filings.toolsItem 1. [FINANCIAL STATEMENTS](#ifca02467bcb44cea9104f4b8b546ac0f16)
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Item 1. [FINANCIAL STATEMENTS](#ifca02467bcb44cea9104f4b8b546ac0f16)
INTERNATIONAL PAPER COMPANY
Condensed Consolidated Statement of Operations
(Unaudited)
(In millions, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net Sales | $ | 5,714 | $ | 5,123 | $ | 16,693 | $ | 15,341 | |||||||||||||||
| Costs and Expenses | |||||||||||||||||||||||
| Cost of products sold | 3,924 | 3,541 | 11,684 | 10,714 | |||||||||||||||||||
| Selling and administrative expenses | 434 | 360 | 1,255 | 1,110 | |||||||||||||||||||
| Depreciation, amortization and cost of timber harvested | 318 | 320 | 933 | 955 | |||||||||||||||||||
| Distribution expenses | 446 | 377 | 1,272 | 1,149 | |||||||||||||||||||
| Taxes other than payroll and income taxes | 42 | 44 | 131 | 129 | |||||||||||||||||||
| Restructuring and other charges, net | 39 | 105 | 243 | 131 | |||||||||||||||||||
| Net (gains) losses on sales and impairments of businesses | (360) | (5) | (367) | 347 | |||||||||||||||||||
| Net (gains) losses on sales of equity method investments | (1) | (2) | (205) | (35) | |||||||||||||||||||
| Net (gains) losses on sales of fixed assets | (86) | — | (86) | — | |||||||||||||||||||
| Interest expense, net | 93 | 112 | 242 | 345 | |||||||||||||||||||
| Non-operating pension expense (income) | (51) | (11) | (156) | (31) | |||||||||||||||||||
| Earnings (Loss) Before Income Taxes and Equity Earnings | 916 | 282 | 1,747 | 527 | |||||||||||||||||||
| Income tax provision (benefit) | 146 | 50 | 347 | 211 | |||||||||||||||||||
| Equity earnings (loss), net of taxes | 94 | (28) | 247 | 13 | |||||||||||||||||||
| Net Earnings (Loss) | $ | 864 | $ | 204 | $ | 1,647 | $ | 329 | |||||||||||||||
| Less: Net earnings (loss) attributable to noncontrolling interests | — | — | 2 | — | |||||||||||||||||||
| Net Earnings (Loss) Attributable to International Paper Company | $ | 864 | $ | 204 | $ | 1,645 | $ | 329 | |||||||||||||||
| Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders | |||||||||||||||||||||||
| Net earnings (loss) | $ | 2.22 | $ | 0.52 | $ | 4.21 | $ | 0.84 | |||||||||||||||
| Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders | |||||||||||||||||||||||
| Net earnings (loss) | $ | 2.20 | $ | 0.52 | $ | 4.16 | $ | 0.83 | |||||||||||||||
| Average Shares of Common Stock Outstanding – assuming dilution | 392.6 | 394.6 | 395.3 | 394.5 |
The accompanying notes are an integral part of these condensed financial statements.
INTERNATIONAL PAPER COMPANY
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)
(In millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net Earnings (Loss) | $ | 864 | $ | 204 | $ | 1,647 | $ | 329 | |||||||||||||||
| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||||||||||||||
| Amortization of pension and post-retirement prior service costs and net loss: | |||||||||||||||||||||||
| U.S. plans | 31 | 42 | 101 | 127 | |||||||||||||||||||
| Non-U.S. plans | — | 1 | — | 1 | |||||||||||||||||||
| Pension and postretirement adjustments: | |||||||||||||||||||||||
| U.S. plans | 826 | — | 826 | — | |||||||||||||||||||
| Non-U.S. plans | 5 | — | 6 | — | |||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | (70) | (28) | 99 | (515) | |||||||||||||||||||
| Net gains/losses on cash flow hedging derivatives: | |||||||||||||||||||||||
| Net gains (losses) arising during the period | (4) | (4) | 3 | (34) | |||||||||||||||||||
| Reclassification adjustment for (gains) losses included in net earnings (loss) | (8) | 6 | (9) | 26 | |||||||||||||||||||
| Total Other Comprehensive Income (Loss), Net of Tax | 780 | 17 | 1,026 | (395) | |||||||||||||||||||
| Comprehensive Income (Loss) | 1,644 | 221 | 2,673 | (66) | |||||||||||||||||||
| Net (earnings) loss attributable to noncontrolling interests | — | — | (2) | — | |||||||||||||||||||
| Other comprehensive (income) loss attributable to noncontrolling interests | — | — | 2 | 2 | |||||||||||||||||||
| Comprehensive Income (Loss) Attributable to International Paper Company | $ | 1,644 | $ | 221 | $ | 2,673 | $ | (64) |
The accompanying notes are an integral part of these condensed financial statements.
INTERNATIONAL PAPER COMPANY
Condensed Consolidated Balance Sheet
(In millions)
| September 30, 2021 | December 31, 2020 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and temporary investments | $ | 2,122 | $ | 595 | |||||||
| Restricted cash | 1,499 | — | |||||||||
| Accounts and notes receivable, net | 3,549 | 3,064 | |||||||||
| Contract assets | 427 | 355 | |||||||||
| Inventories | 2,053 | 2,050 | |||||||||
| Current financial assets of variable interest entities (Note 16) | — | 4,850 | |||||||||
| Assets held for sale | — | 138 | |||||||||
| Other current assets | 246 | 184 | |||||||||
| Total Current Assets | 9,896 | 11,236 | |||||||||
| Plants, Properties and Equipment, net | 11,360 | 12,217 | |||||||||
| Forestlands | 303 | 311 | |||||||||
| Investments | 713 | 1,178 | |||||||||
| Long-Term Financial Assets of Variable Interest Entities (Note 16) | 2,270 | 2,257 | |||||||||
| Goodwill | 3,274 | 3,315 | |||||||||
| Pension Assets | 545 | 5 | |||||||||
| Right of Use Assets | 405 | 459 | |||||||||
| Deferred Charges and Other Assets | 705 | 740 | |||||||||
| Total Assets | $ | 29,471 | $ | 31,718 | |||||||
| Liabilities and Equity | |||||||||||
| Current Liabilities | |||||||||||
| Notes payable and current maturities of long-term debt | $ | 233 | $ | 29 | |||||||
| Current nonrecourse financial liabilities of variable interest entities (Note 16) | — | 4,220 | |||||||||
| Accounts payable | 2,704 | 2,320 | |||||||||
| Accrued payroll and benefits | 489 | 466 | |||||||||
| Liabilities held for sale | — | 181 | |||||||||
| Other current liabilities | 1,272 | 1,068 | |||||||||
| Total Current Liabilities | 4,698 | 8,284 | |||||||||
| Long-Term Debt | 8,241 | 8,064 | |||||||||
| Long-Term Nonrecourse Financial Liabilities of Variable Interest Entities (Note 16) | 2,098 | 2,092 | |||||||||
| Deferred Income Taxes | 2,728 | 2,743 | |||||||||
| Pension Benefit Obligation | 418 | 1,055 | |||||||||
| Postretirement and Postemployment Benefit Obligation | 235 | 251 | |||||||||
| Long-Term Lease Obligations | 263 | 315 | |||||||||
| Other Liabilities | 1,167 | 1,046 | |||||||||
| Equity | |||||||||||
| Common stock, $1 par value, 2021 – 448.9 shares and 2020 – 448.9 shares | 449 | 449 | |||||||||
| Paid-in capital | 6,371 | 6,325 | |||||||||
| Retained earnings | 9,103 | 8,070 | |||||||||
| Accumulated other comprehensive loss | (3,314) | (4,342) | |||||||||
| 12,609 | 10,502 | ||||||||||
| Less: Common stock held in treasury, at cost, 2021 – 61.7 shares and 2020 – 55.8 shares | 2,987 | 2,648 | |||||||||
| Total International Paper Shareholders’ Equity | 9,622 | 7,854 | |||||||||
| Noncontrolling interests | 1 | 14 | |||||||||
| Total Equity | 9,623 | 7,868 | |||||||||
| Total Liabilities and Equity | $ | 29,471 | $ | 31,718 |
The accompanying notes are an integral part of these condensed financial statements.
INTERNATIONAL PAPER COMPANY
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Activities | |||||||||||
| Net earnings (loss) | $ | 1,647 | $ | 329 | |||||||
| Depreciation, amortization and cost of timber harvested | 933 | 955 | |||||||||
| Deferred income tax provision (benefit), net | (151) | (5) | |||||||||
| Restructuring and other charges, net | 243 | 131 | |||||||||
| Net (gains) losses on sales of equity method investments | (205) | (35) | |||||||||
| Net (gains) losses on sales and impairments of businesses | (367) | 347 | |||||||||
| Net (gains) losses on sales of fixed assets | (86) | — | |||||||||
| Equity method dividends received | 149 | 158 | |||||||||
| Equity (earnings) losses, net | (247) | (13) | |||||||||
| Periodic pension (income) expense, net | (84) | 24 | |||||||||
| Other, net | 129 | 212 | |||||||||
| Changes in current assets and liabilities | |||||||||||
| Accounts and notes receivable | (510) | 96 | |||||||||
| Contract assets | (74) | 2 | |||||||||
| Inventories | (133) | 74 | |||||||||
| Accounts payable and accrued liabilities | 716 | — | |||||||||
| Interest payable | 9 | (26) | |||||||||
| Other | (46) | 25 | |||||||||
| Cash Provided By (Used For) Operations | 1,923 | 2,274 | |||||||||
| Investment Activities | |||||||||||
| Invested in capital projects, net of insurance recoveries | (348) | (657) | |||||||||
| Acquisitions, net of cash acquired | (80) | (64) | |||||||||
| Proceeds from sales of equity method investments | 843 | 500 | |||||||||
| Proceeds from sales of businesses, net of cash divested | 827 | — | |||||||||
| Proceeds from settlement of Variable Interest Entity installment notes | 4,850 | — | |||||||||
| Proceeds from sale of fixed assets | 95 | 3 | |||||||||
| Other | (3) | 18 | |||||||||
| Cash Provided By (Used For) Investment Activities | 6,184 | (200) | |||||||||
| Financing Activities | |||||||||||
| Repurchases of common stock and payments of restricted stock tax withholding | (425) | (42) | |||||||||
| Issuance of debt | 1,511 | 692 | |||||||||
| Reduction of debt | (1,132) | (1,795) | |||||||||
| Change in book overdrafts | 29 | 16 | |||||||||
| Dividends paid | (602) | (605) | |||||||||
| Reduction of Variable Interest Entity loans | (4,220) | — | |||||||||
| Net debt tender premiums paid | (221) | (124) | |||||||||
| Other | (14) | (1) | |||||||||
| Cash Provided By (Used For) Financing Activities | (5,074) | (1,859) | |||||||||
| Cash Included in Assets Held for Sale | — | (11) | |||||||||
| Effect of Exchange Rate Changes on Cash and Temporary Investments and Restricted Cash | (7) | (37) | |||||||||
| Change in Cash and Temporary Investments and Restricted Cash | 3,026 | 167 | |||||||||
| Cash and Temporary Investments and Restricted Cash | |||||||||||
| Beginning of period | 595 | 511 | |||||||||
| End of period | $ | 3,621 | $ | 678 |
The accompanying notes are an integral part of these condensed financial statements.
INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States and in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments that are necessary for the fair presentation of International Paper Company’s (International Paper’s, the Company’s or our) financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed herein, such adjustments are of a normal, recurring nature. Results for the first nine months of the year may not necessarily be indicative of full year results. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which have previously been filed with the Securities and Exchange Commission.
On March 11, 2020 the World Health Organization (WHO) declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. During the third quarter of 2021, the number of COVID-19 cases and deaths increased in the United States and numerous other countries, and restrictive measures, including mask and vaccine requirements, have been implemented or reinstituted by various governmental authorities and private businesses. Economic recovery in the United States has continued but may be threatened by the resurgence of COVID-19 cases and other factors. Most of our manufacturing and converting facilities have remained open and operational during the pandemic and at the current time our manufacturing and converting facilities are generally operational.
The pandemic has had a mixed impact on demand for our products. Initially, demand for printing papers products was significantly impacted by the pandemic, but has seen a steady increase over the first nine months of 2021. Demand for our pulp, containerboard and corrugated box products has not been negatively impacted and in some cases has been positively impacted by COVID-19 to date. However, all of our operations continue to experience higher supply chain costs and a constrained transportation environment due in part to the impacts of COVID-19.
There continue to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the resurgence of new variants of the virus in many areas globally; the additional actions taken by governmental authorities and private businesses, including mask and vaccine requirements, to attempt to contain the COVID-19 outbreak or to mitigate its impact; the efficacy, acceptance and availability of various vaccines and booster shots, as well as the possibility that strains of the virus may be resistant to current available vaccines; and the impact of COVID-19 on economic conditions, including with respect to labor market conditions, economic activity, consumer behavior, supply shortages and disruptions and inflationary pressures. COVID-19 has had a significant adverse effect on portions of our business, and could have a material adverse effect on our financial condition, results of operations and cash flows if public health and/or global economic conditions deteriorate.
Printing Papers Spinoff
On October 1, 2021, the Company completed the previously announced spin-off of its Printing Papers segment along with certain mixed-use coated paperboard and pulp businesses in North America, France and Russia into a standalone, publicly-traded company, Sylvamo Corporation. The transaction was implemented through the distribution of shares of the standalone company to International Paper's shareholders (the "Distribution"). As a result of the Distribution, Sylvamo Corporation is an independent public company that trades on the New York Stock Exchange under the symbol "SLVM".
The Distribution was made to the Company's stockholders of record as of the close of business on September 15, 2021 (the "Record Date"), and such stockholders received one share of Sylvamo Corporation common stock for every 11 shares of International Paper common stock held as of the close of business on the Record Date. The Company retained 19.9% of the shares of Sylvamo at the time of the separation, with the intent to monetize its investment and to provide additional proceeds to the Company. The Company is accounting for its ownership interest in Sylvamo at fair value as an investment in equity securities. In the third quarter of 2021, Sylvamo incurred $1.5 billion in debt in anticipation of a net cash distribution of $1.4 billion to be made to the Company as part of the spin-off. See Note 17 – Debt for further details regarding the Sylvamo debt.
All current and historical operating results of the Sylvamo Corporation businesses will be presented as Discontinued Operations, net of tax, in the consolidated statement of operations in the fourth quarter of 2021. The spin-off was tax-free for the Company and its shareholders for U.S. federal income tax purposes.
In connection with the Distribution, on September 29, 2021, the Company and Sylvamo Corporation entered into a separation and distribution agreement as well as various other agreements that govern the relationships between the parties following the Distribution, including a transition services agreement, a tax matters agreement and an employee matters agreement. These
agreements provide for the allocation between International Paper Company and Sylvamo Corporation of assets, liabilities and obligations attributable to periods prior to, at and after the Distribution and govern certain relationships between International Paper and Sylvamo Corporation after the Distribution.
NOTE 2 - RECENT ACCOUNTING DEVELOPMENTS
Recently Issued Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This guidance provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the provisions of this guidance.
Generally, the Company recognizes revenue on a point-in-time basis when the customer takes title to the goods and assumes the risks and rewards for the goods. For customized goods where the Company has a legally enforceable right to payment for the goods, the Company recognizes revenue over time which, generally, is as the goods are produced.
Disaggregated Revenue
A geographic disaggregation of revenues across our company segmentation in the following tables provides information to assist in evaluating the nature, timing and uncertainty of revenue and cash flows and how they may be impacted by economic factors.
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| In millions | Industrial Packaging | Global Cellulose Fibers | Printing Papers | Corporate and Inter-segment Sales | Total | |||||||||||||||||||||||||||
| Primary Geographical Markets (a) | ||||||||||||||||||||||||||||||||
| United States | $ | 3,514 | $ | 623 | $ | 425 | $ | 50 | $ | 4,612 | ||||||||||||||||||||||
| EMEA | 383 | 69 | 232 | (1) | 683 | |||||||||||||||||||||||||||
| Pacific Rim and Asia | 12 | 37 | 8 | 3 | 60 | |||||||||||||||||||||||||||
| Americas, other than U.S. | 178 | — | 181 | — | 359 | |||||||||||||||||||||||||||
| Total | $ | 4,087 | $ | 729 | $ | 846 | $ | 52 | $ | 5,714 | ||||||||||||||||||||||
| Operating Segments | ||||||||||||||||||||||||||||||||
| North American Industrial Packaging | $ | 3,738 | $ | — | $ | — | $ | — | $ | 3,738 | ||||||||||||||||||||||
| EMEA Industrial Packaging | 331 | — | — | — | 331 | |||||||||||||||||||||||||||
| European Coated Paperboard | 52 | — | — | — | 52 | |||||||||||||||||||||||||||
| Global Cellulose Fibers | — | 729 | — | — | 729 | |||||||||||||||||||||||||||
| North American Printing Papers | — | — | 425 | — | 425 | |||||||||||||||||||||||||||
| Brazilian Papers | — | — | 200 | — | 200 | |||||||||||||||||||||||||||
| European Papers | — | — | 218 | — | 218 | |||||||||||||||||||||||||||
| Intra-segment Eliminations | (34) | — | 3 | — | (31) | |||||||||||||||||||||||||||
| Corporate & Inter-segment Sales | — | — | — | 52 | 52 | |||||||||||||||||||||||||||
| Total | $ | 4,087 | $ | 729 | $ | 846 | $ | 52 | $ | 5,714 |
(a) Net sales are attributed to countries based on the location of the seller.
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| In millions | Industrial Packaging | Global Cellulose Fibers | Printing Papers | Corporate and Inter-segment Sales | Total | |||||||||||||||||||||||||||
| Primary Geographical Markets (a) | ||||||||||||||||||||||||||||||||
| United States | $ | 10,125 | $ | 1,682 | $ | 1,195 | $ | 139 | $ | 13,141 | ||||||||||||||||||||||
| EMEA | 1,371 | 209 | 765 | (6) | 2,339 | |||||||||||||||||||||||||||
| Pacific Rim and Asia | 44 | 90 | 25 | 10 | 169 | |||||||||||||||||||||||||||
| Americas, other than U.S. | 556 | — | 488 | — | 1,044 | |||||||||||||||||||||||||||
| Total | $ | 12,096 | $ | 1,981 | $ | 2,473 | $ | 143 | $ | 16,693 | ||||||||||||||||||||||
| Operating Segments | ||||||||||||||||||||||||||||||||
| North American Industrial Packaging | $ | 10,810 | $ | — | $ | — | $ | — | $ | 10,810 | ||||||||||||||||||||||
| EMEA Industrial Packaging | 1,121 | — | — | — | 1,121 | |||||||||||||||||||||||||||
| European Coated Paperboard | 252 | — | — | — | 252 | |||||||||||||||||||||||||||
| Global Cellulose Fibers | — | 1,981 | — | — | 1,981 | |||||||||||||||||||||||||||
| North American Printing Papers | — | — | 1,201 | — | 1,201 | |||||||||||||||||||||||||||
| Brazilian Papers | — | — | 557 | — | 557 | |||||||||||||||||||||||||||
| European Papers | — | — | 723 | — | 723 | |||||||||||||||||||||||||||
| Intra-segment Eliminations | (87) | — | (8) | — | (95) | |||||||||||||||||||||||||||
| Corporate & Inter-segment Sales | — | — | — | 143 | 143 | |||||||||||||||||||||||||||
| Total | $ | 12,096 | $ | 1,981 | $ | 2,473 | $ | 143 | $ | 16,693 |
(a) Net sales are attributed to countries based on the location of the seller.
