# International Paper Co: Form 10-Q for the period ended Jun 30, 2020

- Company: [International Paper Co](/companies/ip.md) (CIK 51434)
- Form: 10-Q
- Filed: 2020-07-31
- Accepted by EDGAR: Jul 31, 2020, 13:08 ET
- Period: 2020-06-30
- Accession: 0000051434-20-000033
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/51434/000005143420000033/ip-20200630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/51434/000005143420000033/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $4.87bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $10.22bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-04-01 to 2020-06-30 | $3.43bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2020-01-01 to 2020-06-30 | $7.17bn | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2020-04-01 to 2020-06-30 | $332.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2020-01-01 to 2020-06-30 | $750.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | $428.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | $940.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-04-01 to 2020-06-30 | $156.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-01-01 to 2020-06-30 | $319.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-04-01 to 2020-06-30 | $67.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | $161.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $266.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | $125.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.67 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.32 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.67 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.32 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 393,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 394,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $1.54bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-01-01 to 2020-06-30 | $538.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2020-01-01 to 2020-06-30 | $403.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2020-01-01 to 2020-06-30 | $41.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-06-30 | $847.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $6.60bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $32.52bn | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $8.33bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2020-06-30 | $9.43bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-06-30 | $33.0m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2020-06-30 | $7.06bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 70,405 characters.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included in "Financial Statements and Supplementary Data" of this Quarterly Report on Form 10-Q (this "Form 10-Q") and the Company's Annual Report on Form 10-K for the year ended December 31, 2019 (our "Annual Report"). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below or elsewhere in our Annual Report, particularly in "Risk Factors" and "Forward-Looking Statements" of this Form 10-Q and our Annual Report.

### EXECUTIVE SUMMARY

Net earnings (loss) attributable to International Paper common shareholders were $266 million ($0.67 per diluted share) in the second quarter of 2020, compared with $(141) million ($(0.36) per diluted share) in the first quarter of 2020 and $292 million ($0.73 per diluted share) in the second quarter of 2019. International Paper generated Adjusted Operating Earnings Attributable to International Paper Common Shareholders (a non-GAAP measure defined below) of $305 million ($0.77 per diluted share) in the second quarter of 2020, compared with $226 million ($0.57 per diluted share) in the first quarter of 2020 and $460 million ($1.15 per diluted share) in the second quarter of 2019.

During the second quarter 2020, International Paper delivered solid earnings and generated strong cash from operations while navigating the COVID-19 pandemic and its significant economic impact. Through the first half of 2020, we have generated $1.5 billion of cash from operations and $1 billion of free cash flow through strong commercial and operational performance, as well as outstanding cost management across all our businesses. During the second quarter, we continued to apply cash from operations consistent with our capital allocation framework, to maintain a strong balance sheet, return cash to shareowners and invest to create value.

Demand and recovery trends vary greatly by business and end-use consumer segment. Overall demand for corrugated packaging and fluff pulp continues to be resilient and outpace the economic backdrop. Our North America box shipments were flat in the second quarter compared to last year and we saw strong demand for fluff pulp. However, we’re experiencing a substantial decline in demand for printing papers across all geographic regions. Against this backdrop, our commercial teams are doing a tremendous job with our customers to ensure we understand and meet their rapidly changing needs. Our manufacturing and supply chain teams continue to leverage the scale and flexibility of our system to deliver strong operational performance and optimize costs, without incurring any material operational disruptions since the start of the pandemic. We are starting to see some recovery in our markets as economies around the world start to reopen; however, uncertainty regarding the duration and magnitude of the economic impact of COVID-19 persists. We will continue to navigate these uncertain times by staying focused on the health and well-being of our employees, taking care of our customers and ensuring the company has a strong financial foundation through each phase of the crisis.

Comparing performance in the second quarter 2020 to the first quarter 2020, price and mix was overall favorable, primarily driven by improved pricing on export containerboard in our North American Industrial Packaging and fluff pulp in our Global Cellulose Fibers businesses, both up from trough level prices. Volumes were lower compared to the first quarter 2020 with resilient demand for corrugated packaging and fluff pulp as we stepped down from an initial surge in demand in the second half of the first quarter. Printing Papers volume was substantially lower as COVID-19 containment efforts continued into the second quarter. Operations and costs were unfavorable although we were able to partially mitigate the impact of the current environment through effective cost management and delivering strong operational performance at our mills and converting facilities. By executing well in these areas, we partly offset the impact of significant economic downtime in our Printing Papers business. Maintenance outage costs were sequentially lower as the second quarter was the lowest maintenance outage quarter in 2020. Input costs were unfavorable as the higher recovered fiber costs that we experienced toward the end of the first quarter carried into the second quarter. These higher costs were partly offset by lower wood and energy costs. Corporate expense and taxes were favorable compared to the first quarter 2020, reflecting higher one-time costs for each in the prior quarter. Equity earnings were favorable even absent the $34 million non-cash foreign exchange gain primarily associated with foreign currency translation on Ilim’s US dollar denominated net debt.

Looking ahead to the third quarter 2020, in our Industrial Packaging business, we expect lower price and mix on the flow-through of prior price index movements in North America. Volume is expected to be stable relative to the second quarter. Operations and costs are expected to be negatively impacted by higher costs associated with the Riverdale mill start-up, higher seasonal costs in our North American box business and the non-repeat of favorable one-time items from the second quarter. Maintenance outage expense is expected to be higher moving from the second quarter low point while input costs are expected to be lower driven by lower recovered fiber costs. In our Global Cellulose Fibers business, we expect price and mix to improve following recent price index movements. Volume is expected to be sequentially lower while operations and costs are expected to negatively impact earnings. We expect increased maintenance outage expenses and increased input costs, driven by higher energy and chemical costs. In our Printing Papers business, we expect price and mix to be down, primarily due to export channels. Volume is expected to improve on initial demand recovery signals. Operations and costs are also expected to improve on better fixed cost absorption. Maintenance outage expenses are expected to increase while input costs are expected to remain stable. Lastly for our Ilim joint venture, we expect lower equity earnings on the non-repeat of the foreign currency gain on US denominated net debt recognized in the second quarter.

There continue to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the various economic reopening plans and the resurgence of the virus in many areas; additional actions that may be taken by governmental authorities and private businesses to attempt to contain the COVID-19 outbreak or to mitigate its impact; the extent and duration of social distancing and stay-at-home orders; the possibility of development of a vaccine; and the ongoing impact of COVID-19 on unemployment, economic activity and consumer confidence. As a result, we are unable to fully quantify the impact that the COVID-19 pandemic will have on our financial results during 2020, but developments related to COVID-19 are significantly adversely affecting our business, and could have a material adverse effect on our financial condition, results of operations and cash flows, particularly if negative global economic conditions persist for a significant period of time or continue to deteriorate.

