# International Paper Co: Form 10-Q for the period ended Jun 30, 2017

- Company: [International Paper Co](/companies/ip.md) (CIK 51434)
- Form: 10-Q
- Filed: 2017-08-04
- Accepted by EDGAR: Aug 4, 2017, 14:47 ET
- Period: 2017-06-30
- Accession: 0000051434-17-000040
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/51434/000005143417000040/ip-6302017xform10xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/51434/000005143417000040/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 6 months, 2017-01-01 to 2017-06-30 | $11.28bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2017-04-01 to 2017-06-30 | $4.11bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2017-01-01 to 2017-06-30 | $8.04bn | us-gaap:CostOfGoodsSold |
| Selling, general and administrative | 3 months, 2017-04-01 to 2017-06-30 | $422.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2017-01-01 to 2017-06-30 | $844.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-04-01 to 2017-06-30 | $129.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-01-01 to 2017-06-30 | $557.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-04-01 to 2017-06-30 | $186.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2017-01-01 to 2017-06-30 | $373.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | −$89.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | −$6.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | $80.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | $289.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | $0.19 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | $0.69 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | $0.19 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | $0.70 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 416,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 416,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-01-01 to 2017-06-30 | $1.28bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $664.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2017-01-01 to 2017-06-30 | $382.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2017-01-01 to 2017-06-30 | $46.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-06-30 | $1.04bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-06-30 | $7.24bn | us-gaap:AssetsCurrent |
| Total assets | at 2017-06-30 | $33.88bn | us-gaap:Assets |
| Current liabilities | at 2017-06-30 | $5.00bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2017-06-30 | $10.39bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-06-30 | $824.0m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2017-06-30 | $4.54bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,224 characters.

### EXECUTIVE SUMMARY

Diluted earnings (loss) attributable to International Paper common shareholders were $80 million ($0.19 per share) in the second quarter of 2017, compared with $209 million ($0.50 per share) in the first quarter of 2017 and $40 million ($0.10 per share) in the second quarter of 2016. Adjusted Operating Earnings is a non-GAAP measure and 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 $270 million ($0.65 per share) in the second quarter of 2017, compared with 2017 first-quarter earnings of $249 million ($0.60 per share) and 2016 second-quarter earnings of $379 million ($0.92 per share).

International Paper delivered solid results in the 2017 second quarter with significant contributions from our North American Industrial Packaging and Global Cellulose Fibers businesses. Key drivers to the 2017 second quarter results were higher prices in our North American Industrial Packaging and Global Cellulose Fibers businesses along with healthy demand for box and containerboard. We saw positive momentum in our Global Cellulose Fibers business with the realization of synergies at a faster than expected rate. The Company also completed the acquisition of Europac's Tangier facility in Morocco which will complement IP's existing EMEA packaging business. Additionally, during the 2017 second quarter, the Company settled the Kleen products class action lawsuit and on August 1, 2017 paid $354 million into a settlement fund.

Price was higher in our North American Industrial Packaging business versus 2017 first quarter as we continue to implement and realize recent price increases in North America and export markets. The Global Cellulose Fibers business delivered significantly improved sequential quarter results on record fluff pulp volume and continued price realization. Volumes were seasonally higher relative to the 2017 first quarter, particularly in our North American Industrial Packaging business. Operations were overall favorable versus the 2017 first quarter primarily driven by solid operating performance in our North American Industrial Packaging and Global Cellulose Fibers businesses. The Company executed a heavy maintenance outage schedule during the 2017 second quarter, with about 75% of the planned outages having now been completed in the first half of the year. Input costs were unfavorable versus the 2017 first quarter primarily due to higher than expected OCC costs; however these costs were offset by lower wood, chemicals and energy costs. Our Ilim joint venture delivered solid results, driven primarily by seasonally higher volume and improved pulp pricing; however, results were negatively impacted by non-cash foreign currency movements primarily associated with Ilim's U.S. dollar denominated net debt.

Looking ahead to the 2017 third quarter, we expect to see significant benefits from the implementation of recent price increases in our North American Industrial Packaging business. Additionally, we should see further price realization on North American Containerboard exports and benefits from the on-going implementation of price increases in the North American Consumer Packaging business. Continued benefits from previous fluff pulp price increases are expected to be partially offset by lower seasonal volume and lower softwood pulp prices. Volumes are expected to be stable relative to the 2017 second quarter; however, our North American Industrial Packaging business will be impacted by one less shipping day during the 2017 third quarter. The North American Industrial Packaging Business is also expected to benefit from better operational performance and lower operating costs. Outage expenses are expected to be significantly lower in the 2017 third quarter as we have completed a significant portion of 2017 planned maintenance outages in the first half of the year. We anticipate higher input costs in the 2017 third quarter, driven primarily by OCC and energy costs. In our Ilim joint venture, we expect sequentially lower volumes due to seasonality and lower average softwood pulp prices. Our outlook for the Ilim equity earnings also assumes a June 30, 2017 RUB/USD exchange rate on Ilim’s U.S. dollar denominated net debt.

Adjusted Operating Earnings and Adjusted Operating Earnings Per Share are non-GAAP measures. Diluted earnings (loss) and Diluted earnings (loss) per share attributable to common shareholders are the most direct comparable GAAP measures. 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 (includes all U.S. pension costs, excluding service costs and prior service costs), 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 common shareholders to Adjusted Operating Earnings attributable to common shareholders.

