filings.toolsItem 1. [FINANCIAL STATEMENTS](#id7347cf112a94db9986c9e179ce44a9f16)
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Item 1. [FINANCIAL STATEMENTS](#id7347cf112a94db9986c9e179ce44a9f16)
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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net Sales | $ | 4,613 | $ | 5,402 | $ | 14,315 | $ | 16,028 | |||||||||||||||
| Costs and Expenses | |||||||||||||||||||||||
| Cost of products sold | 3,345 | 3,830 | 10,347 | 11,475 | |||||||||||||||||||
| Selling and administrative expenses | 286 | 337 | 1,003 | 978 | |||||||||||||||||||
| Depreciation, amortization and cost of timber harvested | 258 | 261 | 743 | 789 | |||||||||||||||||||
| Distribution expenses | 382 | 471 | 1,180 | 1,337 | |||||||||||||||||||
| Taxes other than payroll and income taxes | 39 | 38 | 115 | 110 | |||||||||||||||||||
| Restructuring and other charges, net | — | 93 | — | 93 | |||||||||||||||||||
| Net (gains) losses on mark to market investments | — | (16) | — | (65) | |||||||||||||||||||
| Interest expense, net | 58 | 123 | 179 | 266 | |||||||||||||||||||
| Non-operating pension expense (income) | 13 | (48) | 40 | (144) | |||||||||||||||||||
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings (Loss) | 232 | 313 | 708 | 1,189 | |||||||||||||||||||
| Income tax provision (benefit) | 39 | (575) | 120 | (384) | |||||||||||||||||||
| Equity earnings (loss), net of taxes | (1) | (1) | (2) | (3) | |||||||||||||||||||
| Earnings (Loss) From Continuing Operations | $ | 192 | $ | 887 | $ | 586 | $ | 1,570 | |||||||||||||||
| Discontinued operations, net of taxes | (27) | 64 | (14) | 252 | |||||||||||||||||||
| Net Earnings (Loss) | $ | 165 | $ | 951 | $ | 572 | $ | 1,822 | |||||||||||||||
| Basic Earnings (Loss) Per Share | |||||||||||||||||||||||
| Earnings (loss) from continuing operations | $ | 0.55 | $ | 2.48 | $ | 1.69 | $ | 4.28 | |||||||||||||||
| Discontinued operations, net of taxes | (0.08) | 0.18 | (0.04) | 0.69 | |||||||||||||||||||
| Net earnings (loss) | $ | 0.47 | $ | 2.66 | $ | 1.65 | $ | 4.97 | |||||||||||||||
| Diluted Earnings (Loss) Per Share | |||||||||||||||||||||||
| Earnings (loss) from continuing operations | $ | 0.55 | $ | 2.46 | $ | 1.68 | $ | 4.24 | |||||||||||||||
| Discontinued operations, net of taxes | (0.08) | 0.18 | (0.04) | 0.68 | |||||||||||||||||||
| Net earnings (loss) | $ | 0.47 | $ | 2.64 | $ | 1.64 | $ | 4.92 | |||||||||||||||
| Average Shares of Common Stock Outstanding – assuming dilution | 348.1 | 360.4 | 349.0 | 370.7 |
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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net Earnings (Loss) | $ | 165 | $ | 951 | $ | 572 | $ | 1,822 | |||||||||||||||
| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||||||||||||||
| Amortization of pension and post-retirement prior service costs and net loss: | |||||||||||||||||||||||
| U.S. plans | 22 | 21 | 66 | 64 | |||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | 438 | (120) | 399 | 14 | |||||||||||||||||||
| Net gains/losses on cash flow hedging derivatives | — | 2 | — | 2 | |||||||||||||||||||
| Total Other Comprehensive Income (Loss), Net of Tax | 460 | (97) | 465 | 80 | |||||||||||||||||||
| Comprehensive Income (Loss) | $ | 625 | $ | 854 | $ | 1,037 | $ | 1,902 |
The accompanying notes are an integral part of these condensed financial statements.