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| In millions | Industrial Packaging | Global Cellulose Fibers | Printing Papers | Corporate & Intersegment | Total | |||||||||||||||||||||||||||
| Primary Geographical Markets (a) | ||||||||||||||||||||||||||||||||
| United States | $ | 3,169 | $ | 479 | $ | 362 | $ | 44 | $ | 4,054 | ||||||||||||||||||||||
| EMEA | 394 | 59 | 244 | (3) | 694 | |||||||||||||||||||||||||||
| Pacific Rim and Asia | 15 | 26 | 6 | 10 | 57 | |||||||||||||||||||||||||||
| Americas, other than U.S. | 190 | — | 131 | (3) | 318 | |||||||||||||||||||||||||||
| Total | $ | 3,768 | $ | 564 | $ | 743 | $ | 48 | $ | 5,123 | ||||||||||||||||||||||
| Operating Segments | ||||||||||||||||||||||||||||||||
| North American Industrial Packaging | $ | 3,351 | $ | — | $ | — | $ | — | $ | 3,351 | ||||||||||||||||||||||
| EMEA Industrial Packaging | 306 | — | — | — | 306 | |||||||||||||||||||||||||||
| Brazilian Industrial Packaging | 52 | — | — | — | 52 | |||||||||||||||||||||||||||
| European Coated Paperboard | 90 | — | — | — | 90 | |||||||||||||||||||||||||||
| Global Cellulose Fibers | — | 564 | — | — | 564 | |||||||||||||||||||||||||||
| North American Printing Papers | — | — | 362 | — | 362 | |||||||||||||||||||||||||||
| Brazilian Papers | — | — | 150 | — | 150 | |||||||||||||||||||||||||||
| European Papers | — | — | 232 | — | 232 | |||||||||||||||||||||||||||
| Intra-segment Eliminations | (31) | — | (1) | — | (32) | |||||||||||||||||||||||||||
| Corporate & Inter-segment Sales | — | — | — | 48 | 48 | |||||||||||||||||||||||||||
| Total | $ | 3,768 | $ | 564 | $ | 743 | $ | 48 | $ | 5,123 |
(a) Net sales are attributed to countries based on the location of the seller.
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| In millions | Industrial Packaging | Global Cellulose Fibers | Printing Papers | Corporate & Intersegment | Total | |||||||||||||||||||||||||||
| Primary Geographical Markets (a) | ||||||||||||||||||||||||||||||||
| United States | $ | 9,364 | $ | 1,507 | $ | 1,069 | $ | 146 | $ | 12,086 | ||||||||||||||||||||||
| EMEA | 1,213 | 175 | 765 | (11) | 2,142 | |||||||||||||||||||||||||||
| Pacific Rim and Asia | 43 | 55 | 20 | 20 | 138 | |||||||||||||||||||||||||||
| Americas, other than U.S. | 600 | — | 380 | (5) | 975 | |||||||||||||||||||||||||||
| Total | $ | 11,220 | $ | 1,737 | $ | 2,234 | $ | 150 | $ | 15,341 | ||||||||||||||||||||||
| Operating Segments | ||||||||||||||||||||||||||||||||
| North American Industrial Packaging | $ | 9,947 | $ | — | $ | — | $ | — | $ | 9,947 | ||||||||||||||||||||||
| EMEA Industrial Packaging | 953 | — | — | — | 953 | |||||||||||||||||||||||||||
| Brazilian Industrial Packaging | 148 | — | — | — | 148 | |||||||||||||||||||||||||||
| European Coated Paperboard | 266 | — | — | — | 266 | |||||||||||||||||||||||||||
| Global Cellulose Fibers | — | 1,737 | — | — | 1,737 | |||||||||||||||||||||||||||
| North American Printing Papers | — | — | 1,073 | — | 1,073 | |||||||||||||||||||||||||||
| Brazilian Papers | — | — | 434 | — | 434 | |||||||||||||||||||||||||||
| European Papers | — | — | 728 | — | 728 | |||||||||||||||||||||||||||
| Intra-segment Eliminations | (94) | — | (1) | — | (95) | |||||||||||||||||||||||||||
| Corporate & Inter-segment Sales | — | — | — | 150 | 150 | |||||||||||||||||||||||||||
| Total | $ | 11,220 | $ | 1,737 | $ | 2,234 | $ | 150 | $ | 15,341 |
(a) Net sales are attributed to countries based on the location of the seller.
Revenue Contract Balances
A contract asset is created when the Company recognizes revenue on its customized products prior to having an unconditional right to payment from the customer, which generally does not occur until title and risk of loss passes to the customer.
A contract liability is created when customers prepay for goods prior to the Company transferring those goods to the customer. The contract liability is reduced once control of the goods is transferred to the customer. The majority of our customer prepayments are received during the fourth quarter each year for goods that will be transferred to customers over the following twelve months. Contract liabilities of $25 million and $31 million are included in Other current liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2021 and December 31, 2020, respectively. During the second quarter of 2021, the Company also recorded a contract liability of $115 million related to the April 2021 acquisition disclosed in Note 8.
The difference between the opening and closing balances of the Company's contract assets and contract liabilities primarily results from the difference between the price and quantity at comparable points in time for goods for which we have an unconditional right to payment or receive prepayment from the customer, respectively.
A summary of the changes in equity for the three months and nine months ended September 30, 2021 and 2020 is provided below:
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| In millions, except per share amounts | Common Stock Issued | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Stock Held In Treasury, At Cost | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||
| Balance, July 1 | $ | 449 | $ | 6,330 | $ | 8,442 | $ | (4,094) | $ | 2,775 | $ | 8,352 | $ | 2 | $ | 8,354 | |||||||||||||||||||||||||||||||
| Issuance of stock for various plans, net | — | 41 | — | — | — | 41 | — | 41 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of stock | — | — | — | — | 212 | (212) | — | (212) | |||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($0.5125 per share) | — | — | (203) | — | — | (203) | — | (203) | |||||||||||||||||||||||||||||||||||||||
| Divestiture of noncontrolling interests | — | — | — | — | — | — | (1) | (1) | |||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | 864 | 780 | — | 1,644 | — | 1,644 | |||||||||||||||||||||||||||||||||||||||
| Ending Balance, September 30 | $ | 449 | $ | 6,371 | $ | 9,103 | $ | (3,314) | $ | 2,987 | $ | 9,622 | $ | 1 | $ | 9,623 |
| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| In millions, except per share amounts | Common Stock Issued | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Stock Held In Treasury, At Cost | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||
| Balance, January 1 | $ | 449 | $ | 6,325 | $ | 8,070 | $ | (4,342) | $ | 2,648 | $ | 7,854 | $ | 14 | $ | 7,868 | |||||||||||||||||||||||||||||||
| Issuance of stock for various plans, net | — | 27 | — | — | (86) | 113 | — | 113 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of stock | — | — | — | — | 425 | (425) | — | (425) | |||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($1.5375 per share) | — | — | (612) | — | — | (612) | — | (612) | |||||||||||||||||||||||||||||||||||||||
| Transactions of equity method investees | — | 19 | — | — | — | 19 | — | 19 | |||||||||||||||||||||||||||||||||||||||
| Divestiture of noncontrolling interests | — | — | — | — | — | — | (13) | (13) | |||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | 1,645 | 1,028 | — | 2,673 | — | 2,673 | |||||||||||||||||||||||||||||||||||||||
| Ending Balance, September 30 | $ | 449 | $ | 6,371 | $ | 9,103 | $ | (3,314) | $ | 2,987 | $ | 9,622 | $ | 1 | $ | 9,623 |
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| In millions, except per share amounts | Common Stock Issued | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Stock Held In Treasury, At Cost | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||
| Balance, July 1 | $ | 449 | $ | 6,283 | $ | 8,123 | $ | (5,149) | $ | 2,649 | $ | 7,057 | $ | 3 | $ | 7,060 | |||||||||||||||||||||||||||||||
| Issuance of stock for various plans, net | — | 18 | — | — | (2) | 20 | — | 20 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of stock | — | — | — | — | 1 | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($0.5125 per share) | — | — | (205) | — | — | (205) | — | (205) | |||||||||||||||||||||||||||||||||||||||
| Transactions of equity method investees | — | 1 | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | 204 | 17 | — | 221 | — | 221 | |||||||||||||||||||||||||||||||||||||||
| Ending Balance, September 30 | $ | 449 | $ | 6,302 | $ | 8,122 | $ | (5,132) | $ | 2,648 | $ | 7,093 | $ | 3 | $ | 7,096 |
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| In millions, except per share amounts | Common Stock Issued | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Stock Held In Treasury, At Cost | Total International Paper Shareholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||
| Balance, January 1 | $ | 449 | $ | 6,297 | $ | 8,408 | $ | (4,739) | $ | 2,702 | $ | 7,713 | $ | 5 | $ | 7,718 | |||||||||||||||||||||||||||||||
| Adoption of ASU 2016-13 measurement of credit losses on financial instruments | — | — | (2) | — | — | (2) | — | (2) | |||||||||||||||||||||||||||||||||||||||
| Issuance of stock for various plans, net | — | (31) | — | — | (96) | 65 | — | 65 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of stock | — | — | — | — | 42 | (42) | — | (42) | |||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($1.5375 per share) | — | — | (613) | — | — | (613) | — | (613) | |||||||||||||||||||||||||||||||||||||||
| Transactions of equity method investees | — | 36 | — | — | — | 36 | — | 36 | |||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | 329 | (393) | — | (64) | (2) | (66) | |||||||||||||||||||||||||||||||||||||||
| Ending Balance, September 30 | $ | 449 | $ | 6,302 | $ | 8,122 | $ | (5,132) | $ | 2,648 | $ | 7,093 | $ | 3 | $ | 7,096 |
NOTE 5 - OTHER COMPREHENSIVE INCOME
The following table presents changes in accumulated other comprehensive income (AOCI) for the three months and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Defined Benefit Pension and Postretirement Adjustments | |||||||||||||||||||||||
| Balance at beginning of period | $ | (1,809) | $ | (2,192) | $ | (1,880) | $ | (2,277) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 831 | — | 832 | — | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 31 | 43 | 101 | 128 | |||||||||||||||||||
| Balance at end of period | (947) | (2,149) | (947) | (2,149) | |||||||||||||||||||
| Change in Cumulative Foreign Currency Translation Adjustments | |||||||||||||||||||||||
| Balance at beginning of period | (2,286) | (2,950) | (2,457) | (2,465) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (114) | (28) | (85) | (515) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 44 | — | 184 | — | |||||||||||||||||||
| Other comprehensive income (loss) attributable to noncontrolling interest | — | — | 2 | 2 | |||||||||||||||||||
| Balance at end of period | (2,356) | (2,978) | (2,356) | (2,978) | |||||||||||||||||||
| Net Gains and Losses on Cash Flow Hedging Derivatives | |||||||||||||||||||||||
| Balance at beginning of period | 1 | (7) | (5) | 3 | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (4) | (4) | 3 | (34) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | (8) | 6 | (9) | 26 | |||||||||||||||||||
| Balance at end of period | (11) | (5) | (11) | (5) | |||||||||||||||||||
| Total Accumulated Other Comprehensive Income (Loss) at End of Period | $ | (3,314) | $ | (5,132) | $ | (3,314) | $ | (5,132) |
The following table presents details of the reclassifications out of AOCI for the three months and nine months ended September 30, 2021 and 2020:
| In millions: | Amount Reclassified from Accumulated Other Comprehensive Income | Location of Amount Reclassified from AOCI | ||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Defined benefit pension and postretirement items: | ||||||||||||||||||||||||||||||||
| Prior-service costs | $ | (5) | $ | (5) | $ | (17) | $ | (15) | (a) | Non-operating pension expense | ||||||||||||||||||||||
| Actuarial gains (losses) | (36) | (52) | (118) | (155) | (a) | Non-operating pension expense | ||||||||||||||||||||||||||
| Total pre-tax amount | (41) | (57) | (135) | (170) | ||||||||||||||||||||||||||||
| Tax (expense) benefit | 10 | 14 | 34 | 42 | ||||||||||||||||||||||||||||
| Total, net of tax | (31) | (43) | (101) | (128) | ||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustments: | ||||||||||||||||||||||||||||||||
| Business acquisitions/divestitures | (44) | — | (184) | — | Net (gains) losses on sales and impairments of businesses and Cost of products sold | |||||||||||||||||||||||||||
| Tax (expense) benefit | — | — | — | — | ||||||||||||||||||||||||||||
| Net of tax | (44) | — | (184) | — | ||||||||||||||||||||||||||||
| Net gains and losses on cash flow hedging derivatives: | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | 10 | (8) | 12 | (39) | (b) | Cost of products sold | ||||||||||||||||||||||||||
| Total pre-tax amount | 10 | (8) | 12 | (39) | ||||||||||||||||||||||||||||
| Tax (expense)/benefit | (2) | 2 | (3) | 13 | ||||||||||||||||||||||||||||
| Net of tax | 8 | (6) | 9 | (26) | ||||||||||||||||||||||||||||
| Total reclassifications for the period | $ | (67) | $ | (49) | $ | (276) | $ | (154) |
(a)These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 19 for additional details).
