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

- Company: [International Paper Co](/companies/ip.md) (CIK 51434)
- Form: 10-Q
- Filed: 2016-11-03
- Accepted by EDGAR: Nov 3, 2016, 11:29 ET
- Period: 2016-09-30
- Accession: 0000051434-16-000069
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/51434/000005143416000069/ip-9302016xform10xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/51434/000005143416000069/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $5.27bn | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2016-01-01 to 2016-09-30 | $15.70bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-07-01 to 2016-09-30 | $3.62bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2016-01-01 to 2016-09-30 | $11.35bn | us-gaap:CostOfGoodsSold |
| Selling, general and administrative | 3 months, 2016-07-01 to 2016-09-30 | $380.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2016-01-01 to 2016-09-30 | $1.14bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | $613.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-01-01 to 2016-09-30 | $1.74bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $181.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-01-01 to 2016-09-30 | $513.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | $107.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-01-01 to 2016-09-30 | $139.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-01 to 2016-09-30 | $312.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2016-01-01 to 2016-09-30 | $686.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.75 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-01-01 to 2016-09-30 | $1.65 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.76 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-01-01 to 2016-09-30 | $1.67 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 415,300,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-01-01 to 2016-09-30 | 415,500,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2016-01-01 to 2016-09-30 | $1.57bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2016-01-01 to 2016-09-30 | $903.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2016-01-01 to 2016-09-30 | $543.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2016-01-01 to 2016-09-30 | $132.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-09-30 | $2.56bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-09-30 | $8.10bn | us-gaap:AssetsCurrent |
| Total assets | at 2016-09-30 | $32.60bn | us-gaap:Assets |
| Current liabilities | at 2016-09-30 | $3.54bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2016-09-30 | $10.82bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-09-30 | $78.0m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2016-09-30 | $4.21bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,252 characters.

### EXECUTIVE SUMMARY

Diluted earnings (loss) attributable to International Paper common shareholders were $312 million ($0.75 per share) in the third quarter of 2016, compared with $40 million ($0.10 per share) in the second quarter of 2016 and $220 million ($0.53 per share) in the third quarter of 2015. Adjusted 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 Adjusted Operating Earnings attributable to International Paper common shareholders of $380 million ($0.91 per share) in the third quarter of 2016, compared with 2016 second-quarter earnings of $379 million ($0.92 per share) and 2015 third-quarter earnings of $407 million ($0.97 per share).

International Paper delivered solid results in the 2016 third quarter highlighted by strong cash flow generation. The 2016 third quarter results for the North American Industrial Packaging business were significantly affected by rising input costs along with a less favorable mix and modest price erosion. The lower price and higher input costs offset the benefit of lower planned maintenance outage expense and a lower tax rate. We experienced strong operational performance across the North American, EMEA and Brazil Printing papers businesses.

Input costs in the North American Industrial Packaging business were unfavorable in the 2016 third quarter versus the 2016 second quarter primarily from higher recycled fiber and natural gas costs. Volume was relatively flat on a sequential quarter basis across all businesses with the exception of lower volume in the EMEA Industrial Packaging business due to seasonally lower volumes in Morocco. Price and mix were unfavorable in the North American Industrial Packaging business versus the 2016 second quarter, primarily driven by lower containerboard export prices, the flow through of the 2016 first quarter pricing index changes and a less favorable box mix. Mix was also unfavorable in the North American Pulp business due to another transitional quarter associated with the converted machine at the Riegelwood mill. Operating costs were sequentially higher in the North American Industrial Packaging business due to isolated reliability issues along with additional overtime costs incurred in response to increased box demand. These higher operating costs were partly offset by improved manufacturing operations in the North American Printing Papers business. The Ilim joint venture delivered solid results in the 2016 third quarter tied to strong operational performance.

Looking ahead to the 2016 fourth quarter, we expect relatively stable volume across most of our businesses with some seasonal improvement in the EMEA Industrial Packaging and Brazil Printing Papers businesses. While we expect strong daily demand, the North American Industrial Packaging business will be negatively impacted by four less shipping days. We expect favorable pricing in the North American Industrial Packaging business associated with the implementation of the containerboard and box price increases communicated to customers in October 2016. Mix is expected to be unfavorable in the North American Pulp business as we continue to supply additional tons of softwood market pulp into less-than-favorable market conditions as we work toward qualifying and supplying more fluff pulp out of the new capacity at the Riegelwood mill. Pricing across the rest of our business is expected to be relatively stable with some benefit from the recently implemented price increases in the Brazil Printing Papers business. Operating costs are expected to be higher in the North American businesses due to the impact associated with Hurricane Matthew. Input costs are expected to be higher in the North American businesses tied to continued higher energy costs. We also expect some inflationary cost pressure in the EMEA Printing Papers business. Planned maintenance outage costs are expected to increase slightly versus the 2016 third quarter. The 2016 fourth quarter outlook for the Ilim joint venture is expected to be slightly lower than the 2016 third quarter.