|  | Three Months Ended June 30, 2017 | 2016 | Three Months Ended March 31, 2017 |
| --- | ---: | ---: | ---: |
| Diluted Earnings (Loss) Attributable to Shareholders | **$80** | $40 | $209 |
| Add back - Discontinued operations (gain) loss | **—** | — | — |
| Diluted Earnings (Loss) from Continuing Operations | **80** | 40 | 209 |
| Add Back - Non-operating pension (income) expense | **34** | 487 | 31 |
| Add Back - Net special items expense (income) | **353** | 33 | 14 |
| Income tax effect - Non-operating pension and special items expense | **(197)** | (181) | (5) |
| Adjusted Operating Earnings (Loss) Attributable to Shareholders | **$270** | $379 | $249 |

|  | Three Months Ended June 30, 2017 | 2016 | Three Months Ended March 31, 2017 |
| --- | ---: | ---: | ---: |
| Diluted Earnings (Loss) Per Share Attributable to Shareholders | **$0.19** | $0.10 | $0.50 |
| Add Back - Discontinued operations (gain) loss per share | **—** | — | — |
| Diluted Earnings (Loss) Per Share from Continuing Operations | **0.19** | 0.10 | 0.50 |
| Add Back - Non-operating pension (income) expense per share | **0.08** | 1.18 | 0.07 |
| Add Back - Net special items expense (income) per share | **0.85** | 0.08 | 0.03 |
| Income tax effect per share - Non-operating pension and special items expense | **(0.47)** | (0.44) | — |
| Adjusted Operating Earnings (Loss) Per Share Attributable to Shareholders | **$0.65** | $0.92 | $0.60 |

### RESULTS OF OPERATIONS

For the second quarter of 2017, International Paper Company reported net sales of $5.8 billion, compared with $5.5 billion in the first quarter of 2017 and $5.3 billion in the second quarter of 2016.

Net earnings attributable to International Paper totaled $80 million, or $0.19 per share, in the 2017 second quarter. This compared with $40 million, or $0.10 per share, in the second quarter of 2016 and $209 million or $0.50 per share, in the first quarter of 2017.

Earnings from continuing operations attributable to International Paper Company were $80 million in the second quarter of 2017 compared with $40 million in the second quarter of 2016 and $209 million in the first quarter of 2017. Compared with the second quarter of 2016, the 2017 second quarter reflects higher average sales price realizations net of an unfavorable mix ($58 million), higher sales volumes ($3 million), lower corporate and other costs ($12 million), the operating results for the recently acquired pulp business which was not included in the prior year ($28 million), lower tax expense ($14 million) reflecting a lower estimated tax rate and lower non-operating pension expense ($278 million). These benefits were offset by higher operating costs ($61 million), higher raw material and freight costs ($72 million), higher mill maintenance outage costs ($58 million) and higher net interest expense ($8 million). Equity earnings, net of taxes, relating to International Paper’s investment in Ilim Holding S.A. were $25 million lower in the 2017 second quarter than in the 2016 second quarter. Net special items in the 2017 second quarter were a loss of $169 million compared with a loss of $40 million in the 2016 second quarter.

Compared with the first quarter of 2017, earnings benefited from higher average sales price realizations and a favorable mix ($54 million), higher sales volumes ($25 million), lower operating costs ($17 million), lower corporate and other items ($6 million), lower net interest expense ($1 million), lower tax expense ($2 million) reflecting a lower estimated tax rate and lower non-operating pension expense ($2 million). These benefits were offset by higher raw material and freight costs ($3 million) and higher mill maintenance outage costs ($56 million). Equity earnings, net of taxes, for Ilim Holding, S.A. were $29 million lower than in the 2017 first quarter. Net special items in the 2017 second quarter were a loss of $169 million compared with a loss of $21 million in the 2017 first quarter.

Business Segment Operating Profits are used by International Paper's management to measure the earnings performance of its businesses. Management believes that this measure allows a better understanding of trends in costs, operating efficiencies, prices and volumes. Business Segment Operating Profits are defined as earnings (loss) from continuing operations before income taxes and equity earnings, but including the impact of equity earnings and noncontrolling interests, excluding corporate items and corporate special items. Business Segment Operating Profits are defined by the Securities and Exchange Commission as a non-GAAP financial measure, and are not GAAP alternatives to net income or any other operating measure prescribed by accounting principles generally accepted in the United States.

International Paper operates in four segments: Industrial Packaging, Global Cellulose Fibers, Printing Papers and Consumer Packaging.

The following table presents a reconciliation of net earnings attributable to International Paper Company to its total Business Segment Operating Profit:

*In millions*

|  | Three Months Ended June 30 2017 | 2016 | March 31, 2017 |
| --- | ---: | ---: | ---: |
| Earnings (Loss) From Continuing Operations Attributable to International Paper Company | **$80** | $40 | $209 |
| Add back (deduct): |  |  |  |
| Income tax provision (benefit) | **(89)** | (9) | 83 |
| Equity (earnings) loss, net of taxes | **(20)** | (45) | (48) |
| Noncontrolling interests, net of taxes | **—** | — | — |
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | **(29)** | (14) | 244 |
| Interest expense, net | **137** | 129 | 142 |
| Noncontrolling interests / equity earnings included in operations | **(1)** | — | — |
| Corporate items | **4** | 25 | 11 |
| Special items (income) expense | **(16)** | — | — |
| Non-operating pension expense | **34** | 487 | 31 |
| Adjusted Operating Profit | **$129** | $627 | $428 |
| Business Segment Operating Profit: |  |  |  |
| Industrial Packaging | **$50** | $458 | $365 |
| Global Cellulose Fibers | **7** | (21) | (70) |
| Printing Papers | **86** | 117 | 100 |
| Consumer Packaging | **(14)** | 73 | 33 |
| Total Business Segment Operating Profit | **$129** | $627 | $428 |

27

### Business Segment Operating Profit

Total business segment operating profits of $129 million in the 2017 second quarter were lower than the $627 million in the 2016 second quarter and the $428 million in the 2017 first quarter. Compared with the second quarter of 2016, operating profits in the current quarter benefited from higher average sales price realizations net of an unfavorable mix ($87 million), higher sales volumes ($4 million) and the operating results for the recently acquired pulp business which are not included in the prior year ($42 million). These benefits were offset by higher operating costs ($92 million), higher raw material and freight costs ($110 million), higher mill outage costs ($87 million) and higher other costs ($2 million). Special items were a loss of $373 million in the 2017 second quarter compared with a loss of $33 million in the 2016 second quarter.