INTERNATIONAL PAPER COMPANY
Condensed Consolidated Balance Sheet
(In millions)
| September 30, 2023 | December 31, 2022 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and temporary investments | $ | 1,149 | $ | 804 | |||||||
| Accounts and notes receivable, net | 3,078 | 3,284 | |||||||||
| Contract assets | 474 | 481 | |||||||||
| Inventories | 1,929 | 1,942 | |||||||||
| Assets held for sale | — | 133 | |||||||||
| Other current assets | 150 | 126 | |||||||||
| Total Current Assets | 6,780 | 6,770 | |||||||||
| Plants, Properties and Equipment, net | 10,433 | 10,431 | |||||||||
| Investments | 184 | 186 | |||||||||
| Long-Term Financial Assets of Variable Interest Entities (Note 15) | 2,308 | 2,294 | |||||||||
| Goodwill | 3,041 | 3,041 | |||||||||
| Overfunded Pension Plan Assets | 324 | 297 | |||||||||
| Right of Use Assets | 459 | 424 | |||||||||
| Deferred Charges and Other Assets | 422 | 497 | |||||||||
| Total Assets | $ | 23,951 | $ | 23,940 | |||||||
| Liabilities and Equity | |||||||||||
| Current Liabilities | |||||||||||
| Notes payable and current maturities of long-term debt | $ | 120 | $ | 763 | |||||||
| Accounts payable | 2,363 | 2,708 | |||||||||
| Accrued payroll and benefits | 370 | 355 | |||||||||
| Other current liabilities | 1,029 | 1,174 | |||||||||
| Total Current Liabilities | 3,882 | 5,000 | |||||||||
| Long-Term Debt | 5,549 | 4,816 | |||||||||
| Long-Term Nonrecourse Financial Liabilities of Variable Interest Entities (Note 15) | 2,112 | 2,106 | |||||||||
| Deferred Income Taxes | 1,708 | 1,732 | |||||||||
| Underfunded Pension Benefit Obligation | 281 | 281 | |||||||||
| Postretirement and Postemployment Benefit Obligation | 134 | 150 | |||||||||
| Long-Term Lease Obligations | 317 | 283 | |||||||||
| Other Liabilities | 1,086 | 1,075 | |||||||||
| Equity | |||||||||||
| Common stock, $1 par value, 2023 – 448.9 shares and 2022 – 448.9 shares | 449 | 449 | |||||||||
| Paid-in capital | 4,705 | 4,725 | |||||||||
| Retained earnings | 9,938 | 9,855 | |||||||||
| Accumulated other comprehensive loss | (1,460) | (1,925) | |||||||||
| 13,632 | 13,104 | ||||||||||
| Less: Common stock held in treasury, at cost, 2023 – 102.9 shares and 2022 – 98.6 shares | 4,750 | 4,607 | |||||||||
| Total Equity | 8,882 | 8,497 | |||||||||
| Total Liabilities and Equity | $ | 23,951 | $ | 23,940 |
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, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities | |||||||||||
| Net earnings (loss) | $ | 572 | $ | 1,822 | |||||||
| Depreciation, amortization and cost of timber harvested | 743 | 789 | |||||||||
| Deferred income tax provision (benefit), net | (47) | (816) | |||||||||
| Restructuring and other charges, net | — | 93 | |||||||||
| Net (gains) losses on mark to market investments | — | (65) | |||||||||
| Net (gains) losses on sales and impairments of equity method investments | 135 | — | |||||||||
| Equity method dividends received | 13 | 204 | |||||||||
| Equity (earnings) losses, net of taxes | (109) | (249) | |||||||||
| Periodic pension (income) expense, net | 70 | (87) | |||||||||
| Other, net | 36 | 126 | |||||||||
| Changes in current assets and liabilities | |||||||||||
| Accounts and notes receivable | 201 | (294) | |||||||||
| Contract assets | 7 | (138) | |||||||||
| Inventories | 62 | (217) | |||||||||
| Accounts payable and accrued liabilities | (332) | 218 | |||||||||
| Interest payable | (5) | 50 | |||||||||
| Other | (5) | (23) | |||||||||
| Cash Provided By (Used For) Operations | 1,341 | 1,413 | |||||||||
| Investment Activities | |||||||||||
| Invested in capital projects, net of insurance recoveries | (836) | (609) | |||||||||
| Proceeds from sales of equity method investments, net of transaction costs | 472 | — | |||||||||
| Proceeds from exchange of equity securities | — | 311 | |||||||||
| Proceeds from sale of fixed assets | 4 | 11 | |||||||||
| Other | 2 | (6) | |||||||||
| Cash Provided By (Used For) Investment Activities | (358) | (293) | |||||||||
| Financing Activities | |||||||||||
| Repurchases of common stock and payments of restricted stock tax withholding | (218) | (1,093) | |||||||||
| Issuance of debt | 772 | 752 | |||||||||
| Reduction of debt | (689) | (954) | |||||||||
| Change in book overdrafts | (26) | — | |||||||||
| Dividends paid | (482) | (509) | |||||||||
| Net debt tender premiums paid | — | (89) | |||||||||
| Other | (1) | (2) | |||||||||
| Cash Provided By (Used For) Financing Activities | (644) | (1,895) | |||||||||
| Effect of Exchange Rate Changes on Cash and Temporary Investments | 6 | (9) | |||||||||
| Change in Cash and Temporary Investments | 345 | (784) | |||||||||
| Cash and Temporary Investments | |||||||||||
| Beginning of period | 804 | 1,295 | |||||||||
| End of period | $ | 1,149 | $ | 511 |
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 consolidated 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. You should read these condensed financial statements 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, 2022 (the "Annual Report"), which have previously been filed with the U.S. Securities and Exchange Commission ("SEC").