Adjusted Operating Earnings and Adjusted 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 Adjusted 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. Adjusted Operating Earnings Per Share is calculated by dividing Adjusted Operating Earnings by diluted average shares of common stock outstanding. 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 diluted earnings (loss) attributable to International Paper common shareholders to Adjusted Operating Earnings attributable to International Paper Company common shareholders.

|  | Three Months Ended September 30, 2016 | 2015 | Three Months Ended June 30, 2016 |
| --- | ---: | ---: | ---: |
| Diluted Earnings (Loss) Attributable to Shareholders | **$312** | $220 | $40 |
| Add back - Discontinued operations (gain) loss | **—** | — | — |
| Diluted Earnings (Loss) from Continuing Operations | **312** | 220 | 40 |
| Add Back - Non-operating pension (income) expense | **43** | 76 | 487 |
| Add Back - Net special items expense (income) | **65** | 211 | 33 |
| Income tax effect - Non-operating pension and special items expense | **(40)** | (100) | (181) |
| Adjusted Operating Earnings (Loss) Attributable to Shareholders | **$380** | $407 | $379 |

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

|  | Three Months Ended September 30, 2016 | 2015 | Three Months Ended June 30, 2016 |
| --- | ---: | ---: | ---: |
| Diluted Earnings (Loss) Per Share Attributable to Shareholders | **$0.75** | $0.53 | $0.10 |
| Add Back - Discontinued operations (gain) loss per share | **—** | — | — |
| Diluted Earnings (Loss) Per Share from Continuing Operations | **0.75** | 0.53 | 0.10 |
| Add Back - Non-operating pension (income) expense per share | **0.10** | 0.18 | 1.17 |
| Add Back - Net special items expense (income) per share | **0.16** | 0.50 | 0.08 |
| Income tax effect per share - Non-operating pension and special items expense | **(0.10)** | (0.24) | (0.43) |
| Adjusted Operating Earnings (Loss) Per Share Attributable to Shareholders | **$0.91** | $0.97 | $0.92 |

### RESULTS OF OPERATIONS

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

Net earnings attributable to International Paper totaled $312 million, or $0.75 per share, in the 2016 third quarter. This compared with $220 million, or $0.53 per share, in the third quarter of 2015 and $40 million or $0.10 per share, in the second quarter of 2016.

Earnings from continuing operations attributable to International Paper Company were $312 million in the third quarter of 2016 compared with $220 million in the third quarter of 2015 and $40 million in the second quarter of 2016. Compared with the third quarter of 2015, the 2016 third quarter reflects higher sales volumes ($8 million), lower raw material and freight costs ($14 million), lower net interest expense ($6 million), lower tax expense ($14 million) reflecting a lower estimated tax rate and lower non-operating pension expense ($20 million). These benefits were offset by lower average sales price realizations and an unfavorable mix ($86 million), higher operating costs ($26 million), higher mill maintenance outage costs ($6 million) and higher corporate and other costs ($5 million). Equity earnings, net of taxes, relating to International Paper’s investment in Ilim Holding S.A. were $54 million higher in the 2016 third quarter than in the 2015 third quarter. Net special items in the 2016 third quarter were a loss of $42 million compared with a loss of $141 million in the 2015 third quarter.

Compared with the second quarter of 2016, earnings benefited from lower mill maintenance outage costs ($40 million), lower corporate and other items ($14 million), lower tax expense ($17 million) reflecting a lower estimated tax rate and lower non-operating pension expense ($273 million). These benefits were offset by lower average sales price realizations and an unfavorable mix ($33 million), lower sales volumes ($1 million), higher operating costs ($7 million), higher raw material and freight costs ($26 million) and higher net interest expense ($3 million). Equity earnings, net of taxes, for Ilim Holding, S.A. were even with the 2016 second quarter. Net special items in the 2016 third quarter were a loss of $42 million compared with a loss of $40 million in the 2016 second quarter.

To measure the performance of the Company’s business segments from period to period, International Paper’s management focuses on business 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 total business segment operating profit:

*In millions*

|  | Three Months Ended September 30 2016 | 2015 | June 30, 2016 |
| --- | ---: | ---: | ---: |
| Earnings (Loss) From Continuing Operations Attributable to International Paper Company | **$312** | $220 | $40 |
| Add back (deduct): |  |  |  |
| Income tax provision (benefit) | **107** | 106 | (9) |
| Equity (earnings) loss, net of taxes | **(43)** | 13 | (45) |
| Noncontrolling interests, net of taxes | **(3)** | (10) | — |
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | **373** | 329 | (14) |
| Interest expense, net | **132** | 141 | 129 |
| Noncontrolling interests / equity earnings included in operations | **1** | 6 | — |
| Corporate items | **11** | 10 | 26 |
| Special items (income) expense | **54** | 17 | — |
| Non-operating pension expense | **42** | 76 | 487 |
|  | **$613** | $579 | $628 |
| Business Segment Operating Profit: |  |  |  |
| Industrial Packaging | **$424** | $553 | $459 |
| Printing Papers | **128** | 179 | 96 |
| Consumer Packaging | **61** | (153) | 73 |
| Total Business Segment Operating Profit | **$613** | $579 | $628 |

29

### Business Segment Operating Profit

Total business segment operating profits of $613 million in the 2016 third quarter were higher than the $579 million in the 2015 third quarter, but lower than the $628 million in the 2016 second quarter. Compared with the third quarter of 2015, operating profits in the current quarter benefited from higher sales volumes ($12 million) and lower raw material and freight costs ($21 million). These benefits were offset by lower net average sales price realizations and an unfavorable mix ($128 million), higher operating costs ($38 million), higher mill outage costs ($9 million) and higher other costs ($6 million). Special items were a loss of $12 million in the 2016 third quarter compared with a loss of $194 million in the 2015 third quarter.

Compared with the second quarter of 2016, operating profits benefited from lower mill outage costs ($61 million) and lower other items ($5 million). These benefits were offset by lower average sales price realizations and an unfavorable mix ($49 million), lower sales volumes ($2 million), higher operating costs ($11 million) and higher raw material and freight costs ($40 million). Special items were a loss of $12 million in the 2016 third quarter compared with a loss of $33 million in the 2016 second quarter.

