# International Paper Co: Form 10-Q for the period ended Jun 30, 2019

- Company: [International Paper Co](/companies/ip.md) (CIK 51434)
- Form: 10-Q
- Filed: 2019-07-31
- Accepted by EDGAR: Jul 31, 2019, 15:53 ET
- Period: 2019-06-30
- Accession: 0000051434-19-000028
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/51434/000005143419000028/ip-6302019xform10xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/51434/000005143419000028/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $5.67bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2019-01-01 to 2019-06-30 | $11.31bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-04-01 to 2019-06-30 | $3.90bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2019-01-01 to 2019-06-30 | $7.83bn | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2019-04-01 to 2019-06-30 | $402.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2019-01-01 to 2019-06-30 | $815.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | $472.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-01-01 to 2019-06-30 | $1.05bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-04-01 to 2019-06-30 | $177.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-01-01 to 2019-06-30 | $361.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-04-01 to 2019-06-30 | $128.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2019-01-01 to 2019-06-30 | $234.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | $292.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-01-01 to 2019-06-30 | $716.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.73 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2019-01-01 to 2019-06-30 | $1.78 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.74 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2019-01-01 to 2019-06-30 | $1.80 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-04-01 to 2019-06-30 | 398,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2019-01-01 to 2019-06-30 | 401,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2019-01-01 to 2019-06-30 | $1.80bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-01-01 to 2019-06-30 | $628.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2019-01-01 to 2019-06-30 | $398.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2019-01-01 to 2019-06-30 | $460.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-06-30 | $787.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $7.39bn | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $34.35bn | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $5.05bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2019-06-30 | $10.05bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2019-06-30 | $676.0m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2019-06-30 | $7.48bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 62,278 characters.

### EXECUTIVE SUMMARY

Net earnings (loss) attributable to International Paper common shareholders were $292 million ($0.73 per diluted share) in the second quarter of 2019, compared with $424 million ($1.05 per diluted share) in the first quarter of 2019 and $405 million ($0.97 per diluted share) in the second quarter of 2018. 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 $460 million ($1.15 per diluted share) in the second quarter of 2019, compared with $447 million ($1.11 per diluted share) in the first quarter of 2019 and $498 million ($1.19 per diluted share) in the second quarter 2018.

International Paper delivered solid earnings and strong cash generation in the second quarter of 2019. Our second quarter performance demonstrates our ability to leverage our system flexibility to deliver solid results in a more challenging environment. Box shipments were seasonally stronger versus the first quarter but weaker than expected, with soft demand in certain non-food segments for non-durable goods. Our export containerboard and pulp businesses saw lower volume in the second quarter driven by uneven global demand and high inventory levels. In spite of these challenges, operational performance was strong and we managed costs well across our businesses as we executed our highest maintenance outage quarter of the year. We continued to generate strong cash flows in the second quarter with cash from operations of approximately $1.1 billion and free cash flow of $732 million, including a $239 million cash dividend from our Ilim joint venture. This strong cash flow has enabled us to return about $810 million to shareholders through dividends and share repurchases during the first half of 2019.

Comparing performance with the first quarter of 2019, price and mix were lower in the second quarter mainly due to lower export containerboard and pulp prices, which were partially offset by higher prices in our North American Printing Papers business. Volume increased on seasonally stronger demand in our North American container and Brazil Papers businesses, which was partly offset by lower export containerboard and pulp volume. Operations and cost performance was strong. We ran our system well and managed costs effectively to mitigate the impact of downtime taken in the second quarter. We also successfully executed our highest maintenance outage quarter of the year and have now completed approximately 75% of our planned annual outages of 2019. Input costs were favorable versus the prior quarter, with lower recovered fiber and energy costs across our businesses, as well as lower wood costs, following a steep run up in 2018 and the first quarter of 2019. Our Ilim joint venture delivered solid earnings and operational performance. Ilim equity earnings decreased due to lower average pulp prices and higher planned maintenance outage expenses in the second quarter, as well as lower sequential non-cash, foreign exchange gains on Ilim’s U.S. dollar denominated net debt.

Looking ahead to the third quarter of 2019, across our businesses we expect lower price and mix, improved seasonal volume and export shipments, lower input costs and significantly lower maintenance outages following the heavy first half activity. In Industrial Packaging, we expect lower price and mix due to the impact of prior price index movements and continued export pressure. Volume is expected to improve on seasonally stronger demand in North America and improved export containerboard demand, with inventory destocking progressing as expected in overseas markets. Operations and costs are expected to be unfavorably impacted by higher seasonal labor costs in the North America box system. Maintenance outage expense will be lower, and we anticipate lower input costs for fiber and energy. In Global Cellulose Fibers, we expect lower price and mix due to continued trade and tariff uncertainty and high pulp inventory levels. Operations and costs are also expected to negatively impact earnings in the quarter due to the non-repeat of hurricane-related insurance recovery in the second quarter along with higher unabsorbed fixed costs. Earnings will benefit from lower maintenance outage expense along with lower input costs, primarily wood costs. In Printing Papers, we expect lower price and mix primarily related to export pressure in Latin America and geographic mix. This should be offset by improved volume on seasonally stronger demand in North America and Brazil. Printing Papers will also benefit from lower maintenance outage expenses in the quarter. Finally, in our Ilim joint venture, we expect lower average pulp prices and higher maintenance outage expenses in the third quarter, along with the non-repeat of the foreign exchange gain on Ilim’s U.S. dollar denominated net debt.

Adjusted Operating Earnings and Adjusted Operating Earnings Per Share are non-GAAP measures and are defined as net earnings from continuing operations (a GAAP measure) excluding special items and non-operating pension expense. Net earnings (loss) and Diluted earnings (loss) per share attributable to common shareholders are the most directly comparable GAAP measures. The Company calculates Adjusted Operating Earnings by excluding the after-tax effect of non-operating pension expense, items considered by management to be unusual, and discontinued operations from the earnings reported under GAAP. 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 consolidated operating results. The Company believes that using this information, along with the most directly comparable GAAP measure, provides for a more complete analysis of the results of operations.

