 5,108 |
| North American Containerboard | **770** | 818 | **1,510** | 1,592 |
| North American Recycling | **592** | 610 | **1,199** | 1,200 |
| North American Saturated Kraft | **44** | 38 | **91** | 75 |
| North American Gypsum/Release Kraft | **47** | 43 | **93** | 79 |
| North American Bleached Kraft | **5** | 6 | **11** | 11 |
| EMEA Industrial Packaging (c) | **373** | 352 | **747** | 699 |
| Asian Box (c) | **105** | 95 | **208** | 197 |
| Brazilian Packaging (c) | **74** | 91 | **151** | 172 |
| Industrial Packaging | **4,652** | 4,661 | **9,171** | 9,133 |
| Printing Papers |  |  |  |  |
| U.S. Uncoated Papers | **460** | 453 | **935** | 919 |
| EMEA and Russian Uncoated Papers | **389** | 366 | **762** | 746 |
| Brazilian Uncoated Papers | **272** | 254 | **526** | 489 |
| Indian Uncoated Papers | **61** | 63 | **124** | 127 |
| Uncoated Papers | **1,182** | 1,136 | **2,347** | 2,281 |
| Market Pulp (b) | **497** | 428 | **902** | 845 |
| Consumer Packaging |  |  |  |  |
| North American Consumer Packaging | **306** | 371 | **614** | 709 |
| EMEA Coated Paperboard | **99** | 89 | **193** | 188 |
| Asian Coated Paperboard (d) | **—** | 315 | **—** | 619 |
| Consumer Packaging | **405** | 775 | **807** | 1,516 |

(a) Sales volumes include third party and inter-segment sales and exclude sales of equity investees.

(b) Includes North American, European and Brazilian volumes and internal sales to mills.

(c) Volumes for corrugated box sales reflect consumed tons sold (CTS). Board sales for these businesses reflect invoiced tons.

(d) Includes sales volumes through the date of sale in October 2015.

### Income Taxes

An income tax benefit of $9 million was recorded for the 2016 second quarter. Excluding an expense of $7 million related to the tax effects of special items and a benefit of $188 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 34% for the quarter.

An income tax provision of $41 million was recorded for the 2016 first quarter. Excluding a benefit of $74 million related to the tax effects of special items and a benefit of $17 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 33% for the quarter.

An income tax provision of $110 million was recorded for the 2015 second quarter. Excluding a benefit of $39 million related to the tax effects of special items and a benefit of $19 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 33% for the quarter.

### Interest Expense and Corporate Items

Net interest expense for the 2016 second quarter was $129 million compared with $123 million in the 2016 first quarter and $144 million in the 2015 second quarter.

Corporate items, net, were $26 million in the 2016 second quarter compared with $21 million in the 2016 first quarter, and $8 million in the 2015 second quarter.

### Restructuring and Other Charges

During the three months and six months ended June 30, 2016, restructuring and other charges totaling $1 million were recorded. During the three months and six months ended June 30, 2015, net restructuring and other charges totaling $194 million before taxes were recorded. See discussion in Note 6 to the financial statements for further details.

### BUSINESS SEGMENT OPERATING RESULTS

The following presents business segment discussions for the second quarter of 2016.

### Industrial Packaging

*In millions*

|  | 2016 2nd Quarter | 1st Quarter | Six Months | 2015 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$3,597** | **$3,452** | **$7,049** | $3,694 | $3,553 | $7,247 |
| Operating Profit | **459** | **396** | **855** | 528 | 468 | 996 |

Industrial Packaging net sales for the second quarter of 2016 were 4% higher than in the first quarter of 2016 but 3% lower than in the second quarter of 2015. Operating profits in the second quarter of 2016 included a charge of $28 million for costs associated with the sale of our Asia corrugated packaging business while operating profits in the first quarter of 2016 included a charge of $37 million to write down the assets of that business and for costs associated with the sale. Excluding these items, operating profits in the second quarter of 2016 were 12% higher than in the first quarter of 2016 but 8% lower than the second quarter of 2015.

***North American Industrial Packaging*** net sales were $3.1 billion in the second quarter of 2016 compared with $3.0 billion in the first quarter of 2016 and $3.2 billion in the second quarter of 2015. Operating profits were $496 million in the second quarter of 2016 compared with $438 million in the first quarter of 2016 and $533 million in the second quarter of 2015.

Sales volumes for boxes in the second quarter of 2016 were higher than in the first quarter of 2016, reflecting seasonally stronger market demand and one more shipping day. Containerboard shipments to the domestic market were slightly lower, while shipments to the export market increased. Total maintenance and economic downtime decreased 143,000 tons from 353,000 tons to 210,000 tons which reflects a decrease of 16,000 tons for maintenance downtime and a decrease of 127,000 tons for economic downtime. Average sales margins for boxes were lower. Average sales price realizations for export containerboard also decreased. Input costs were lower for wood, energy and chemicals, but were partially offset by higher costs for recycled fiber. Planned maintenance downtime costs were $5 million higher in the 2016 second quarter compared with the 2016 first quarter. Operating costs were lower, reflecting the impact of cost saving initiatives.