During the 2016 third quarter, International Paper took approximately 226,000 tons of downtime of which approximately 107,000 tons were economic-related compared with approximately 217,000 tons of downtime, which included about 106,000 tons that were economic-related, in the 2015 third quarter. During the 2016 second quarter, International Paper took approximately 286,000 tons of downtime of which approximately 85,000 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 September 30, 2016 and 2015 were as follows:

*In thousands of short tons*

| Industrial Packaging | Three Months Ended September 30, 2016 | 2015 | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| North American Corrugated Packaging (c) | **2,640** | 2,609 | **7,801** | 7,717 |
| North American Containerboard | **801** | 783 | **2,311** | 2,375 |
| North American Recycling | **613** | 588 | **1,812** | 1,788 |
| North American Saturated Kraft | **51** | 37 | **142** | 112 |
| North American Gypsum/Release Kraft | **49** | 46 | **142** | 125 |
| North American Bleached Kraft | **7** | 6 | **18** | 17 |
| EMEA Industrial Packaging (c) (d) | **344** | 340 | **1,091** | 1,039 |
| Asian Box (c) (e) | **—** | 110 | **208** | 307 |
| Brazilian Packaging (c) | **84** | 89 | **235** | 261 |
| Industrial Packaging | **4,589** | 4,608 | **13,760** | 13,741 |
| Printing Papers |  |  |  |  |
| U.S. Uncoated Papers | **467** | 485 | **1,402** | 1,404 |
| EMEA and Russian Uncoated Papers | **358** | 364 | **1,120** | 1,110 |
| Brazilian Uncoated Papers | **274** | 294 | **800** | 783 |
| Indian Uncoated Papers | **51** | 55 | **175** | 182 |
| Uncoated Papers | **1,150** | 1,198 | **3,497** | 3,479 |
| Market Pulp (b) | **457** | 446 | **1,359** | 1,291 |
| Consumer Packaging |  |  |  |  |
| North American Consumer Packaging | **301** | 371 | **915** | 1,080 |
| EMEA Coated Paperboard | **105** | 96 | **298** | 284 |
| Asian Coated Paperboard (f) | **—** | 339 | **—** | 958 |
| Consumer Packaging | **406** | 806 | **1,213** | 2,322 |

(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) Excludes newsprint sales volumes at the Madrid, Spain mill.

(e) Includes sales volumes through the date of sale on June 30, 2016.

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

### Income Taxes

An income tax provision of $107 million was recorded for the 2016 third quarter. Excluding a benefit of $24 million related to the tax effects of special items and a benefit of $16 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 30.5% for the quarter.

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 $106 million was recorded for the 2015 third quarter. Excluding a benefit of $70 million related to the tax effects of special items and a benefit of $30 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 third quarter was $132 million compared with $129 million in the 2016 second quarter and $141 million in the 2015 third quarter.

Corporate items, net, were $11 million in the 2016 third quarter compared with $26 million in the 2016 second quarter, and $10 million in the 2015 third quarter.

### Effects of Special Items

Special items in the third quarter of 2016 included a pre-tax charge of $46 million ($29 million after taxes) for Restructuring and other charges. Included within Restructuring and other charges were a pre-tax charge of $29 million ($18 million after taxes) for debt extinguishment costs and a pre-tax charge of $17 million ($11 million after taxes) to write-off costs associated with the India Packaging business evaluation. Special items also included a pre-tax charge of $8 million ($5 million after taxes) for the write-off of certain regulatory pre-engineering costs, pre-tax charges of $7 million ($4 million after taxes) for costs associated with the announced agreement to purchase the Weyerhaeuser pulp business and pre-tax charges of $5 million ($4 million after taxes) for costs associated with the sale of our Asia corrugated packaging business.

Special items for the nine months ended September 30, 2016 included a pre-tax charge of $47 million ($30 million after taxes) for Restructuring and other charges. Included within Restructuring and other charges were a pre-tax charge of $29 million ($18 million after taxes) for debt extinguishment costs, a pre-tax charge of $17 million ($11 million after taxes) to write-off costs associated with the India Packaging business evaluation, a pre-tax charge of $9 million ($6 million after taxes) related to costs associated with the conversion of the Riegelwood, North Carolina facility to 100% pulp production and a pre-tax gain of $8 million ($5 million after taxes) for the sale of our remaining investment in Arizona Chemical. Special items also included a pre-tax charge of $8 million ($5 million after taxes) for the write-off of certain regulatory pre-engineering costs, pre-tax charges of $12 million ($7 million after taxes) for costs associated with the announced agreement to purchase the Weyerhaeuser pulp business, a pre-tax charge of $36 million ($33 million after taxes) for an impairment of the assets of our Asia Box business, pre-tax charges of $34 million ($25 million after taxes) for costs associated with the sale of our Asia corrugated packaging business, a tax expense of $23 million associated with the 2016 cash pension contributions, a tax benefit of $6 million related to an international legal entity restructuring, a tax benefit of $57 million associated with the legal restructuring of our Brazil Packaging business and a tax benefit of $14 million related to the closure of a U.S. federal income tax audit.

Special items in the third quarter of 2015 included a pre-tax loss of $25 million ($16 million after taxes) for Restructuring and other charges. Included within Restructuring and other charges were a pre-tax charge of $17 million ($11 million after taxes) related to the restructuring of our 2006 timber monetization, net pre-tax charges of $7 million ($4 million after taxes) related to the sale of the Carolina® Coated Bristols brand and costs associated with the conversion of the Riegelwood, North Carolina facility to 100% pulp production, and a charge of $1 million (before and after taxes) for other items. Special items also included a pre-tax charge of $186 million ($125 million after taxes) for the impairment of goodwill and other assets of the IP-Sun JV.