Adjusted Operating Earnings and Adjusted Operating Earnings Per Share are non-GAAP measures and are defined as net earnings (loss) attributable to International Paper (a GAAP measure) excluding net special items and non-operating pension expense (income). 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 (income) and items considered by management to be unusual 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, 2020 | 2019 | Three Months Ended March 31, 2020 |
| --- | ---: | ---: | ---: |
| Net Earnings (Loss) Attributable to Shareholders | **$266** | $292 | $(141) |
| Add Back - Non-operating pension expense (income) | **(14)** | 8 | (6) |
| Add Back - Net special items expense (income) | **68** | 158 | 384 |
| Income tax effect - Non-operating pension and net special items expense | **(15)** | 2 | (11) |
| Adjusted Operating Earnings (Loss) Attributable to International Paper Company | **$305** | $460 | $226 |

*In millions*

|  | Three Months Ended June 30, 2020 | 2019 | Three Months Ended March 31, 2020 |
| --- | ---: | ---: | ---: |
| Diluted Earnings (Loss) Per Share Attributable to Shareholders | **$0.67** | $0.73 | $(0.36) |
| Add Back - Non-operating pension expense (income) per share | **(0.04)** | 0.02 | (0.01) |
| Add Back - Net special items expense (income) per share | **0.17** | 0.40 | 0.97 |
| Income tax effect per share - Non-operating pension and net special items expense | **(0.03)** | — | (0.03) |
| Adjusted Operating Earnings (Loss) Per Share Attributable to Shareholders | **$0.77** | $1.15 | $0.57 |

Cash provided by operations totaled $1.5 billion and $1.8 billion for the first six months of 2020 and 2019, respectively. The Company generated free cash flow of approximately $1.0 billion and $1.2 billion in the first six months of 2020 and 2019, respectively. Free cash flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operations. Management utilizes this measure in connection with managing our business and 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, we believe that 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, 2020 | 2019 |
| --- | ---: | ---: |
| Cash provided by operations | **$1,539** | $1,800 |
| Adjustments: |  |  |
| Cash invested in capital projects | **(538)** | (628) |
| Free Cash Flow | **$1,001** | $1,172 |

The non-GAAP financial measures presented in this Quarter Report on Form 10-Q as referenced above have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results calculated in accordance with GAAP. In addition, because not all companies utilize identical calculations, the Company's presentation of non-GAAP measures in this Quarterly Report on Form 10-Q may not be comparable to similarly titled measures disclosed by other companies, including companies in the same industry as the Company.

### RESULTS OF OPERATIONS

For the second quarter of 2020, International Paper Company reported net sales of $4.9 billion, compared with $5.4 billion in the first quarter of 2020 and $5.7 billion in the second quarter of 2019.

Net earnings (loss) attributable to International Paper totaled $266 million, or $0.67 per diluted share, in the second quarter of 2020. This compared with $(141) million, or $(0.36) per diluted share, in the first quarter of 2020 and $292 million, or $0.73 per diluted share, in the second quarter of 2019.

Compared with the first quarter of 2020, earnings benefited from higher average sales prices and a favorable mix ($22 million), lower mill maintenance outage costs ($52 million), lower corporate and other items ($25 million), lower net interest expense ($1 million), lower tax expense ($9 million) and lower non-operating pension expense ($6 million). These benefits were offset by lower sales volumes ($80 million), higher operating costs ($24 million) and higher raw material and freight costs ($29 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 $103 million higher than in the first quarter of 2020. Net special items in the second quarter of 2020 were a loss of $50 million compared with a loss of $372 million in the first quarter of 2020.

Compared with the second quarter of 2019, the second quarter of 2020 reflects lower raw material and freight costs ($30 million), lower mill maintenance outage costs ($137 million), lower corporate and other costs ($4 million), lower net interest expense ($4 million) and lower non-operating pension expense ($17 million). These benefits were offset by lower average sales prices and an unfavorable mix ($221 million), lower sales volumes ($62 million), higher operating costs ($34 million) and higher tax expense ($5 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 $8 million lower in the second quarter of 2020 than in the second quarter of 2019. Net special items in the second quarter of 2020 were a loss of $50 million compared with a loss of $162 million in the second quarter of 2019.

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) before income taxes and equity earnings, but including the impact of noncontrolling interests, and excluding interest expense, net, corporate expenses, net, corporate net special items, business net special items and non-operating pension expense. Business Segment Operating Profits is a measure reported to our management for purposes of making decisions about allocating resources to our business segments and assessing the performance of our business segments and is presented in our financial statement footnotes in accordance with ASC 280.

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, 2020 | 2019 | March 31, 2020 |
| --- | ---: | ---: | ---: |
| Net Earnings (Loss) Attributable to International Paper Company | **$266** | $292 | $(141) |
| Add back (deduct): |  |  |  |
| Income tax provision (benefit) | **67** | 128 | 94 |
| Equity (earnings) loss, net of taxes | **(72)** | (80) | 31 |
| Noncontrolling interests, net of taxes | **—** | (6) | — |
| Earnings (Loss) Before Income Taxes and Equity Earnings | **261** | 334 | (16) |
| Interest expense, net | **116** | 122 | 117 |
| Noncontrolling interests included in operations | **—** | 5 | — |
| Corporate expenses, net | **(3)** | 3 | 32 |
| Corporate net special items | **54** | — | 33 |
| Business net special items | **14** | 157 | 352 |
| Non-operating pension expense (income) | **(14)** | 8 | (6) |
| Adjusted Operating Profit | **$428** | $629 | $512 |
| Business Segment Operating Profit (Loss): |  |  |  |
| Industrial Packaging | **$449** | $515 | $470 |
| Global Cellulose Fibers | **(10)** | — | (54) |
| Printing Papers | **(11)** | 114 | 96 |
| Total Business Segment Operating Profit | **$428** | $629 | $512 |

32

### Business Segment Operating Profit

Total business segment operating profits were $428 million in the second quarter of 2020, $512 million in the first quarter of 2020 and $629 million in the second quarter of 2019.

Compared with the first quarter of 2020, operating profits benefited from higher average sales prices and a favorable mix ($31 million) and lower mill outage costs ($73 million). These benefits were offset by lower sales volumes ($113 million), higher operating costs ($34 million) and higher raw material and freight costs ($41 million).

Compared with the second quarter of 2019, operating profits in the current quarter benefited from lower raw material and freight costs ($40 million) and lower mill outage costs ($183 million). These benefits were offset by lower average sales prices and an unfavorable mix ($295 million), lower sales volumes ($83 million) and higher operating costs ($46 million).