Compared with the second quarter of 2015, sales volumes in the second quarter of 2016 were higher primarily due to one more shipping day. Sales volumes for containerboard to both domestic and export markets were lower. Total maintenance and economic downtime was 9,000 tons higher in the second quarter of 2016 which comprises a decrease of 21,000 tons for maintenance downtime more than offset by an increase of 30,000 tons for economic downtime. Average sales price realizations were lower for containerboard largely due to pricing pressures in export markets related to the strong U.S. dollar. Average sales margins for boxes were also lower. Input costs decreased for energy, wood and freight fuel surcharges. Planned maintenance downtime costs were $15 million lower in the second quarter of 2016 compared with the second quarter of 2015.

Entering the third quarter of 2016, sales volumes are expected to be seasonally lower for boxes with an equal number of shipping days. Input costs are expected to be higher for recycled fiber and energy. Planned maintenance downtime costs should be $33 million lower.

***EMEA Industrial Packaging*** net sales were $295 million in the second quarter of 2016 compared with $294 million in the first quarter of 2016 and $277 million in the second quarter of 2015. Operating profits were $6 million in the second quarter of 2016 compared with $7 million in the first quarter of 2016 and $4 million in the second quarter of 2015.

On June 30, 2016, the Company completed the previously announced acquisition of Holmen Paper's newsprint mill in Madrid, Spain. Under the terms of the agreement, International Paper purchased the Madrid newsprint mill as well as associated recycling operations and a 50% ownership interest in a cogeneration facility. The Company intends to convert the mill to produce recycled containerboard in 2017 with an expected capacity of 380,000 metric tonnes. Once completed, the converted mill will support the Company's corrugated packaging business in EMEA.

Sales volumes for boxes in the second quarter of 2016 were slightly lower than in the first quarter of 2016 due to seasonally lower demand in Morocco. Average sales margins increased, reflecting stable box prices and continued decreases in paper costs. Input costs for energy were lower, but were more than offset by higher operating costs. Operating earnings were also impacted by a $3 million transfer tax expense related to the acquisition of Holmen Paper.

Compared with the second quarter of 2015, sales volumes in the second quarter of 2016 were higher, reflecting growing market demand in the Euro-zone and the recovery from prior year labor strikes and lost customers in Turkey. Average sales margins were significantly higher primarily due to improved pricing. Input costs for energy were lower.

Looking ahead to the third quarter of 2016, sales volumes are expected to be seasonally lower. Average sales margins are expected to increase slightly. Higher energy costs should be more than offset by lower operating costs. Additional costs associated with the Holmen Paper acquisition are also expected.

***Brazilian Industrial Packaging*** net sales were $51 million in the second quarter of 2016 compared with $42 million in the first quarter of 2016 and $63 million in the second quarter of 2015. Operating profits were a loss of $12 million in the second quarter of 2016 compared with a loss of $8 million in the first quarter of 2016 and a loss of $7 million in the second quarter of 2015.

Sales volumes in the second quarter of 2016 were seasonally higher than in the first quarter of 2016 although weak economic conditions persist. Average sales margins were higher due to the further realization of a box sales price increase and a favorable customer and product mix. Planned maintenance downtime costs in the second quarter of 2016 which included an outage at the Nova Campinia mill were $2 million higher than in the first quarter of 2016 which included no outages. Input costs were higher for recycled fiber.

Compared with the second quarter of 2015, sales volumes in the second quarter of 2016 were lower for boxes and sheets due to continued poor economic conditions, but were higher for containerboard. Average sales price realizations increased, while input costs, primarily for recycled fiber, were higher. Manufacturing operating costs decreased, but were more than offset by higher other costs and inflation.

Looking ahead to the third quarter of 2016, sales volumes are expected to be seasonally higher, although the weak economic conditions are expected to continue. Average sales price realizations are also expected to improve due to the continuing realization of box sales price increases. Input costs should be lower, primarily for energy. There are no planned maintenance outages scheduled in the third quarter.

***Asian Industrial Packaging*** net sales were $165 million in the second quarter of 2016 compared with $126 million in the first quarter of 2016 and $149 million in the second quarter of 2015. Operating profits were a loss of $31 million (a loss of $3 million excluding costs associated with the sale of the business) in the second quarter of 2016 compared with a loss of $41 million (a loss of $4 million excluding asset write-downs and costs associated with the sale of the business) in the first quarter of 2016 and a loss of $2 million in the second quarter of 2015.