The following are reconciliations of Earnings (loss) attributable to shareholders to Adjusted Operating Earnings (Loss) attributable to shareholders.

*In millions*

|  | Three Months Ended June 30, 2019 | 2018 | Three Months Ended March 31, 2019 |
| --- | ---: | ---: | ---: |
| Net Earnings (Loss) Attributable to International Paper Company | **$292** | $405 | $424 |
| Less - Discontinued operations (gain) loss | **—** | 23 | — |
| Earnings (Loss) from Continuing Operations | **292** | 428 | 424 |
| Add Back - Non-operating pension expense (income) | **8** | 36 | 10 |
| Add Back - Net special items expense (income) | **158** | 47 | 21 |
| Income tax effect - Non-operating pension and special items expense | **2** | (13) | (8) |
| Adjusted Operating Earnings (Loss) Attributable to International Paper Company | **$460** | $498 | $447 |

|  | Three Months Ended June 30, 2019 | 2018 | Three Months Ended March 31, 2019 |
| --- | ---: | ---: | ---: |
| Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders | **$0.73** | $0.97 | $1.05 |
| Less - Discontinued operations (gain) loss per share | **—** | 0.05 | — |
| Diluted Earnings (Loss) Per Share from Continuing Operations | **0.73** | 1.02 | 1.05 |
| Add Back - Non-operating pension expense (income) per share | **0.02** | 0.09 | 0.02 |
| Add Back - Net special items expense (income) per share | **0.40** | 0.11 | 0.05 |
| Income tax effect per share - Non-operating pension and special items expense | **—** | (0.03) | (0.01) |
| Adjusted Operating Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders | **$1.15** | $1.19 | $1.11 |

The Company generated free cash flow of approximately $1.2 billion and $535 million in the first six months of 2019 and 2018, 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, 2019 | 2018 |
| --- | ---: | ---: |
| Cash provided by operations | **$1,800** | $1,464 |
| Adjustments: |  |  |
| Cash invested in capital projects | **(628)** | (929) |
| Free Cash Flow | **$1,172** | $535 |

30

### RESULTS OF OPERATIONS

For the second quarter of 2019, International Paper Company reported net sales of $5.7 billion, compared with $5.6 billion in the first quarter of 2019 and $5.8 billion in the second quarter of 2018.

Net earnings attributable to International Paper totaled $292 million, or $0.73 per diluted share, in the 2019 second quarter. This compared with $424 million, or $1.05 per diluted share, in the first quarter of 2019 and $405 million, or $0.97 per diluted share, in the second quarter of 2018.

Earnings from continuing operations attributable to International Paper Company were $292 million in the second quarter of 2019, $424 million in the first quarter of 2019 and $428 million in the second quarter of 2018.

Compared with the first quarter of 2019, earnings benefited from higher sales volumes ($17 million), lower operating costs ($63 million), lower raw material and freight costs ($49 million), lower corporate and other items ($14 million), lower net interest expense ($9 million), lower tax expense ($2 million) and lower non-operating pension expense ($2 million). These benefits were offset by lower average sales prices, net of a favorable mix ($26 million), and higher mill maintenance outage costs ($81 million). Equity earnings, net of taxes, relating to International Paper’s investments in Ilim S.A., Graphic Packaging International Partners, LLC, and other investments were $34 million lower than in the first quarter of 2019. Net special items in the second quarter of 2019 were a loss of $162 million compared with a loss of $15 million in the first quarter of 2019.

Compared with the second quarter of 2018, the second quarter of 2019 reflects higher average sales prices, net of an unfavorable mix ($71 million), lower corporate and other costs ($20 million), lower net interest expense ($9 million), lower tax expense ($1 million) and lower non-operating pension expense ($21 million). These benefits were offset by lower sales volumes ($48 million), higher operating costs ($43 million), higher raw material and freight costs ($22 million) and higher mill maintenance outage costs ($36 million). Equity earnings, net of taxes, relating to International Paper’s investments in Ilim S.A., Graphic Packaging International Partners, LLC, and other investments were $10 million higher in the second quarter of 2019 than in the second quarter of 2018. Net special items in the second quarter of 2019 were a loss of $162 million compared with a loss of $43 million in the second quarter of 2018.

Business Segment Operating Profits are used by International Paper's management to measure the earnings performance of its businesses. 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 a more complete analysis of the results of operations by quarter. 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, and excluding interest expense, net, corporate expenses, net, corporate special items, net and non-operating pension expense.

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

The following table presents a reconciliation of net earnings (loss) from continuing operations attributable to International Paper Company to its Total Business Segment Operating Profit:

*In millions*

|  | Three Months Ended June 30, 2019 | 2018 | March 31, 2019 |
| --- | ---: | ---: | ---: |
| Net Earnings (Loss) From Continuing Operations Attributable to International Paper Company | **$292** | $428 | $424 |
| Add back (deduct): |  |  |  |
| Income tax provision (benefit) | **128** | 130 | 106 |
| Equity (earnings) loss, net of taxes | **(80)** | (70) | (114) |
| Noncontrolling interests, net of taxes | **(6)** | 2 | 2 |
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | **334** | 490 | 418 |
| Interest expense, net | **122** | 133 | 133 |
| Noncontrolling interests / equity earnings included in operations | **5** | (4) | (3) |
| Corporate expenses, net | **3** | 30 | 21 |
| Corporate special items (income) expense | **—** | 12 | . |
| Non-operating pension expense | **8** | 36 | 10 |
| Adjusted Operating Profit | **$472** | $697 | $579 |
| Business Segment Operating Profit: |  |  |  |
| Industrial Packaging | **$507** | $537 | $404 |
| Global Cellulose Fibers | **(2)** | 66 | 32 |
| Printing Papers | **(33)** | 94 | 143 |
| Total Business Segment Operating Profit | **$472** | $697 | $579 |

33

### Business Segment Operating Profit

Total business segment operating profits were $472 million in the second quarter of 2019, $579 million in the first quarter of 2019 and $697 million in the second quarter of 2018.