Economic-related 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 thousands of tons*

|  | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Three Months Ended March 31, 2020 |
| --- | ---: | ---: | ---: |
| Economic-related downtime | **328** | 339 | 83 |
| Maintenance downtime | **51** | 303 | 170 |

34

### Sales Volumes by Product (a)

Sales volumes of major products for the three months and six months ended June 30, 2020 and 2019 were as follows:

| In thousands of short tons (except as noted) Industrial Packaging | Three Months Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Corrugated Packaging (b) | **2,571** | 2,624 | **5,195** | 5,159 |
| Containerboard | **783** | 707 | **1,610** | 1,404 |
| Recycling | **512** | 625 | **928** | 1,234 |
| Saturated Kraft | **39** | 52 | **87** | 93 |
| Gypsum/Release Kraft | **48** | 49 | **104** | 100 |
| Bleached Kraft | **8** | 5 | **15** | 12 |
| EMEA Packaging (b) | **375** | 379 | **816** | 749 |
| Brazilian Packaging (b) | **83** | 91 | **173** | 176 |
| European Coated Paperboard | **95** | 102 | **206** | 206 |
| Industrial Packaging | **4,514** | 4,634 | **9,134** | 9,133 |
| Global Cellulose Fibers (in thousands of metric tons) (c) | **965** | 869 | **1,866** | 1,728 |
| Printing Papers |  |  |  |  |
| U.S. Uncoated Papers | **247** | 441 | **662** | 889 |
| European and Russian Uncoated Papers | **271** | 367 | **631** | 721 |
| Brazilian Uncoated Papers | **150** | 283 | **390** | 527 |
| Indian Uncoated Papers | **—** | 66 | **—** | 134 |
| Printing Papers | **668** | 1,157 | **1,683** | 2,271 |

(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.

### Income Taxes

An income tax provision of $67 million was recorded for the second quarter of 2020 and the reported effective income tax rate was 26%. Excluding a benefit of $18 million related to the tax effects of net special items and expense of $3 million related to the tax effects of non-operating pension expense, the effective income tax rate was 26% for the quarter.

An income tax provision of $94 million was recorded for the first quarter of 2020 and the reported effective income tax rate was (588)%. Excluding an expense of $12 million related to the tax effects of net special items and expense of $1 million related to the tax effects of non-operating pension expense, the effective income tax rate was 29% for the quarter.

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 net 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.

### Interest Expense

Net interest expense was $116 million in the second quarter of 2020, compared with $117 million in the first quarter of 2020 and $122 million in the second quarter of 2019.

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

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

*In millions*

| Business Segments | Three Months Ended June 30, 2020 Before Tax | After Tax |  | 2019 Before Tax | After Tax |  | March 31, 2020 Before Tax | After Tax |  |
| --- | ---: | ---: | --- | ---: | ---: | --- | ---: | ---: | --- |
| Brazil Packaging impairment | **$9** | **$7** | **(a)** | $— | $— |  | $344 | $337 | (a) |
| Abandoned property removal | **5** | **4** | **(b)** | 11 | 8 | (b) | 9 | 7 | (b) |
| Riverdale mill conversion | **—** | **—** |  | 1 | 1 | (c) | 1 | 1 | (c) |
| India impairment | **—** | **—** |  | 145 | 143 | (c) | — | — |  |
| Foreign value-added tax refund accrual | **—** | **—** |  | — | — |  | (2) | (1) | (a) |
| **Business Segments Total** | **14** | **11** |  | 157 | 152 |  | 352 | 344 |  |
| **Corporate** |  |  |  |  |  |  |  |  |  |
| Asbestos litigation reserve adjustment | **43** | **33** |  | — | — |  | — | — |  |
| Debt extinguishment costs | **18** | **13** |  | — | — |  | 8 | 6 |  |
| Gain on sale of portion of investment in India | **(6)** | **(6)** |  | — | — |  | — | — |  |
| India investment fair value adjustment | **—** | **—** |  | **—** | — |  | 17 | 17 |  |
| Environmental remediation reserve adjustment | **—** | **—** |  | **—** | — |  | 41 | 31 |  |
| Gain on sale of portion of equity investment in Graphic Packaging | **—** | **—** |  | **—** | — |  | (33) | (25) |  |
| Other | **(1)** | **(1)** |  | 1 | 1 |  | (1) | (1) |  |
| **Corporate Total** | **54** | **39** |  | 1 | 1 |  | 32 | 28 |  |
| **Total net special items** | **68** | **50** |  | 158 | 153 |  | 384 | 372 |  |
| Non-operating pension expense (income) | **(14)** | **(11)** |  | 8 | 6 |  | (6) | (5) |  |
| **Total net special items and non-operating pension expense (income)** | **$54** | **$39** |  | $166 | $159 |  | $378 | $367 |  |

(a) Recorded in the Industrial Packaging segment.

(b) Includes $3 million ($2 million after taxes), $6 million ($5 million after taxes) and $8 million ($6 million after taxes) for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively, recorded in the Industrial Packaging segment; $2 million (before and after taxes), $3 million ($2 million after taxes) and $2 million ($1 million after taxes) for the three months ended June 30, 2020, March 31, 2020, and June 30, 2019, respectively, recorded in the Global Cellulose Fibers segment; $1 million (before and after taxes) for the three months ended June 30, 2019, recorded in the Printing Papers segment.

(c) Recorded in the Printing Papers segment.

Net special items include the following tax expenses (benefits):

*In millions*

|  | Three Months Ended June 30, 2020 | 2019 | March 31, 2020 |
| --- | ---: | ---: | ---: |
| Luxembourg tax law rate change | **$—** | $9 | $— |
| State income tax legislative changes | **—** | (3) | — |
| Settlement of foreign tax audits | **—** | 3 | — |
| **Total** | **$—** | $9 | $— |

36

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

*In millions*

| Business Segments | Six Months Ended June 30, 2020 Before Tax | After Tax |  | 2019 Before Tax | After Tax |  |
| --- | ---: | ---: | --- | ---: | ---: | --- |
| Brazil Packaging impairment | **$353** | **$344** | **(a)** | $— | $— |  |
| Abandoned property removal | **14** | **11** | **(b)** | 22 | 16 | (b) |
| Riverdale mill conversion | **1** | **1** | **(c)** | 2 | 2 | (c) |
| Foreign value-added tax refund accrual | **(2)** | **(1)** | **(a)** | — | — |  |
| India impairment | **—** | **—** |  | 145 | 143 | (c) |
| Multi-employer pension plan exit liability | **—** | **—** |  | 16 | 12 | (a) |
| Gain on sale of EMEA Packaging box plant | **—** | **—** |  | (7) | (6) | (a) |
| **Business Segments Total** | **366** | **355** |  | 178 | 167 |  |
| **Corporate** |  |  |  |  |  |  |
| Asbestos litigation reserve adjustment | **43** | **33** |  | — | — |  |
| Debt extinguishment costs | **26** | **19** |  | — | — |  |
| Gain on sale of portion of investment in India | **(6)** | **(6)** |  | — | — |  |
| India investment fair value adjustment | **17** | **17** |  | — | — |  |
| Environmental remediation reserve adjustment | **41** | **31** |  | — | — |  |
| Gain on sale of portion of equity investment in Graphic Packaging | **(33)** | **(25)** |  | — | — |  |
| Other | **(2)** | **(2)** |  | 1 | 1 |  |
| **Corporate Total** | **86** | **67** |  | 1 | 1 |  |
| **Total net special items** | **452** | **422** |  | 179 | 168 |  |
| Non-operating pension expense (income) | **(20)** | **(16)** |  | 18 | 14 |  |
| **Total net special items and non-operating pension expense (income)** | **$432** | **$406** |  | $197 | $182 |  |

(a) Recorded in the Industrial Packaging segment.

