filings.toolsItem 2. [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](#ie7f6d240f1a64635881941b71ead2c6688)
60K characters. Original on sec.gov · Markdown
Item 2. [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](#ie7f6d240f1a64635881941b71ead2c6688)
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
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.
| Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||
| In millions | 2023 | 2022 | 2023 | ||||||||||||||
| Net earnings (loss) | $ | 235 | $ | 511 | $ | 172 | |||||||||||
| Less - Discontinued operations (gain) loss | (13) | (95) | — | ||||||||||||||
| Earnings (loss) from continuing operations | 222 | 416 | 172 | ||||||||||||||
| Add back - Non-operating pension expense (income) | 12 | (47) | 15 | ||||||||||||||
| Add back - Net special items expense (income) | (6) | 18 | 3 | ||||||||||||||
| Income taxes - Non-operating pension and special items | (24) | (23) | (5) | ||||||||||||||
| Adjusted operating earnings (loss) | $ | 204 | $ | 364 | $ | 185 |
| Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||
| 2023 | 2022 | 2023 | |||||||||||||||
| Diluted earnings (loss) per share | $ | 0.68 | $ | 1.38 | $ | 0.49 | |||||||||||
| Less - Discontinued operations (gain) loss per share | (0.04) | (0.25) | — | ||||||||||||||
| Diluted earnings (loss) per share from continuing operations | 0.64 | 1.13 | 0.49 | ||||||||||||||
| Add back - Non-operating pension expense (income) per share | 0.03 | (0.13) | 0.04 | ||||||||||||||
| Add back - Net special items expense (income) per share | (0.02) | 0.05 | 0.01 | ||||||||||||||
| Income taxes per share - Non-operating pension and special items | (0.06) | (0.06) | (0.01) | ||||||||||||||
| Adjusted operating earnings (loss) per share | $ | 0.59 | $ | 0.99 | $ | 0.53 |
Cash provided by operations, including discontinued operations, totaled $873 million and $978 million for the first six months of 2023 and 2022, respectively. The Company generated free cash flow of approximately $265 million and $607 million in the first six months of 2023 and 2022, respectively. Free cash flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operations. Management utilizes this measure in connection with managing our business and believes that free cash flow is useful to investors as a liquidity measure because it measures the amount of cash generated that is available, after reinvesting in the business, to maintain a strong balance sheet, pay dividends, repurchase stock, service debt and make investments for future growth. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. By adjusting for certain items that are not indicative of the Company's ongoing performance, we believe that free cash flow also enables investors to perform meaningful comparisons between past and present periods.
The following is a reconciliation of cash provided by operations to free cash flow:
| Six Months Ended June 30, | |||||||||||
| In millions | 2023 | 2022 | |||||||||
| Cash provided by operations | $ | 873 | $ | 978 | |||||||
| Adjustments: | |||||||||||
| Cash invested in capital projects, net of insurance recoveries | (608) | (371) | |||||||||
| Free Cash Flow | $ | 265 | $ | 607 |
The non-GAAP financial measures presented in this Form 10-Q as referenced above have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results calculated in accordance with GAAP. In addition, because not all companies utilize identical calculations, the Company's presentation of non-GAAP measures in this Form 10-Q may not be comparable to similarly titled measures disclosed by other companies, including companies in the same industry as the Company.
For the second quarter of 2023, International Paper reported net sales of $4.7 billion, compared with $5.0 billion in the first quarter of 2023 and $5.4 billion in the second quarter of 2022.
Net earnings (loss) totaled $235 million, or $0.68 per diluted share, in the second quarter of 2023. This compared with $172 million, or $0.49 per diluted share, in the first quarter of 2023 and $511 million, or $1.38 per diluted share, in the second quarter of 2022.
Compared with the first quarter of 2023, earnings from continuing operations benefited from lower raw material and freight costs ($65 million), lower mill maintenance outage costs ($69 million), lower tax expense ($2 million) and lower non-operating pension expense ($2 million). These benefits were offset by lower average sales prices and an unfavorable mix ($106 million), lower sales volumes ($2 million), higher operating costs ($5 million) and higher net interest expense ($5 million). Equity earnings, net of taxes, were $1 million higher in the second quarter of 2023 than in the first quarter of 2023. Net special items in the second quarter of 2023 were a gain of $27 million compared with a charge of $2 million in the first quarter of 2023.