(b)This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 18 for additional details).
NOTE 6 - EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS
Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings per share is computed assuming that all potentially dilutive securities were converted into common shares. There are no adjustments required to be made to net income for purposes of computing basic and diluted earnings per share. A reconciliation of the amounts included in the computation of basic earnings (loss) per share and diluted earnings (loss) per share is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions, except per share amounts | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Earnings (loss) attributable to International Paper Company common shareholders | $ | 864 | $ | 204 | $ | 1,645 | $ | 329 | |||||||||||||||
| Weighted average common shares outstanding | 388.8 | 393.1 | 391.0 | 392.9 | |||||||||||||||||||
| Effect of dilutive securities | |||||||||||||||||||||||
| Restricted performance share plan | 3.8 | 1.5 | 4.3 | 1.6 | |||||||||||||||||||
| Weighted average common shares outstanding – assuming dilution | 392.6 | 394.6 | 395.3 | 394.5 | |||||||||||||||||||
| Basic earnings (loss) per share attributable to International Paper Company Common Shareholders | $ | 2.22 | $ | 0.52 | $ | 4.21 | $ | 0.84 | |||||||||||||||
| Diluted earnings (loss) per share attributable to International Paper Company Common Shareholders | $ | 2.20 | $ | 0.52 | $ | 4.16 | $ | 0.83 |
NOTE 7 - RESTRUCTURING AND OTHER CHARGES, NET
2021: During the three months ended September 30, 2021, the Company recorded a $35 million pre-tax charge in Corporate related to early debt extinguishment costs and a $4 million pre-tax charge in Corporate for severance. The majority of the severance is expected to be paid over the next twelve months.
During the three months ended June 30, 2021, the Company recorded a $170 million pre-tax charge in Corporate related to early debt extinguishment costs and a $4 million pre-tax charge in Corporate for severance. The majority of the severance is expected to be paid over the next twelve months.
During the three months ended March 31, 2021, the Company recorded an $18 million pre-tax charge in Corporate related to early debt extinguishment costs and a $12 million pre-tax charge in the Industrial Packaging segment for severance related to the optimization of our EMEA Packaging business. The majority of the severance is expected to be paid over the next twelve months.
In connection with our Building a Better IP initiative, we expect to incur additional restructuring charges over the course of the initiative, which could be material. At this time, the plans have not been finalized.
2020: During the three months ended September 30, 2020, the Company recorded a $105 million pre-tax charge in Corporate related to early debt extinguishment costs.
During the three months ended June 30, 2020, the Company recorded an $18 million pre-tax charge in Corporate related to early debt extinguishment costs.
During the three months ended March 31, 2020, the Company recorded an $8 million pre-tax charge in Corporate related to early debt extinguishment costs.
2021: On April 1, 2021, the Company closed on the previously announced acquisition of two box plants located in Spain. The total purchase consideration, inclusive of working capital adjustments, was approximately €71 million (approximately $83 million based on the April 1, 2021 exchange rate), subject to post-closing adjustments.
The following table summarizes the provisional fair value assigned to assets and liabilities acquired as of April 1, 2021:
| In millions | |||||
| Cash and temporary investments | $ | 5 | |||
| Accounts and notes receivable | 10 | ||||
| Inventories | 3 | ||||
| Plants, properties and equipment | 38 | ||||
| Goodwill | 30 | ||||
| Intangible assets | 14 | ||||
| Total assets acquired | $ | 100 | |||
| Short-term debt | 3 | ||||
| Accounts payable and accrued liabilities | 4 | ||||
| Other current liabilities | 1 | ||||
| Deferred income taxes | 9 | ||||
| Total liabilities assumed | 17 | ||||
| Net assets acquired | $ | 83 |
Since the date of acquisition, Net sales of $9 million and $18 million and Earnings from continuing operations before income taxes and equity earnings of $0 and $1 million have been included in the Company's consolidated statement of operations for the three months and year to date ended September 30, 2021, respectively.
The purchase price and related allocation are preliminary and could be revised as a result of adjustments made to the purchase price, additional information obtained regarding assets acquired and liabilities assumed, and revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to inventory, property, plant and equipment and acquired intangible assets. Adjustments to provisional amounts will be finalized as new information becomes available, but within the adjustment period of up to one year from the acquisition date.
Pro forma information has not been included as it is impracticable to obtain the information due to the lack of availability of historical U.S. GAAP financial data. The results of the operations of these businesses do not have a material effect on the Company's consolidated results of operations.
The Company has accounted for the above acquisition under ASC 805, "Business Combinations" and the results of operations have been included in International Paper's financial statements beginning with the date of acquisition.
In April 2021, the Company received a noncontrolling interest in a U.S-based corrugated packaging producer. In the second quarter, the Company recorded its investment of $115 million based on the fair value of the noncontrolling interest, and a corresponding contract liability that is amortized over 15 years. The Company is party to various agreements with the entity which includes a containerboard supply agreement. The Company is accounting for its interest as an equity method investment.
2020: In May 2020, the Company increased its noncontrolling interest in an entity that produces corrugated sheets. The equity purchase price was $56 million. The Company is party to various agreements with the entity which includes a containerboard supply agreement. The Company is accounting for its interest as an equity method investment.
NOTE 9 - DIVESTITURES AND IMPAIRMENTS
Kwidzyn Mill
2021: On August 6, 2021, the Company completed the sale of its Kwidzyn, Poland mill for €669 million (approximately $794 million using the July 31, 2021 exchange rate) in cash, subject to final working capital and net debt adjustments. The business includes the pulp and paper mill in Kwidzyn and supporting functions. During the third quarter of 2021, the Company recorded a net gain of $360 million ($350 million after taxes) including a gain of $404 million ($394 million after taxes) related to the sale of net assets and a loss of $44 million (before and after taxes) related to the cumulative foreign currency translation loss. These charges are included in the Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations and are included in the results of the Printing Papers segment. All current year and historical operating results for Kwidzyn will be presented as Discontinued Operations, net of tax, in the consolidated statement of operations in the fourth quarter of 2021.
Olmuksan International Paper
2021: On May 31, 2021, the Company completed the sale of its 90.38% ownership interest in Olmuksan International Paper, a corrugated packaging business in Turkey, to Mondi Group for €66 million (approximately $81 million using the May 31, 2021 exchange rate). During the second quarter of 2021, the Company recorded a gain of $6 million ($0 after taxes) related to the business working capital adjustment. This charge is included in the Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations and is included in the results for the Industrial Packaging segment.
In conjunction with the announced agreement in the fourth quarter of 2020, a determination was made that the current book value of the Olmuksan International Paper disposal group exceeded its estimated fair value of $79 million which was based on the agreed upon transaction price. As a result, a preliminary charge of $123 million (before and after taxes) was recorded during the fourth quarter of 2020. During the first quarter of 2021, the Company recorded an additional charge of $2 million (before and after taxes) related to the cumulative foreign currency translation loss. This charge is included in the Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations and is included in the results for the Industrial Packaging segment.
Brazil Industrial Packaging
2020: On October 14, 2020, the Company closed the previously announced sale of its Brazilian Industrial Packaging business for R$330 million ($58.5 million U.S. dollars), with R$280 million ($49.6 million U.S. dollars) paid at closing and R$50 million ($8.9 million U.S. dollars) to be paid one year from closing. This business includes three containerboard mills and four box plants and the agreement follows International Paper's previously announced strategic review of the Brazilian Industrial Packaging business.
In conjunction with the announced agreement, net pre-tax charges of $347 million ($340 million after taxes) were recorded in 2020. These charges included $327 million related to the cumulative foreign currency translation loss and a $20 million loss related to the write down of the long-lived assets of the Brazilian Industrial Packaging business to their estimated fair value. These charges are included in Net (gains) losses on sales and impairments of businesses in the accompanying condensed consolidated statement of operations and are included in the results for the Industrial Packaging segment.
NOTE 10 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Temporary Investments
Temporary investments with an original maturity of three months or less and money market funds with greater than three month maturities but with the right to redeem without notices are treated as cash equivalents and are stated at cost. Temporary investments totaled $3.2 billion and $358 million at September 30, 2021 and December 31, 2020, respectively.
Restricted Cash
A reconciliation of cash and temporary investments and restricted cash in the consolidated balance sheet to cash and temporary investments and restricted cash in the consolidated statement of cash flows for the nine months ended September 30, 2021 and 2020 is as follows:
| Nine Months Ended September 30, | |||||||||||
| In millions | 2021 | 2020 | |||||||||
| Cash and Temporary Investments | $ | 2,122 | $ | 678 | |||||||
| Restricted Cash | 1,499 | — | |||||||||
| Total Cash and Temporary Investments and Restricted Cash | $ | 3,621 | $ | 678 |
The Company's restricted cash consists of the cash proceeds from the debt incurred by Sylvamo Corporation as part of the Printing Papers segment spin-off that was completed on October 1, 2021. Of this amount, approximately $1.4 billion was remitted to the Company in the form of a cash distribution. See Note 17 - Debt for further details regarding the Sylvamo debt and the use of the cash proceeds from the debt issuances.