(b) Includes $9 million ($7 million after taxes) and $16 million ($12 million after taxes) for the six months ended June 30, 2020 and June 30, 2019, respectively, recorded in the Industrial Packaging segment; $5 million ($4 after taxes) and $5 million ($3 million after taxes) for the six months ended June 30, 2020 and June 30, 2019, respectively, recorded in the Global Cellulose Fibers segment; and $1 million (before and after taxes) for the six months ended June 30, 2019, recorded in the Printing Papers segment.

(c) Recorded in the Printing Papers segment.

Net special items include the following tax expenses (benefits):

*In millions*

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Luxembourg tax law rate change | **$—** | $9 |
| State income tax legislative changes | **—** | (3) |
| Settlement of foreign tax audits | **—** | 3 |
| **Total** | **$—** | $9 |

37

### BUSINESS SEGMENT OPERATING RESULTS

The following tables present net sales and operating profit (loss) which is the Company's measure of segment profitability.

### Industrial Packaging

*In millions*

| Total Industrial Packaging | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$3,633** | **$3,819** | **$7,452** | $3,864 | $3,832 | $7,696 |
| **Operating Profit (Loss)** | **$449** | **$470** | **$919** | $515 | $421 | $936 |

Industrial Packaging net sales for the second quarter of 2020 were 5% lower compared with the first quarter of 2020 and 6% lower compared with the second quarter of 2019. Operating profit was 4% lower in the second quarter of 2020 compared with the first quarter of 2020 and 13% lower compared with the second quarter of 2019.

*In millions*

| North American Industrial Packaging | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales (a)** | **$3,241** | **$3,355** | **$6,596** | $3,414 | $3,376 | $6,790 |
| **Operating Profit (Loss)** | **$434** | **$437** | **$871** | $515 | $419 | $934 |

(a) Includes intra-segment sales of $31 million for each of the three months ended June 30, 2020 and 2019; $32 million and $31 million for the three months ended March 31, 2020 and 2019, respectively; and $63 million and $62 million for the six months ended June 30, 2020 and 2019, respectively.

***North American Industrial Packaging*** sales volumes in the second quarter of 2020 decreased compared to the first quarter of 2020, reflecting lower shipments for boxes and seasonally lower export containerboard volumes. There was one less shipping day in the second quarter of 2020 compared with the first quarter of 2020. The COVID-19 pandemic had a mixed impact on box demand reflecting strong growth in the eCommerce segment as online shopping has become a major spending channel for consumers. The shipping and distribution and chemicals and pharmaceuticals segments were also favorably impacted. Demand for fresh foods, durable and other non-durable segments was negatively impacted by COVID-19 restrictions and a pullback in discretionary spending. Total maintenance and economic downtime was about 10,000 tons lower in the second quarter of 2020 compared with the first quarter of 2020, primarily driven by maintenance downtime. Average sales margins were stable as lower average sales prices for boxes was offset by higher export containerboard prices. Operating costs were lower as both our box plants and mill system performed well and managed costs during the COVID-19 pandemic. Planned maintenance downtime costs were $34 million lower in the second quarter of 2020 compared with the first quarter of 2020. Input costs were higher, primarily for recovered fiber, partially offset by lower wood, energy and distribution costs. Earnings in the second quarter of 2020 benefited from insurance recoveries related to the Rome fire and Bogalusa recovery boiler event.

Compared with the second quarter of 2019, sales volumes were stable in the second quarter of 2020 as lower shipments for boxes reflecting the demand impacts of the COVID-19 pandemic, was mostly offset by higher export containerboard volumes. Total maintenance and economic downtime was about 371,000 tons lower in the second quarter of 2020, primarily driven by economic downtime. Export containerboard and box prices were significantly lower reflecting prior index movements throughout 2019 and early 2020. Operating costs were flat, driven by strong operational performance at our mills offset by inflation. Planned maintenance downtime costs were $80 million lower in the second quarter of 2020 compared with the second quarter of 2019. Input costs were flat as higher recovered fiber costs were offset by lower wood, energy and distribution costs. Earnings in the second quarter of 2020 benefited from insurance recoveries related to the Rome fire and Bogalusa recovery boiler event.

Entering the third quarter of 2020, sales volumes for boxes are expected to be stable. Demand continues to be mixed reflecting continued strong demand for eCommerce, protein, shipping and distribution and chemicals and pharmaceuticals offset by slower demand for fresh foods and durable and other non-durable goods. Export containerboard volumes are expected to be lower. Average sales margins for boxes are expected to be lower, slightly offset by higher export containerboard average sales margins. Operating costs are expected to be higher. Planned maintenance downtime costs are expected to be $36 million higher in the third quarter of 2020 compared with the second quarter of 2020. Input costs are expected to be favorable primarily for recovered fiber.

*In millions*

| EMEA Industrial Packaging | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$297** | **$350** | **$647** | $331 | $339 | $670 |
| **Operating Profit (Loss)** | **$5** | **$10** | **$15** | $(7) | $(15) | $(22) |

***EMEA Industrial Packaging*** sales volumes for boxes in the second quarter of 2020 were lower compared with the first quarter of 2020 in all regions, primarily driven by the demand impact and restriction of the COVID-19 pandemic particularly in non-essential industry segments. Lower seasonal box demand in Morocco also impacted volumes. Average sales margins improved in all regions driven by a sales price increase in Turkey and an improved mix as the fruit and vegetable segment was less impacted by the COVID-19 pandemic. Operating costs were higher reflecting higher distribution costs. Planned maintenance downtime costs were $1 million lower in the second quarter of 2020 compared with the first quarter of 2020. Input costs were stable. Earnings benefited from favorable foreign currency impacts in Morocco.

Compared with the second quarter of 2019, sales volumes in the second quarter of 2020 were lower, primarily due to the impacts of the COVID-19 pandemic partially offset by improved economic conditions in Turkey. Average sales margins improved significantly, reflecting stable sales prices for boxes and lower containerboard costs. Operating costs improved from the ramp-up of the Madrid mill and improved box plant operations. Earnings also benefited from the box plant acquisitions completed in the first half of 2019. There were no planned maintenance downtime outages in either the second quarter of 2020 or the second quarter of 2019. Input costs were stable. Earnings were positively affected by favorable foreign currency impacts, primarily in Morocco.

