International Paper 10-Q 2023-06-30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number 001-03157

INTERNATIONAL PAPER COMPANY

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (901) 419-7000

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange

Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of July 21, 2023 was 345,999,129.

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INDEX

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PART I. FINANCIAL INFORMATION

INTERNATIONAL PAPER COMPANY

Condensed Consolidated Statement of Operations

(Unaudited)

(In millions, except per share amounts)

The accompanying notes are an integral part of these condensed financial statements.

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INTERNATIONAL PAPER COMPANY

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)

(In millions)

The accompanying notes are an integral part of these condensed financial statements.

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INTERNATIONAL PAPER COMPANY

Condensed Consolidated Balance Sheet

(In millions)

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included in "Financial Statements and Supplementary Data" of this Quarterly Report on Form 10-Q (this "Form 10-Q") and the Company's Annual Report on Form 10-K for the year ended December 31, 2022 (our "Annual Report"). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and in our Annual Report, particularly under "Risk Factors" and "Forward-Looking Statements" of this Form 10-Q and our Annual Report.

EXECUTIVE SUMMARY

Net earnings (loss) were $235 million ($0.68 per diluted share) in the second quarter of 2023, compared with $172 million ($0.49 per diluted share) in the first quarter of 2023 and $511 million ($1.38 per diluted share) in the second quarter of 2022. The Company generated Adjusted operating earnings (a non-GAAP measure defined below) of $204 million ($0.59 per diluted share) in the second quarter of 2023, compared with $185 million ($0.53 per diluted share) in the first quarter of 2023 and $364 million ($0.99 per diluted share) in the second quarter of 2022.

International Paper’s second quarter 2023 earnings reflect solid performance in the face of a challenging macroeconomic environment. During the second quarter, we delivered $55 million of year-over-year incremental earnings benefit from our Building a Better IP initiatives, bringing total benefits of $120 million for the first half of 2023. Additionally, our mill system continued to perform well in the current environment as we optimized our system while taking care of our customers. Underlying demand for our products improved throughout the second quarter 2023, but remained constrained by inventory destocking as our customers and the broader supply chain worked through elevated inventories of their products. Based on discussions with our customers and trends observed across the various end-use segments for packaging and pulp products, we believe consumer priorities in the second quarter remained focused on services as well as non-discretionary goods. This trend has been influenced by the pull forward of goods during the pandemic, as well as inflationary pressures and rising interest rates. Margins remained under pressure due to the resulting weak volumes and lower prices across our portfolio; however, this was mitigated by lower input costs. Regarding capital allocation in the second quarter 2023, we returned $200 million to shareowners including $160 million of dividends and $40 million of share repurchases. Finally, with respect to the sale of our interest in the Ilim joint venture, we previously reported the approval from a Russian commission overseeing exits by foreign companies but we are still awaiting approval from the Russian competition authority. The buyers continue to pursue this approval and we expect to close as soon as all regulatory approvals are secured.

Comparing our performance in the second quarter 2023 to the first quarter 2023, price and mix was lower in our North American Industrial Packaging business due to prior index movements and lower export prices. Price in our Global Cellulose Fibers business was lower as a result of prior index movements and unfavorable mix driven by lower absorbent pulp shipments. Volume in our North American Industrial Packaging business was sequentially higher despite one less shipping day, as demand improved throughout the quarter. However, overall demand for packaging continued to be impacted by ongoing inventory destocking across the supply chain. Fluff pulp volumes in our Global Cellulose Fibers business were lower due to weaker demand in absorbent products including the impact of continued customer inventory destocking. Operations and costs were higher in our North American Industrial Packaging business, primarily due to higher economic downtime in the second quarter 2023. Operations and costs were lower in our Global Cellulose Fibers business driven by lower distribution costs and seasonal mill efficiencies. Maintenance outages were sequentially lower in the second quarter 2023 as the first quarter 2023 represented the highest planned maintenance outage quarter of 2023 and as a result of deferring some outages into the second half of the year. Input costs were significantly lower in both business segments, primarily driven by lower energy, wood and distribution costs.

Looking ahead to the third quarter 2023, as compared to the second quarter 2023, in our Industrial Packaging business, we expect price and mix to be lower primarily due to prior index movements along with lower prices in the export market. Volume is expected to be higher in North America, partially offset by one less shipping day. Operations and costs are expected to improve due to lower unabsorbed fixed costs from increased production volume. Maintenance outage expense is expected to decrease relative to the second quarter 2023 as we have now completed approximately 70% of planned maintenance outages. Input costs are expected to be higher driven by increased average energy costs. In our Global Cellulose Fibers business, we expect price and mix to decrease earnings on prior index movements. Volume is expected to be higher as demand recovers on lower inventory destocking. Operations and costs are expected to be favorable due to lower employee benefit costs in the third

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quarter 2023. Maintenance outage expense is expected to be lower along with lower input costs, primarily due to lower fiber and chemical costs.

Adjusted Operating Earnings and Adjusted Operating Earnings Per Share are non-GAAP measures and are defined as net earnings (loss) (a GAAP measure) excluding discontinued operations, net special items and non-operating pension expense (income). Net earnings (loss) and Diluted earnings (loss) per share are the most directly comparable GAAP measures. The Company calculates Adjusted Operating Earnings by excluding the after-tax effect of discontinued operations, non-operating pension expense (income) and items considered by management to be unusual (net special items) from net earnings (loss) reported under GAAP. Adjusted Operating Earnings Per Share is calculated by dividing Adjusted Operating Earnings by diluted average shares of common stock outstanding. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present consolidated operating results from continuing operations. The Company believes that using this information, along with the most direct comparable GAAP measure, provides for a more complete analysis of the results of operations.

The following are reconciliations of Net earnings (loss) to Adjusted operating earnings (loss) on a total and per share basis. Additional detail is provided later in this Form 10-Q regarding the net special items expense (income) referenced in the charts below.

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Information relating to quantitative and qualitative disclosures about market risk is shown on pages 41-42 of International Paper’s Annual Report, which information is incorporated herein by reference. There have been no material changes in the Company’s exposure to market risk since December 31, 2022.

Evaluation of Disclosure Controls and Procedures:

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported (and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure) within the time periods specified in the Securities and Exchange Commission’s rules and forms. As of the end of the period covered by this Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2023 (the end of the period covered by this Form 10-Q).

Changes in Internal Control over Financial Reporting:

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.****LEGAL PROCEEDINGS

A discussion of material developments regarding certain legal proceedings involving the Company occurring in the period covered by this Form 10-Q is found in Note 13 - Commitments and Contingencies of the Condensed Notes to the Consolidated Financial Statements in this Form 10-Q, which is incorporated by reference herein. The Company is not subject to any administrative or judicial proceeding arising under any Federal, State or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment that is likely to result in monetary sanctions of $1 million or more.

There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (Part I, Item 1A).

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

(a) 7,817 shares were acquired from employees or board members as a result of share withholdings to pay income taxes under the Company's restricted stock program. The remainder were purchased under a share repurchase program. On October 11, 2022, our Board increased the authorization up to a total of $3.35 billion shares. This repurchase program does not have an expiration date. As of June 30, 2023, approximately $2.96 billion aggregate shares of our common stock remained authorized for repurchase under a previous Board authorization.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable. Without limiting the generality of the foregoing, during the quarter ended June 30, 2023, no director or Section 16 officer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements, as defined in Item 408(a) of Regulation S-K.

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ITEM 6. EXHIBITS

** Filed herewith*

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.