Accounts and Notes Receivable
| In millions | September 30, 2021 | December 31, 2020 | |||||||||
| Accounts and notes receivable, net: | |||||||||||
| Trade | $ | 3,222 | $ | 2,776 | |||||||
| Other | 327 | 288 | |||||||||
| Total | $ | 3,549 | $ | 3,064 |
The allowance for expected credit losses was $64 million and $76 million at September 30, 2021 and December 31, 2020, respectively. Based on the Company's accounting estimates and the facts and circumstances available as of the reporting date, we believe our allowance for expected credit losses is adequate.
Inventories
| In millions | September 30, 2021 | December 31, 2020 | |||||||||
| Raw materials | $ | 241 | $ | 268 | |||||||
| Finished pulp, paper and packaging | 1,156 | 1,091 | |||||||||
| Operating supplies | 569 | 627 | |||||||||
| Other | 87 | 64 | |||||||||
| Total | $ | 2,053 | $ | 2,050 |
Plants, Properties and Equipment
Accumulated depreciation was $21.2 billion and $21.4 billion at September 30, 2021 and December 31, 2020, respectively. Depreciation expense was $302 million and $300 million for the three months ended September 30, 2021 and 2020, respectively, and $888 million and $902 million for the nine months ended September 30, 2021 and 2020, respectively.
Non-cash additions to plants, property and equipment included within accounts payable were $61 million and $41 million at September 30, 2021 and December 31, 2020, respectively.
Amounts invested in capital projects in the accompanying condensed consolidated statement of cash flows are presented net of insurance recoveries of $6 million received during the nine months ended September 30, 2021 and $40 million received during the nine months ended September 30, 2020.
Interest
Interest payments made during the nine months ended September 30, 2021 and 2020 were $357 million and $520 million, respectively.
Amounts related to interest were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Interest expense | $ | 117 | $ | 148 | $ | 358 | $ | 467 | |||||||||||||||
| Interest income | 24 | 36 | 116 | 122 | |||||||||||||||||||
| Capitalized interest costs | 3 | 9 | 8 | 27 |
Asset Retirement Obligations
The Company had recorded liabilities of $135 million and $116 million related to asset retirement obligations at September 30, 2021 and December 31, 2020, respectively.
International Paper leases various real estate, including certain operating facilities, warehouses, office space and land. The Company also leases material handling equipment, vehicles, and certain other equipment. The Company's leases have a
remaining lease term of up to 32 years. Total lease cost was $73 million and $68 million for the three months ended September 30, 2021 and 2020, respectively, and $216 million and $202 million for the nine months ended September 30, 2021 and 2020, respectively.
Supplemental Balance Sheet Information Related to Leases
| In millions | Classification | September 30, 2021 | December 31, 2020 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating lease assets | Right-of-use assets | $ | 405 | $ | 459 | |||||||||||||||
| Finance lease assets | Plants, properties and equipment, net (a) | 87 | 95 | |||||||||||||||||
| Total leased assets | $ | 492 | $ | 554 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current | ||||||||||||||||||||
| Operating | Other current liabilities | $ | 146 | $ | 148 | |||||||||||||||
| Finance | Notes payable and current maturities of long-term debt | 12 | 13 | |||||||||||||||||
| Noncurrent | ||||||||||||||||||||
| Operating | Long-term lease obligations | 263 | 315 | |||||||||||||||||
| Finance | Long-term debt | 75 | 82 | |||||||||||||||||
| Total lease liabilities | $ | 496 | $ | 558 |
(a)Finance leases are recorded net of accumulated amortization of $62 million and $53 million as of September 30, 2021 and December 31, 2020, respectively.
NOTE 12 - EQUITY METHOD INVESTMENTS
The Company accounts for the following investments under the equity method of accounting.
Graphic Packaging International Partners, LLC
The Company completed the transfer of its North American Consumer Packaging business in exchange for an initial 20.5% ownership interest (79,911,591 units) in Graphic Packaging International Partners, LLC (GPIP) in 2018. The Company has since fully monetized its investment in GPIP with transactions beginning in the first quarter 2020 through the second quarter 2021.
GPIP Monetization Transactions
| Date | Transaction Type | Units | Proceeds | Pre-tax Gain | After-Tax Gain | ||||||||||||
| In millions except units | |||||||||||||||||
| 2020 First Quarter | Units exchange | 15,150,784 | $ | 250 | $ | 33 | $ | 25 | |||||||||
| 2020 Third Quarter | Units exchange | 17,399,414 | 250 | — | — | ||||||||||||
| 2021 First Quarter | Units exchange and open market sale | 24,588,316 | 397 | 33 | 25 | ||||||||||||
| 2021 First Quarter | TRA | 41 | 31 | ||||||||||||||
| 2021 Second Quarter | Units exchange and open market sale | 22,773,077 | 402 | 64 | 48 | ||||||||||||
| 2021 Second Quarter | TRA (a) | 66 | 50 |
(a) The TRA entitles the Company to 50% of the amount of any tax benefits projected to be realized by GPIP upon the Company's exchange of its units. This amount is recorded in other receivables and is expected to be received within the next 12 months.
As of June 30, 2021, the Company no longer had an ownership interest in GPIP. The Company recorded equity earnings of $11 million for the three months ended September 30, 2020 and $4 million and $29 million for the nine months ended September 30, 2021 and 2020, respectively. There were no equity earnings recorded for the three months ended September 30, 2021. The Company received cash dividends from GPIP of $5 million and $16 million during the first nine months of 2021 and 2020, respectively.
Ilim S.A.
The Company has a 50% equity interest in Ilim S.A. (Ilim), which has subsidiaries whose primary operations are in Russia. The Company recorded equity earnings (losses), net of taxes, of $95 million and $(33) million for the three months ended September 30, 2021 and 2020, respectively, and $245 million and $(5) million for the nine months ended September 30, 2021 and 2020, respectively. Foreign exchange gains (losses) included in equity earnings for the three months and nine months ended September 30, 2021, were not material and JSC Ilim Group had no U.S. dollar-denominated debt outstanding as of September 30, 2021. Equity earnings (losses) for the three months and nine months ended September 30, 2020, included after-tax foreign exchange losses of $55 million and $72 million, respectively, primarily on the remeasurement of U.S. dollar-denominated net debt. The Company received cash dividends from the joint venture of $144 million and $141 million during the first nine months of 2021 and 2020, respectively. At September 30, 2021 and December 31, 2020, the Company's investment in Ilim was $517 million and $393 million, respectively, which was $131 million and $127 million, respectively, more than the Company's proportionate share of the joint venture's underlying net assets. The differences primarily relate to currency translation adjustments and the basis difference between the fair value of our investment at acquisition and the underlying net assets. Prior to the spin-off of the Printing Papers segment on October 1, 2021, the Company was party to a joint marketing agreement with JSC Ilim Group, a subsidiary of Ilim, under which the Company purchased, marketed and sold paper produced by JSC Ilim Group. Purchases under this agreement were $42 million and $41 million for the three months ended September 30, 2021 and 2020, respectively, and $125 million and $131 million for the nine months ended September 30, 2021 and 2020, respectively. The joint marketing agreement was conveyed to Sylvamo Corporation as part of the spin-off transaction on October 1, 2021.
Summarized financial information for Ilim is presented in the following tables:
Balance Sheet
| In millions | September 30, 2021 | December 31, 2020 | |||||||||
| Current assets | $ | 935 | $ | 739 | |||||||
| Noncurrent assets | 3,069 | 2,733 | |||||||||
| Current liabilities | 711 | 674 | |||||||||
| Noncurrent liabilities | 2,487 | 2,249 | |||||||||
| Noncontrolling interests | 34 | 17 |
Income Statement
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net sales | $ | 729 | $ | 498 | $ | 1,993 | $ | 1,474 | |||||||||||||||
| Gross profit | 393 | 191 | 1,051 | 597 | |||||||||||||||||||
| Income (loss) from continuing operations | 190 | (62) | 498 | 7 | |||||||||||||||||||
| Net income (loss) | 182 | (60) | 481 | 7 |
The Company's remaining equity method investments are not material.
NOTE 13 - GOODWILL AND OTHER INTANGIBLES
Goodwill
The following table presents changes in goodwill balances as allocated to each business segment for the nine-months ended September 30, 2021:
| In millions | Industrial Packaging | Global Cellulose Fibers | Printing Papers | Total | |||||||||||||||||||
| Balance as of January 1, 2021 | |||||||||||||||||||||||
| Goodwill | $ | 3,410 | $ | 52 | $ | 1,966 | $ | 5,428 | |||||||||||||||
| Accumulated impairment losses | (296) | (52) | (1,765) | (2,113) | |||||||||||||||||||
| 3,114 | — | 201 | 3,315 | ||||||||||||||||||||
| Currency translation and other (a) | (5) | — | (8) | (13) | |||||||||||||||||||
| Goodwill additions/reductions | 29 | (b) | — | (57) | (c) | (28) | |||||||||||||||||
| Accumulated impairment loss additions / reductions | — | — | — | — | |||||||||||||||||||
| Balance as of September 30, 2021 | |||||||||||||||||||||||
| Goodwill | 3,434 | 52 | 1,901 | 5,387 | |||||||||||||||||||
| Accumulated impairment losses | (296) | (52) | (1,765) | (2,113) | |||||||||||||||||||
| Total | $ | 3,138 | $ | — | $ | 136 | $ | 3,274 |
(a)Represents the effects of foreign currency translations.
(b)Reflects the box plant acquisitions in EMEA.
(c)Reflects the Kwidzyn sale.