Looking ahead to the third quarter of 2020, sales volumes for boxes are expected to be seasonally lower, primarily in Morocco. Sales volumes will continue to be negatively impacted by the COVID-19 pandemic. Average sales margins are expected to be lower, primarily driven by mix in Morocco. Operating costs are expected to be seasonally higher. Planned maintenance downtime costs are expected to be $3 million higher in the third quarter of 2020 compared with the second quarter of 2020. Input costs are expected to be slightly higher.

*In millions*

| Brazilian Industrial Packaging | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$42** | **$54** | **$96** | $58 | $57 | $115 |
| **Operating Profit (Loss)** | **$(2)** | **$(1)** | **$(3)** | $(1) | $(5) | $(6) |

***Brazilian Industrial Packaging*** sales volumes in the second quarter of 2020 compared with the first quarter of 2020 were lower for both boxes and containerboard. Seasonally higher volumes were more than offset by the demand impacts of the COVID-19 pandemic primarily for durables and discretionary segments. Average sales margins were stable, reflecting higher sales prices for containerboard and boxes partially offset by an unfavorable product mix. Operating costs were lower. There were no planned maintenance downtime costs in either the second quarter of 2020 or the first quarter of 2020. Input costs were higher for recovered fiber and chemicals.

Compared with the second quarter of 2019, sales volumes in the second quarter of 2020 were higher for boxes but were more than offset by lower containerboard volumes. The COVID-19 pandemic negatively impacted volumes. Average sales prices increased for boxes and containerboard. Operating costs were flat. There were no planned maintenance downtime costs in either the second quarter of 2020 or the second quarter of 2019. Input costs were stable.

Looking ahead to the third quarter of 2020, sales volumes for boxes are expected to be seasonally higher partially offset by lower containerboard volumes. Average sales margins are expected to be higher, reflecting a favorable mix. Planned maintenance downtime costs are expected to be $2 million higher in the third quarter of 2020 compared with the second quarter of 2020. Input costs are expected to be higher for recovered fiber and energy.

*In millions*

| European Coated Paperboard | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$84** | **$92** | **$176** | $92 | $91 | $183 |
| **Operating Profit (Loss)** | **$12** | **$24** | **$36** | $8 | $22 | $30 |

***European Coated Paperboard*** sales volumes in the second quarter of 2020 compared with the first quarter of 2020 were lower in both Europe and Russia. Sales volumes in both regions were negatively affected by the COVID-19 pandemic. Average sales margins improved in both regions driven by a favorable mix. Operating costs were lower in Russia but were more than offset by higher operating costs in Europe. Planned maintenance downtime costs were $4 million higher in the second quarter of 2020 compared with the first quarter of 2020. Input costs were stable in both regions. Earnings were negatively affected by unfavorable foreign currency impacts, primarily in Russia.

Compared with the second quarter of 2019, sales volumes decreased in both Europe and Russia reflecting the demand impact of the COVID-19 pandemic. Average sales margins were higher in Europe driven by a favorable mix and stable in Russia. Operating costs were lower in Russia but higher in Europe. Planned maintenance downtime costs were $4 million lower in the second quarter of 2020 compared with the second quarter of 2019. Input costs were lower in Europe for purchased pulp, energy amd wood. In Russia, input costs were stable. Earnings were benefited from favorable foreign currency impacts in Europe.

Entering the third quarter of 2020, sales volumes are expected to be higher in Russia and stable in Europe. Average sales margins are expected to be stable in both regions. Operating costs are expected to be higher in Europe and flat in Russia. Planned maintenance downtime costs are expected to be $3 million higher in the third quarter of 2020 compared with the second quarter of 2020. Input costs are expected to be stable in both regions.

### Global Cellulose Fibers

*In millions*

| Total Global Cellulose Fibers | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$605** | **$568** | **$1,173** | $661 | $689 | $1,350 |
| **Operating Profit (Loss)** | **$(10)** | **$(54)** | **$(64)** | $— | $35 | $35 |

***Global Cellulose Fibers*** net sales were 7% higher in the second quarter of 2020 than in the first quarter of 2020 and 8% lower than in the second quarter of 2019. Operating profit in the second quarter of 2020 improved 81% compared to the first quarter of 2020 and was lower than in the second quarter of 2019.

Sales volumes in the second quarter of 2020 compared with the first quarter of 2020 were higher for both fluff and market pulp reflecting continued strong consumer demand for absorbent hygiene and tissue and towel products partially due to the COVID-19 pandemic. Total maintenance and economic downtime was about 40,000 tons lower in the second quarter of 2020 compared with the first quarter of 2020 due to maintenance downtime. Average sales margins improved, reflecting flow through of previously announced sales price increases. Operating costs were lower as our mills improved reliability and reduced spending to overcome the uncertainty of the COVID-19 pandemic. Planned maintenance downtime costs in the second quarter of 2020 were $29 million lower compared with the first quarter of 2020. Input costs were stable. Earnings were negatively affected by the non-repeat of a favorable inventory valuation adjustment in the first quarter of 2020. In Europe and Russia, sales volumes were higher, primarily in Russia driven by the demand impacts of the COVID-19 pandemic. Average sales margins were also higher in both regions. Planned maintenance downtime costs in the second quarter of 2020 were $2 million higher compared with the first quarter of 2020 in Europe and Russia. Operating costs were favorable in both Europe and Russia. Input costs were higher in both both regions driven by wood. Earnings were negatively impacted by unfavorable foreign currency impacts in both Europe and Russia.

Compared with the second quarter of 2019, sales volumes in the second quarter of 2020 were higher driven by solid demand going into the COVID-19 pandemic reflecting a strong customer stocking cycle in anticipation of COVID-19 related supply chain issues and commercial wins. Total maintenance and economic downtime was about 76,000 tons lower in the second quarter of 2020, primarily for maintenance downtime. Average sales prices were significantly lower for both fluff and market pulp. Operating costs were favorable. Planned maintenance downtime costs in the second quarter of 2020 were $64 million lower compared with the second quarter of 2019. Input costs were lower primarily for wood, energy and chemicals. In Europe and Russia, sales volumes increased in both regions driven by the increased demand due to the COVID-19 pandemic. Average sales margins were significantly lower in both regions reflecting lower average sales prices. Operating costs were unfavorable in both Europe and Russia. Planned maintenance downtime costs in the second quarter of 2020 were $2 million lower compared with the second quarter of 2019 in Europe and Russia. Input costs were flat in Europe and higher in Russia primarily for wood. Earnings were negatively impacted by unfavorable foreign currency impacts in Europe, slight offset by favorable impacts in Russia.

Entering the third quarter of 2020, sales volumes are expected to be seasonally lower and include the impact of some destocking due to a more stable supply chain in the COVID-19 pandemic. Average sales margins are expected to be higher, reflecting the flow through of previously announced sales price increases. Planned maintenance downtime costs in the third quarter of 2020 are expected to be $46 million higher compared with the second quarter of 2020. Input costs are expected to be higher. In Europe and Russia, sales volumes are expected to be stable in Europe and lower in Russia. Average sales margins are expected to be lower in both regions. Operating costs are expected to be higher in both Europe and Russia. Planned maintenance downtime costs in the third quarter of 2020 are expected to be flat compared with the second quarter of 2020 in Europe and Russia.