Compared with the second quarter of 2022, the second quarter of 2023 benefited from lower raw material and freight costs ($225 million), lower mill maintenance outage costs ($7 million), lower corporate and other costs ($14 million), lower net interest expense ($7 million) and lower tax expense ($7 million). These benefits were offset by an unfavorable mix net of higher average sales prices ($10 million), lower sales volumes ($90 million), higher operating costs ($322 million) and higher non-operating pension expense ($44 million). Equity earnings, net of taxes, were $2 million higher in the second quarter of 2023 than in the second quarter of 2022. Net special items in the second quarter of 2023 were a gain of $27 million compared with a gain of $17 million in the second quarter of 2022.
Business segment operating profits (losses) are used by International Paper's management to measure the earnings performance of its businesses. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. International Paper believes that using this information, along with net earnings, provides a more complete analysis of the results of operations by quarter. Business segment operating profits (losses) are defined as earnings (loss) from continuing operations before income taxes and equity earnings, but including the impact of less than wholly owned subsidiaries, and excluding interest expense, net, corporate expenses, net, corporate net special items, business net special items and non-operating pension expense. Business segment operating profit (loss) is a measure reported to our management for purposes of making decisions about allocating resources to our business segments and assessing the performance of our business segments and is presented in our financial statement footnotes in accordance with ASC 280.
The Company currently operates in two segments: Industrial Packaging and Global Cellulose Fibers. On January 24, 2023, the Company announced an agreement to sell its Ilim equity investment and, as a result, all current and historical results of the Ilim investment are presented as Discontinued Operations, net of taxes and our equity investment is no longer a separate reportable industry segment.
The following table presents a reconciliation of Net earnings (loss) from continuing operations to its total business segment operating profit (loss):
| Three Months Ended | |||||||||||||||||
| June 30, | March 31, | ||||||||||||||||
| In millions | 2023 | 2022 | 2023 | ||||||||||||||
| Net Earnings (Loss) from Continuing Operations | $ | 222 | $ | 416 | $ | 172 | |||||||||||
| Add back (deduct): | |||||||||||||||||
| Income tax provision (benefit) | 33 | 96 | 48 | ||||||||||||||
| Equity (earnings) loss, net of taxes | — | 2 | 1 | ||||||||||||||
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 255 | 514 | 221 | ||||||||||||||
| Interest expense, net | 59 | 74 | 62 | ||||||||||||||
| Less than wholly owned subsidiaries included in operations | — | (1) | — | ||||||||||||||
| Corporate expenses, net | 8 | 27 | 8 | ||||||||||||||
| Corporate net special items | — | 18 | — | ||||||||||||||
| Non-operating pension expense (income) | 12 | (47) | 15 | ||||||||||||||
| Adjusted Operating Profit | $ | 334 | $ | 585 | $ | 306 | |||||||||||
| Business Segment Operating Profit (Loss): | |||||||||||||||||
| Industrial Packaging | $ | 304 | $ | 560 | $ | 322 | |||||||||||
| Global Cellulose Fibers | 30 | 25 | (16) | ||||||||||||||
| Total Business Segment Operating Profit (Loss) | $ | 334 | $ | 585 | $ | 306 |
Business Segment Operating Profit (Loss)
Total business segment operating profits (losses) were $334 million in the second quarter of 2023, $306 million in the first quarter of 2023 and $585 million in the second quarter of 2022.
Compared with the first quarter of 2023, operating profits benefited from lower raw material and freight costs ($83 million) and lower mill outage costs ($88 million). These benefits were offset by lower average sales prices and an unfavorable mix ($135 million), lower sales volumes ($2 million) and higher operating costs ($6 million).
Compared with the second quarter of 2022, operating profits in the current quarter benefited from lower raw material and freight costs ($298 million) and lower mill outage costs ($9 million). These benefits were offset by an unfavorable mix net of higher average sales prices ($13 million), lower sales volumes ($119 million) and higher operating costs ($426 million).