Compared with the first quarter of 2019, operating profits benefited from higher sales volumes ($23 million), lower operating costs ($85 million) and lower raw material and freight costs ($65 million). These benefits were offset by lower average sales prices, net of a favorable mix ($35 million) and higher mill outage costs ($109 million). Special items were a loss of $157 million in the second quarter of 2019 compared with a loss of $21 million in the first quarter of 2019.

Compared with the second quarter of 2018, operating profits in the current quarter benefited from higher average sales prices net of an unfavorable mix ($96 million). These benefits were offset by lower sales volumes ($64 million), higher operating costs ($57 million), higher raw material and freight costs ($30 million) and higher mill outage costs ($48 million). Special items were a loss of $157 million in the second quarter of 2019 compared with a loss of $35 million in the second quarter of 2018.

Economic downtime results from the amount of production required to meet our customer demand. Planned maintenance downtime is taken periodically throughout the year. The following table details North American planned maintenance and economic-related downtime (in tons):

|  | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Three Months Ended March 31, 2019 |
| --- | ---: | ---: | ---: |
| Economic-related downtime | **339** | — | 484 |
| Maintenance downtime | **303** | 207 | 156 |

35

### Sales Volumes by Product (a)

Sales volumes of major products for the three months and six months ended June 30, 2019 and 2018 were as follows:

| In thousands of short tons (except as noted) Industrial Packaging | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Corrugated Packaging (b) | **2,624** | 2,724 | **5,159** | 5,303 |
| Containerboard | **707** | 800 | **1,404** | 1,583 |
| Recycling | **625** | 597 | **1,234** | 1,134 |
| Saturated Kraft | **52** | 52 | **93** | 98 |
| Gypsum/Release Kraft | **49** | 67 | **100** | 120 |
| Bleached Kraft | **5** | 9 | **12** | 16 |
| EMEA Packaging (b) | **379** | 387 | **749** | 784 |
| Brazilian Packaging (b) | **91** | 85 | **176** | 171 |
| European Coated Paperboard | **102** | 90 | **206** | 186 |
| Industrial Packaging | **4,634** | 4,811 | **9,133** | 9,395 |
| Global Cellulose Fibers (in thousands of metric tons) (c) | **869** | 884 | **1,728** | 1,779 |
| Printing Papers |  |  |  |  |
| U.S. Uncoated Papers | **441** | 484 | **889** | 954 |
| European and Russian Uncoated Papers | **367** | 342 | **721** | 703 |
| Brazilian Uncoated Papers | **283** | 265 | **527** | 525 |
| Indian Uncoated Papers | **66** | 66 | **134** | 133 |
| Printing Papers | **1,157** | 1,157 | **2,271** | 2,315 |

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

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

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

### Discontinued Operations

See discussion in Note 9 - Divestitures and Impairments in the Condensed Notes to the Consolidated Financial Statements.

### Income Taxes

An income tax provision of $128 million was recorded for the second quarter of 2019 and the reported effective income tax rate was 38%. Excluding an expense of $4 million related to the tax effects of special items and a benefit of $2 million related to the tax effects of non-operating pension expense, the effective income tax rate was 25% for the quarter.

An income tax provision of $106 million was recorded for the first quarter of 2019 and the reported effective income tax rate was 25%. Excluding a benefit of $6 million related to the tax effects of special items and a benefit of $2 million related to the tax effects of non-operating pension expense, the effective income tax rate was 25% for the quarter.

An income tax provision of $130 million was recorded for the second quarter of 2018 and the reported effective income tax rate was 27%. Excluding a benefit of $4 million related to the tax effects of special items and a benefit of $9 million related to the tax effects of non-operating pension expense, the effective income tax rate was 25% for the quarter.

### Interest Expense

Net interest expense was $122 million which includes interest expense of $1 million related to the settlement of foreign tax audits in the second quarter of 2019, compared with $133 million in both the first quarter of 2019 and the second quarter of 2018.

### Effects of Special Items and Non-Operating Pension Expense

Details of special items and non-operating pension expense (income) for the three months ended are as follows:

*In millions*

| Business Segments | Three Months Ended June 30, 2019 Before Tax | After Tax | 2018 Before Tax | After Tax | March 31, 2019 Before Tax | After Tax |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| India impairment | **$145** | **$143** | $— | $— | $— | $— |
| Multi-employer pension plan exit liability | **—** | **—** | — | — | 16 | 12 |
| Gain on sale of EMEA Packaging box plant | **—** | **—** | — | — | (7) | (6) |
| EMEA Packaging optimization | **—** | **—** | 26 | 18 | — | — |
| Abandoned property removal | **11** | **8** | 9 | 7 | 11 | 8 |
| Riverdale mill conversion | **1** | **1** | — | — | 1 | 1 |
| **Business Segments Total** | **157** | **152** | 35 | 25 | 21 | 15 |
| **Corporate** |  |  |  |  |  |  |
| Smufit-Kappa acquisition proposal costs | **—** | **—** | 12 | 9 | — | — |
| Interest expense related to settlement of foreign tax audits | **1** | **1** | **—** | — | — | — |
| Corporate Total | **1** | **1** | 12 | 9 | — | — |
| **Total special items** | **158** | **153** | 47 | 34 | 21 | 15 |
| Non-operating pension expense | **8** | **6** | 36 | 27 | 10 | 8 |
| **Total special items and non-operating pension expense** | **$166** | **$159** | $83 | $61 | $31 | $23 |

Special items include the following tax expenses (benefits):