### Printing Papers

*In millions*

| Total Printing Papers | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$583** | **$908** | **$1,491** | $1,088 | $1,065 | $2,153 |
| **Operating Profit (Loss)** | **$(11)** | **$96** | **$85** | $114 | $144 | $258 |

Printing Papers net sales for the second quarter of 2020 were 36% lower than in the first quarter of 2020 and 46% lower than in the second quarter of 2019. Operating profit in the second quarter of 2020 was significantly lower compared with the first quarter of 2020 and the second quarter of 2019.

*In millions*

| North American Papers | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$265** | **$446** | **$711** | $486 | $496 | $982 |
| **Operating Profit (Loss)** | **$(23)** | **$23** | **$—** | $41 | $57 | $98 |

***North American Papers*** sales volumes in the second quarter of 2020 were significantly lower compared with the first quarter of 2020 across all grades for uncoated freesheet paper driven by the unprecedented demand decline due to the COVID-19 pandemic. Total maintenance and economic downtime was about 176,000 tons higher in the second quarter of 2020 compared with the first quarter of 2020 primarily for economic downtime. Average sales margins were stable, reflecting lower average sales prices offset by a favorable mix. Operating costs were lower due to seasonality and strong operations and cost management. Planned maintenance downtime costs were $24 million lower in the second quarter of 2020, compared with the first quarter of 2020. Input costs were lower, primarily for chemicals, energy and wood.

Compared with the second quarter of 2019, sales volumes in the second quarter of 2020 were significantly lower across all grades for uncoated freesheet paper driven by the demand impact of the COVID-19 pandemic. Total maintenance and economic downtime was about 184,000 tons higher in the second quarter of 2020 compared with the second quarter of 2019 primarily for economic downtime associated with the COVID-19 pandemic. Average sales margins were lower, reflecting lower average sales prices. Operating costs were favorable due to strong mill operations and cost management. Planned maintenance downtime costs were $23 million lower in the second quarter of 2020 compared with the second quarter of 2019. Input costs were favorable, primarily for wood.

Entering the third quarter of 2020, sales volumes are expected to improve driven by the ease in COVID-19 related restrictions on businesses and schools. Average sales margins are expected to be stable. Operating costs are expected to be higher. Planned maintenance downtime costs are expected to be $7 million higher in the third quarter of 2020. Input costs are expected to be stable.

*In millions*

| European Papers | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$209** | **$287** | **$496** | $321 | $309 | $630 |
| **Operating Profit (Loss)** | **$13** | **$41** | **$54** | $29 | $47 | $76 |

***European Papers*** sales volumes for uncoated freesheet paper in the second quarter of 2020 compared with the first quarter of 2020 were significantly lower in Europe and Russia driven by the unprecedented demand decline due to the COVID-19 pandemic. Earnings in both regions were negatively impacted by economic downtime in the second quarter of 2020 due to the COVID-19 demand impact. Average sales margins for uncoated freesheet paper decreased in Europe, reflecting lower average sales prices. In Russia, average sales margins were higher due to a favorable mix. Operating costs were lower in Europe and Russia driven by strong operations and cost management. Planned maintenance downtime costs were $8 million higher in the second quarter of 2020 compared to the first quarter of 2020. Input costs were stable in Europe as higher wood and chemical costs were offset by lower energy costs. In Russia, input costs were higher, primarily for wood. Earnings were negatively impacted by unfavorable foreign currency impacts in Russia.

Sales volumes for uncoated freesheet paper in the second quarter of 2020, compared with the second quarter of 2019, were significantly lower in Europe and Russia reflecting the negative demand impact of the COVID-19 pandemic. Earnings in both regions were negatively impacted by economic downtime in the second quarter of 2020 due to the COVID-19 demand impact. Average sales margins for uncoated freesheet paper were lower in both regions reflecting lower average sales prices and an unfavorable mix. Operating costs were lower in both Europe and Russia. Planned maintenance downtime costs were $12 million lower in the second quarter of 2020 compared with the second quarter of 2019. In Europe, input costs were lower, primarily for wood, energy and chemicals. In Russia, input costs increased, primarily for wood. Earnings benefited from favorable foreign currency impacts in Europe, partially offset by unfavorable foreign currency impacts in Russia.

Looking forward to the third quarter of 2020, sales volumes for uncoated freesheet paper are expected to be stable in Europe and improve in Russia. Average sales margins are expected to be lower in both regions. Operating costs are expected to be higher in both Europe and Russia. Planned maintenance downtime costs are expected to be $8 million higher in the third quarter of 2020 compared with the second quarter of 2020. Input costs are expected to be higher in Europe, primarily for energy and stable in Russia.

*In millions*

| Brazilian Papers | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales (a)** | **$108** | **$176** | **$284** | $240 | $215 | $455 |
| **Operating Profit (Loss)** | **$(1)** | **$32** | **$31** | $37 | $33 | $70 |

(a) Includes intra-segment sales of $(1) million and $12 million for the three months ended June 30, 2020 and 2019, respectively; $1 million and $8 million for the three months ended March 31, 2020 and 2019, respectively; and $0 million and $20 million for the six months ended June 30, 2020 and 2019, respectively.

***Brazilian Papers*** sales volumes in the second quarter of 2020, compared with the first quarter of 2020, were significantly lower for both domestic and export shipments of uncoated freesheet paper driven by the unprecedented decline in demand due to the COVID-19 pandemic. Earnings were negatively impacted by economic downtime due to the demand impact of the COVID-19 pandemic. Average sales margins were stable. Operating costs were favorable. Planned maintenance outage downtime costs were $3 million higher in the second quarter of 2020 compared with the first quarter of 2020. Input costs were flat.

Compared with the second quarter of 2019, sales volumes for uncoated freesheet paper in the second quarter of 2020 were significantly lower in both export and domestic markets reflecting the demand impact of the COVID-19 pandemic. Earnings were negatively impacted by economic downtime due to the demand impact of the COVID-19 pandemic. Average sales margins were lower reflecting lower average sales prices and an unfavorable geographic mix. Operating costs were lower. Planned maintenance outage expenses were $3 million higher in the second quarter of 2020 compared with the second quarter of 2019. Input costs were lower for virgin fiber and pulp, partially offset by higher chemicals and energy costs.

Entering the third quarter of 2020, sales volumes for uncoated freesheet paper are expected to improve for both domestic and export shipments as COVID-19 negative demand impact begin to recover. Average sales margins are expected to be lower driven by export markets. Operating costs are expected to be higher. Planned maintenance outage expenses are expected to be $1 million lower in the third quarter of 2020 compared with the second quarter of 2020. Input costs are expected to be higher.