Sales volumes for boxes in the second quarter of 2016 were slightly higher than in the first quarter of 2016. Average sales margins were stable. Compared with the second quarter of 2015, corrugated box sales volumes in the second quarter of 2016 were higher. Average sales margins decreased due to competitive pressure and weak economic conditions. Distribution sales were higher in the second quarter of 2016 compared with both the first quarter of 2016 and the second quarter of 2015. Net sales and operating profits in the third quarter of 2016 will reflect the results of the distribution operations of the business.

On June 30, 2016, the Company completed the previously announced sale of its corrugated packaging business in China and Southeast Asia to Xiamen Bridge Hexing Equity Investment Partnership Enterprise. Under the terms of the transaction, International Paper received a total of approximately RMB 1 billion (approximately $149 million at the June 30, 2016 exchange rate), subject to post-closing adjustments and other payments, including the buyer's assumption of the liability for loans of approximately $55 million. Remaining payments to be received total $24 million and are payable up to three years from the closing of the sale.

### Printing Papers

*In millions*

|  | 2016 2nd Quarter | 1st Quarter | Six Months | 2015 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$1,271** | **$1,184** | **$2,455** | $1,249 | $1,228 | $2,477 |
| Operating Profit | **96** | **85** | **181** | 101 | 109 | 210 |

Printing Papers net sales for the second quarter of 2016 were 7% higher than in the first quarter of 2016 and 2% higher than in the second quarter of 2015. Operating profits in the second quarter of 2016 included a charge of $5 million for costs associated with the announced agreement to purchase the Weyerhaeuser pulp business. Excluding this item, operating profits in the second quarter of 2016 were 19% higher than in the first quarter of 2016 and even with the second quarter of 2015.

***North American Printing Papers*** net sales were $466 million in the second quarter of 2016 compared with $481 million in the first quarter of 2016 and $471 million in the second quarter of 2015. Operating profits were $51 million in the second quarter of 2016 compared with $61 million in the first quarter of 2016 and $31 million in the second quarter of 2015.

Sales volumes in the second quarter of 2016 were slightly lower than in the first quarter of 2016. However, average sales price realizations for uncoated freesheet paper in the domestic market benefited from the partial realization of the earlier announced price increases for rolls. Input costs decreased slightly. Planned maintenance downtime costs in the second quarter of 2016, which included outages at the Georgetown, Eastover and Ticonderoga mills, were $10 million higher than in the first quarter of 2016 which included an outage at the Georgetown mill.

Compared with the second quarter of 2015, sales volumes in the second quarter of 2016 were slightly higher reflecting increased shipments of uncoated freesheet paper to the domestic market. However, average sales price realizations for domestic sales of uncoated freesheet paper were lower. Input costs and operating costs were lower. Planned maintenance downtime costs in the second quarter of 2016 were $5 million lower compared with the second quarter of 2015.

Entering the third quarter of 2016, sales volumes are expected to improve for uncoated freesheet paper in the North American market. Average sales price realizations are also expected to increase due to the continuing implementation of previously announced sales price increases. Input costs are expected to be slightly higher. Planned maintenance downtime costs should be $26 million lower with no outages scheduled in the third quarter.

***European Printing Papers*** net sales were $318 million in the second quarter of 2016 compared with $289 million in the first quarter of 2016 and $312 million in the second quarter of 2015. Operating profits were $36 million in the second quarter of 2016 compared with $45 million in the first quarter of 2016 and $20 million in the second quarter of 2015.

Compared with the first quarter of 2016, sales volumes in the second quarter of 2016 for uncoated freesheet paper were higher in both Europe and Russia. Sales volumes for pulp increased in Europe, but decreased in Russia. Average sales price realizations for uncoated freesheet paper decreased in Europe as the price increases realized in the first quarter were lost in the second quarter, but increased in Russia reflecting the full quarter impact of the realization of a first-quarter price increase. However, average sales price realizations for pulp, primarily for hardwood pulp, decreased. Input costs improved slightly in Europe, but were higher in Russia largely due to seasonally higher wood costs. Planned maintenance downtime costs in the second quarter of 2016 were $8 million higher than in the first quarter of 2016 due to an outage at the Svetogorsk mill. Manufacturing operating costs were higher.

Sales volumes for uncoated freesheet paper in the second quarter of 2016 were higher compared with the second quarter of 2015 in both Europe and Russia. Average sales price realizations increased for uncoated freesheet paper due to price increases implemented during 2015 and, in Russia, the first quarter of 2016. In Europe, input costs were lower for wood and energy, while in Russia costs for wood and energy were higher. Planned maintenance downtime costs were $14 million lower in the second quarter of 2016 than in the second quarter of 2015.

Looking forward to the third quarter of 2016, sales volumes for uncoated freesheet paper are expected to be stable in Europe, and higher in Russia. Average sales price realizations for uncoated freesheet paper are expected to be slightly lower in both Europe and Russia. Average sales price realizations for hardwood pulp in Europe are expected to begin to recover. Input costs are expected to increase for wood, energy and purchased fiber in Europe and for energy in Russia. Planned maintenance downtime costs should be $2 million in the third quarter of 2016 which includes an outage scheduled at the Kwidzyn mill.