Other Intangibles
Identifiable intangible assets comprised the following:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| In millions | Gross Carrying Amount | Accumulated Amortization | Net Intangible Assets | Gross Carrying Amount | Accumulated Amortization | Net Intangible Assets | |||||||||||||||||||||||||||||
| Customer relationships and lists | $ | 552 | $ | 314 | $ | 238 | $ | 542 | $ | 294 | $ | 248 | |||||||||||||||||||||||
| Tradenames, patents and trademarks, and developed technology | 170 | 128 | 42 | 170 | 117 | 53 | |||||||||||||||||||||||||||||
| Land and water rights | 8 | 2 | 6 | 8 | 2 | 6 | |||||||||||||||||||||||||||||
| Software | 17 | 17 | — | 25 | 24 | 1 | |||||||||||||||||||||||||||||
| Other | 14 | 10 | 4 | 19 | 10 | 9 | |||||||||||||||||||||||||||||
| Total | $ | 761 | $ | 471 | $ | 290 | $ | 764 | $ | 447 | $ | 317 |
The Company recognized the following amounts as amortization expense related to intangible assets:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Amortization expense related to intangible assets | $ | 12 | $ | 17 | $ | 35 | $ | 43 |
International Paper made income tax payments, net of refunds, of $389 million and $203 million for the nine months ended September 30, 2021 and 2020, respectively.
The Company currently estimates, that as a result of ongoing discussions, pending tax settlements and expirations of statutes of limitations, the amount of unrecognized tax benefits could be reduced by approximately $11 million during the next 12 months.
The Brazilian Federal Revenue Service has challenged the deductibility of goodwill amortization generated in a 2007 acquisition by Sylvamo do Brasil Ltda., a wholly-owned subsidiary of the Company. The Company received assessments for the tax years 2007-2015 totaling approximately $107 million in tax, and $351 million in interest, penalties, and fees as of September 30, 2021 (adjusted for variation in currency exchange rates). After a previous favorable ruling challenging the basis for these assessments, we received other subsequent unfavorable decisions from the Brazilian Administrative Council of Tax Appeals. The Company has appealed and intends to further appeal these and any future unfavorable administrative judgments to the Brazilian federal courts; however, this tax litigation matter may take many years to resolve. The Company believes that it has appropriately evaluated the transaction underlying these assessments, and has concluded based on Brazilian tax law, that its position would be sustained.
The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for tax years subsequent to 2015. This assessment pertains to a business that was conveyed to Sylvamo Corporation as of October 1, 2021, as part of our spin-off transaction. Pursuant to the terms of the tax matters agreement entered into between the Company and Sylvamo Corporation, the Company will pay 60% and Sylvamo will pay 40%, on up to $300 million of any assessment related to this matter, and the Company will pay all amounts of the assessment over $300 million. The Brazilian government may enact a tax amnesty program that would allow Sylvamo do Brasil Ltda. to resolve this dispute for less than the assessed amount. In addition, all decisions concerning the conduct of the litigation related to this matter, including strategy settlement, pursuit and abandonment, will continue to be made by the Company. Sylvamo will thus have no control over any decision related to this ongoing litigation. As of October 1, 2021, in connection with the recording of the distribution of assets and liabilities resulting from the spin-off transaction, International Paper will establish a liability on the Company's balance sheet representing the initial fair value of the contingent obligation under the tax matters agreement. The Company's fair value estimate is in process and the Company is currently unable to quantify the liability to be recognized in the fourth quarter. It is possible the amount could be material.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Environmental
The Company has been named as a potentially responsible party (PRP) in environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Many of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under CERCLA and equivalent state laws, as a practical matter, liability for CERCLA cleanups is typically allocated among the many PRPs. There are other remediation costs typically associated with the cleanup of hazardous substances at the Company’s current, closed or formerly-owned facilities, and recorded as liabilities in the balance sheet.
Remediation costs are recorded in the consolidated financial statements when they become probable and reasonably estimable. The Company has estimated the probable liability associated with these environmental remediation matters, including those described herein, to be approximately $187 million ($195 million undiscounted) in the aggregate as of September 30, 2021. Other than as described below, completion of required remedial actions is not expected to have a material effect on our consolidated financial statements.
Cass Lake: One of the matters included above arises out of a closed wood-treatment facility located in Cass Lake, Minnesota. In June 2011, the United States Environmental Protection Agency (EPA) selected and published a proposed soil remedy at the site with an estimated cost of $46 million. In April 2020, the EPA issued a final plan concerning clean-up standards at a portion of the site, the estimated cost of which is included within the reserve referenced above. In October 2012, the Natural Resource Trustees for this site provided notice to International Paper and other PRPs of their intent to perform a Natural Resource Damage Assessment. It is premature to predict the outcome of the assessment or to estimate a loss or range of loss, if any, in excess of the applicable reserve referenced above, which may be incurred.
Kalamazoo River: The Company is a PRP with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site in Michigan. The EPA asserts that the site is contaminated by polychlorinated biphenyls (PCBs) primarily as a result of discharges from various paper mills located along the Kalamazoo River, including a paper mill (the Allied Paper Mill) formerly owned by St. Regis Paper Company (St. Regis). The Company is a successor in interest to St. Regis.
-
Operable Unit 5, Area 1: In March 2016, the Company and other PRPs received a special notice letter from the EPA (i) inviting participation in implementing a remedy for a portion of the site known as Operable Unit 5, Area 1, and (ii) demanding reimbursement of EPA past costs totaling $37 million, including $19 million in past costs previously demanded by the EPA. The Company responded to the special notice letter. In December 2016, the EPA issued a unilateral administrative order to the Company and other PRPs to perform the remedy. The Company responded to the unilateral administrative order, agreeing to comply with the order subject to its sufficient cause defenses.
-
Operable Unit 1: In October 2016, the Company and another PRP received a special notice letter from the EPA inviting participation in the remedial design component of the landfill remedy for the Allied Paper Mill, which is also known as Operable Unit 1. The Record of Decision establishing the final landfill remedy for the Allied Paper Mill was issued by the EPA in September 2016. The Company responded to the Allied Paper Mill special notice letter in December 2016. In February 2017, the EPA informed the Company that it would make other arrangements for the performance of the remedial design.
In addition, in December 2019, the United States published notice in the Federal Register of a proposed consent decree with NCR Corporation (one of the parties to the allocation/apportionment litigation described below), the State of Michigan and natural resource trustees under which NCR would make payments of more than $100 million and perform work in Operable Unit 5, Areas 2, 3, and 4 at an estimated cost of $135.7 million. In December 2020, the Federal District Court approved the proposed consent decree.
The Company’s CERCLA liability has not been finally determined with respect to these or any other portions of the site, and except as noted above, the Company has declined to perform any work or reimburse the EPA at this time. As noted below, the Company is involved in allocation/apportionment litigation with regard to the site. Accordingly, it is premature to predict the outcome or estimate our maximum reasonably possible loss or range of loss with respect to this site. We have recorded a liability for future remediation costs at the site that are probable and reasonably estimable, and it remains reasonably possible that additional losses in excess of this recorded liability could be material.
The Company was named as a defendant by Georgia-Pacific Consumer Products LP, Fort James Corporation and Georgia Pacific LLC in a contribution and cost recovery action for alleged pollution at the site. NCR Corporation and Weyerhaeuser Company are also named as defendants in the suit. The suit seeks contribution under CERCLA for costs purportedly expended by plaintiffs ($79 million as of the filing of the complaint) and for future remediation costs. In June 2018, the Court issued its Final Judgment and Order, which fixed the past cost amount at approximately $50 million (plus interest to be determined) and allocated to the Company a 15% share of responsibility for those past costs. The Court did not address responsibility for future costs in its decision. In July 2018, the Company and each of the other parties filed notices appealing the Final Judgment and prior orders incorporated into that Judgment. The Company appeal is pending.
Harris County: International Paper and McGinnis Industrial Maintenance Corporation (MIMC), a subsidiary of Waste Management, Inc. (WMI), are PRPs at the San Jacinto River Waste Pits Superfund Site in Harris County, Texas. The PRPs have been actively participating in the activities at the site and share the costs of these activities.
In October 2017, the EPA issued a Record of Decision (ROD) selecting the final remedy for the site: removal and relocation of the waste material from both the northern and southern impoundments. The EPA did not specify the methods or practices needed to perform this work. The EPA’s selected remedy was accompanied by a cost estimate of approximately $115 million ($105 million for the northern impoundment, and $10 million for the southern impoundment). Subsequent to the issuance of the ROD, there have been numerous meetings between the EPA and the PRPs, and the Company continues to work with the EPA and MIMC/WMI to develop the remedial design.
To this end, in April 2018, the PRPs entered into an Administrative Order on Consent (AOC) with the EPA, agreeing to work together to develop the remedial design for the northern impoundment. That remedial design work is ongoing. The AOC does not include any agreement to perform waste removal or other construction activity at the site. Rather, it involves adaptive management techniques and a pre-design investigation, the objectives of which include filling data gaps (including but not limited to post-Hurricane Harvey technical data generated prior to the ROD and not incorporated into the selected remedy), refining areas and volumes of materials to be addressed, determining if an excavation remedy is able to be implemented in a manner protective of human health and the environment, and investigating potential impacts of remediation activities to infrastructure in the vicinity.
During the first quarter of 2020, through a series of meetings among the Company, MIMC/WMI, our consultants, the EPA and the Texas Commission on Environmental Quality (TCEQ), progress was made to resolve key technical issues previously preventing the Company from determining the manner in which the selected remedy for the northern impoundment would be feasibly implemented. As a result of these developments, the Company reserved the following amounts in relation to remediation at this site: (a) $10 million for the southern impoundment; and (b) $55 million for the northern impoundment, which represents the Company's 50% share of our estimate of the low end of the range of probable remediation costs.
We have submitted the Final Design Package for the southern impoundment to the EPA, and the EPA approved this plan May 7, 2021. With respect to the northern impoundment, although several key technical issues have been resolved, we still face significant challenges remediating this area in a cost-efficient manner and without a release to the environment and therefore our discussions with the EPA on the best approach to remediation will continue. Because of ongoing questions regarding cost effectiveness, timing and gathering other technical data, additional losses in excess of our recorded liability are possible. We are currently unable to reasonably estimate any further adjustment to our recorded liability or any loss or range of loss in excess of such liability; however, we believe it is unlikely any adjustment would be material.
Asbestos-Related Matters
We have been named as a defendant in various asbestos-related personal injury litigation, in both state and federal court, primarily in relation to the prior operations of certain companies previously acquired by the Company. As of September 30, 2021, the Company's total recorded liability with respect to pending and future asbestos-related claims was $112 million, net of estimated insurance recoveries. While it is reasonably possible that the Company may incur losses in excess of its recorded liability with respect to asbestos-related matters, we do not believe additional material losses are probable.