Sales Volumes by Product (a)
Sales volumes of major products for the three months and six months ended June 30, 2023 and 2022 were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| In thousands of short tons (except as noted) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Industrial Packaging | |||||||||||||||||||||||
| Corrugated Packaging (b) | 2,393 | 2,619 | 4,774 | 5,237 | |||||||||||||||||||
| Containerboard | 600 | 707 | 1,144 | 1,419 | |||||||||||||||||||
| Recycling | 528 | 535 | 1,088 | 1,099 | |||||||||||||||||||
| Saturated Kraft | 44 | 51 | 78 | 95 | |||||||||||||||||||
| Gypsum/Release Kraft | 61 | 64 | 121 | 118 | |||||||||||||||||||
| EMEA Packaging (b) | 317 | 354 | 652 | 722 | |||||||||||||||||||
| Industrial Packaging | 3,943 | 4,330 | 7,857 | 8,690 | |||||||||||||||||||
| Global Cellulose Fibers (in thousands of metric tons) (c) | 625 | 720 | 1,313 | 1,432 |
(a)Sales volumes include third party and intersegment sales and exclude sales of equity investees.
(b)Volumes for corrugated box sales reflect consumed tons sold ("CTS'). Board sales for these businesses reflect invoiced tons.
(c)Includes North American volumes and internal sales to mills.
Discontinued Operations
On January 24, 2023, the Company announced it had reached an agreement to sell its equity investment in Ilim and had also received an indication of interest to purchase its equity investment in Ilim Group. All current and historical results of the Ilim joint venture investment are presented as Discontinued Operations, net of taxes in the condensed consolidated statement of operations. This transaction is discussed further in Note 10 - Equity Method Investments of Item 1. Financial Statements.
Discontinued operations include the equity earnings of the Ilim joint venture. Discontinued operations also includes after-tax net special items charges of $33 million and $43 million for the three months ended June 30, 2023 and March 31, 2023, respectively.
Details of these charges were as follows:
| Three Months | Three Months | ||||||||||||||||||||||
| June 30, | March 31, | ||||||||||||||||||||||
| 2023 | 2023 | ||||||||||||||||||||||
| In millions | Before Tax | After Tax | Before Tax | After Tax | |||||||||||||||||||
| Ilim equity method investment impairment | $ | 33 | $ | 33 | $ | 43 | $ | 43 | |||||||||||||||
| Total | $ | 33 | $ | 33 | $ | 43 | $ | 43 |
Income Taxes
An income tax provision of $33 million was recorded for the second quarter of 2023 and the reported effective income tax rate was 13%. Excluding a benefit of $21 million related to the tax effects of net special items and a benefit of $3 million related to the tax effects of non-operating pension expense, the operational effective income tax rate was 22% for the second quarter of 2023. The reported effective tax rate for the second quarter of 2023 was lower than the first quarter of 2023 primarily due to a benefit recorded related to the closure of the 2015-2016 federal audits.
An income tax provision of $48 million was recorded for the first quarter of 2023 and the reported effective income tax rate was 22%. Excluding a benefit of $1 million related to the tax effects of net special items and benefit of $4 million related to the tax effects of non-operating pension expense, the operational effective income tax rate was 22% for the first quarter of 2023.
An income tax provision of $96 million was recorded for the second quarter of 2022 and the reported effective income tax rate was 19%. Excluding a benefit of $35 million related to the tax effects of net special items and expense of $12 million related to the tax effects of non-operating pension expense, the operational effective income tax rate was 25% for the second quarter of 2022.
The operational effective tax provision and rate are non-GAAP measures and are calculated by adjusting the income tax provision from continuing operations and rate to exclude the tax effect of net special items and non-operating pension expense (income). Management believes that the presentation provides useful information to investors by providing a more meaningful comparison of the income tax rate between past and present periods.
Interest Expense
Net interest expense was $59 million in the second quarter of 2023, compared with $62 million in the first quarter of 2023 and $74 million in the second quarter of 2022. The second quarter of 2023 includes $6 million of interest income related to the settlement of tax audits. The first quarter of 2023 includes $3 million of interest expense related to the previously announced settlement of the timber monetization restructuring tax matter.