Special items for the nine months ended September 30, 2015 included a pre-tax loss of $219 million ($141 million after taxes) for Restructuring and other charges. Included within Restructuring and other charges were a pre-tax charge of $17 million ($11 million after taxes) related to the restructuring of our 2006 timber monetization, a net pre-tax gain of $7 million ($5 million after taxes) related to the sale of the Carolina® Coated Bristols brand and costs associated with the conversion of the Riegelwood, North Carolina facility to 100% pulp production, a pre-tax charge of $207 million ($133 million after tax) for premiums paid on a cash tender offer on outstanding debt and a charge of $2 million (before and after taxes) for other items. Special items also included a pre-tax charge of $186 million ($125 million after taxes) for the impairment of goodwill and other assets of the IP-Sun JV, a pre-tax gain of $4 million ($2 million after taxes) related to state tax credits, a tax expense of $23 million for the tax impact of the 2015 cash pension contribution of $750 million and a tax expense of $5 million for other items.

### BUSINESS SEGMENT OPERATING RESULTS

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

### Industrial Packaging

*In millions*

|  | 2016 3rd Quarter | 2nd Quarter | Nine Months | 2015 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$3,582** | **$3,597** | **$10,631** | $3,642 | $3,694 | $10,889 |
| Operating Profit | **424** | **459** | **1,279** | 553 | 528 | 1,549 |

Industrial Packaging net sales for the third quarter of 2016 were even with the second quarter of 2016 but were 2% lower than in the third quarter of 2015. Operating profits included a charge of $5 million in the third quarter of 2016 and a charge of $28 million in the second quarter of 2016 for costs associated with the sale of our Asia corrugated packaging business. Excluding these items, operating profits in the third quarter of 2016 were 12% lower than in the second quarter of 2016 and 22% lower than the third quarter of 2015.

***North American Industrial Packaging*** net sales were $3.1 billion in the third quarter of 2016 compared with $3.1 billion in the second quarter of 2016 and $3.2 billion in the third quarter of 2015. Operating profits were $439 million in the third quarter of 2016 compared with $496 million in the second quarter of 2016 and $557 million in the third quarter of 2015.

Sales volumes for boxes in the third quarter of 2016 were slightly lower than in the second quarter of 2016, reflecting seasonally weaker market demand with the same number of shipping days. Containerboard shipments to both domestic and export markets were higher. Total maintenance and economic downtime decreased 17,000 tons from 210,000 tons to 193,000 tons which reflects a decrease of 39,000 tons for maintenance downtime and an increase of 22,000 tons for economic downtime. Average sales margins for boxes were lower. Average sales price realizations for export containerboard also decreased. Input costs were higher for recycled fiber, energy, chemicals and freight, but were partially offset by lower wood costs. Planned maintenance downtime costs were $34 million lower in the 2016 third quarter compared with the 2016 second quarter. Operating costs were higher, a result of mill operations and seasonally higher labor and benefit costs in the box plants.

Compared with the third quarter of 2015, sales volumes in the third quarter of 2016 were higher. Sales volumes for containerboard were flat as higher shipments to export markets were offset by lower domestic shipments. Total maintenance and economic downtime was 43,000 tons higher in the third quarter of 2016 which comprises an increase of 14,000 tons for maintenance downtime and an increase of 29,000 tons for economic downtime. Average sales price realizations were significantly lower for containerboard largely due to pricing pressures in export markets. Average sales margins for boxes were also lower. Input costs decreased for wood and freight fuel surcharges, but increased for recycled fiber. Planned maintenance downtime costs were $17 million higher in the third quarter of 2016 compared with the third quarter of 2015. Operating costs were also higher.

Entering the fourth quarter of 2016, sales volumes are expected to be seasonally lower for boxes with four fewer shipping days. Input costs are expected to be flat. Planned maintenance downtime costs should be $6 million lower. Earnings in the fourth quarter will be impacted by approximately $7 million of costs associated with the effects of Hurricane Matthew. We expect favorable pricing in the North American Industrial Packaging business associated with the implementation of the containerboard and box price increases communicated to customers in October 2016.

***EMEA Industrial Packaging*** net sales were $313 million in the third quarter of 2016 compared with $295 million in the second quarter of 2016 and $262 million in the third quarter of 2015. Operating profits were about breakeven in the third quarter of 2016 compared with $6 million in the second quarter of 2016 and $1 million in the third quarter of 2015.

Sales volumes for boxes in the third quarter of 2016 were lower than in the second quarter of 2016 due to seasonally lower demand in Morocco and geopolitical issues in Turkey. Average sales margins increased reflecting continuing decreases in paper costs. Input costs for energy were higher as were operating costs. Operating profits in the second quarter of 2016 were impacted by a $3 million transfer tax expense related to the acquisition of Holmen Paper which did not recur in the third quarter.

Compared with the third quarter of 2015, sales volumes in the third quarter of 2016 were higher, reflecting growing market demand in the Euro-zone and strong demand for boxes in the industrial market in Morocco. Average sales margins were significantly higher due to material cost decreases and favorable mix. Operating costs increased.

Looking ahead to the fourth quarter of 2016, sales volumes are expected to be seasonally higher. Average sales margins are expected to continue to increase due to lower paper costs. Lower energy and distribution costs should be more than offset by higher operating costs driven by the volume increase.