Compared with the first quarter of 2017, operating profits benefited from higher average sales price realizations and a favorable mix ($78 million), higher sales volumes ($37 million), lower operating costs ($23 million) and lower other items ($6 million). These benefits were offset by higher raw material and freight costs ($4 million) and higher mill outage costs ($80 million). Special items were a loss of $373 million in the 2017 second quarter compared with a loss of $14 million in the 2017 first quarter.

During the 2017 second quarter, International Paper took approximately 291,000 tons of downtime of which none were economic-related compared with approximately 286,000 tons of downtime, which included about 85,000 tons that were economic-related, in the 2016 second quarter. During the 2017 first quarter, International Paper took approximately 242,000 tons of downtime of which approximately 35,000 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 and six months ended June 30, 2017 and 2016 were as follows:

| In thousands of short tons (except as noted) Industrial Packaging | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| North American Corrugated Packaging (c) | **2,648** | 2,642 | **5,185** | 5,161 |
| North American Containerboard | **797** | 770 | **1,610** | 1,510 |
| North American Recycling | **925** | 968 | **1,875** | 1,896 |
| North American Saturated Kraft | **41** | 44 | **87** | 91 |
| North American Gypsum/Release Kraft | **58** | 47 | **111** | 93 |
| North American Bleached Kraft | **6** | 5 | **13** | 11 |
| EMEA Industrial Packaging (c) (d) | **400** | 373 | **774** | 747 |
| Asian Box (c) (e) | **—** | 105 | **—** | 208 |
| Brazilian Packaging (c) | **87** | 84 | **173** | 161 |
| Industrial Packaging | **4,962** | 5,038 | **9,828** | 9,878 |
| Cellulose Fibers (in thousands of metric tons) (b) | **896** | 451 | **1,773** | 818 |
| Printing Papers |  |  |  |  |
| North American Uncoated Papers | **465** | 460 | **954** | 935 |
| EMEA and Russian Uncoated Papers | **380** | 389 | **739** | 762 |
| Brazilian Uncoated Papers | **288** | 272 | **552** | 526 |
| Indian Uncoated Papers | **67** | 61 | **128** | 124 |
| Uncoated Papers | **1,200** | 1,182 | **2,373** | 2,347 |
| Consumer Packaging |  |  |  |  |
| North American Consumer Packaging | **289** | 306 | **580** | 614 |
| EMEA Coated Paperboard | **94** | 99 | **193** | 193 |
| Consumer Packaging | **383** | 405 | **773** | 807 |

(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. Includes sales volumes from the pulp business acquired beginning December 1, 2016.

(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.

### Income Taxes

An income tax benefit of $89 million was recorded for the 2017 second quarter and the reported effective income tax rate for continuing operations was 298%. Excluding a benefit of $184 million related to the tax effects of special items and a benefit of $13 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 30.0% for the quarter.

An income tax provision of $83 million was recorded for the 2017 first quarter and the reported effective income tax rate for continuing operations was 34%. Excluding an expense of $7 million related to the tax effects of special items and a benefit of $12 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 and the reported effective income tax rate for continuing operations was 64%. 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.

### Interest Expense and Noncontrolling Interest

Net interest expense for the 2017 second quarter was $137 million which includes interest income of $4 million related to income tax refund claims compared with $142 million in the 2017 first quarter and $129 million in the 2016 second quarter.

### Effects of Special Items

Details of special items for the three months are as follows:

*In millions*

| Business Segments | Three Months Ended June 30 2017 Before Tax | After Tax | 2016 Before Tax | After Tax | March 31 2017 Before Tax | After Tax |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Kleen Products anti-trust class action lawsuit settlement | **$354** | **$219** | $— | $— | $— | $— |
| Pulp business acquisition inventory fair value step-up amortization | **—** | **—** | — | — | 14 | 8 |
| Weyerhaeuser pulp business integration costs | **5** | **3** | 5 | 3 | 4 | 2 |
| Holmen mill net bargain purchase gain | **—** | **—** | — | — | (6) | (6) |
| Asia Packaging restructuring and impairment | **—** | **—** | 28 | 20 | — | — |
| Foodservice Asia impairment | **9** | **4** | — | — | — | — |
| Other | **5** | **3** | — | — | 2 | 2 |
| Business Segments Total | **373** | **229** | **33** | **23** | 14 | 6 |
| **Corporate** |  |  |  |  |  |  |
| India Packaging business evaluation write-off | **(2)** | **(2)** | — | — | — | — |
| Gain on sale of investment in ArborGen | **(14)** | **(9)** | — | — | — | — |
| Interest income related to income tax refund claim | **(4)** | **(2)** | — | — | — | — |
| Corporate Total | **(20)** | **(13)** | **—** | **—** | — | — |
| **Total special items** | **353** | **216** | 33 | 23 | 14 | 6 |
| Non-operating pension expense | **34** | **21** | 487 | 299 | 31 | 19 |
| **Total** | **$387** | **$237** | $520 | $322 | $45 | $25 |

Includes the following tax expenses (benefits):

*In millions*

|  | Three Months Ended June 30 2017 | 2016 | March 31 2017 |
| --- | ---: | ---: | ---: |
| Income tax refund claims | **$(85)** | $— | $— |
| Return to accrual | **38** | 23 | — |
| International investment restructuring | **—** | — | 15 |
| International legal entity restructuring | **—** | (6) | — |
| **Total** | **$(47)** | $17 | $15 |

30

Details of special items for the six months are as follows:

*In millions*

| Business Segments | Six Months Ended June 30 2017 Before Tax | After Tax | 2016 Before Tax | After Tax |
| --- | ---: | ---: | ---: | ---: |
| Kleen Products anti-trust class action lawsuit settlement | **$354** | **$219** | $— | $— |
| Pulp business acquisition inventory fair value step-up amortization | **14** | **8** | — | — |
| Weyerhaeuser pulp business integration costs | **9** | **5** | 5 | 3 |
| Holmen mill net bargain purchase gain | **(6)** | **(6)** | — | — |
| Riegelwood mill conversion costs | **—** | **—** | 9 | 6 |
| Asia Packaging restructuring and impairment | **—** | **—** | 65 | 54 |
| Foodservice Asia impairment | **9** | **4** | — | — |
| Abandoned property | **7** | **5** | — | — |
| Business Segments Total | **387** | **235** | 79 | 63 |
| **Corporate** |  |  |  |  |
| Gain on sale of investment in Arizona Chemical | **—** | **—** | (8) | (5) |
| India Packaging business evaluation write-off | **(2)** | **(2)** | — | — |
| Gain on sale of investment in ArborGen | **(14)** | **(9)** | — | — |
| Interest income related to income tax refund claim | **(4)** | **(2)** | — | — |
| Corporate Total | **(20)** | **(13)** | (8) | (5) |
| **Total special items** | **367** | **222** | 71 | 58 |
| Non-operating pension expense | **65** | **40** | 531 | 326 |
| **Total** | **$432** | **$262** | $602 | $384 |

Includes the following tax expenses (benefits):

*In millions*

|  | Six Months Ended June 30 2017 | 2016 |
| --- | ---: | ---: |
| Income tax refund claims | **$(85)** | $— |
| Return to accrual | **38** | 23 |
| International investment restructuring | **15** | — |
| International legal entity restructuring | **—** | (63) |
| Federal income tax audit closure | **—** | (14) |
| **Total** | **$(32)** | $(54) |

### BUSINESS SEGMENT OPERATING RESULTS

The following tables present net sales and operating profit (loss) which is the Company's measure of segment profitability. The tables include a detail of special items in each year, where applicable, in order to show operating profit before special items. The Company calculates Operating Profit Before Special Items (non-GAAP) by excluding the pre-tax effect of items considered by management to be unusual from the earnings reported under U.S. generally accepted accounting principles (“GAAP”). 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. International Paper believes that using this information, along with net earnings, provides for a more complete analysis of the results of operations by quarter. Net earnings attributable to International Paper is the most directly comparable GAAP measure. See Note 18 - Business Segment Information in the Condensed Notes to the Consolidated Financial Statements for the GAAP reconciliation of segment operating profit.

### Industrial Packaging

*In millions*

| Total Industrial Packaging | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales (a)** | **$3,706** | $3,499 | **$7,205** | $3,520 | $3,411 | $6,931 |
| **Operating Profit** | **$50** | $365 | **$415** | $458 | $396 | $854 |
| Asia Packaging restructuring and impairment | **—** | — | **—** | 28 | 37 | 65 |
| Holmen mill bargain purchase gain | **—** | (6) | **(6)** | — | — | — |
| Kleen Products anti-trust settlement | **354** | — | **354** | — | — | — |
| Other | **3** | 1 | **4** | — | — | — |
| **Operating Profit Before Special Items** | **$407** | $360 | **$767** | $486 | $433 | $919 |

Industrial Packaging net sales for the second quarter of 2017 were 6% higher than in the first quarter of 2017 and were 5% higher than in the second quarter of 2016. Operating profit before special items (as shown in the table above) was 13% higher in the second quarter of 2017 than in the first quarter of 2017 and 16% lower than in the second quarter of 2016.

*In millions*

| North American Industrial Packaging | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$3,336** | $3,155 | **$6,491** | $3,138 | $3,055 | $6,193 |
| **Operating Profit** | **$51** | $361 | **$412** | $496 | $438 | $934 |
| Kleen Products anti-trust settlement | **354** | — | **354** | — | — | — |
| Other | **3** | 1 | **4** | — | — | — |
| **Operating Profit Before Special Items** | **$408** | $362 | **$770** | $496 | $438 | $934 |

(a) Includes intra-segment sales of $31 million and $32 million for the three months ended June 30, 2017 and 2016, respectively, and $32 million and $45 million for the three months ended March 31, 2017 and 2016, respectively.

***North American Industrial Packaging*** sales volumes for boxes in the second quarter of 2017 were higher than in the first quarter of 2017 despite one less shipping day, reflecting seasonally stronger demand. Containerboard shipments to export markets were also higher. Total maintenance and economic downtime increased 29,000 tons from 128,000 tons to 157,000 tons which reflects an increase of 64,000 tons for maintenance downtime and a decrease of 35,000 tons for economic downtime. Average sales margins for boxes were higher due to the realization of box sales price increases. Average sales price realizations for containerboard also increased in both the domestic and export markets. Input costs were higher for recycled fiber, but were partially offset by lower costs for energy, wood and chemicals. Planned maintenance downtime costs were $31 million higher in the 2017 second quarter compared with the 2017 first quarter. Operating costs, including costs associated with the January Pensacola mill digester incident, were lower.

Compared with the second quarter of 2016, sales volumes for boxes were higher in the second quarter of 2017 which included one less shipping day. Sales volumes for containerboard increased in export markets, while domestic shipments were relatively flat. Total maintenance and economic downtime was 53,000 tons lower in the second quarter of 2017 which comprises an increase of 32,000 tons for maintenance downtime and a decrease of 85,000 tons for economic downtime. Average sales margins for boxes increased due to higher average sales price realizations. Average sales price realizations in both domestic and export containerboard markets were higher. Significantly higher input costs for recycled fiber and energy were slightly offset by lower wood costs. Planned maintenance downtime costs were $22 million higher in the second quarter of 2017 compared with the second quarter of 2016. Operating costs were higher due to reliability events and spending as well as inventory valuation costs.

Entering the third quarter of 2017, sales volumes for boxes are expected to continue to be strong, but will include one less shipping day. Containerboard export and domestic shipments are expected to be similar to the second quarter. Input costs for recycled fiber, wood and energy are expected to rise. Planned maintenance downtime costs should be $53 million lower.