Effects of Net Special Items Expense (Income) and Non-Operating Pension Expense
Details of net special items expense (income), excluding interest expense, and non-operating pension expense (income) for the three months ended are as follows:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | ||||||||||||||||||||||||||||||||||||
| In millions | Before Tax | After Tax | Before Tax | After Tax | Before Tax | After Tax | ||||||||||||||||||||||||||||||||
| Environmental remediation reserve adjustment | $ | — | $ | — | $ | 15 | $ | 11 | $ | — | $ | — | ||||||||||||||||||||||||||
| Sylvamo investment | — | — | (3) | (2) | — | — | ||||||||||||||||||||||||||||||||
| Other | — | — | 6 | 5 | — | — | ||||||||||||||||||||||||||||||||
| Total net special items expense (income) | — | — | 18 | 14 | — | — | ||||||||||||||||||||||||||||||||
| Non-operating pension expense (income) | 12 | 9 | (47) | (35) | 15 | 11 | ||||||||||||||||||||||||||||||||
| Total net special items and non-operating pension expense (income) | $ | 12 | $ | 9 | $ | (29) | $ | (21) | $ | 15 | $ | 11 |
Net special items expense (income) include the following tax expenses (benefits):
| Three Months Ended | ||||||||||||||||||||
| June 30, | March 31, | |||||||||||||||||||
| In millions | 2023 | 2022 | 2023 | |||||||||||||||||
| Tax benefit related to the settlement of tax audits | $ | (23) | $ | — | $ | — | ||||||||||||||
| Tax benefit related to tax-free exchange of Sylvamo shares | — | (31) | — | |||||||||||||||||
| Total | $ | (23) | $ | (31) | $ | — |
BUSINESS SEGMENT OPERATING RESULTS
The following tables present net sales and business segment operating profit (loss) which is the Company's measure of segment profitability.
Industrial Packaging
| Total Industrial Packaging | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||||||||
| Sales | $ | 3,884 | $ | 4,083 | $ | 7,967 | $ | 4,491 | $ | 4,406 | $ | 8,897 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 304 | $ | 322 | $ | 626 | $ | 560 | $ | 397 | $ | 957 |
Industrial Packaging net sales for the second quarter of 2023 were 5% lower compared with the first quarter of 2023 and 14% lower compared with the second quarter of 2022. Operating profit was 6% lower in the second quarter of 2023 compared with the first quarter of 2023 and 46% lower compared with the second quarter of 2022.
| North American Industrial Packaging | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||||||||
| Sales (a) | $ | 3,550 | $ | 3,724 | $ | 7,274 | $ | 4,126 | $ | 4,025 | $ | 8,151 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 284 | $ | 302 | $ | 586 | $ | 550 | $ | 400 | $ | 950 | |||||||||||||||||||||||
(a)Includes intra-segment sales of $17 million and $48 million for the three months ended June 30, 2023 and 2022, respectively; $32 million and $29 million for the three months ended March 31, 2023 and 2022, respectively; and $49 million and $77 million for the six months ended June 30, 2023 and 2022, respectively.
North American Industrial Packaging average sales margins were lower driven by lower average sales prices for corrugated boxes and containerboard from prior index movement. Sales volumes in the second quarter of 2023 were higher compared to the first quarter of 2023 for corrugated boxes and containerboard despite one less shipping day in the second quarter of 2023. Total maintenance and economic downtime was about 124,000 short tons higher in the second quarter of 2023 compared with the first quarter of 2023, due to higher economic downtime reflecting a continued soft demand environment across all product segments. The increase in economic downtime was partially offset by lower maintenance downtime. Operating costs were
higher driven by increased economic downtime and timing of spending. Planned maintenance downtime costs were $54 million lower in the second quarter of 2023 compared with the first quarter of 2023. Input costs were lower, primarily for energy, freight and wood.
Compared with the second quarter of 2022, sales volumes in the second quarter of 2023 were lower for corrugated boxes and containerboard reflecting the soft demand environment as consumers continue to focus spending on non-discretionary goods and services and retailers and manufacturers pull down inventory levels. Total maintenance and economic downtime was about 597,000 short tons higher in the second quarter of 2023, primarily due to higher economic downtime. Average sales prices for boxes were higher reflecting previous price increases. Containerboard prices were lower driven by prior index movements. Operating costs increased, driven by economic downtime, inflation on goods and services and distribution costs. Planned maintenance downtime costs were slightly higher in the second quarter of 2023 compared with the second quarter of 2022. Input costs were significantly lower driven by recovered fiber and energy costs.