***Brazilian Industrial Packaging*** net sales were $61 million in the third quarter of 2016 compared with $51 million in the second quarter of 2016 and $55 million in the third quarter of 2015. Operating profits were a loss of $9 million in the third quarter of 2016 compared with a loss of $12 million in the second quarter of 2016 and a loss of $4 million in the third quarter of 2015.

Sales volumes in the third quarter of 2016 were seasonally higher than in the second quarter of 2016. Average sales margins were slightly lower due to a less favorable product mix. There were no planned maintenance outages in the third quarter of 2016 compared with a cost of $2 million in the second quarter of 2016 related to an outage at the Nova Campina mill. Input costs were higher for recycled fiber.

Compared with the third quarter of 2015, sales volumes in the third quarter of 2016 were lower for boxes and sheets due to continued poor economic conditions, but were higher for containerboard. Average sales price realizations for boxes 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 fourth quarter of 2016, sales volumes are expected to be seasonally higher. Average sales price realizations are also expected to improve due to the continuing realization of box sales price increases. Input costs should be higher, primarily for recycled fiber.

***Asian Industrial Packaging*** net sales were $109 million in the third quarter of 2016 compared with $165 million in the second quarter of 2016 and $150 million in the third quarter of 2015. Operating profits were a loss of $6 million (a loss of $1 million excluding costs associated with the sale of the corrugated packaging business) in the third quarter of 2016 compared with 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 and a loss of $1 million in the third quarter of 2015.

On June 30, 2016, the Company completed the sale of its corrugated packaging business in China and Southeast Asia to Xiamen Bridge Hexing Equity Investment Partnership Enterprise. Net sales and operating profits beginning with the third quarter of 2016 reflect the results of the distribution operations of the business.

### Printing Papers

*In millions*

|  | 2016 3rd Quarter | 2nd Quarter | Nine Months | 2015 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$1,266** | **$1,271** | **$3,721** | $1,258 | $1,249 | $3,735 |
| Operating Profit | **128** | **96** | **309** | 179 | 101 | 389 |

Printing Papers net sales for the third quarter of 2016 were even with the second quarter of 2016 and were 1% higher than in the third quarter of 2015. Operating profits included a charge of $7 million in the third quarter of 2016 and a charge of $5 million in the second quarter of 2016 for costs associated with the announced agreement to purchase the Weyerhaeuser pulp business. Excluding these items, operating profits in the third quarter of 2016 were 34% higher than in the second quarter of 2016 and 25% lower than in the third quarter of 2015.

***North American Printing Papers*** net sales were $478 million in the third quarter of 2016 compared with $466 million in the second quarter of 2016 and $500 million in the third quarter of 2015. Operating profits were $81 million in the third quarter of 2016 compared with $51 million in the second quarter of 2016 and $81 million in the third quarter of 2015.

Sales volumes in the third quarter of 2016 were higher than in the second quarter of 2016. Average sales price realizations for uncoated freesheet paper in the domestic market were flat, but average sales margins were unfavorably impacted by mix. Input costs increased for energy and chemicals, partially offset by lower wood costs. Operating costs were lower. There were no planned maintenance outages in the third quarter of 2016, compared with a cost of $26 million related to outages at the Ticonderoga, Eastover and Georgetown mills in the second quarter of 2016.

Compared with the third quarter of 2015, sales volumes in the third quarter of 2016 were lower reflecting decreased shipments of uncoated freesheet paper to the export market. Average sales price realizations were lower, primarily for cutsize paper and rolls. Input costs were higher, but operating costs decreased. Planned maintenance downtime costs in the third quarter of 2016 were $1 million lower than in the third quarter of 2015.

Entering the fourth quarter of 2016, sales volumes are expected to improve for uncoated freesheet paper in the export market. Average sales price realizations are expected to be stable. Input costs should be slightly higher for wood. Planned maintenance downtime costs should be $11 million higher with outages scheduled at the Riverdale and Eastover mills in the fourth quarter. Operating costs are expected to be seasonally higher. Earnings in the fourth quarter will be impacted by approximately $4 million of costs associated with the effects of Hurricane Matthew.

***European Printing Papers*** net sales were $306 million in the third quarter of 2016 compared with $318 million in the second quarter of 2016 and $284 million in the third quarter of 2015. Operating profits were $41 million in the third quarter of 2016 compared with $36 million in the second quarter of 2016 and $30 million in the third quarter of 2015.

Compared with the second quarter of 2016, sales volumes for uncoated freesheet paper in the third quarter of 2016 were flat in Europe and higher in Russia. Sales volumes for pulp decreased in Europe, but increased in Russia. Average sales price realizations for uncoated freesheet paper decreased in Europe and were stable in Russia. Average sales price realizations for pulp decreased in Europe, but increased in Russia. Input costs were flat. Planned maintenance downtime costs in the third quarter of 2016 which included an outage at the Kwidzyn mill were $1 million higher than in the second quarter of 2016 which included an outage at the Svetogorsk mill. Manufacturing operating costs were lower.

Sales volumes for uncoated freesheet paper in the third quarter of 2016 were higher compared with the third 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 $5 million lower in the third quarter of 2016 than in the third quarter of 2015.

Looking forward to the fourth quarter of 2016, sales volumes for uncoated freesheet paper are expected to increase in Europe, and be stable in Russia. Average sales price realizations for uncoated freesheet paper are expected to be stable in both Europe and Russia. However, average sales price realizations for hardwood pulp in Europe are expected to improve. Input costs are expected to increase for energy and purchased fiber in Europe and for wood and freight in Russia. Planned maintenance downtime costs should be $5 million higher in the fourth quarter of 2016 which includes an outage scheduled at the Saillat mill.