*In millions*

|  | Three Months Ended June 30, 2019 | 2018 | March 31, 2019 |
| --- | ---: | ---: | ---: |
| Luxembourg tax law rate change | **$9** | $— | $— |
| State income tax legislative changes | **(3)** | 9 | — |
| Settlement of foreign tax audits | **3** | — | — |
| **Total** | **$9** | $9 | $— |

37

Details of special items and non-operating pension expense for the six months ended are as follows:

*In millions*

| Business Segments | Six Months Ended June 30, 2019 Before Tax | After Tax | 2018 Before Tax | After Tax |
| --- | ---: | ---: | ---: | ---: |
| India impairment | **$145** | **$143** | $— | $— |
| Multi-employer pension plan exit liability | **16** | **12** | — | — |
| Gain on sale of EMEA Packaging box plant | **(7)** | **(6)** | — | — |
| EMEA Packaging optimization | **—** | **—** | 48 | 35 |
| Abandoned property removal | **22** | **16** | 18 | 14 |
| Riverdale mill conversion | **2** | **2** | — | — |
| **Business Segments Total** | **178** | **167** | 66 | 49 |
| **Corporate** |  |  |  |  |
| Smufit-Kappa acquisition proposal costs | **—** | **—** | 12 | 9 |
| Interest expense related to settlement of foreign tax audits | **1** | **1** | — | — |
| Legal settlement | **—** | **—** | 9 | 7 |
| Corporate Total | **1** | **1** | 21 | 16 |
| **Total special items** | **179** | **168** | 87 | 65 |
| Non-operating pension expense | **18** | **14** | 40 | 30 |
| **Total special items and non-operating pension expense** | **$197** | **$182** | $127 | $95 |

Special items include the following tax expenses (benefits):

*In millions*

|  | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Luxembourg tax law rate change | **$9** | $— |
| State income tax legislative changes | **(3)** | 9 |
| Settlement of foreign tax audits | **3** | — |
| **Total** | **$9** | $9 |

### 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 21 - 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 | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$3,864** | **$3,832** | **$7,696** | $4,022 | $3,827 | $7,849 |
| **Operating Profit** | **$507** | **$404** | **$911** | $537 | $437 | $974 |
| Multi-employer pension plan exit liability | **—** | **16** | **16** | — | — | — |
| Gain on sale of EMEA Packaging box plant | **—** | **(7)** | **(7)** | — | — | — |
| EMEA Packaging optimization | **—** | **—** | **—** | 26 | 22 | 48 |
| Abandoned property removal | **8** | **8** | **16** | 6 | 5 | 11 |
| **Operating Profit Before Special Items** | **$515** | **$421** | **$936** | $569 | $464 | $1,033 |

Industrial Packaging net sales for the second quarter of 2019 were 1% higher than in the first quarter of 2019 and 4% lower than in the second quarter of 2018. Operating profit before special items was 22% higher in the second quarter of 2019 than in the first quarter of 2019 and 9% lower than in the second quarter of 2018.

*In millions*

| North American Industrial Packaging | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales (a)** | **$3,414** | **$3,376** | **$6,790** | $3,582 | $3,369 | $6,951 |
| **Operating Profit** | **$507** | **$395** | **$902** | $574 | $459 | $1,033 |
| Multi-employer pension plan exit liability | **—** | **16** | **16** | — | — | — |
| Abandoned property removal | **8** | **8** | **16** | 6 | 5 | 11 |
| **Operating Profit Before Special Items** | **$515** | **$419** | **$934** | $580 | $464 | $1,044 |

(a) Includes intra-segment sales of $31 million and $46 million for the three months ended June 30, 2019 and 2018, respectively; $31 million and $58 million for the three months ended March 31, 2019 and 2018, respectively; and $62 million and $104 million for the six months ended June 30, 2019 and 2018, respectively.

***North American Industrial Packaging*** sales volumes in the second quarter of 2019 increased compared to the first quarter of 2019, reflecting seasonally higher shipments for boxes, partially offset by lower export containerboard volumes as customer destocking continued. Total maintenance and economic downtime was 10,000 tons higher in the second quarter of 2019, which comprises an increase of 92,000 tons for planned maintenance downtime and a decrease of 82,000 tons for economic downtime. Economic downtime was driven by lower volumes as we continued to manage production to meet our customers' needs. Average sales margins were lower, driven by lower average sales prices for export containerboard. Manufacturing performance was strong in both our mills and box plants and we continued to manage costs well to mitigate the impact of downtime in the quarter. Planned maintenance downtime costs were $27 million higher in the second quarter of 2019 compared with the first quarter of 2019, with 80% of our annual planned outages now complete. Input costs were significantly favorable, primarily for recycled fiber, energy, wood and distribution.

Compared with the second quarter of 2018, sales volumes were lower in the second quarter of 2019 for export containerboard and boxes, partially due to one less shipping day in 2019. Total maintenance and economic downtime was 376,000 tons higher in the second quarter of 2019, which comprises an increase of 48,000 tons for planned maintenance downtime and 328,000 tons for economic downtime. Average sales prices for boxes were higher, due to carryover of the Spring 2018 sales price increase. Export containerboard prices were lower, reflecting weaker demand. Manufacturing costs were lower, driven by strong operational performance at our mills. Planned maintenance downtime costs were $9 million higher in the second quarter of 2019 compared with the second quarter of 2018. Input costs for recycled fiber and energy were lower, partially offset by higher costs for wood.

Entering the third quarter of 2019, sales volumes for boxes are expected to be higher. Containerboard export shipments are also expected to increase, as demand improves and customers begin to replenish inventory. Average sales prices for boxes and export containerboard are expected to be lower, reflecting the impact of prior index movement, mix and export pressure. Operating costs are expected to be seasonally higher. Planned maintenance downtime costs should be $63 million lower in the third quarter of 2019 than in the second quarter of 2019. Input costs are projected to be lower, primarily for wood.