*In millions*

| EMEA Industrial Packaging | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$341** | $317 | **$658** | $295 | $294 | $589 |
| **Operating Profit** | **$5** | $14 | **$19** | $6 | $7 | $13 |
| Holmen mill net bargain purchase gain | **—** | (6) | **(6)** | — | — | — |
| **Operating Profit Before Special Items** | **$5** | $8 | **$13** | $6 | $7 | $13 |

***EMEA Industrial Packaging*** sales volumes for boxes in the second quarter of 2017 were about even with the first quarter of 2017 as seasonally lower sales in Morocco were offset by a recovery from the first quarter weather-related shortfall in the Euro- zone. Average sales margins decreased due to higher input costs for board. Input costs for energy were lower, while distribution costs increased due to higher export shipments from Turkey. Operating costs were higher.

Compared with the second quarter of 2016, sales volumes in the second quarter of 2017 were higher. Average sales margins improved due to material cost decreases and sales price increases in Turkey. Operating costs and distribution costs both increased.

Looking ahead to the third quarter of 2017, sales volumes are expected to be seasonally lower. Average sales margins are expected to continue to be compressed due to higher material costs, only partially offset by box sales price increases and mix improvement initiatives. Operating costs are expected to be lower.

*In millions*

| Brazilian Industrial Packaging | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$60** | $59 | **$119** | $51 | $42 | $93 |
| **Operating Profit** | **$(6)** | $(10) | **$(16)** | $(12) | $(8) | $(20) |

***Brazilian Industrial Packaging*** sales volumes in the second quarter of 2017 compared with the first quarter of 2017 were higher for boxes and flat for containerboard. Average sales margins were impacted by higher sales prices for boxes, largely offset by an unfavorable customer/segment mix. Planned maintenance downtime costs in the second quarter of 2017 were $2 million lower than in the first quarter of 2017 which included an outage at the Nova Campina mill. Input costs were lower for recycled fiber.

Compared with the second quarter of 2016, sales volumes in the second quarter of 2017 were higher for boxes and containerboard, reflecting improving economic conditions. Average sales price realizations for boxes increased, while input costs, primarily for utilities and recycled fiber, decreased. Operating costs were lower and planned maintenance downtime costs were $2 million lower than in the second quarter of 2016.

Looking ahead to the third quarter of 2017, sales volumes are expected to be seasonally higher for boxes. Average sales price realizations are also expected to improve for both boxes and containerboard and the customer/segment mix should be favorable. Input costs should be stable.

*In millions*

| Asian Industrial Packaging | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$—** | $— | **$—** | $68 | $65 | $133 |
| **Operating Profit** | **$—** | $— | **$—** | $(32) | $(41) | $(73) |
| Asia Packaging Restructuring and Impairment | **—** | — | **—** | 28 | 37 | 65 |
| **Operating Profit Before Special Items** | **$—** | $— | **$—** | $(4) | $(4) | $(8) |

### Asian Industrial Packaging

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. See Note 8 - Divestitures / Spinoff in the Condensed Notes to the Consolidated Financial Statements for further discussion of the sale of this business.

### Global Cellulose Fibers

*In millions*

| Total Global Cellulose Fibers | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$612** | $564 | **$1,176** | $259 | $212 | $471 |
| **Operating Profit** | **$7** | $(70) | **$(63)** | $(21) | $(50) | $(71) |
| Acquisition costs | **5** | 4 | **9** | 5 | — | 5 |
| Inventory fair value step-up amortization | **—** | 14 | **14** | — | — | — |
| Other | **—** | 1 | **1** | — | — | — |
| **Operating Profit Before Special Items** | **$12** | $(51) | **$(39)** | $(16) | $(50) | $(66) |

***Global Cellulose Fibers*** includes the results of the pulp business acquired from Weyerhaeuser beginning in December 2016. See Note 7 - Acquisitions in the Condensed Notes to Consolidated Financial Statements for further discussion of this acquisition. Net sales were 9% higher in the second quarter of 2017 than in the first quarter of 2017 and significantly higher than in the second quarter of 2016 due to the acquisition. Operating profit before special items (as shown in the table above) was 124% higher in the second quarter of 2017 than in the first quarter of 2017 and 175% higher than in the second quarter of 2016.

Sales volumes in the second quarter of 2017 compared with the first quarter of 2017 increased reflecting solid demand, particularly for fluff pulp. Average sales price realizations also increased. Operating costs were lower as the mills recovered from first-quarter performance issues and the January Pensacola mill digester incident. Input costs were lower. Planned maintenance downtime costs in the second quarter of 2017 were $6 million lower than in the first quarter of 2017. In Europe and Russia, sales volumes were lower, but average sales price realizations were favorable.

Compared with the second quarter of 2016, for the legacy business sales volumes in the second quarter of 2017 were flat. Average sales price realizations improved. Planned maintenance downtime costs in the second quarter of 2017 which included outages at the Riegelwood, Pensacola and Eastover mills were $16 million higher than in the second quarter of 2016 which included outage costs associated with the Riegelwood mill conversion. In Europe and Russia, sales volumes decreased, but average sales margins were favorably impacted by higher sales price realizations and a positive mix.

Entering the third quarter of 2017, sales volumes for the combined business are expected to be stable. Average sales price realizations are expected to reflect the realization of recent price increases. Average sales margins will also benefit from a more favorable product mix. Input costs are expected to be slightly higher. Planned maintenance downtime costs should be $36 million lower in the third quarter of 2017. In Europe and Russia, average sales price realizations are expected to decrease, but sales volumes are expected to increase.

### Printing Papers

*In millions*

| Total Printing Papers | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$1,017** | $995 | **$2,012** | $1,012 | $972 | $1,984 |
| **Operating Profit** | **$86** | $100 | **$186** | $117 | $135 | $252 |
| Other | 2 | — | **2** | — | — | — |
| **Operating Profit Before Special Items** | **$88** | $100 | **$188** | $117 | $135 | $252 |

Printing Papers net sales for the second quarter of 2017 were 2% higher than in the first quarter of 2017, but were even with the second quarter of 2016. Operating profit before special items (as shown in the table above) in the second quarter of 2017 was 12% lower than in the first quarter of 2017 and 25% lower than in the second quarter of 2016.