***Brazilian Printing Papers*** net sales were $227 million in the third quarter of 2016 compared with $220 million in the second quarter of 2016 and $219 million in the third quarter of 2015. Operating profits were $53 million in the third quarter of 2016, $34 million in the second quarter of 2016 and $56 million in the third quarter of 2015.

Sales volumes in the third quarter of 2016 increased compared with the second quarter of 2016 reflecting seasonally stronger demand for uncoated freesheet paper in the domestic market, partially offset by weaker demand in the export markets. Average sales price realizations increased slightly in the domestic market, but were lower in export markets. Input costs were lower, primarily for pulp. Planned maintenance downtime costs were $7 million lower in the third quarter of 2016 which included no outages compared with outages at the Mogi Guacu and Luiz Antonio mills in the second quarter of 2016.

Compared with the third quarter of 2015, sales volumes for uncoated freesheet paper in the third quarter of 2016 were lower in both the domestic and other Latin American markets due to weaker demand and competitive pressures. Average sales price realizations were higher reflecting the continued realization of the first-quarter 2016 domestic price increase, although prices to Latin American export markets decreased. Input costs were flat. Planned maintenance downtime costs were $2 million lower than in the third quarter of 2015.

Entering the fourth quarter of 2016, sales volumes are expected to be seasonally stronger for uncoated freesheet paper in the domestic market. Average sales margins should benefit from a more favorable geographic mix. Input costs are expected to be higher, particularly for wood. Planned maintenance outage costs should be $1 million higher in the fourth quarter with an outage scheduled at the Tres Lagoas mill.

***Indian Printing Papers*** net sales were $35 million in the third quarter of 2016 compared with $42 million in the second quarter of 2016 and $39 million in the third quarter of 2015. Operating profits were a loss of $8 million in the third quarter of 2016, a loss of $2 million in the second quarter of 2016 and a loss of $4 million in the third quarter of 2015.

Compared with the second quarter of 2016, sales volumes in the third quarter of 2016 were lower, reflecting the impact of the planned maintenance outage at the Rajahmundry mill. Average sales price realizations increased slightly. Input costs for fiber and chemicals were higher, while operating costs also increased. Planned maintenance downtime costs were $1 million higher than in the second quarter of 2016. Compared with the third quarter of 2015, sales volumes in the third quarter of 2016 were lower. Average sales price realizations increased slightly. Higher operating costs were offset by lower input costs.

Looking ahead to the fourth quarter of 2016, sales volumes are expected to be seasonally higher. Average sales margins should be favorably impacted by increased average sales price realizations and an improved mix. Planned maintenance downtime costs should be $1 million lower in the fourth quarter.

***U.S. Pulp*** net sales were $220 million in the third quarter of 2016 compared with $225 million in the second quarter of 2016 and $216 million in the third quarter of 2015. Operating profits were a loss of $39 million (a loss of $32 million excluding acquisition-related costs) in the third quarter of 2016 compared with a loss of $23 million (a loss of $18 million excluding acquisition-related costs) in the second quarter of 2016 and a profit of $16 million in the third quarter of 2015.

Sales volumes in the third quarter of 2016 compared with the second quarter of 2016 increased as a result of the ramp-up of production at the Riegelwood mill. Average sales price realizations were flat, but average sales margins were impacted by an unfavorable product mix. Operating costs were lower despite operational issues at two mills. Input costs were higher, primarily for natural gas and chemicals. Planned maintenance downtime costs in the third quarter of 2016 included an outage at the Franklin mill and were $7 million higher than in the second quarter of 2016.

Compared with the third quarter of 2015, sales volumes increased in the third quarter of 2016. Average sales price realizations were significantly lower for fluff pulp and softwood pulp. Input costs increased slightly. Operating costs were higher in the third quarter of 2016 due to costs associated with the Riegelwood mill conversion. Planned maintenance downtime costs were $2 million higher in the third quarter of 2016.

Entering the fourth quarter of 2016, sales volumes are expected to be stable. Average sales margins will reflect a less favorable product mix resulting from the ramp-up of the Riegelwood mill as it continues to produce lower margin softwood pulp while continuing the fluff pulp qualification process. Input costs are expected to be slightly higher. Planned maintenance downtime costs should be $13 million lower in the fourth quarter of 2016 with no outages scheduled. Earnings in the fourth quarter will be impacted by approximately $6 million of costs associated with the effects of Hurricane Matthew.

### Consumer Packaging

*In millions*

|  | 2016 3rd Quarter | 2nd Quarter | Nine Months | 2015 3rd Quarter | 2nd Quarter | Nine Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | **$494** | **$501** | **$1,490** | 809 | $797 | $2,384 |
| Operating Profit | **61** | **73** | **150** | (153) | 47 | (60) |

Consumer Packaging net sales in the third quarter of 2016 were 1% lower than in the second quarter of 2016 and 39% lower than in the third quarter of 2015. Operating profits in the third quarter of 2015 included a charge of $186 million for asset write-offs related to the sale of our 55% equity share of the IP-Sun JV, a net loss of $7 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 third quarter of 2016 were 16% lower than in the second quarter of 2016, but 49% higher than in the third quarter of 2015.