*In millions*

| EMEA Industrial Packaging | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$331** | **$339** | **$670** | $344 | $362 | $706 |
| **Operating Profit** | **$(7)** | **$(8)** | **$(15)** | $(43) | $(34) | $(77) |
| Gain on sale of EMEA Packaging box plant | **—** | **(7)** | **(7)** | — | — | — |
| EMEA Packaging optimization | **—** | **—** | **—** | 26 | 22 | 48 |
| **Operating Profit Before Special Items** | **$(7)** | **$(15)** | **$(22)** | $(17) | $(12) | $(29) |

***EMEA Industrial Packaging*** sales volumes for boxes in the second quarter of 2019 were lower than in the first quarter of 2019 primarily due to lower seasonal demand in Morocco. Average sales margins improved in all regions driven by lower containerboard prices and stable box prices. Manufacturing operations improved, reflecting improved performance at the Madrid mill and the benefits of our box system optimization initiatives. Earnings also benefited from the box plant acquisitions completed in the first quarter of 2019. There were no planned maintenance downtime costs in either the second quarter of 2019 or the first quarter of 2019. Input costs were stable. Earnings were negatively affected by unfavorable foreign currency impacts in Turkey.

Compared with the second quarter of 2018, sales volumes in the second quarter of 2019 were lower, primarily due to the recession in Turkey. Average sales margins for boxes improved, reflecting sales price increases during 2018 and lower containerboard costs. Operating costs benefited from the ramp-up of the Madrid mill. Earnings also benefited from the box plant acquisitions completed in the first quarter of 2019. There were no planned maintenance downtime costs in the second quarter of 2018. Input costs were stable. Earnings were negatively affected by unfavorable foreign currency impacts, primarily in Morocco.

Looking ahead to the third quarter of 2019, sales volumes for boxes are expected to be seasonally lower in Morocco, but stable in the Eurozone and Turkey. Average sales margins should improve in Turkey, partially offset by lower average sales margins in the Eurozone and Morocco. Operating and input costs should be stable. Planned maintenance downtime costs should be $1 million higher in the third quarter of 2019 than in the second quarter of 2019.

*In millions*

| Brazilian Industrial Packaging | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$58** | **$57** | **$115** | $56 | $62 | $118 |
| **Operating Profit** | **$(1)** | **$(5)** | **$(6)** | $(11) | $(8) | $(19) |

***Brazilian Industrial Packaging*** sales volumes in the second quarter of 2019 compared with the first quarter of 2019 were higher for both boxes and containerboard due to seasonality. Average sales margins reflected higher sales prices for containerboard, offset by an unfavorable geographic and product mix. There were no planned maintenance outages in either the second quarter of 2019 or the first quarter of 2019. Input costs were higher for purchased pulp, energy and recycled fiber, offset by lower distribution costs.

Compared with the second quarter of 2018, sales volumes in the second quarter of 2019 were higher for both boxes and containerboard as the second quarter of 2018 included the impact of a nationwide trucker's strike. Average sales prices increased for boxes and containerboard. Operating costs were lower, but were partially offset by higher input costs for recycled fiber, energy and wood. Planned maintenance downtime costs were $1 million lower in the second quarter of 2019 than in the second quarter of 2018.

Looking ahead to the third quarter of 2019, sales volumes for boxes and containerboard are expected to be seasonally higher. Average sales margins are expected to be higher, reflecting a favorable geographic mix. Planned maintenance downtime costs should be $2 million higher in the third quarter of 2019 than in the second quarter of 2019. Input costs are projected to be in line with the second quarter.

*In millions*

| European Coated Paperboard | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$92** | **$91** | **$183** | $86 | $92 | $178 |
| **Operating Profit** | **$8** | **$22** | **$30** | $17 | $20 | $37 |

***European Coated Paperboard*** sales volumes in the second quarter of 2019 compared with the first quarter of 2019 were flat in both Europe and Russia. Average sales margins improved in Europe driven by a favorable mix. In Russia, average sales margins were stable. Operating costs were higher in both Europe and Russia. Planned maintenance downtime costs were $8 million higher in the second quarter of 2019 compared with the first quarter of 2019 with outages at the Kwidzyn and Svetogorsk mills. Input costs were favorable in Europe and Russia, primarily for purchased pulp in Europe and wood in Russia.

Compared with the second quarter of 2018, sales volumes increased in Europe, partially due to the impact of production constraints related to the Kwidzyn fire in 2018. Sales volumes were slightly higher in Russia. Average sales margins decreased in Europe due to an unfavorable mix, though improved in Russia, reflecting higher average sales prices and a favorable mix. Operating costs were higher in both Europe and Russia. Planned maintenance downtime costs in the second quarter of 2019 were $4 million higher than in the second quarter of 2018. Input costs increased in Europe and Russia, primarily for purchased pulp, wood and energy in Europe and chemicals and energy in Russia.

Entering the third quarter of 2019, sales volumes are expected to be higher in both Europe and Russia. Average sales margins are expected to increase in both regions, reflecting a favorable mix. Operating costs are expected to be higher in Europe, but lower in Russia. Planned maintenance downtime costs should be $8 million lower in the third quarter of 2019 than in the second quarter of 2019. Input costs are expected to be lower in Europe, primarily for purchased pulp and wood, but slightly higher in Russia, primarily for chemicals, wood and energy.

### Global Cellulose Fibers

*In millions*

| Total Global Cellulose Fibers | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$661** | **$689** | **$1,350** | $692 | $677 | $1,369 |
| **Operating Profit** | **$(2)** | **$32** | **$30** | $66 | $11 | $77 |
| Abandoned property removal | **2** | **3** | **5** | 3 | 4 | 7 |
| **Operating Profit Before Special Items** | **$—** | **$35** | **$35** | $69 | $15 | $84 |

***Global Cellulose Fibers*** net sales were 4% lower in the second quarter of 2019 than in the first quarter of 2019 and 4% lower than in the second quarter of 2018. Operating profit before special items was 100% lower in the second quarter of 2019 than in the first quarter of 2019 and 100% lower than in the second quarter of 2018.