Entering the third quarter of 2023, sales volumes are expected to be higher compared to the second quarter of 2023. There is one less shipping day in the third quarter. Average sales margins are expected to be lower. Operating costs are expected to be lower. Planned maintenance downtime costs are expected to be lower in the third quarter of 2023 compared with the second quarter of 2023. Input costs are expected to be higher driven by recovered fiber and energy.
| EMEA Industrial Packaging | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||||||||
| Sales | $ | 351 | $ | 391 | $ | 742 | $ | 413 | $ | 410 | $ | 823 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 20 | $ | 20 | $ | 40 | $ | 10 | $ | (3) | $ | 7 |
EMEA Industrial Packaging sales volumes for corrugated boxes in the second quarter of 2023 were seasonally lower compared with the first quarter of 2023. Average sales margins for corrugated boxes were stable. Average sales margins for containerboard were lower. Operating costs were higher. There were no planned maintenance outages in either the second quarter of 2023 or the first quarter of 2023. Input costs were lower driven by energy costs.
Compared with the second quarter of 2022, sales volumes in the second quarter of 2023 were lower reflecting soft demand in the Eurozone. Higher average sales margins for corrugated boxes were more than offset by lower margins for containerboard. Operating costs were higher driven by inflation on goods and services. There were no planned maintenance outages in either the second quarter of 2023 or the second quarter of 2022. Input costs were lower primarily for energy and recovered fiber.
Looking ahead to the third quarter of 2023, sales volumes for corrugated boxes are expected to be higher in Europe and seasonally lower in Morocco. Average sales margins are expected to be lower. Operating costs are expected to be higher. There are no planned maintenance outages in the third quarter of 2023. Input costs are expected to be stable.
Global Cellulose Fibers
| Total Global Cellulose Fibers | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||||||||
| Sales | $ | 698 | $ | 811 | $ | 1,509 | $ | 788 | $ | 710 | $ | 1,498 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 30 | $ | (16) | $ | 14 | $ | 25 | $ | (49) | $ | (24) |
Global Cellulose Fibers net sales in the second quarter of 2023 were 14% lower compared with the first quarter of 2023 and 11% lower than in the second quarter of 2022. Operating profit increased in the second quarter of 2023 compared with the first quarter of 2023 and were 20% higher compared with the second quarter of 2022.
Sales volumes in the second quarter of 2023, compared with the first quarter of 2023, were lower driven by customer inventory destocking. Total maintenance and economic downtime was about 12,000 short tons lower in the second quarter of 2023 compared with the first quarter of 2023 driven by less maintenance downtime. Average sales margins were lower as the benefits from contract restructuring were offset by price index movement and an unfavorable product mix. Operating costs were lower driven by distribution and overhead costs and seasonality. Planned maintenance downtime costs in the second quarter of 2023 were $34 million lower compared with the first quarter of 2023. Input costs were lower, primarily for chemicals and energy.
Compared with the second quarter of 2022, sales volumes in the second quarter of 2023 were lower driven by customer inventory destocking. Total maintenance and economic downtime was about 150,000 short tons higher in the second quarter of 2023, due to economic downtime. Average sales margins were higher reflecting higher average sales prices partially offset by an unfavorable product mix. Operating costs were higher driven by economic downtime. Planned maintenance downtime costs
in the second quarter of 2023 were $10 million lower compared with the second quarter of 2022. Input costs were lower primarily for energy and chemicals.
Entering the third quarter of 2023, sales volumes are expected to be higher. Average sales margins are expected to be lower. Planned maintenance downtime costs in the third quarter of 2023 are expected to be lower compared with the second quarter of 2023. Operating costs are expected to be higher. Input costs are expected to be lower.