***Brazilian Printing Papers*** net sales were $220 million in the second quarter of 2016 compared with $190 million in the first quarter of 2016 and $210 million in the second quarter of 2015. Operating profits were $34 million in the second quarter of 2016, $35 million in the first quarter of 2016 and $35 million in the second quarter of 2015.

Sales volumes in the second quarter of 2016 increased compared with the first quarter of 2016 reflecting seasonally stronger demand in the Latin American export markets, partially offset by weaker demand in the domestic market due to customer inventory adjustments. Average sales price realizations were higher in the domestic market due to the partial realization of announced price increases for cutsize and offset paper, but average sales price realizations in other Latin American markets were lower. Input costs were higher for virgin fiber, chemicals and energy, while pulp costs were lower. Planned maintenance downtime costs were $7 million higher in the second quarter of 2016 which included outages at the Mogi Guacu and Luiz Antonio mills than in the first quarter of 2016.

Compared with the second quarter of 2015, sales volumes in the second quarter of 2016 increased despite weak economic conditions largely due to increased purchases of uncoated freesheet paper by the Brazilian government. Average sales price realizations were higher reflecting the full realization of the first-quarter 2016 domestic price increase, although prices to Latin American export markets decreased. Input costs were higher for energy, chemicals, virgin fiber and pulp. Planned maintenance downtime costs were $7 million higher than in the second quarter of 2015.

Entering the third quarter of 2016, sales volumes are expected to be seasonally stronger for uncoated freesheet paper in the domestic market. Average sales price realizations are expected to be higher reflecting the full quarter impact of the first-half 2016 price increases for cutsize paper and offset paper in the domestic Brazilian market, partially offset by the impact of price pressures in the Latin American export markets caused by over-supplied market conditions. Average sales margins should benefit from a more favorable geographic mix. Input costs are expected to be lower, particularly for pulp, chemicals and energy. Planned maintenance outage costs should be $7 million lower in the third quarter with no outages scheduled.

***Indian Printing Papers*** net sales were $42 million in the second quarter of 2016 compared with $43 million in the first quarter of 2016 and $45 million in the second quarter of 2015. Operating profits were a loss of $2 million in the second quarter of 2016, a loss of $1 million in the first quarter of 2016 and a loss of $3 million in the second quarter of 2015.

Compared with the first quarter of 2016, sales volumes in the second quarter of 2016 were higher, reflecting strengthening economic conditions and increased paper demand for writing and printing paper, especially copier paper. Average sales price realizations were slightly higher. Input costs were slightly lower for fiber, while operating costs increased. Compared with the second quarter of 2015, sales volumes in the second quarter of 2016 were lower primarily due to lower production volume resulting from reliability issues at the Rajahmundry mill. Average sales price realizations were slightly higher.

Looking ahead to the third quarter of 2016, sales volumes are expected to be seasonally lower in the domestic market, but should be offset by higher export market demand. Planned maintenance downtime costs are expected to be $1 million higher in the third quarter of 2016 with an outage scheduled at the Rajahmundry mill.

***U.S. Market Pulp*** net sales were $225 million in the second quarter of 2016 compared with $181 million in the first quarter of 2016 and $211 million in the second quarter of 2015. Operating profits were a loss of $23 million (a loss of $18 million excluding acquisition-related costs) in the second quarter of 2016 compared with a loss of $55 million in the first quarter of 2016 and a profit of $18 million in the second quarter of 2015.

Sales volumes in the second quarter of 2016 compared with the first quarter of 2016 increased for fluff pulp, but were partially offset by lower market pulp shipments. Average sales price realizations were lower for fluff pulp, reflecting market pressures. Operating costs were improved principally due to lower costs related to the Riegelwood conversion. Input costs for wood decreased. Planned maintenance downtime costs in the second quarter of 2016 were $41 million lower than in the first quarter of 2016 which included significant outage costs associated with the Riegelwood mill conversion.

Compared with the second quarter of 2015, sales volumes increased in the second quarter of 2016 for both market pulp and fluff pulp. Average sales price realizations were lower for fluff pulp and market pulp. Input costs decreased slightly. Operating costs were higher in the second quarter of 2016 due to costs associated with the Riegelwood mill conversion. Planned maintenance downtime and conversion costs were $1 million lower in the second quarter of 2016.

Entering the third quarter of 2016, sales volumes are expected to be higher as a result of the Riegelwood conversion. Average sales margins will reflect a less favorable product mix resulting from the ramp-up of the Riegelwood mill as it produces lower margin softwood pulp while continuing the fluff pulp qualification process. Input costs are expected to be higher. Planned maintenance downtime costs should be $7 million higher in the third quarter of 2016 with an outage scheduled at the Franklin mill.