Sales volumes in the second quarter of 2019 compared with the first quarter of 2019 were higher for both fluff and market pulp. Total maintenance and economic downtime was 33,000 tons lower in the second quarter of 2019, which comprises an increase of 32,000 tons for maintenance downtime and a decrease of 65,000 tons for economic downtime. Average sales margins decreased, reflecting lower average pulp prices in a challenging export environment associated with trade and tariff uncertainty and high inventory levels. Operating costs were stable as our mills performed well in a heavy planned maintenance downtime quarter. Planned maintenance downtime costs in the second quarter of 2019 were $27 million higher than in the first quarter of 2019. Input costs were favorable, primarily for wood and chemicals. Earnings benefited in the second quarter of 2019 from $10 million of insurance proceeds related to Hurricane Florence. In Europe and Russia, sales volumes were lower. Average sales prices were lower in both regions. Planned maintenance downtime costs in the second quarter of 2019 were $4 million higher than in the first quarter of 2019 in Europe and Russia, with an outage at the Svetogorsk mill. Manufacturing and other operating costs were favorable in Russia and higher in Europe. Input costs were favorable in Europe, primarily due to energy. Input costs were flat in Russia.

Compared with the second quarter of 2018, sales volumes in the second quarter of 2019 were down, driven by weaker global demand. Total maintenance and economic downtime was 34,000 tons higher in the second quarter of 2019, which comprises an increase of 25,000 tons for maintenance downtime and 9,000 tons for economic downtime. Average sales prices were higher for fluff pulp, but lower for market pulp. Product mix was unfavorable. Operating costs were higher, driven by inflation. Planned maintenance downtime costs in the second quarter of 2019 were $36 million higher than in the second quarter of 2018. Input costs were higher, primarily for softwood. In Europe and Russia, sales volumes increased. Average sales margins were lower, reflecting lower average sales prices and an unfavorable mix. Operating costs were unfavorable in Europe and flat in Russia. Planned maintenance downtime costs in the second quarter of 2019 were $4 million lower than in the second quarter of 2018 in Europe and Russia. Input costs were flat in Europe and slightly higher in Russia, primarily for chemicals and energy.

Entering the third quarter of 2019, sales volumes are expected to be flat. Average sales margins are expected to be lower, reflecting the continuing effects of commercial conditions unfavorably impacted by slower growth in developing markets, tariff uncertainty and regional economic conditions. Operating costs are expected to be lower as we continue to focus on efficiencies at our mills. Planned maintenance downtime costs in the third quarter of 2019 should be $48 million lower than in the second quarter of 2019. Input costs are expected to be favorable. In Europe and Russia, sales volumes are expected to be lower in Europe and higher in Russia. Average sales margins are expected to be lower in both regions. Operating costs are expected to be stable in Europe and higher in Russia. Planned maintenance downtime costs in the third quarter of 2019 should be $4 million lower than in the second quarter of 2019 in Europe and Russia, as no outages are scheduled.

### Printing Papers

*In millions*

| Total Printing Papers | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$1,088** | **$1,065** | **$2,153** | $1,060 | $1,053 | $2,113 |
| **Operating Profit** | **$(33)** | **$143** | **$110** | $94 | $64 | $158 |
| India impairment | **145** | **—** | **145** | — | — | — |
| Abandoned property removal | **1** | **—** | **1** | — | — | — |
| Riverdale mill conversion | **1** | **1** | **2** | — | — | — |
| **Operating Profit Before Special Items** | **$114** | **$144** | **$258** | **$94** | **$64** | **$158** |

Printing Papers net sales for the second quarter of 2019 were 2% higher than in the first quarter of 2019 and 3% higher than in the second quarter of 2018. Operating profit before special items in the second quarter of 2019 was 21% lower than in the first quarter of 2019 and 21% higher than in the second quarter of 2018.

*In millions*

| North American Papers | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$486** | **$496** | **$982** | $493 | $458 | $951 |
| **Operating Profit** | **$39** | **$56** | **$95** | $25 | $1 | $26 |
| Abandoned property removal | **1** | **—** | **1** | — | — | — |
| Riverdale mill conversion | **1** | **1** | **2** | — | — | — |
| **Operating Profit Before Special Items** | **$41** | **$57** | **$98** | $25 | $1 | $26 |

***North American Papers*** sales volumes in the second quarter of 2019 were lower than in the first quarter of 2019 for uncoated freesheet paper, primarily driven by softer demand in commercial printing. Average sales prices were favorable, benefiting from the continued realization of price increases, partially offset by an unfavorable geographic mix. Operating costs were flat. Planned maintenance downtime costs were $23 million higher in the second quarter of 2019, compared with the first quarter of 2019, with 60% of planned annual maintenance outages now complete. Input costs were lower, primarily for wood. Earnings benefited in the second quarter of 2019 from $2 million of insurance proceeds related to Hurricane Florence.

Compared with the second quarter of 2018, sales volumes in the second quarter of 2019 were lower for uncoated freesheet paper, primarily driven by commercial printing paper. Average sales prices were significantly higher, reflecting the impact of price increases in 2018. Operating costs were unfavorable, driven by inflation. Planned maintenance downtime costs were $7 million higher than in the second quarter of 2018. Input costs increased, primarily for wood, but partially offset by lower distribution costs.

Entering the third quarter of 2019, sales volumes are expected to be higher, driven by increased cutsize volumes and seasonally higher commercial printing paper volumes. Average sales margins are expected to be lower, including the impact of an unfavorable mill sourcing mix. Operating costs are expected to be lower. Planned maintenance downtime costs should be $17 million lower in the third quarter. Input costs are expected to be favorable, primarily for wood.