*In millions*

| North American Papers | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$446** | $468 | **$914** | $466 | $482 | $948 |
| **Operating Profit** | **$19** | $33 | **$52** | $51 | $61 | $112 |
| Other | **2** | — | **2** | — | — | — |
| **Operating Profit Before Special Items** | **$21** | $33 | **$54** | $51 | $61 | $112 |

***North American Papers*** sales volumes in the second quarter of 2017 were lower than in the first quarter of 2017 reflecting weak demand in the commercial printing market. Average sales price realizations for uncoated freesheet paper were lower due to competitive pressures. Average sales margins were also negatively impacted by an unfavorable geographic mix. Operating costs were seasonally lower and input costs also decreased. Planned maintenance downtime costs were $11 million higher in the second quarter of 2017 compared with the first quarter of 2017.

Compared with the second quarter of 2016, sales volumes in the second quarter of 2017 were slightly higher primarily due to increased shipments of uncoated freesheet paper to export markets. Average sales price realizations were lower, reflecting weak market conditions. Average sales margins were also impacted by an unfavorable product and mill sourcing mix. Input costs were flat. Planned maintenance downtime costs in the second quarter of 2017 were $8 million higher than in the second quarter of 2016.

Entering the third quarter of 2017, sales volumes are expected to be seasonally higher, while average sales price realizations are expected to decline. Average sales margins should be impacted by a negative geographic mix. Input costs are expected to be steady. Planned maintenance downtime costs should be $33 million lower with no scheduled outages in the third quarter.

*In millions*

| European Papers | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$299** | $274 | **$573** | $288 | $259 | $547 |
| **Operating Profit** | **$26** | $29 | **$55** | $34 | $40 | $74 |

***European Papers*** sales volumes for uncoated freesheet paper in the second quarter of 2017 compared with the first quarter of 2017 were higher in Russia and seasonally lower in Europe. Average sales price realizations for uncoated freesheet paper increased in Europe and were flat in Russia. Average sales margins benefited from a favorable mix in both regions. Input costs were higher, primarily for wood and purchased pulp, partially offset by lower energy costs in Europe and freight costs in Russia. Planned maintenance downtime costs in the second quarter of 2017 were $6 million higher than in the first quarter of 2017. Manufacturing operating costs were higher.

Sales volumes for uncoated freesheet paper in the second quarter of 2017 compared with the second quarter of 2016, were lower in Europe, but higher in Russia. Average sales price realizations for uncoated freesheet paper were flat overall as an increase in Russia was offset by lower prices in Europe. Input costs, primarily for wood and energy, were higher. Planned maintenance downtime costs in the second quarter of 2017 were $1 million lower than in the second quarter of 2016.

Looking forward to the third quarter of 2017, sales volumes for uncoated freesheet paper are expected to increase in Europe, but to be offset by a decrease in Russia. Average sales price realizations are expected to be stable. Input costs are expected to be stable in both Europe and Russia. Planned maintenance downtime costs should be $6 million lower in the third quarter of 2017 with no outages scheduled.

*In millions*

| Brazilian Papers | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales (a)** | **$232** | $214 | **$446** | $219 | $189 | $408 |
| **Operating Profit** | **$43** | $39 | **$82** | $34 | $35 | $69 |

(a) Includes intra-segment sales of $7 million and $3 million for the three months ended June 30, 2017 and 2016, respectively, and $9 million and $1 million for the three months ended March 31, 2017 and 2016, respectively.

***Brazilian Papers*** sales volumes in the second quarter of 2017 increased compared with the first quarter of 2017 reflecting stronger demand for uncoated freesheet paper in the Latin American export market. Average sales margins were lower as increased sales price realizations in the export market were more than offset by an unfavorable geographic mix. Input costs were steady. Planned maintenance downtime costs were $3 million higher in the second quarter of 2017 which included an outage at the Mogi Guacu mill.

Compared with the second quarter of 2016, sales volumes for uncoated freesheet paper in the second quarter of 2017 increased in other Latin American markets, but were lower in the domestic market. Average sales margins were lower due to an unfavorable geographic mix. Input costs were lower, primarily for purchased pulp. Planned maintenance outage costs were $4 million lower in the second quarter of 2017 compared with the second quarter of 2016 which included outages at the Luiz Antonio and Mogi Guacu mills.

Entering the third quarter of 2017, sales volumes for uncoated freesheet paper are expected to be seasonally higher in the domestic market, partially offset by lower shipments to export markets. Average sales price realizations are expected to be higher in the Latin American export market and average sales margins should also benefit from a more favorable geographic mix. Input costs are expected to be higher, particularly for virgin fiber and energy. Planned maintenance outage costs should be $3 million lower in the third quarter.

*In millions*

| Indian Papers | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$47** | $48 | **$95** | $42 | $43 | $85 |
| **Operating Profit** | **$(2)** | $(1) | **$(3)** | $(2) | $(1) | $(3) |

***Indian Papers*** sales volumes in the second quarter of 2017 compared with the first quarter of 2017 were lower due to reduced production capacity associated with a planned maintenance outage. Average sales price realizations were slightly higher. Input costs were lower, primarily for wood and were offset by higher operating costs. Compared with the second quarter of 2016, sales volumes in the second quarter of 2017 were flat. Average sales price realizations increased. Both operating costs and input costs were flat.

Looking ahead to the third quarter of 2017, sales volumes are expected to be lower due seasonally weaker demand and a planned maintenance outage at the Rajahmundry mill. Average sales prices should be seasonally lower. Planned maintenance outage costs are expected to be $1 million higher than in the second quarter of 2017 due to the outage at the Rajahmundry mill.

### Consumer Packaging

*In millions*

| Total Consumer Packaging | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$474** | $466 | **$940** | $501 | $495 | $996 |
| **Operating Profit** | **$(14)** | $33 | **$19** | $73 | $16 | $89 |
| Riegelwood mill conversion costs | **—** | — | **—** | — | 9 | 9 |
| Foodservice Asia asset impairment | **9** | — | **9** | — | — | — |
| **Operating Profit Before Special Items** | **$(5)** | $33 | **$28** | $73 | $25 | $98 |

Consumer Packaging net sales in the second quarter of 2017 were 2% higher than in the first quarter of 2017, but 5% lower than in the second quarter of 2016. Operating profit before special items (as shown in the table above) was 115% lower in the second quarter of 2017 than in the first quarter of 2017, and 107% lower than in the second quarter of 2016.