***North American Consumer Packaging*** net sales in the third quarter of 2016 were $407 million compared with $416 million in the second quarter of 2016 and $494 million in the third quarter of 2015. Operating profits were $39 million in the third quarter of 2016 compared with $48 million in the second quarter of 2016 and $22 million ($30 million excluding the net loss on the sale of the Carolina Coated Bristols brand and mill conversion costs and sheet plant closure costs) in the third quarter of 2015.

Coated Paperboard sales volumes in the third quarter of 2016 were about even with the second quarter of 2016. Average sales price realizations were lower, primarily for folding carton board, and average sales margins were further impacted by an unfavorable mix. There were no planned maintenance outages in either the third quarter of 2016 or the second quarter of 2016. Higher input costs for energy and chemicals were offset by lower costs for wood. Operating costs increased primarily due to inventory reserve adjustments.

Compared with the third quarter of 2015, sales volumes in the third quarter of 2016 were lower primarily due to the absence of the coated bristols product line. The business took 29,000 tons of market related downtime in the third quarter of 2015 and none in the third quarter of 2016. Average sales price realizations were lower. Average sales margins were also negatively affected by an unfavorable mix. Input costs were lower for wood, chemicals and freight. Planned maintenance downtime costs were $2 million lower.

Foodservice sales volumes in the third quarter of 2016 were higher than in the second quarter of 2016. Average sales prices decreased due to competitive market pressures. Compared with the third quarter of 2015, sales volumes in the third quarter of 2016 increased slightly. Average sales margins were flat reflecting lower average sales price realizations due to market pressures offset by a more favorable product mix. Freight costs decreased reflecting lower fuel prices and the impact of supply chain initiatives.

Looking forward to the fourth quarter of 2016, coated paperboard sales volumes are expected to be seasonally lower. Average sales price realizations are expected to be slightly lower. Input costs are expected to be flat. Planned maintenance downtime costs should be $12 million higher with an outage scheduled at the Texarkana mill. For Foodservice, sales volumes are expected to be flat while input costs and operating costs are expected to be lower.

***European Consumer Packaging*** net sales were $87 million in the third quarter of 2016 compared with $85 million in the second quarter of 2016 and $80 million in the third quarter of 2015. Operating profits in the third quarter of 2016 were $22 million compared with $25 million in the second quarter of 2016 and $20 million in the third quarter of 2015.

Compared with the second quarter of 2016, sales volumes in the third quarter of 2016 were higher in Europe and flat in Russia. Average sales margins decreased reflecting lower sales price realizations and a unfavorable mix. Input costs were flat. Planned maintenance downtime costs in the third quarter of 2016 which included an outage at the Kwidzyn mill were flat compared with the second quarter of 2016 which had an outage at the Svetogorsk mill.

Compared with the third 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 chemicals, energy and wood decreased in Europe, but increased for wood and energy in Russia. Planned maintenance downtime costs were $3 million lower in the third quarter of 2016 compared with the third quarter of 2015.

Entering the fourth quarter of 2016, sales volumes are expected to be lower in Europe and slightly higher in Russia. Average sales margins are expected to decrease reflecting lower average sales price realizations in both Europe and Russia, partially mitigated by a favorable mix in Russia. Planned maintenance downtime costs are expected to be $2 million lower with no outages scheduled in the fourth quarter. Input costs for wood and energy are expected to be higher.

***Asian Consumer Packaging*** net sales were $235 million in the third quarter of 2015. Operating profits were a loss of $195 million (a loss of $9 million excluding asset write-off costs) in the third 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 third quarter of 2016, compared with $46 million in the second quarter of 2016 and a loss of $9 million in the third quarter of 2015. In the third quarter of 2016, the after-tax foreign exchange impact primarily on the remeasurement of U.S. dollar-denominated net debt was a gain of $3 million compared with a gain of $6 million in the second quarter of 2016. Compared with the second quarter of 2016, sales volumes in the third quarter of 2016 were lower, primarily for sales of softwood pulp to China and other export markets. Average sales price realizations for sales of softwood pulp to China were relatively flat but were higher in other export markets, and were partially offset by lower hardwood pulp prices to China and lower paper prices in export markets. Input costs for wood, chemicals and distribution decreased. Planned maintenance downtime costs in the third quarter of 2016 were slightly lower for outages at all three mills.

Compared with the third quarter of 2015, sales volumes in the third quarter of 2016 increased primarily for sales of softwood pulp to China and hardwood pulp in the Russian domestic market, but were partially offset by decreased sales volumes of hardwood pulp to China and other 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 Russian domestic market. Input costs for wood, energy and chemicals were higher in the third quarter of 2016 compared with the third quarter of 2015. Operating costs were lower. An after-tax foreign exchange loss of $65 million primarily on the remeasurement of U.S. dollar-denominated net debt was recorded in the third quarter of 2015.

Looking forward to the fourth quarter of 2016, sales volumes are expected to improve. Average sales price realizations are expected to be relatively flat compared with the third quarter of 2016. Input costs are expected to be seasonally higher for wood and energy. There are no planned maintenance outages in the fourth quarter, so downtime costs are expected to be about $10 million lower on a 100% pre-tax basis than in the third quarter.

### LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations totaled $1.6 billion for the first nine months of 2016, compared with $1.6 billion for the comparable 2015 nine-month period. Cash used for working capital components totaled $120 million for the first nine months of 2016 compared to $283 million for the comparable 2015 nine-month period.

The Company generated free cash flow of approximately $1.4 billion and $1.3 billion in the first nine months of 2016 and 2015, respectively. Free cash flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operations. Management believes that free cash flow is useful to investors as a liquidity measure because it measures the amount of cash generated that is available, after reinvesting in the business, to maintain a strong balance sheet, pay dividends, repurchase stock, service debt and make investments for future growth. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. By adjusting for certain items that are not indicative of the Company's ongoing performance, free cash flow also enables investors to perform meaningful comparisons between past and present periods.