*In millions*

| European Papers | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$321** | **$309** | **$630** | $302 | $319 | $621 |
| **Operating Profit** | **$29** | **$47** | **$76** | $15 | $21 | $36 |

***European Papers*** sales volumes for uncoated freesheet paper in the second quarter of 2019 compared with the first quarter of 2019 were lower in Europe, but higher in Russia. Average sales margins for uncoated freesheet paper increased in Russia, reflecting higher average sales prices and a favorable mix. In Europe, average sales margins were lower. Operating costs were higher in both Europe and Russia. Planned maintenance downtime costs were $20 million higher in the second quarter of 2019 compared to the first quarter of 2019, with outages at the Kwidzyn and Svetogorsk mills. Input costs were lower for energy and purchased pulp, but higher for wood in Europe. In Russia, input costs were lower, primarily for wood. Earnings benefited from favorable foreign currency impacts in Russia.

Sales volumes for uncoated freesheet paper in the second quarter of 2019, compared with the second quarter of 2018, were higher in Europe, partially due to the impact of the Kwidzyn fire in 2018. In Russia, sales volumes were lower. Average sales prices for uncoated freesheet paper increased significantly in both regions, reflecting price increases implemented in late 2018 and in 2019. Operating costs were lower in both Europe and Russia. Planned maintenance downtime costs were $2 million higher than in the second quarter of 2018. Input costs, primarily for energy, chemicals and packaging materials in Russia and for purchased pulp, wood and chemicals in Europe, were higher. Earnings were negatively affected by unfavorable foreign currency impacts in both Europe and Russia.

Looking forward to the third quarter of 2019, sales volumes for uncoated freesheet paper are expected to be higher in both Europe and Russia. In Europe, average sales margins are expected to be lower. In Russia, average sales margins will be negatively impacted by an unfavorable mix. Operating costs should be higher in Russia and flat in Europe. Planned maintenance downtime costs should be $20 million lower, as there are no outages scheduled in the third quarter of 2019. Input costs are expected to be stable in Europe and higher in Russia, primarily for wood, chemicals and energy.

*In millions*

| Brazilian Papers | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales (a)** | **$240** | **$215** | **$455** | $222 | $229 | $451 |
| **Operating Profit** | **$37** | **$33** | **$70** | $49 | $40 | $89 |

(a) Includes intra-segment sales of $12 million and $8 million for the three months ended June 30, 2019 and 2018, respectively; $8 million and $5 million for the three months ended March 31, 2019 and 2018, respectively; and $20 million and $13 million for the six months ended June 30, 2019 and 2018, respectively.

***Brazilian Papers*** sales volumes in the second quarter of 2019, compared with the first quarter of 2019, were seasonally higher for cutsize, primarily in export markets. However, domestic demand for offset was weaker than expected due to delays in the government textbook program which began about three months later than normal. Export average sales prices were lower, reflecting higher supply availability, while domestic average sales prices were stable. Operating costs were slightly higher. There were no planned maintenance outages in either the second quarter of 2019 or the first quarter of 2019. Input costs were unfavorable, primarily for wood.

Compared with the second quarter of 2018, sales volumes for uncoated freesheet paper in the second quarter of 2019 were higher for export markets, but lower for domestic markets, reflecting challenging demand conditions, heavily impacted by the textbook program delays. The second quarter of 2018 included the impact of a nationwide trucker's strike. Average domestic sales prices were higher and geographic and product mix were favorable, offset by lower export sales prices. Operating costs were unfavorable. Planned maintenance outage expenses were $4 million lower in the second quarter of 2019. Input costs were higher, primarily for wood, purchased pulp, chemicals and energy.

Entering the third quarter of 2019, sales volumes for uncoated freesheet paper are expected to be seasonally stronger in the domestic market, partially offset by lower export volumes. Average sales margins are expected to be stable for the domestic market, while export sales margins are expected to be lower. Operating costs should be slightly favorable. Planned maintenance outage expenses are expected to be $3 million higher. Input costs are expected to be slightly unfavorable.

*In millions*

| Indian Papers | 2019 2nd Quarter | 1st Quarter | Six Months | 2018 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$53** | **$53** | **$106** | $51 | $52 | $103 |
| **Operating Profit** | **$(138)** | **$7** | **$(131)** | $5 | $2 | $7 |
| India Impairment | **145** | **—** | **145** | — | — | — |
| **Operating Profit Before Special Items** | **$7** | **$7** | **$14** | **$5** | **$2** | **$7** |

***Indian Papers*** sales volumes in the second quarter of 2019 compared with the first quarter of 2019 were flat as strong demand continued. Sales margins improved due to higher average sales prices and a more favorable mix. Operating costs were favorable due to improved mill productivity. Input costs were slightly unfavorable.

Compared with the second quarter of 2018, sales volumes were flat in the second quarter of 2019. Average sales prices improved reflecting the impact of 2018 sale price increases. Operating costs were lower, reflecting improved mill productivity, while input costs were higher, primarily for chemicals.

Looking ahead to the third quarter of 2019, sales volumes are expected to be lower and operating costs are expected to be higher due to production constraints associated with the planned annual outage at the Rajahmundry mill. Average sales margins are expected to be lower. Input costs are expected to be slightly lower.

### Equity Earnings, Net of Taxes – Ilim

Since October 2007, International Paper and Ilim 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 $67 million in the second quarter of 2019, compared with $101 million in the first quarter of 2019 and $57 million in the second quarter of 2018. In the second quarter of 2019, the after-tax foreign exchange impact primarily on the remeasurement of U.S. dollar-denominated net debt was a gain of $7 million, compared with a gain of $21 million in the first quarter of 2019. The Company received cash dividends from the joint venture of $239 million during the second quarter of 2019.