Equity Earnings, Net of Taxes – Ilim
On January 24, 2023, the Company announced it had reached an agreement to sell its equity investment in Ilim and also received from the same purchasers an indication of interest to purchase its equity investment in Ilim Group. This transaction is discussed further in Note 10 - Equity Method Investments of Item 1. Financial Statements .
In conjunction with the entry into the announced agreement, a determination was made that the book value of the Ilim and Ilim Group investments plus associated cumulative translation losses, exceeded fair value, based upon the agreed upon transaction price for Ilim and the offer price for Ilim Group. As a result, an other than temporary impairment of $33 million, $43 million and $533 million was recorded for the three months ended June 30, 2023, March 31, 2023 and December 31, 2022, respectively, and $76 million for the six months ended June 30, 2023, to write down these investments to fair value. As of June 30, 2023 and December 31, 2022, approximately $478 million and $375 million, respectively, of cumulative translation adjustment loss remained within AOCI with the recognition of this loss recorded as an offset to the investment balance.
All current and historical results of the Ilim joint venture investment are presented as Discontinued Operations, net of taxes in the condensed consolidated statement of operations. The Company recorded equity earnings, net of taxes, of $46 million in the second quarter 2023, compared with earnings of $43 million in the first quarter 2023 and $95 million in the second quarter of 2022.
The Company received cash dividends from the Ilim joint venture of $13 million and $204 million during the first six months of 2023 and 2022, respectively.
Compared with the first quarter of 2023, results in the second quarter of 2023 were relatively flat, reflecting the negative impact of lower average sales prices, offset by higher volume, lower operating costs and the positive impact of a weaker ruble.
Compared with the second quarter of 2022, results in the second quarter of 2023 were significantly lower, reflecting lower sales prices, partially offset by lower interest costs and the positive impact of a weaker ruble.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $873 million for the first six months of 2023, compared with $978 million for the comparable 2022 six-month period.
Investments in capital projects, net of insurance recoveries, totaled $608 million in the first six months of 2023, compared to $371 million in the first six months of 2022. Full-year 2023 capital spending is currently expected to be approximately $1.1 billion to $1.2 billion, or 110% to 120% of depreciation and amortization.
Financing activities for the first six months of 2023 included a $236 million net increase in debt versus a $11 million net decrease in debt during the comparable 2022 six-month period.
See Note 15 - Debt of Item 1. Financial Statements for a discussion of various debt-related actions taken by the Company during the six months ended June 30, 2023.
Amounts related to early debt extinguishments during the three and six months ended June 30, 2023 and 2022 were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| In millions | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Early debt reductions (a) | $ | — | $ | 5 | $ | — | $ | 5 |
(a)Reductions related to notes with interest rates ranging from 4.35% to 4.40% with original maturities from 2047 to 2048 for both the three months and six months ended June 30, 2022.
At June 30, 2023, contractual obligations for future payments of debt maturities (including finance lease liabilities disclosed in Note 9 - Leases and excluding the timber monetization structure disclosed in Note 14 - Variable Interest Entities) by calendar year were as follows: $245 million in 2023; $136 million in 2024; $191 million in 2025; $144 million in 2026; $323 million in 2027; and $4.8 billion thereafter.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At June 30, 2023, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively. In addition, the Company held short-term credit ratings of A2 and P2 by S&P and Moody's, respectively, for borrowings under the Company's commercial paper program.
At June 30, 2023, International Paper’s credit agreements totaled $1.9 billion, which is comprised of the $1.4 billion contractually committed bank credit agreement and up to $500 million under the receivables securitization program. In June 2023, the Company amended and restated its credit agreement to, among other things (i) reduce the size of the contractually committed bank facility from $1.5 billion to $1.4 billion, (ii) extend the maturity date from June 2026 to June 2028, and (iii) replace the LIBOR-based rate with a SOFR-based rate. Management believes that the Company's credit agreements are adequate to cover expected operating cash flow variability during the current economic cycle. The credit agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. At June 30, 2023, the Company had no borrowings outstanding under the $1.4 billion credit agreement or the $500 million receivables securitization program. The Company’s credit agreements are not subject to any restrictive covenants other than the financial covenants as disclosed in Note 15 - Debt, and the borrowings under the receivables securitization program being limited by eligible receivables. The Company was in compliance with all its debt covenants at June 30, 2023, and was well below the thresholds stipulated under the covenants as defined in the credit agreements. Further the financial covenants do not restrict any borrowings under the credit agreements.