*In millions*

| Indian Papers | 2020 2nd Quarter | 1st Quarter | Six Months | 2019 2nd Quarter | 1st Quarter | Six Months |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Sales** | **$—** | **$—** | **$—** | $53 | $53 | $106 |
| **Operating Profit (Loss)** | **$—** | **$—** | **$—** | $7 | $7 | $14 |

On May 29, 2019, International Paper announced it had entered into an agreement to sell its controlling interest in its Indian Papers business. The transaction closed on October 30, 2019.

### Equity Earnings, Net of Taxes – Ilim

International Paper accounts for its 50% equity interest in Ilim S.A. (Ilim) using the equity method of accounting. Ilim is a separate reportable industry segment whose primary operations are in Russia. The Company recorded equity earnings (loss), net of taxes, of $63 million in the second quarter of 2020, compared with $(35) million in the first quarter of 2020 and $67 million in the second quarter of 2019. In the second quarter of 2020, the after-tax foreign exchange impact primarily on the remeasurement of U.S. dollar-denominated net debt was a gain of $34 million, compared with a loss of $51 million in the first quarter of 2020.

Compared with the first quarter of 2020, sales volumes in the second quarter of 2020 were 7% higher overall, primarily for sales of softwood pulp in China, other export markets and Russia, and sales of containerboard in China and Russia. Average sales price realizations increased slightly for softwood pulp and hardwood pulp in China and other export markets, but were lower in Russia. Input costs for wood were seasonally higher. Repair and outage costs were also higher.

Compared with the second quarter of 2019, sales volumes in the second quarter of 2020 increased overall by 6%, primarily for sales of softwood pulp in China and other export markets, partially offset by lower sales of hardwood pulp in China. Sales of containerboard in China and other export markets improved. Average sales price realizations for softwood pulp, hardwood pulp and containerboard were lower in all regions. Input costs, primarily for wood increased. Distribution costs were higher. An after-tax foreign exchange gain of $7 million primarily on the remeasurement of U.S. dollar denominated net debt was recorded in the second quarter of 2019.

Looking forward to the third quarter of 2020, sales volumes are expected to be lower as maintenance mill outages are scheduled to occur at the Koryzhama and Bratsk mills. Based on pricing to date in the current quarter, average sales price realizations are projected to be relatively flat compared with the second quarter of 2020. Input costs for wood are expected to be seasonally lower. Distribution costs are projected to increase.

### Equity Earnings – GPIP

International Paper recorded equity earnings of $11 million in the second quarter of 2020, compared with $7 million in the first quarter of 2020 and $14 million in the second quarter of 2019. As of June 30, 2020, the Company's ownership interest in GPIP was 18.9%.

### LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations totaled $1.5 billion for the first six months of 2020, compared with $1.8 billion for the comparable 2019 six-month period.

Investments in capital projects, net of insurance recoveries, totaled $538 million in the first six months of 2020, compared to $628 million in the first six months of 2019. Full-year 2020 capital spending is currently expected to be approximately $800 million, which represents a reduction of approximately $200 million from our initial plan. This represents 63% of depreciation and amortization, including approximately $300 million of strategic investments.

Financing activities for the first six months of 2020 included a $338 million net decrease in debt versus a $8 million net decrease in debt during the comparable 2019 six-month period.

Amounts related to early debt extinguishment during the three and six months ended June 30, 2020 and 2019 were as follows:

*In millions*

|  | Three Months Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Early debt reductions (a) | **$222** | $74 | **$294** | $168 |
| Pre-tax early debt extinguishment (gain) loss, net | **18** | (1) | **26** | (2) |

(a) Reductions related to notes with interest rates ranging from 3.00% to 7.50% with original maturities from 2021 to 2027 and from 3.00% to 4.40% with original maturities from 2027 to 2048 for the three months ended June 30, 2020 and 2019, respectively, and from 3.00% to 7.50% with original maturities from 2021 to 2048 and from 3.00% to 9.50% with original maturities from 2024 to 2048 for the six months ended June 30, 2020 and 2019, respectively.

At June 30, 2020, contractual obligations for future payments of debt maturities (including finance lease liabilities disclosed in Note 11 - Leases of the Condensed Notes to the Consolidated Financial Statements and excluding the timber monetization structures disclosed in Note 16 - Variable Interest Entities of the Condensed Notes to the Consolidated Financial Statements) by calendar year were as follows: $8 million in 2020; $253 million in 2021; $227 million in 2022; $360 million in 2023; $806 million in 2024; and $7.8 billion thereafter.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At June 30, 2020, 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 under the Company's commercial paper program.

At June 30, 2020, International Paper’s credit agreements totaled $2.8 billion, which is comprised of the $750 million contractually committed revolving credit agreement, the $1.5 billion contractually committed bank credit agreement, and up to $550 million under the receivables securitization program. Management believes these credit agreements 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. At June 30, 2020, the Company had no borrowings outstanding under either the $750 million revolving credit agreement, the $1.5 billion credit agreement, or the $550 million receivables securitization program. The Company’s credit agreements are not subject to any restrictive covenants other than the financial covenants as disclosed in Note 17 - Debt of the Condensed Notes to the Consolidated Financial Statements, and the borrowings under the receivables securitization program being limited by eligible receivables. The Company was in compliance with all its debt covenants at June 30, 2020 and was well below the thresholds stipulated under the covenants as defined in the credit agreements. Further the financial covenants do not restrict any borrowings under the credit agreements.

In addition to the $2.8 billion in credit agreements, International Paper has a commercial paper program with a borrowing capacity of $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 or floating rate notes. As of June 30, 2020, the Company had no borrowings outstanding under the program.

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 2020 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 maintain appropriate levels of liquidity to meet our needs while managing balance sheet debt and interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors. The COVID-19 pandemic has negatively impacted the global economy and created significant volatility and disruption of capital and financial markets. As a result of the current economic environment, management has taken various actions to further strengthen the Company’s liquidity position. In addition to the Company entering into a $750 million revolving credit agreement and the Company amending the receivable securitization program from uncommitted to committed financing, the Company also plans to reduce capital expenditures by approximately $200 million in 2020, has indefinitely suspended the Company’s share repurchase program beginning April 2020, and has been deferring the payment of our payroll taxes as allowed under CARES Act. The CARES Act allows for the deferral of the payment of the employer portion of Social Security taxes accrued between March 27, 2020, and December 31, 2020. Under the CARES Act 50% of the deferred payroll taxes will be paid by December 31, 2021 and the remainder will be paid by December 31, 2022. We believe that these actions provide us with sufficient liquidity to operate in this uncertain environment; however, an extended period of economic disruption could impact our access to additional sources of liquidity.

During the first six months of 2020, International Paper used 2.0 million shares of treasury stock for various incentive plans. International Paper also acquired 1.0 million shares of treasury stock, including restricted stock tax withholdings. Repurchases of common stock and payments of restricted stock withholding taxes totaled $41 million, including $14 million related to shares repurchased under the Company's repurchase program. The Company has indefinitely suspended its repurchase program beginning April 2020.