### Consumer Packaging

*In millions*

|  | 2016 2nd Quarter | 1st Quarter | Six Months | 2015 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$501** | **$495** | **$996** | 797 | $778 | $1,575 |
| Operating Profit | **73** | **16** | **89** | 47 | 46 | 93 |

Consumer Packaging net sales in the second quarter of 2016 were 1% higher than in the first quarter of 2016 but 37% lower than in the second quarter of 2015. Operating profits in the first quarter of 2016 included charges of $9 million related to the conversion of the Riegelwood mill to 100% pulp production. Operating profits in the second quarter of 2015 included a net gain of $14 million related to the sale of the Carolina Coated Bristols brand and costs associated with the conversion of the Riegelwood mill and an expense of $1 million related to sheet plant closures. Excluding these items, operating profits in the second quarter of 2016 were significantly higher than in both the first quarter of 2016 and the second quarter of 2015.

***North American Consumer Packaging*** net sales in the second quarter of 2016 were $416 million compared with $418 million in the first quarter of 2016 and $500 million in the second quarter of 2015. Operating profits were $48 million in the second quarter of 2016 compared with a loss of $10 million (a loss of $1 million excluding costs associated with the conversion of the Riegelwood mill) in the first quarter of 2016 and a gain of $40 million ($27 million excluding the net gain on the sale of the Carolina Coated Bristols brand and mill conversion costs and sheet plant closure costs) in the second quarter of 2015.

Coated Paperboard sales volumes in the second quarter of 2016 were about even with the first quarter of 2016. Average sales price realizations were lower for folding carton board and platestock, but average sales margins benefited from a more favorable mix. Planned maintenance downtime costs were $19 million lower in the 2016 second quarter which included no outages compared with the 2016 first quarter which had an outage at the Augusta mill. Input costs were lower, primarily for wood. Manufacturing operating costs decreased due to strong performance.

Compared with the second quarter of 2015, sales volumes in the second quarter of 2016 were lower primarily due to the absence of the coated bristols product line. The business took 4,000 tons of market related downtime in the second quarter of 2015 and none in the second quarter of 2016. Average sales price realizations were lower due to competitive pressures. Average sales margins were also negatively affected by an unfavorable customer and product mix. Input costs were lower for wood, energy and chemicals. Planned maintenance downtime costs were $10 million lower.

Foodservice sales volumes in the second quarter of 2016 were seasonally higher than in the first quarter of 2016. Average sales prices decreased due to the pass-through of lower resin costs and market pressures. Compared with the second quarter of 2015, sales volumes in the second quarter of 2016 decreased slightly. Average sales margins decreased reflecting lower average sales price realizations due to market pressures, partially offset by a more favorable product mix. Freight costs decreased reflecting lower fuel prices and the impact of savings initiatives.

Looking forward to the third quarter of 2016, coated paperboard sales volumes are expected to be stable. Average sales margins should benefit from a more favorable mix. Input costs are expected to be flat. For Foodservice, sales volumes are expected to be higher and operating costs to be lower.

***European Consumer Packaging*** net sales were $85 million in the second quarter of 2016 compared with $77 million in the first quarter of 2016 and $75 million in the second quarter of 2015. Operating profits in the second quarter of 2016 were $25 million compared with $26 million in the first quarter of 2016 and $16 million in the second quarter of 2015.

Compared with the first quarter of 2016, sales volumes in the second quarter of 2016 were higher in both Europe and Russia. Average sales margins decreased in Europe, reflecting lower sales price realizations and a unfavorable mix, while in Russia average sale prices increased and the mix was favorable. Input costs for pulp, energy and wood were lower in Europe, but energy and wood costs were higher in Russia. Planned maintenance downtime costs were $3 million higher in the second quarter of 2016 due to an outage at the Svetogorsk mill compared with no outages in the first quarter of 2016. Compared with the second quarter of 2015, sales volumes increased in both Europe and Russia. Average sales price realizations increased in Russia, but decreased in Europe. Input costs for purchased pulp, energy and wood decreased in Europe, but increased for wood and energy in Russia. Planned maintenance downtime costs were $1 million higher in the second quarter of 2016 compared with the second quarter of 2015.

Entering the third quarter of 2016, sales volumes are expected to be higher in Europe and flat in Russia. Average sales margins are expected to be lower, reflecting lower average sales price realizations and an unfavorable mix in Russia, partially offset by higher average sales margins in Europe. Planned maintenance downtime costs are expected to be $1 million lower with outages scheduled at the Kwidzyn mill. Input costs for wood and energy are expected to be higher.

***Asian Consumer Packaging*** net sales were $222 million in the second quarter of 2015. Operating profits were a loss of $9 million in the second quarter of 2015. The Company sold its 55% equity share in the IP-Sun JV in October 2015.