Antitrust
In March 2017, the Italian Competition Authority (ICA) commenced an investigation into the Italian packaging industry to determine whether producers of corrugated sheets and boxes violated the applicable European competition law. In April 2019, the ICA concluded its investigation and issued initial findings alleging that over 30 producers, including our Italian packaging subsidiary (IP Italy), improperly coordinated the production and sale of corrugated sheets and boxes. On August 6, 2019, the ICA issued its decision and assessed IP Italy a fine of €29 million (approximately $32 million at current exchange rates) which was recorded in the third quarter of 2019. We appealed the ICA decision and our appeal was denied on May 25, 2021. However, we continue to believe we have numerous and strong bases to challenge the ICA decision, and we have further appealed the decision to the Italian Council of State.
Taxes Other Than Payroll Taxes
In 2017, the Brazilian Federal Supreme Court decided that the state value-added tax (VAT) should not be included in the basis of federal VAT calculations. In 2018 and 2019, the Brazilian tax authorities published both an internal consultation and a normative ruling with a narrow interpretation of the effects of the case. Based upon the best information available to us at that time, we determined an estimated refund was probable of being realized. As of March 31, 2021, we had recognized a receivable of $11 million based upon the authorities narrow interpretation. On May 13, 2021, the Brazilian Federal Supreme Court ruled again on the case. This ruling provides a much broader definition of the state VAT, which increased the exclusion amount from the Federal VAT calculations. Therefore, we recognized an additional receivable of $70 million during the three months ended June 30, 2021, which brought the total receivable to $81 million as of June 30, 2021. The $70 million of income recognized during the second quarter of 2021 included income of $42 million in Cost of Products sold and income of $28 million in Interest expense, net in the accompanying condensed consolidated statement of operations. A portion of this receivable has been consumed by offsetting various taxes payable. After giving effect to this offset, the ending balance of the total receivable is $48 million as of September 30, 2021. The issue is now considered fully resolved, and no further ruling by either the Brazilian Supreme Court or the Brazilian tax authorities is expected. This receivable pertains to a business that was conveyed to Sylvamo Corporation as of October 1, 2021, as part of our spin-off transaction.
General
The Company is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, personal injury, product liability, labor and employment, contracts, sales of property, intellectual property, tax, and other matters, some of which allege substantial monetary damages. See Note 14 for details regarding a tax matter. Assessments of lawsuits and claims can involve a series of complex judgments about future events, can rely heavily on estimates and assumptions, and are otherwise subject to significant uncertainties. As a result, there can be no certainty that the Company will not ultimately incur charges in excess of presently recorded liabilities. The Company believes that loss contingencies arising from pending matters including the matters described herein, will not have a material effect on the consolidated financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in pending or threatened legal matters, some of which are beyond the Company's control, and the large or indeterminate damages sought in some of these matters, a future adverse ruling, settlement, unfavorable development, or increase in accruals with respect to these matters could result in future charges that could be material to the Company's results of operations or cash flows in any particular reporting period.
NOTE 16 - VARIABLE INTEREST ENTITIES
Variable Interest Entities
In August 2021, the Timber Notes of $4.8 billion and the Extension Loans of $4.2 billion related to the 2015 Financing Entities both matured. We settled the Extension Loans at their maturity with the proceeds from the Timber Notes. This resulted in cash proceeds of approximately $630 million representing our equity in the variable interest entities. Maturity of the installment notes and termination of the monetization structure also resulted in a $72 million tax liability that is expected to be paid in the fourth quarter of 2021.
As of September 30, 2021, the Company's remaining deferred tax liability associated with the 2015 Financing Entities was $815 million. The nature and timing of the income tax due related to these transactions is currently under review by the Internal Revenue Service.
Activity between the Company and the 2015 Financing Entities was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Revenue (a) | $ | 14 | $ | 24 | $ | 61 | $ | 71 | |||||||||||||||
| Expense (a) | 8 | 32 | 34 | 96 | |||||||||||||||||||
| Cash receipts (b) | 48 | 48 | 95 | 95 | |||||||||||||||||||
| Cash payments (c) | 24 | 64 | 38 | 128 |
(a)The revenue and expense are included in Interest expense, net in the accompanying statement of operations.
(b)The cash receipts are interest received on the Financial assets of special purpose entities.
(c)The cash payments represent interest paid on Nonrecourse financial liabilities of special purpose entities.
As of September 30, 2021, the fair value of the Timber Notes and Extension Loans for the 2007 Financing Entities was $2.3 billion and $2.1 billion, respectively. The Timber Notes and Extension Loans are classified as Level 2 within the fair value hierarchy, which is further defined in Note 17 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The Timber Notes of $2.3 billion and the Extension Loans of $2.1 billion both mature in 2027 and are shown in Long-term nonrecourse financial assets of variable interest entities and Long-term nonrecourse financial liabilities of variable interest entities, respectively, on the accompanying balance sheet.
Activity between the Company and the 2007 Financing Entities was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Revenue (a) | $ | 5 | $ | 7 | $ | 18 | $ | 35 | |||||||||||||||
| Expense (b) | 6 | 8 | 18 | 36 | |||||||||||||||||||
| Cash receipts (c) | 1 | 5 | 4 | 28 | |||||||||||||||||||
| Cash payments (d) | 4 | 8 | 12 | 34 |
(a)The revenue is included in Interest expense, net in the accompanying statement of operations and includes approximately $5 million and $14 million for the three months and nine months ended September 30, 2021 and 2020, respectively, of accretion income for the amortization of the basis difference adjustment on the Financial assets of special purpose entities.
(b)The expense is included in Interest expense, net in the accompanying statement of operations and includes approximately $2 million and $5 million for the three months and nine months ended September 30, 2021 and 2020, respectively, of accretion expense for the amortization of the basis difference adjustment on the Nonrecourse financial liabilities of special purpose entities.
(c)The cash receipts are interest received on the Financial assets of special purpose entities.
(d)The cash payments are interest paid on Nonrecourse financial liabilities of special purpose entities.
The borrowing capacity of the Company's commercial paper program is $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 September 30, 2021, the Company had no borrowings outstanding under the program.
At September 30, 2021, International Paper’s credit facilities totaled $2.1 billion. The Agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. The Agreements include a $1.5 billion contractually committed bank facility. In June 2021, the Company extended the maturity date of the $1.5 billion credit facility from December 2022 to June 2026. The liquidity facilities also include up to $550 million of uncommitted financings based on eligible receivables balances under a receivables securitization program. In February of 2021, after considering the Company’s liquidity position in relation to the macroeconomic environment at such time, the Company
amended the receivable securitization program from a committed financing arrangement to an uncommitted financing arrangement. In August of 2021, the Company amended the receivable securitization program to remove receivable balances related to Sylvamo. The borrowing limit of up to $550 million based on eligible receivables balances and the expiration date in April 2022 were unchanged by the February 2021 and August 2021 amendments. At September 30, 2021, there were no borrowings under either the bank facility or receivables securitization program.
In March 2020, the Company entered into a $750 million contractually committed 364-day revolving credit agreement with a syndicate of banks and other financial institutions which augmented the Company's access to liquidity due to the macroeconomic conditions related to COVID-19 and supplemented the Company's $1.5 billion credit agreement. After considering the Company’s liquidity position in relation to the macroeconomic environment at such time, the Company determined not to extend the $750 million credit agreement after its expiration on March 24, 2021.
In anticipation of the spin-off, Sylvamo incurred $1.5 billion in debt during the third quarter of 2021 with the proceeds to be used for a distribution to the Company and other expenses associated with the transaction. The Company was an obligor of the debt prior to the spin-off as Sylvamo was a wholly-owned subsidiary. Subsequent to the distribution of the net assets, the Company was no longer an obligor of the Sylvamo debt. The $1.5 billion of borrowings is comprised of $450 million of 7.00% senior unsecured notes due 2029 issued in September 2021. It is also comprised of the senior secured credit facility that Sylvamo entered into in September 2021 which consisted of $450 million of borrowings related to its term loan “B” facility, $520 million of borrowings related to its term loan “F” facility, and the $100 million draw on its revolving credit facility which has a capacity of $450 million.
The Company's early debt reductions in the third quarter of 2021 were a debt tender in August 2021 of approximately $200 million related to debt with an interest rate of 3.55% and a maturity date of 2029.
The Company’s early debt reductions in the second quarter of 2021 were a debt tender in June 2021 of approximately $558 million related to debt with interest rates ranging from 4.35% to 4.40% and maturity dates ranging from 2047 to 2048 and open market repurchases of approximately $232 million related to debt with interest rates ranging from 3.00% to 5.15% and maturity dates ranging from 2027 to 2046.
The Company’s early debt reductions in the first quarter of 2021 were open market repurchases of approximately $107 million related to debt with interest rates ranging from 3.00% to 4.80% and maturities dates from 2027 to 2048.
The Company’s financial covenants require the maintenance of a minimum net worth, as defined in our debt agreements, of $9 billion and a total debt-to-capital ratio of less than 60%. Net worth is defined as the sum of common stock, paid-in capital and retained earnings, less treasury stock plus any cumulative goodwill impairment charges. The calculation also excludes accumulated other comprehensive income/loss and both the current and long-term Nonrecourse Financial Liabilities of Variable Interest Entities. The total debt-to-capital ratio is defined as total debt divided by the sum of total debt plus net worth. As of September 30, 2021, we were in compliance with our debt covenants.
At September 30, 2021, the fair value of International Paper’s $8.5 billion of debt was approximately $10.2 billion. The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues. International Paper’s long-term debt is classified as Level 2 within the fair value hierarchy, which is further defined in Note 17 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
NOTE 18 - DERIVATIVES AND HEDGING ACTIVITIES
As a multinational company, International Paper is exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices.
The notional amounts of qualifying and non-qualifying financial instruments used in hedging transactions were as follows:
| In millions | September 30, 2021 | December 31, 2020 | |||||||||
| Derivatives in Cash Flow Hedging Relationships: | |||||||||||
| Foreign exchange contracts (USD) | $ | 108 | $ | 85 | |||||||
| Foreign exchange contracts (EUR) | — | 187 | |||||||||
| Derivatives Not Designated as Hedging Instruments: | |||||||||||
| Electricity contract (MWh) | 0.3 | 0.2 | |||||||||
The following table shows gains or losses recognized in AOCI, net of tax, related to derivative instruments:
| Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships: | |||||||||||||||||||||||
| Foreign exchange contracts | $ | (4) | $ | (4) | $ | 3 | $ | (34) | |||||||||||||||
| Total | $ | (4) | $ | (4) | $ | 3 | $ | (34) | |||||||||||||||
| Derivatives in Net Investment Hedging Relationships: | |||||||||||||||||||||||
| Foreign exchange contracts | $ | 6 | $ | — | $ | 18 | $ | — | |||||||||||||||
| Interest rate contracts | — | — | — | 24 | |||||||||||||||||||
| Total | $ | 6 | $ | — | $ | 18 | $ | 24 |
During the next 12 months, the amount of the September 30, 2021 AOCI balance, after tax, that is expected to be reclassified to earnings is a loss of $2 million.