During the first six months of 2019, International Paper used approximately 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 withholding. 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.

Cash dividend payments related to common stock totaled $403 million and $398 million for the first six months of 2020 and 2019, respectively. Dividends were $1.0250 per share and $1.0000 per share for the first six months in 2020 and 2019, respectively.

Our pension plan is currently sufficiently funded and we do not anticipate any required contributions in 2020.

### Variable Interest Entities

Information concerning variable interest entities is set forth in Note 15 in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. In connection with the 2006 International Paper installment sale of forestlands, we received $4.8 billion of installment notes. These installment notes were used by variable interest entities as collateral for borrowings from third-party lenders. These variable interest entities were restructured in 2015 when the installment notes and third-party loans were extended. The restructured variable interest entities hold installment notes of $4.8 billion that mature in August 2021 (unless extended) and third-party loans of $4.2 billion that mature in the fourth quarter of 2020 (unless extended). These third-party loans are shown in Current nonrecourse financial liabilities of variable interest entities on the accompanying consolidated balance sheet. We are evaluating alternatives for extending the installment notes and refinancing the third-party loans.

Failure to extend, renew or refinance these third-party loans prior to their stated maturity, which we believe is unlikely, could necessitate a disposition of the installment notes to facilitate the $4.2 billion debt payment. We are confident we would be able to dispose of the installment notes, if necessary.

### 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% interest would be approximately $1.1 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 2019 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 2020.

While we have taken into account certain impacts arising from COVID-19 in connection with the accounting estimates reflected in this Quarterly Report on Form 10-Q, the full impact of COVID-19 is unknown and cannot be reasonably estimated. However, we have made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be affected.

### 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) developments related to the COVID-19 pandemic, including the severity, magnitude and duration of the pandemic, negative global economic conditions arising from the pandemic, impacts of governments’ responses to the pandemic on our operations, impacts of the pandemic on commercial activity, our customers and business partners and consumer preferences and demand, supply chain disruptions, and disruptions in the capital or financial markets; (ii) the level of indebtedness and changes in interest rates; (iii) industry conditions, including but not limited to changes in the cost or availability of raw materials, energy and transportation costs, competition International Paper faces, cyclicality and changes in consumer preferences, demand and pricing for International Paper products (including changes resulting from the COVID-19 pandemic); (iv) domestic and global economic conditions and political changes, changes in currency exchange rates, trade protectionist policies, downgrades in International Paper’s credit ratings, and/or the credit ratings of banks issuing certain letters of credit, issued by recognized credit rating organizations; (v) the amount of International Paper’s future pension funding obligations, and pension and health care costs; (vi) unanticipated expenditures or other adverse developments related to the cost of compliance with existing and new environmental, tax, labor and employment, privacy and other U.S. and non-U.S. governmental laws and regulations (including new legal requirements arising from the COVID-19 pandemic); (vii) any material disruption at any of International Paper’s manufacturing facilities (including as the result of the COVID-19 pandemic); (viii) risks inherent in conducting business through joint ventures; (ix) International Paper’s ability to achieve the benefits expected from, and other risks associated with, acquisitions, joint ventures, divestitures and other corporate transactions, (x) information technology risks, and (xi) loss contingencies and pending, threatened or future litigation, including with respect to environmental related matters. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements can be found in International Paper’s press releases and U.S. Securities and Exchange Commission filings. In addition, other risks and uncertainties not presently known to International Paper or that it currently believes to be immaterial could affect the accuracy of any forward-looking statements. International Paper undertakes 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 36 of International Paper’s 2019 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, 2019.

## 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, 2020 (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, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 4,895 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, 2019 (Part I, Item 1A) other than as discussed below.

***The current COVID-19 pandemic is significantly affecting our business, and may have material adverse effects on our business, financial condition, results of operations and cash flows.***

The COVID-19 pandemic has resulted in authorities throughout the world implementing widespread measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, stay-at-home orders, the promotion of social distancing and limitations on business activity, including business closures. These measures and the pandemic are causing significant global economic downturn, disrupting supply chains, significantly increasing unemployment and underemployment levels, and adversely impacting consumer confidence and spending. The continued spread of COVID-19 has also led to significant disruption and volatility in the global capital and financial markets, which increases the cost of capital and may adversely impact our access to such markets. In addition, the negative impacts arising from the pandemic may continue or worsen in the future, amplifying the negative impact on global economic conditions and global financial markets.

Although governments of countries in which we operate have generally considered forest products and the supply chain on which we depend to be “essential industries” that should remain operational during this pandemic, any significant disruption in operations at one or more of our mills, plants, distribution centers or other facilities as a result of the COVID-19 pandemic, including precautionary measures we take or taken by governmental authorities that limits in-person workplace contact at any of our facilities to reduce the potential for employee exposure to COVID-19, could have an adverse effect on our business or operations. If a significant portion of our workforce is unable to work effectively due to measures taken in response to the COVID-19 pandemic such as those described herein, our operations will likely be negatively impacted.

The COVID-19 pandemic is having a significant negative impact on demand for our printing papers products and could accelerate the underlying secular decline in demand for these products. If negative economic conditions with respect to COVID-19 persist or continue to deteriorate, these conditions are expected to impact demand for other products we sell, such as our pulp, containerboard and corrugated box products, which would be more significant to our enterprise as a whole. In addition, the COVID-19 pandemic may cause supply chain disruptions. Conditions related to the pandemic could also limit the ability of our suppliers, customers, third-party service providers, joint venture and other business partners and other counterparties to fulfill their commitments and responsibilities in a timely manner and in accordance with agreed upon terms, as well as limit our ability to perform fully on our contracts. Moreover, we may incur additional costs as the result of the pandemic arising from measures to keep our employees safe and expenditures to enable our office workers to work remotely. Likewise, remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. Finally, if negative economic conditions arising from the pandemic persist and continue to significantly adversely affect economic conditions, this could give rise to an impairment in the value of our tangible or intangible assets, or result in a continued significant decrease in our pension plan assets or also a negative impact to pension plan liabilities.

There continues to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the various economic reopening plans and the resurgence of the virus in many areas; additional actions that may be taken by governmental authorities and private businesses to attempt to contain the COVID-19 outbreak or to mitigate its impact; the extent and duration of social distancing and stay-at-home orders; the possibility of development of a vaccine; and the ongoing impact of COVID-19 on unemployment, economic activity and consumer confidence. As a result, we are unable to fully quantify the impact that the COVID-19 pandemic will have on our financial results during 2020, but developments related to COVID-19 are significantly adversely affecting our business, and could have a material adverse effect on our financial condition, results of operations and cash flows, particularly if negative global economic conditions persist for a significant period of time or continue to deteriorate.

Filed Jul 31, 2020.
Source: SEC EDGAR, the filing index for accession 0000051434-20-000033. Last ingested by Listed: Nov 10, 2026, 17:11 ET. No prices; not investment advice.