*In millions*

| North American Consumer Packaging | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$395** | $388 | **$783** | $416 | $418 | $834 |
| **Operating Profit** | **$(28)** | $14 | **$(14)** | $48 | $(10) | $38 |
| Riegelwood mill conversion costs | **—** | — | **—** | — | 9 | 9 |
| Foodservice Asia asset impairment | **9** | — | **9** | — | — | — |
| **Operating Profit Before Special Items** | **$(19)** | $14 | **$(5)** | $48 | $(1) | $47 |

***North American Consumer Packaging*** Coated paperboard sales volumes in the second quarter of 2017 were flat compared with the first quarter of 2017. Average sales price realizations were slightly higher reflecting the partial realization of an announced sales price increase. Average sales margins were further impacted by a more favorable mix. Planned maintenance downtime costs were $33 million higher in the second quarter of 2017 with outages at our Augusta and Texarkana mills compared with the first quarter of 2017 which included no outages. Operating costs were higher due to reliability issues at our Augusta mill during the 2017 second quarter. Input costs were stable.

Compared with the second quarter of 2016, sales volumes in the second quarter of 2017 were lower primarily due to capacity constraints associated with downtime at the Augusta mill. Average sales price realizations were lower for folding carton board and plate stock. Average sales margins were also negatively affected by an unfavorable mix. Planned maintenance downtime costs were $33 million higher. Operating costs were higher due to performance issues at our Augusta mill, while input costs were flat.

Foodservice sales volumes in the second quarter of 2017 were seasonally higher than in the first quarter of 2017. Average sales margins increased, reflecting higher average sales price realizations and a more favorable product mix, partially offset by higher input costs for polystyrene resin and board. Compared with the second quarter of 2016, sales volumes in the second quarter of 2017 increased slightly. Average sales price realizations were lower due to competitive pressure. Average sales margins were also negatively impacted by higher polystyrene and board input costs.

Looking forward to the third quarter of 2017, coated paperboard sales volumes are expected to be seasonally stronger. Average sales price realizations are expected to increase for cupstock and folding carton board. Input costs are expected to be stable. Planned maintenance downtime costs should be $33 million lower with no scheduled outages in the third quarter. Operating costs are expected to recover. For Foodservice, sales volumes are expected to be seasonally higher while average sales margins will reflect the realization of sales price increases and lower input costs.

*In millions*

| European Consumer Packaging | 2017 2nd Quarter | 1st Quarter | Six Months | 2016 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$79** | $78 | **$157** | $85 | $77 | $162 |
| **Operating Profit** | **$14** | $19 | **$33** | $25 | $26 | $51 |

***European Consumer Packaging*** sales volumes in the second quarter of 2017 compared with the first quarter of 2017 were lower in Europe, but were partially offset by higher volumes in Russia. Average sales margins decreased, reflecting lower sales price realizations and an unfavorable mix in Russia, while sales price realizations and mix were both favorable in Europe. Input costs were higher in both Europe and Russia. Planned maintenance downtime costs were $2 million higher in the second quarter of 2017 due to an outage at the Svetogorsk mill.

Compared with the second quarter of 2016, sales volumes increased in Europe, but decreased in Russia. Average sales margins were lower in Russia due to lower average sales price realizations, but in Europe sales margins reflected higher average sales price realizations and a more favorable mix. Input costs for energy and wood increased in both Europe and Russia. Planned maintenance downtime costs were $1 million lower in the second quarter of 2017 than in the second quarter of 2016.

Entering the third quarter of 2017, sales volumes are expected to be higher in both Europe and Russia. Average sales margins are expected to decrease, reflecting an unfavorable mix in Russia, although average sales price realizations in Russia are expected to increase. Planned maintenance downtime costs are expected to be $2 million lower with no scheduled outages in the third quarter. Input costs are expected to be flat.

### 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 business segment. The Company recorded equity earnings, net of taxes, of $21 million in the second quarter of 2017, compared with $50 million in the first quarter of 2017 and $46 million in the second quarter of 2016. In the second quarter of 2017, the after-tax foreign exchange impact primarily on the remeasurement of U.S. dollar-denominated net debt was a loss of $18 million compared with a gain of $23 million in the first quarter of 2017. Compared with the first quarter of 2017, sales volumes in the second quarter of 2017 were seasonally higher primarily for sales of hardwood pulp in China and sales of containerboard in domestic and other export markets. Average sales price realizations increased, primarily for sales of hardwood and softwood pulp in China and domestic markets and for containerboard in all markets, partially offset by cut-size paper sales in domestic markets. Input costs for wood increased, while operating costs were improved but were offset by planned maintenance outage costs in the second quarter of 2017.

Compared with the second quarter of 2016, sales volumes in the second quarter of 2017 increased primarily for sales of hardwood pulp to China, partially offset by decreased sales of softwood pulp to China, and other export and domestic markets. Average sales price realizations were higher, primarily for sales of softwood and hardwood pulp in China and in domestic markets and for sales of containerboard in all markets. Input costs and operating costs were relatively flat. An after-tax foreign exchange gain of $6 million primarily on the remeasurement of U.S. dollar denominated net debt was recorded in the second quarter of 2016.

Looking forward to the third quarter of 2017, sales volumes are expected to decrease. Average sales price realizations are expected to decrease compared with the second quarter of 2017 primarily for export sales of softwood pulp, but higher export prices are expected for sales of hardwood pulp. Input costs are expected to be lower primarily for wood, partially offset by higher distribution costs. Planned maintenance downtime costs will be higher in the third quarter of 2017 with outages scheduled at all three mills.

### LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations totaled $1.3 billion for the first six months of 2017, compared with $1.2 billion for the comparable 2016 six-month period. Cash used for working capital components totaled $648 million for the first six months of 2017 compared to $211 million for the comparable 2016 six-month period. The increase to working capital in 2017 reflects income tax receivables primarily driven by the planned pension contribution and the accrued Kleen litigation settlement.

The Company generated free cash flow of approximately $614 million and $838 million in the first six months of 2017 and 2016, 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*

|  | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Cash provided by operations | **$1,278** | $1,225 |
| Adjustments: |  |  |
| Cash invested in capital projects | **(664)** | (637) |
| Cash contribution to pension plan | **—** | 250 |
| Free Cash Flow | **$614** | $838 |

37

Investments in capital projects totaled $664 million in the first six months of 2017 compared to $637 million in the first six months of 2016. Full-year 2017 capital spending is currently expected to be approximately $1.5 billion, or about 107% of depreciation and amortization expense for our current businesses.

Financing activities for the first six months of 2017 included a $116 million net decrease in debt versus a $134 million net increase in debt during the comparable 2016 six-month period.

At June 30, 2017, contractual obligations for future payments of debt maturities by calendar year were as follows: $279 million in 2017; $538 million in 2018; $424 million in 2019; $160 million in 2020; $633 million in 2021; $920 million in 2022; and $8.25 billion thereafter.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At June 30, 2017, 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.

Subsequent to June 30, 2017, International Paper priced $1.0 billion of 4.35% senior unsecured notes with a maturity date in 2048. We expect the sale of this debt to close on or about August 9, 2017. The proceeds from this debt issuance, together with a combination of available cash and other borrowings, will be used to make a voluntary pension contribution in the aggregate amount of $1.25 billion by September 15, 2017. In addition, International Paper borrowed approximately $350 million under the commercial paper program. The proceeds from this borrowing, along with cash on hand, were used to pay the amount owed under the *Kleen Products LLC et al. v. International Paper Co. et al. (N.D.Ill.)* settlement agreement discussed in Note 12.

At June 30, 2017, 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 December 2021 and has a facility fee of 0.15% per annum payable quarterly. The liquidity facilities also include up to $600 million of uncommitted financings based on eligible receivable balances ($600 million available at June 30, 2017) under a receivables securitization program that expires in December 2017.

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, 2017, the Company had $240 million of borrowings outstanding under this program.

During the first six months of 2017, International Paper used 2.5 million shares of treasury stock for various incentive plans. International Paper also acquired 0.9 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 $46 million. In September 2013, the Company announced a share repurchase program to acquire up to $1.5 billion of the Company's common stock 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 June 30, 2017.

During the first six months of 2016, International Paper used approximately 2.7 million shares of treasury stock for various incentive plans. International Paper also acquired 3.6 million shares of treasury stock, including 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. Cash dividend payments related to common stock totaled $382 million and $362 million for the first six months of 2017 and 2016, respectively. Dividends were $0.9250 per share and $0.8800 per share for the first six months in 2017 and 2016, respectively.

International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2017 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 - Acquisitions in the Condensed Notes to the Consolidated 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 provides that at any time, either the Company or its partners may commence procedures specified under the deadlock agreement. 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 $1.3 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,income taxes and business combinations.

The Company has included in its 2016 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 2017.

### Pension Accounting

Net pension expense totaled approximately $158 million for International Paper’s U.S. plans for the six months ended June 30, 2017, or about $466 million less than the pension expense for the first six months of 2016. The decrease in U.S. plan expense was due to a $439 million plan settlement accounting charge in the second quarter of 2016, and lower amortization of unrecognized actuarial losses and prior service cost, partially offset by a decrease in the assumed discount rate to 4.10% in 2017 from 4.40% in 2016 (prior to the June 30, 2016 remeasurement discussed below). Net pension expense for non-U.S. plans was about $2 million for the first six months of 2017 and 2016.

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, 2017, the market value of plan assets for International Paper’s U.S. plans totaled approximately $10.9 billion, consisting of approximately 51% equity securities, 28% fixed income securities, and 21% real estate and other assets. Plan assets did not include International Paper common stock.

In the first quarter of 2016, International Paper offered a voluntary, limited-time opportunity for former employees who were 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 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 to the qualified pension plan in the first six months of 2016. No contributions have been made to date in 2017, but the Company intends to make a voluntary cash contribution in the aggregate amount of $1.25 billion to the qualified pension plan by September 15, 2017. The U.S. nonqualified plans are only funded to the extent of benefits paid, which totaled $10 million for the six months ended June 30, 2017.

We have implemented in the past, and currently intend to implement, initiatives designed to address the underfunded Pension Plan and future funding needs and to reduce risk in the Pension Plan. Going forward, we intend to make changes in plan asset allocations to emphasize more fixed income investments, re-allocate the plan's fixed income investments to longer duration maturities, expand certain hedging strategies and explore other risk-mitigation actions. There can be no assurances that we will pursue any of these initiatives or that, if pursued, any such initiative would have a material positive impact on the future funding needs of the Pension Plan or actually reduce risk in the Pension Plan. In addition, implementing certain initiatives could result in non-cash charges to the Company's earnings, which could be material, such as the charge we recorded in the second quarter of 2016 resulting from the buyout program for former International Paper employees.

### 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 failure to realize the expected synergies and cost-savings from our purchase of the pulp business of Weyerhaeuser Company or delay in realization thereof; (viii) our ability to achieve the benefits we expect from all other strategic acquisitions, divestitures and restructurings; and (ix) 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, 2016 ("Risk Factors"). We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

## Market risk

As filed, 300 characters.

Information relating to quantitative and qualitative disclosures about market risk is shown on page 38 of International Paper’s 2016 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, 2016.

## 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, 2017 (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, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 164 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, 2016 (Part I, Item 1A).

Filed Aug 4, 2017.
Source: SEC EDGAR, the filing index for accession 0000051434-17-000040. Last ingested by Listed: Nov 10, 2026, 17:11 ET. No prices; not investment advice.