Compared with the first quarter of 2019, sales volumes in the second quarter of 2019 were 2% lower, primarily for sales of softwood pulp and containerboard in China, partially offset by higher sales of hardwood pulp in China. Average sales price realizations for softwood pulp in China and containerboard in China and in Russia were lower. Following the launch of a modernization program at the Bratsk mill and an outage at the Koryazhma mill in the second quarter of 2019, Ilim incurred mill outage and repair costs that were $10 million higher than in the first quarter of 2019. In addition, input costs for wood were seasonally higher in the second quarter of 2019.

Compared with the second quarter of 2018, sales volumes in the second quarter of 2019 decreased overall by 3%, primarily for sales of softwood pulp and containerboard in China and other export markets, partially offset by higher sales of hardwood pulp in China and Russia. Average sales price realizations were lower for softwood pulp and hardwood pulp in China and other export markets. In contrast, average sales price realizations for softwood pulp, hardwood pulp and containerboard in Russia increased during the second quarter of 2019. Input costs, primarily for wood, fuel and chemicals were higher. Distribution costs were also higher. An after-tax foreign exchange loss of $39 million primarily on the remeasurement of U.S. dollar denominated net debt was recorded in the second quarter of 2018.

Looking forward to the third quarter of 2019, sales volumes are expected to be lower. Average sales margins should reflect the continuing effects of prior price decreases, primarily for softwood pulp, hardwood pulp and containerboard in China and other export markets. Input costs are expected to be relatively flat. A project to upgrade the pulp line at the Ust-Ilimsk mill will be launched during a planned outage in the third quarter. Planned maintenance mill outages are also scheduled in the third quarter at the Bratsk and Koryazhma mills.

### Equity Earnings – GPI

International Paper recorded equity earnings of $14 million on its 21% ownership position in GPI in the second quarter of 2019, compared with $13 million in the first quarter of 2019 and $15 million in the second quarter of 2018.

### LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations totaled $1.8 billion for the first six months of 2019, compared with $1.5 billion for the comparable 2018 six-month period. Cash provided by working capital components totaled $98 million for the first six months of 2019, compared to cash used by working capital components of $213 million for the comparable 2018 six-month period.

Investments in capital projects totaled $628 million in the first six months of 2019, compared to $929 million in the first six months of 2018. Full-year 2019 capital spending is currently expected to be approximately $1.4 billion, or about 106% of depreciation and amortization, including approximately $400 million of strategic investments.

Financing activities for the first six months of 2019 included an $8 million net decrease in debt versus a $338 million net increase in debt during the comparable 2018 six-month period.

Amounts related to early debt extinguishment during the six months ended June 30, 2019 and 2018 were as follows:

*In millions*

|  | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Early debt reductions (a) | **$168** | $— |
| Pre-tax early debt extinguishment (gain) loss, net | **(2)** | — |

(a) Reductions related to notes with interest rates ranging from 3.00% to 9.50% with original maturities from 2024 to 2048 for the six months ended June 30, 2019.

At June 30, 2019, contractual obligations for future payments of debt maturities (including finance lease liabilities disclosed in Note 11 - Leases) by calendar year were as follows: $600 million in 2019; $101 million in 2020; $450 million in 2021; $489 million in 2022; $351 million in 2023; and $8.7 billion thereafter.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At June 30, 2019, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively. In addition, the Company held short-term credit ratings of A2 and P2 by S&P and Moody's, respectively, for borrowings during the current quarter under the Company's commercial paper program.

At June 30, 2019, 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 under a receivables securitization program that expires in December 2019. At June 30, 2019, there were no outstanding borrowings under the credit facility nor under the receivables securitization program.

In June 2018, the borrowing capacity of the commercial paper program was increased from $750 million to $1.0 billion. 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, 2019, the Company had $535 million of borrowings outstanding under this program at a weighted average interest rate of 2.64%.

During the first six months of 2019, International Paper used 3.4 million shares of treasury stock for various incentive plans. International Paper also acquired 10.1 million shares of treasury stock, including restricted stock tax withholdings. Repurchases of common stock and payments of restricted stock withholding taxes totaled $460 million, including $411 million related to shares repurchased under the Company's repurchase program. On October 9, 2018, the Company announced an authorization to repurchase $2 billion of the Company's common stock to supplement remaining amounts under prior share repurchase authorizations, bringing total share repurchase authorizations since 2013 to $5.0 billion. The Company will continue to repurchase such shares in open market repurchase transactions. Under the $5.0 billion share repurchase program, the Company has repurchased 67.1 million shares at an average price of $47.37, for a total of approximately $3.2 billion, as of June 30, 2019.

During the first six months of 2018, International Paper used approximately 1.7 million shares of treasury stock for various incentive plans. International Paper also acquired 5.8 million shares of treasury stock, including restricted stock tax withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $331 million. Cash dividend payments related to common stock totaled $398 million and $393 million for the first six months of 2019 and 2018, respectively. Dividends were $1.0000 per share and $0.9500 per share for the first six months in 2019 and 2018, respectively.

International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during the remainder of 2019 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.

### Ilim S.A. Shareholders’ Agreement

In October 2007, in connection with the formation of the Ilim S.A. joint venture (Ilim), International Paper entered into a shareholders' 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 shareholders' 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 $2.3 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 shareholders' 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 and income taxes.

The Company has included in its 2018 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 2019.

### 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 trade protection measures, 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 joint ventures; (vii) our ability to achieve the benefits we expect from strategic acquisitions, divestitures, restructurings and capital investments, and (viii) 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, 2018. 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 35 of International Paper’s 2018 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, 2018.

## 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, 2019 (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, 2019 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, 2018 (Part I, Item 1A).

Filed Jul 31, 2019.
Source: SEC EDGAR, the filing index for accession 0000051434-19-000028. Last ingested by Listed: Nov 4, 2026, 18:37 ET. No prices; not investment advice.