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

*In millions*

|  | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Cash provided by operations | **$1,566** | $1,590 |
| Adjustments: |  |  |
| Cash invested in capital projects | **(903)** | (998) |
| Cash contribution to pension plan | **750** | 750 |
| Free Cash Flow | **$1,413** | $1,342 |

Investments in capital projects totaled $903 million in the first nine months of 2016 compared to $998 million in the first nine 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 nine months of 2016 included a $1.6 billion net increase in debt versus a $238 million net increase in debt during the comparable 2015 nine-month period. During the third quarter of 2016, the Company issued $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.

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

*In millions*

|  | Three Months Ended September 30, 2016 | 2015 | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Early debt reductions (a) | **$266** | $90 | **$266** | $1,479 |
| Pre-tax early debt extinguishment costs | **29** | 1 | **29** | 208 |

(a) Reductions related to notes with an interest rate of 7.95% and original maturity in 2018 for both the three and nine months ended September 30, 2016, and from 4.75% to 5.85% with original maturities from 2019 to 2030 and from 4.70% to 9.38% with original maturities from 2015 to 2030 for the three and nine months ended September 30, 2015, respectively.

At September 30, 2016, contractual obligations for future payments of debt maturities by calendar year were as follows: $29 million in 2016; $58 million in 2017; $507 million in 2018; $410 million in 2019; $168 million in 2020; $641 million in 2021; and $9.1 billion thereafter.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 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 September 30, 2016, International Paper’s credit agreements totaled $2.1 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 that expires in August 2019 and has a facility fee of 0.15% per annum payable quarterly.

During the first nine months of 2016, International Paper borrowed and repaid $800 million under a receivable securitization facility at an average rate of 1.20%. The Company has no borrowings outstanding under this program at September 30, 2016.

During the first nine months of 2016, International Paper entered into a $250 million contractually committed bank credit facility that expires on December 31, 2016 and has a facility fee of 0.15% per annum payable quarterly. During the first nine months of 2016, the Company borrowed and repaid $230 million on the bank credit facility and the bank credit facility was terminated during the third quarter of 2016.

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 September 30, 2016, the Company had no borrowings outstanding under this program. The liquidity facilities also include up to $600 million of uncommitted financings based on eligible receivable balances ($600 million available at September 30, 2016) under a receivables securitization program that expires in December 2016.

During the first nine 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 $131.7 million, including $100.1 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. Under the current repurchase program, 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 September 30, 2016.

During the first nine 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 9.8 million shares of treasury stock, including restricted stock tax withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $504.5 million, including $422.6 million related to shares repurchased under the Company's share repurchase program. Cash dividend payments related to common stock totaled $543 million and $503 million for the first nine months of 2016 and 2015, respectively. Dividends were $1.3200 per share and $1.2000 per share for the first nine 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

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, to add standstill provisions that tolled the rights of the Company and its partners to commence certain procedures specified under the deadlock provisions. Unless these standstill provisions are renewed, these rights will be reinstated as of January 1, 2017. If these or any other deadlock procedures under the shareholder's agreement 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. Based on the provisions of the agreement, the Company estimates that the current purchase price for its partners' 50% interests would be approximately $1.4 billion, which could be satisfied by payment of cash or International Paper common stock, or some combination of the two, at the Company's option. The purchase by the Company of its partners’ 50% interest in Ilim would result in the consolidation of Ilim's financial position and results of operations in all subsequent periods. The parties have informed each other that they have no current intention to commence procedures specified under the deadlock provisions of the shareholder’s agreement.

### 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 nine months of 2016.

### Pension Accounting

Net pension expense totaled approximately $718 million for International Paper’s U.S. plans for the nine months ended September 30, 2016, or about $368 million more than the pension expense for the first nine months of 2015. The increase in U.S. plan expense was due to $442 million plan settlement accounting charges in the second and third quarters of 2016 and updated demographic assumptions partially offset by lower amortization of unrecognized actuarial losses. Net pension expense for non-U.S. plans was about $3 million and $5 million for the first nine 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 September 30, 2016, the market value of plan assets for International Paper’s U.S. plans totaled approximately $10.8 billion, consisting of approximately 49% equity securities, 31% fixed income securities, and 20% 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 other 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. Additional payments of $8 million were made during the third quarter of 2016 due to mandatory cash payouts and a small lump sum payout project, and the Pension Plan was subsequently remeasured at September 30, 2016 using a discount rate of 3.60%, down from 3.80% at June 30, 2016. As a result of settlement accounting, the Company recognized a pro-rata portion of the unamortized net actuarial loss, after remeasurement, resulting in a $3 million non-cash charge to the Company's earnings in the third quarter of 2016. As a result of the plan remeasurement and other quarterly activity, including the pension contributions discussed below, the difference between the qualified plan liabilities and plan assets decreased by $441 million during the third 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 $500 million to the qualified pension plan in the second and third quarters of 2016, respectively. The Company made a voluntary cash contribution of $750 million to the qualified pension plan in the second quarter of 2015. These contributions were 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 $15 million for the nine months ended September 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 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, 1,485 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 September 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 September 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 Nov 3, 2016.
Source: SEC EDGAR, the filing index for accession 0000051434-16-000069. Last ingested by Listed: Nov 10, 2026, 17:11 ET. No prices; not investment advice.