The amounts of gains and losses recognized in the statement of operations on qualifying and non-qualifying financial instruments used in hedging transactions were as follows:
| Gain (Loss) Reclassified from AOCI Into Income (Effective Portion) | Location of Gain (Loss) Reclassified from AOCI (Effective Portion) | |||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships: | ||||||||||||||||||||||||||
| Foreign exchange contracts | $ | 8 | $ | (6) | $ | 9 | $ | (26) | Cost of products sold | |||||||||||||||||
| Total | $ | 8 | $ | (6) | $ | 9 | $ | (26) |
| Gain (Loss) Recognized in Income | Location of Gain (Loss) In Statement of Operations | ||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Derivatives in Fair Value Hedging Relationships: | |||||||||||||||||||||||||||||
| Interest rate contracts | $ | — | $ | — | $ | — | $ | 38 | Interest expense, net | ||||||||||||||||||||
| Debt | — | — | — | (38) | Interest expense, net | ||||||||||||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||
| Derivatives in Net Investment Hedging Relationships: | |||||||||||||||||||||||||||||
| Foreign exchange contracts | — | 1 | — | 2 | Net (gain) losses on sales and impairments of businesses | ||||||||||||||||||||||||
| Total | $ | — | $ | 1 | $ | — | $ | 2 | |||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments: | |||||||||||||||||||||||||||||
| Electricity contract | $ | 6 | $ | 1 | $ | 13 | $ | (2) | Cost of products sold | ||||||||||||||||||||
| Foreign exchange contracts | 5 | — | (1) | — | Cost of products sold | ||||||||||||||||||||||||
| Total | $ | 11 | $ | 1 | $ | 12 | $ | (2) |
Fair Value Measurements
The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period.
The following table provides a summary of the impact of our derivative instruments in the balance sheet:
Fair Value Measurements
Level 2 – Significant Other Observable Inputs
| Assets | Liabilities | |||||||||||||||||||||||||
| In millions | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||||||||||||||
| Foreign exchange contracts – cash flow | $ | 3 | $ | 5 | $ | 5 | $ | 8 | ||||||||||||||||||
| Total derivatives designated as hedging instruments | 3 | 5 | 5 | 8 | ||||||||||||||||||||||
| Derivatives not designated as hedging instruments | ||||||||||||||||||||||||||
| Electricity contract | 11 | — | — | 1 | ||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | 11 | — | — | 1 | ||||||||||||||||||||||
| Total derivatives | $ | 14 | (a) | $ | 5 | (b) | $ | 5 | (c) | $ | 9 | (d) |
(a)Includes $13 million recorded in Other current assets and $1 million recorded in Deferred charges and other assets in the accompanying consolidated balance sheet.
(b)Included in Other current assets in the accompanying consolidated balance sheet.
(c)Includes $4 million recorded in Other current liabilities and $1 million recorded in Other liabilities in the accompanying consolidated balance sheet.
(d)Includes $7 million recorded in Other current liabilities and $2 million recorded in Other liabilities in the accompanying consolidated balance sheet.
The above contracts are subject to enforceable master netting arrangements that provide rights of offset with each counterparty when amounts are payable on the same date in the same currency or in the case of certain specified defaults. Management has made an accounting policy election to not offset the fair value of recognized derivative assets and derivative liabilities in the balance sheet. The amounts owed to the counterparties and owed to the Company are considered immaterial with respect to each counterparty and in the aggregate with all counterparties.
International Paper sponsors and maintains the Retirement Plan of International Paper Company (the Pension Plan), a tax-qualified defined benefit pension plan that provides retirement benefits to substantially all U.S. salaried and hourly and union employees who work at a participating business unit.
The Pension Plan provides defined pension benefits based on years of credited service and either final average earnings (salaried employees and hourly employees receiving salaried benefits), hourly job rates or specified benefit rates (hourly and union employees).
Effective January 1, 2019, the Company froze participation, including credited service and compensation, for salaried employees under the Pension Plan, the Pension Restoration Plan and the SERP plan. This change does not affect benefits accrued through December 31, 2018. For service after December 31, 2018, employees affected by the freeze receive a company contribution to their individual Retirement Savings Account.
In advance of the spin-off of the Printing Papers segment into a standalone, publicly-traded company, Sylvamo, a legally separate Sylvamo Pension Plan was established to transfer both pension liabilities and qualified pension assets for the approximately 900 active qualified pension participants who transitioned to Sylvamo. Effective September 1, 2021, the Retirement Plan of International Paper (“IP Pension Plan”) and the Sylvamo Pension Plan were legally separated and remeasured as of that date. The remeasurement resulted in a net asset balance of $520 million for the IP Pension Plan, which has been classified as part of the Pension Assets balance on the Consolidated Balance Sheet. Based on the September 1, 2021 remeasurement, the IP Pension Plan completed the transfer of approximately $286 million in projected benefit obligation and approximately $263 million in qualified pension assets to the Sylvamo Pension Plan.
Net periodic pension (income) expense for our qualified and nonqualified U.S. defined benefit plans comprised the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Service cost | $ | 26 | $ | 21 | $ | 78 | $ | 64 | |||||||||||||||
| Interest cost | 84 | 98 | 251 | 294 | |||||||||||||||||||
| Expected return on plan assets | (177) | (167) | (543) | (501) | |||||||||||||||||||
| Actuarial loss | 35 | 51 | 114 | 152 | |||||||||||||||||||
| Amortization of prior service cost | 5 | 5 | 16 | 15 | |||||||||||||||||||
| Net periodic pension (income) expense | $ | (27) | $ | 8 | $ | (84) | $ | 24 |
The components of net periodic pension (income) expense other than the Service cost component are included in Non-operating pension (income) expense in the Consolidated Statement of Operations.
The Company’s funding policy for our pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plan, tax deductibility, the cash flows generated by the Company, and other factors. The Company made no voluntary cash contributions to the qualified pension plan in the first nine months of 2021 or 2020. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $16 million for the nine months ended September 30, 2021.
NOTE 20 - STOCK-BASED COMPENSATION
International Paper has an Incentive Compensation Plan (ICP) which is administered by the Management Development and Compensation Committee of the Board of Directors (the Committee). The ICP authorizes the grants of restricted stock, restricted or deferred stock units, performance awards payable in cash or stock upon the attainment of specified performance goals, dividend equivalents, stock options, stock appreciation rights, other stock-based awards and cash-based awards at the discretion of the Committee. As of September 30, 2021, 7.6 million shares were available for grant under the ICP.
Stock-based compensation expense and related income tax benefits were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Total stock-based compensation expense (selling and administrative) | $ | 42 | $ | 17 | $ | 103 | $ | 48 | |||||||||||||||
| Income tax benefits related to stock-based compensation | (2) | 1 | 13 | 18 |
At September 30, 2021, $107 million, net of estimated forfeitures, of compensation cost related to unvested restricted performance shares, executive continuity awards and restricted stock attributable to future service had not yet been recognized. This amount will be recognized in expense over a weighted-average period of 1.9 years.
Performance Share Plan
During the first nine months of 2021, the Company granted 2.0 million performance units at an average grant date fair value of $53.15.
NOTE 21 - BUSINESS SEGMENT INFORMATION
International Paper’s business segments, Industrial Packaging, Global Cellulose Fibers and Printing Papers, are consistent with the internal structure used to manage these businesses. All segments are differentiated on a common product, common customer basis consistent with the business segmentation generally used in the Forest Products industry. On October 1, 2021, the Company completed the previously announced spin-off of its Printing Papers segment into a standalone, publicly-traded company, Sylvamo Corporation. As a result of the spin-off, the Company no longer operated this Printing Papers segment effective October 1, 2021, and all current and historical financial results will be adjusted to reflect the Printing Papers segment as a discontinued operation in the fourth quarter of 2021. In addition, certain limited historical and ongoing business activities will be included in our Industrial Packaging and Global Cellulose Fibers segments.
Business segment operating profits are used by International Paper's management to measure the earnings performance of its businesses. Management believes that this measure allows a better understanding of trends in costs, operating efficiencies, prices and volumes. Business segment operating profits are defined as earnings (loss) 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.
Net sales by business segment for the three months and nine months ended September 30, 2021 and 2020 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Industrial Packaging | $ | 4,087 | $ | 3,768 | $ | 12,096 | $ | 11,220 | |||||||||||||||
| Global Cellulose Fibers | 729 | 564 | 1,981 | 1,737 | |||||||||||||||||||
| Printing Papers | 846 | 743 | 2,473 | 2,234 | |||||||||||||||||||
| Corporate and Intersegment Sales | 52 | 48 | 143 | 150 | |||||||||||||||||||
| Net Sales | $ | 5,714 | $ | 5,123 | $ | 16,693 | $ | 15,341 |
Operating profit (loss) by business segment for the three months and nine months ended September 30, 2021 and 2020 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Industrial Packaging | $ | 429 | $ | 469 | $ | 1,284 | $ | 1,388 | |||||||||||||||
| Global Cellulose Fibers | 96 | (59) | 24 | (123) | |||||||||||||||||||
| Printing Papers | 106 | 63 | 262 | 148 | |||||||||||||||||||
| Business Segment Operating Profits | $ | 631 | 473 | $ | 1,570 | $ | 1,413 | ||||||||||||||||
| Earnings (loss) before income taxes and equity earnings | $ | 916 | $ | 282 | $ | 1,747 | $ | 527 | |||||||||||||||
| Interest expense, net | 93 | 112 | 242 | 345 | |||||||||||||||||||
| Noncontrolling interests adjustment | (1) | — | (3) | — | |||||||||||||||||||
| Corporate expenses, net | 12 | (20) | 44 | 9 | |||||||||||||||||||
| Corporate net special items | 11 | 108 | 81 | 195 | |||||||||||||||||||
| Business net special items | (349) | 2 | (385) | 368 | |||||||||||||||||||
| Non-operating pension expense (income) | (51) | (11) | (156) | (31) | |||||||||||||||||||
| Business Segment Operating Profits | $ | 631 | $ | 473 | $ | 1,570 | $ | 1,413 |
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