### Equity Earnings, Net of Taxes – Ilim

Since October 2007, International Paper and Ilim Holding S.A. (Ilim) have operated a 50:50 joint venture in Russia. Ilim is a separate reportable industry segment. The Company recorded equity earnings, net of taxes, of $46 million in the second quarter of 2016, compared with $62 million in the first quarter of 2016 and $67 million in the second quarter of 2015. In the second quarter of 2016, the after-tax foreign exchange impact primarily on the remeasurement of U.S. dollar-denominated net debt was a gain of $6 million compared with a gain of $11 million in the first quarter of 2016. Compared with the first quarter of 2016, sales volumes in the second quarter of 2016 were higher, primarily for sales of softwood pulp in export markets and sales of containerboard in the Russian domestic market. Average sales price realizations were flat overall with higher average domestic sales prices offset by lower average export sales prices. Input costs for wood and distribution increased. Planned maintenance downtime costs in the second quarter of 2016 were $12 million on a 100%, pretax basis for outages at the Koryazhma and Bratsk mills compared with none in the first quarter of 2016. The Company received cash dividends from the joint venture of $58 million during the second quarter of 2016.

Compared with the second quarter of 2015, sales volumes in the second quarter of 2016 increased for sales of softwood pulp to China and pulp and paper in the Russian domestic market, but were partially offset by decreased sales volumes of hardwood pulp to export markets. Average sales price realizations were lower, primarily for export sales of softwood and hardwood pulp, partially offset by improved sales prices for paper in the domestic market. Input costs for wood, chemicals and distribution increased. Operating costs were lower. Planned maintenance downtime costs were $3 million higher in the second quarter of 2016 compared with the second quarter of 2015. An after-tax foreign exchange gain of $27 million primarily on the remeasurement of U.S. dollar-denominated net debt was recorded in the second quarter of 2015.

Looking forward to the third quarter of 2016, sales volumes are expected to decrease slightly due to supply chain limitations. Average sales price realizations are expected to remain flat. Input costs are expected to be seasonally higher for wood, but will be largely offset by lower fuel and energy costs. Planned maintenance downtime costs are expected to be lower in the third quarter of 2016.

### LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations totaled $1.2 billion for the first six months of 2016, compared with $753 million for the comparable 2015 six-month period. Earnings from operations adjusted for non-cash charges and cash pension plan

contributions for the first six months of 2016 compared to $897 million for the first six months of 2015. Cash used for working capital components totaled $211 million for the first six months of 2016 compared to $144 million for the comparable 2015 six-month period.

The Company generated free cash flow of approximately $838 million and $830 million in the first six months of 2016 and 2015, respectively. Free cash flow is a non-GAAP measure and the most comparable GAAP measure is cash provided by operations. Management uses free cash flow as a liquidity metric because it measures the amount of cash generated that is available to maintain our assets, make investments or acquisitions, pay dividends, reduce debt, and fund other activities.

The following is a reconciliation of free cash flow to cash provided by operations:

*In millions*

|  | Six Months Ended June 30, 2016 | 2015 |
| --- | ---: | ---: |
| Cash provided by operations | **$1,225** | $753 |
| Adjustments: |  |  |
| Cash invested in capital projects | **(637)** | (673) |
| Cash contribution to pension plan | **250** | 750 |
| Free Cash Flow | **$838** | $830 |

Investments in capital projects totaled $637 million in the first six months of 2016 compared to $673 million in the first six months of 2015. Full-year 2016 capital spending is currently expected to be approximately $1.3 billion, or about 100% of depreciation and amortization expense for our current businesses.

Financing activities for the first six months of 2016 included a $134 million net increase in debt versus a $589 million net increase in debt during the comparable 2015 six-month period.

Amounts related to early debt extinguishment during the three months and six months ended June 30, 2016 and 2015 were as follows:

*In millions*

|  | Three Months Ended June 30, 2016 | 2015 | Six Months Ended June 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Early debt reductions (a) | **$—** | $1,172 | $— | $1,389 |
| Pre-tax early debt extinguishment costs | **—** | 207 | — | 208 |

(a) Reductions related to notes with interest rates ranging from 4.7% to 9.38% with original maturities from 2018 to 2030 for the three months ended June 30, 2015 and from 4.70% to 9.38% with original maturities from 2015 to 2030 for the six months ended June 30, 2015.

At June 30, 2016, contractual obligations for future payments of debt maturities by calendar year were as follows: $588 million in 2016; $60 million in 2017; $778 million in 2018; $412 million in 2019; $170 million in 2020; $644 million in 2021; and $6.8 billion thereafter.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At June 30, 2016, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively. In addition, the Company held short-term credit ratings of A2 and P2 by S&P and Moody's, respectively, for borrowings during the current quarter under the Company's commercial paper program.

At June 30, 2016, International Paper’s credit agreements totaled $2.35 billion, which management believes are adequate to cover expected operating cash flow variability during the current economic cycle. The credit agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. The liquidity facilities include a $1.5 billion contractually committed bank credit agreement (net liquidity available of $1.45 billion at June 30, 2016 after adjusting for commercial paper outstanding) that expires in August 2019 and has a facility fee of 0.15% per annum payable quarterly.