In addition to the $1.9 billion capacity under the Company's credit agreements, International Paper has a commercial paper program with a borrowing capacity of $1.0 billion supported by its $1.4 billion credit agreement. Under the terms of the program, individual maturities on borrowings may vary, but not exceed one year from the date of issue. Interest bearing notes may be issued either as fixed or floating rate notes. As of June 30, 2023, the Company had $80 million outstanding under the program with remaining capacity of $920 million, and the remaining credit agreement capacity was $1.3 billion.
During the first quarter of 2023, the Company entered into a variable term loan agreement providing for a $600 million term loan which was fully drawn on the date of such loan agreement and matures in 2028. The $600 million debt was issued following the repayment of $410 million of commercial paper earlier in 2023 and will be used to repay debt maturing later in 2023 and for general corporate purposes.
During the second quarter of 2023, the Company issued approximately $24 million of debt with a variable interest rate and a maturity date of December 1, 2027. The Company had debt reductions of approximately $49 million of variable interest EDB with current maturities. Additionally during the second quarter of 2023, the Company issued an approximately $54 million EDB with a variable rate and a maturity date of May 1, 2028. The proceeds of this were used to repay an approximately $54 million EDB that matured on May 1, 2023. The Company issued an approximately $25 million EDB with a variable rate and a maturity date of June 1, 2030. The proceeds of this were used to repay an approximately $25 million EDB that matured on June 1, 2023.
International Paper expects to be able to meet projected capital expenditures, service existing debt, meet working capital and dividend requirements and make common stock and/or debt repurchases for the next 12 months and for the foreseeable future thereafter with current cash balances and cash from operations, supplemented as required by its existing credit facilities. The Company will continue to rely on debt and capital markets for the majority of any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure planning objectives. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and maintain appropriate levels of liquidity to meet our needs while managing balance sheet debt and interest expense, and we have repurchased, and may continue to repurchase, our common stock (under our existing share repurchase program) and debt (including in open market purchases) to the extent consistent with this capital structure planning, and subject to prevailing market conditions, our liquidity requirements, applicable securities laws requirements, and other factors. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors.
During the first six months of 2023, International Paper used 1.6 million shares of treasury stock for various incentive plans. International Paper also acquired 5.9 million shares of treasury stock, including restricted stock tax withholdings. Repurchases of common stock and payments of restricted stock withholding taxes totaled $218 million, including $197 million related to shares repurchased under the Company's repurchase program. Our current share repurchase program approved by our Board of Directors on October 11, 2022, which does not have an expiration date, has approximately $2.96 billion aggregate amount of shares of common stock remaining authorized for purchase as of June 30, 2023.
During the first six months of 2022, International Paper used approximately 1.5 million shares of treasury stock for various incentive plans. International Paper also acquired 18.1 million shares of treasury stock, including restricted stock tax withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $823 million, including $801 million related to shares repurchased under the Company's repurchase program.
Cash dividend payments related to common stock totaled $322 million and $344 million for the first six months of 2023 and 2022, respectively. Dividends were $0.9250 per share for the first six months of 2023 and 2022.
Our pension plan is currently fully funded and we do not anticipate any required contributions for the next 12 months.
Variable Interest Entities
Information concerning variable interest entities is set forth in Note 15 in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. In connection with the 2006 International Paper installment sale of forestlands, we received $4.8 billion of installment notes. These installment notes were used by variable interest entities as collateral for borrowings from third-party lenders. These variable interest entities were restructured in 2015 when the installment notes and third-party loans were extended. The restructured variable interest entities held installment notes of $4.8 billion and third-party loans of $4.2 billion which both matured in August 2021. We settled the third-party loans at their maturity with the proceeds from the installment 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 was paid in the fourth quarter of 2021. On September 2, 2022, the Company and the Internal Revenue Service agreed to settle the 2015 Financing Entities timber monetization restructuring tax matter. Under this agreement, the Company will fully resolve the matter and pay $252 million in U.S. federal income taxes. As a result, interest will also be charged upon closing of the audit. The amount of interest expense recognized during the first six months of 2023 was $58 million. As of June 30, 2023, $252 million in U.S. federal income taxes and $58 million in interest expense have been paid as a result of the settlement agreement. The Company has now fully satisfied the payment terms of the settlement agreement regarding the 2015 Financing Entities timber monetization restructuring tax matter. The reversal of the Company’s remaining deferred tax liability associated with the 2015 Financing Entities of $604 million was recognized as a one-time tax benefit in the third quarter of 2022.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.
Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include accounting for contingencies, impairment or disposal of long-lived assets, goodwill and other intangible assets, pensions and income taxes.
The Company has included in its Annual Report a discussion of these critical accounting policies, which are important to the portrayal of the Company’s financial condition and results of operations and require management’s judgments. The Company has not made any changes in these critical accounting policies during the first six months of 2023.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q that are not historical in nature may be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “believes,” “estimates” and similar expressions identify forward-looking statements. These statements are not guarantees of future performance and reflect management’s current views and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors which could cause actual
results to differ include but are not limited to: (i) risks with respect to climate change and global, regional, and local weather conditions, as well as risks related to our ability to meet targets and goals with respect to climate change and the emission of GHGs and other environmental, social and governance matters; (ii) the level of our indebtedness and changes in interest rates (including the impact of current elevated interest rate levels); (iii) the impact of global and domestic economic conditions and industry conditions, including with respect to current negative macroeconomic conditions, inflationary pressures and changes in the cost or availability of raw materials, energy sources and transportation sources, supply chain shortages and disruptions, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products, and conditions impacting the credit, capital and financial markets, including possible instability in such markets and/or disruptions to the banking system due to potential or actual bank failures; (iv) domestic and global geopolitical conditions, changes in currency exchange rates, trade protectionist policies, downgrades in our credit ratings, and/or the credit ratings of banks issuing certain letters of credit, issued by recognized credit rating organizations; (v) the amount of our future pension funding obligations, and pension and healthcare costs; (vi) unanticipated expenditures or other adverse developments related to compliance with existing and new environmental, tax, labor and employment, privacy, anti-bribery and anti-corruption, and other U.S. and non-U.S. governmental laws and regulations; (vii) any material disruption at any of our manufacturing facilities or other adverse impact on our operations due to severe weather, natural disasters, climate change or other causes; (viii) the impact of the conflict involving Russia and Ukraine, including in connection with related escalated sanctions imposed by the United States, the European Union, G7 and other countries and possible actions by the Russian government, and the impact of such developments on domestic and global economic and geopolitical conditions in general and on us and our Ilim joint venture, which could be materially and adversely affected by such developments, and our inability to predict the full impact of the Russian invasion of Ukraine, current or future sanctions, current or future actions by the Russian government, geopolitical instability and the possibility of broadened military conflict on our Ilim joint venture, on our receipt of dividends from our Ilim joint venture and on our ability to complete the sale of our interest in the Ilim joint venture under the terms of the agreement with our joint venture partners to purchase our interest (and, if we are unable to complete such a sale, on the value of and our ability to sell our interest to another purchaser); (ix) risks inherent in conducting business through joint ventures; (x) our ability to achieve the benefits expected from, and other risks associated with, acquisitions, joint ventures, divestitures, spinoffs and other corporate transactions, (xi) cybersecurity and information technology risks; (xii) loss contingencies and pending, threatened or future litigation, including with respect to environmental related matters; (xiii) our exposure to claims under our agreements with Sylvamo Corporation; (xiv) our failure to realize the anticipated benefits of the spin-off of Sylvamo Corporation and the qualification of such spin-off as a tax-free transaction for U.S. federal income tax purposes; and (xv) our ability to attract and retain qualified personnel, particularly in light of current labor market conditions. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements can be found in our press releases and SEC filings. In addition, other risks and uncertainties not presently known to the Company or that we currently believe to be immaterial could affect the accuracy of any forward-looking statements. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Previous: Item 1. [FINANCIAL STATEMENTS](#ie7f6d240f1a64635881941b71ead2c6616) · Next: Item 3. [QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](#ie7f6d240f1a64635881941b71ead2c66100)