In June 2016, International Paper entered into a commercial paper program with a borrowing capacity of $750 million. Under the terms of the program, individual maturities on borrowings may vary, but not exceed one year from the date of issue. Interest bearing notes may be issued either as fixed notes or floating rate notes. As of June 30, 2016, the Company had $50 million outstanding under this program. The liquidity facilities also include up to $600 million of uncommitted financings based on eligible receivable balances ($350 million available at June 30, 2016) under a receivables securitization program that expires in December 2016. During the second quarter of 2016, International Paper entered into a $250 million contractually committed bank credit facility ($20 million available at June 30, 2016) that expires on December 31, 2016 and has a facility fee of 0.15% per annum payable quarterly. Subsequent to June 30, 2016, International Paper repaid $120 million of the borrowings under this contractually committed bank credit facility.

Subsequent to June 30, 2016, International Paper priced $1.1 billion of 3.00% senior unsecured notes with a maturity date in 2027 and $1.2 billion of 4.40% senior unsecured notes with a maturity date in 2047. We expect the sale of these notes to close on or about August 11, 2016.

During the first six months of 2016, International Paper used 2.7 million shares of treasury stock for various incentive plans. International Paper also acquired 3.6 million shares of treasury stock, including shares for the payment of restricted stock tax withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $131 million, including $100 million related to shares repurchased under the Company's share repurchase program. In September 2013, the Company announced a share repurchase program to acquire up to $1.5 billion of the Company's common stock over the next two to three years in open market repurchase transactions. In addition, in July 2014, the Company announced that it would acquire up to $1.5 billion of additional shares of the Company's common stock to supplement the $1.5 billion share repurchase program authorized in September 2013 and intends to continue to repurchase such shares in open market repurchase transactions. The Company has repurchased 44.6 million shares at an average price of $46.40, for a total of approximately $2.1 billion, as of June 30, 2016.

During the first six months of 2015, International Paper issued approximately 62,477 shares of common stock and used approximately 4.2 million shares of treasury stock for various incentive plans, including stock option exercises that generated approximately $2 million of cash. International Paper also acquired 6.7 million shares of treasury stock, including restricted stock tax withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $353 million, including $271 million related to shares repurchased under the Company's share repurchase program. Cash dividend payments related to common stock totaled $362 million and $337 million for the first six months of 2016 and 2015, respectively. Dividends were $0.8800 per share and $0.8000 per share for the first six months in 2016 and 2015, respectively.

International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2016 with current cash balances and cash from operations, supplemented as required by its existing credit facilities. The Company will continue to rely on debt and capital markets for the majority of any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure planning objectives. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors.

### Acquisitions and Joint Ventures

See discussion in Note 7 to the financial statements.

### Ilim Holding S.A. Shareholders’ Agreement

In October 2007, in connection with the formation of the Ilim Holding S.A. joint venture, International Paper entered into a shareholder’s agreement that includes provisions relating to the reconciliation of disputes among the partners. This agreement was amended May 7, 2014. Pursuant to the amended agreement, beginning on January 1, 2017, either the Company or its partners may commence certain procedures specified under the deadlock provisions. If these or any other deadlock procedures are commenced, although it is not obligated to do so, the Company may in certain situations, choose to purchase its partners' 50% interest in Ilim. Any such transaction would be subject to review and approval by Russian and other relevant anti-trust authorities. The purchase of Ilim's 50% interest by International Paper would result in the consolidation of Ilim's financial position and results of operations in all subsequent periods.

### CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.

Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include accounting for contingencies, impairment or disposal of long-lived assets, goodwill and other intangible assets, pensions, postretirement benefits other than pensions, stock options and income taxes.

The Company has included in its 2015 Form 10-K a discussion of these critical accounting policies, which are important to the portrayal of the Company’s financial condition and results of operations and require management’s judgments. The Company has not made any changes in these critical accounting policies during the first six months of 2016.

### Pension Accounting

Net pension expense totaled approximately $624 million for International Paper’s U.S. plans for the six months ended June 30, 2016, or about $400 million more than the pension expense for the first six months of 2015. The increase in U.S. plan expense was due to a $439 million plan settlement accounting charge in the second quarter of 2016, and updated demographic assumptions partially offset by lower amortization of unrecognized actuarial losses, and an increase in the assumed discount rate to 4.40% in 2016 (prior to the June 30, 2016 remeasurement discussed below) from 4.10% in 2015. Net pension expense for non-U.S. plans was about $2 million and $3 million for the first six months of 2016 and 2015, respectively.

After consultation with our actuaries, International Paper determines key actuarial assumptions on December 31 of each year that are used to calculate liability information as of that date and pension expense for the following year. Key assumptions affecting pension expense include the discount rate, the expected long-term rate of return on plan assets, the projected rate of future compensation increases, and various demographic assumptions including expected mortality. The discount rate assumption is determined based on approximately 500 Aa-rated bonds appropriate to provide the projected benefit payments of the plan. A bond portfolio is selected and a single rate is determined that equates the market value of the bonds purchased to the discounted value of the plan’s benefit payments. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. At June 30, 2016, the market value of plan assets for International Paper’s U.S. plans totaled approximately $10.1 billion, consisting of approximately 48% equity securities, 30% fixed income securities, and 22% real estate and other assets. Plan assets did not include International Paper common stock.

As previously disclosed, in the first quarter of 2016, International Paper announced a voluntary, limited-time opportunity for former employees who are participants in the Retirement Plan of International Paper Company (the Pension Plan) to request early payment of their entire Pension Plan benefit in the form of a single lump sum payment. The amount of total payments under this program was approximately $1.2 billion, and were made from Plan trust assets on June 30, 2016. Based on the level of payments made, settlement accounting rules applied and resulted in a plan remeasurement as of the June 30, 2016 payment date. The discount rate used in the plan remeasurement was 3.80%, down from 4.40% at December 31, 2015. As a result of the plan remeasurement and year to date activity, the difference between the qualified plan liabilities and plan assets grew by $602 million versus the December 31, 2015 difference. Additionally, as a result of settlement accounting, the Company recognized a pro-rata portion of the unamortized net actuarial loss, after remeasurement, resulting in a $439 million non-cash charge to the Company's earnings in the second quarter of 2016.

The Company’s funding policy for our pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plan, tax deductibility, the cash flows generated by the Company, and other factors. The Company made voluntary cash contributions of $250 million and $750 million to the qualified pension plan in the first six months of 2016 and 2015, respectively. The Company expects to make an additional $500 million voluntary contribution during the second half of 2016. This contribution was made in line with our strategy of de-risking the pension plan while generating tax benefits and fee savings. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $10 million for the six months ended June 30, 2016.

### FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q that are not historical in nature may be considered “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar nature. These statements are not guarantees of future performance and reflect management’s current views with respect to future events, which are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include but are not limited to: (i) the level of our indebtedness and changes in interest rates; (ii) industry conditions, including but not limited to changes in the cost or availability of raw materials, energy and transportation costs, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products; (iii) global economic conditions and political changes, including but not limited to the impairment of financial institutions, changes in currency exchange rates, credit ratings issued by recognized credit rating organizations, the amount of our future pension funding obligation, changes in tax laws and pension and health care costs; (iv) unanticipated expenditures related to the cost of compliance with existing and new environmental and other governmental regulations and to actual or potential litigation; (v) whether we experience a material disruption at one of our manufacturing facilities; (vi) risks inherent in conducting business through a joint venture; (vii) the successful closing of the sale of our corrugated box business in China and Southeast Asia within the estimated timeframe; (viii) the receipt of governmental and other approvals and favorable rulings associated with the purchase of the pulp business of Weyerhaeuser Company and the successful fulfillment or waiver of all closing conditions for the transaction without unexpected delays or conditions; (ix) our ability to finance and complete the proposed acquisition of the pulp business of Weyerhaeuser Company; (x) the failure to realize anticipated synergies and cost savings from the acquisition of the pulp business of Weyerhaeuser Company or delay in realization thereof; (xi) our ability to achieve the benefits we expect from all strategic acquisitions, divestitures and restructurings; and (xii) other factors you can find in our press releases and filings with the Securities and Exchange Commission, including the risk factors identified in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as updated in Item 1A of Part II of this Quarterly Report on Form 10-Q ("Risk Factors"). We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. All financial information and statistical measures regarding our 50/50 Ilim joint venture in Russia (“Ilim”), other than historical International Paper Equity Earnings and dividends received by International Paper, have been prepared by the management of Ilim. Ilim management has indicated that the financial information was prepared in accordance with International Financial Reporting Standards and extracted from Ilim’s financial statements, but International Paper has not verified or audited any of this information. Any projected financial information and statistical measures reflect the current views of Ilim management and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such projections.

## Market risk

As filed, 300 characters.

Information relating to quantitative and qualitative disclosures about market risk is shown on page 39 of International Paper’s 2015 Form 10-K, which information is incorporated herein by reference. There have been no material changes in the Company’s exposure to market risk since December 31, 2015.

## Controls and procedures

As filed, 1,475 characters.

### Evaluation of Disclosure Controls and Procedures:

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported (and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure) within the time periods specified in the Securities and Exchange Commission’s rules and forms. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2016 (the end of the period covered by this report).

### Changes in Internal Control over Financial Reporting:

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 276 characters.

There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Part I, Item 1A), as updated by our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2016 (Part II, Item 1A).

Filed Aug 5, 2016.
Source: SEC EDGAR, the filing index for accession 0000051434-16-000063. Last ingested by Listed: Nov 10, 2026, 17:11 ET. No prices; not investment advice.