These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States that require the use of management’s estimates. Actual results could differ from management’s estimates.
NOTE 2 - RECENT ACCOUNTING DEVELOPMENTS
Recently Adopted Accounting Pronouncements
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, 2024. The Company has applied and will continue to apply this guidance to account for contract modifications due to changes in reference rates as those modifications occur. We do not expect this guidance to have a material impact on our consolidated financial statements and related disclosures.
Liabilities - Supplier Finance Programs
In September 2022, the FASB issued ASU 2022-04, "Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations." This guidance requires a business entity operating as a buyer in a supplier finance agreement to disclose qualitative and quantitative information about its supplier finance programs. This guidance is effective for annual reporting periods beginning after December 15, 2022, and interim periods within those years. The Company adopted the provisions of this guidance in the first quarter of 2023. See Note 9 - Supplemental Financial Information.
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
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||
| In millions | Industrial Packaging | Global Cellulose Fibers | Corporate & Intersegment | Total | ||||||||||||||||||||||
| Primary Geographical Markets (a) | ||||||||||||||||||||||||||
| United States | $ | 3,281 | $ | 646 | $ | 101 | $ | 4,028 | ||||||||||||||||||
| Europe, Middle East & Africa ("EMEA") | 316 | 26 | — | 342 | ||||||||||||||||||||||
| Pacific Rim and Asia | 9 | 53 | — | 62 | ||||||||||||||||||||||
| Americas, other than U.S. | 181 | — | — | 181 | ||||||||||||||||||||||
| Total | $ | 3,787 | $ | 725 | $ | 101 | $ | 4,613 | ||||||||||||||||||
| Operating Segments | ||||||||||||||||||||||||||
| North American Industrial Packaging | $ | 3,491 | $ | — | $ | — | $ | 3,491 | ||||||||||||||||||
| EMEA Industrial Packaging | 316 | — | — | 316 | ||||||||||||||||||||||
| Global Cellulose Fibers | — | 725 | — | 725 | ||||||||||||||||||||||
| Intra-segment Eliminations | (20) | — | — | (20) | ||||||||||||||||||||||
| Corporate & Intersegment Sales | — | — | 101 | 101 | ||||||||||||||||||||||
| Total | $ | 3,787 | $ | 725 | $ | 101 | $ | 4,613 |
(a) Net sales are attributed to countries based on the location of the seller.
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||
| In millions | Industrial Packaging | Global Cellulose Fibers | Corporate & Intersegment | Total | ||||||||||||||||||||||
| Primary Geographical Markets (a) | ||||||||||||||||||||||||||
| United States | $ | 10,041 | $ | 1,992 | $ | 327 | $ | 12,360 | ||||||||||||||||||
| EMEA | 1,058 | 77 | — | 1,135 | ||||||||||||||||||||||
| Pacific Rim and Asia | 24 | 165 | — | 189 | ||||||||||||||||||||||
| Americas, other than U.S. | 631 | — | — | 631 | ||||||||||||||||||||||
| Total | $ | 11,754 | $ | 2,234 | $ | 327 | $ | 14,315 | ||||||||||||||||||
| Operating Segments | ||||||||||||||||||||||||||
| North American Industrial Packaging | $ | 10,765 | $ | — | $ | — | $ | 10,765 | ||||||||||||||||||
| EMEA Industrial Packaging | 1,058 | — | — | 1,058 | ||||||||||||||||||||||
| Global Cellulose Fibers | — | 2,234 | — | 2,234 | ||||||||||||||||||||||
| Intra-segment Eliminations | (69) | — | — | (69) | ||||||||||||||||||||||
| Corporate & Intersegment Sales | — | — | 327 | 327 | ||||||||||||||||||||||
| Total | $ | 11,754 | $ | 2,234 | $ | 327 | $ | 14,315 |
(a) Net sales are attributed to countries based on the location of the seller.
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| In millions | Industrial Packaging | Global Cellulose Fibers | Corporate & Intersegment | Total | ||||||||||||||||||||||
| Primary Geographical Markets (a) | ||||||||||||||||||||||||||
| United States | $ | 3,816 | $ | 846 | $ | 129 | $ | 4,791 | ||||||||||||||||||
| EMEA | 355 | 29 | — | 384 | ||||||||||||||||||||||
| Pacific Rim and Asia | 12 | 12 | 1 | 25 | ||||||||||||||||||||||
| Americas, other than U.S. | 202 | — | — | 202 | ||||||||||||||||||||||
| Total | $ | 4,385 | $ | 887 | $ | 130 | $ | 5,402 | ||||||||||||||||||
| Operating Segments | ||||||||||||||||||||||||||
| North American Industrial Packaging | $ | 4,055 | $ | — | $ | — | $ | 4,055 | ||||||||||||||||||
| EMEA Industrial Packaging | 355 | — | — | 355 | ||||||||||||||||||||||
| Global Cellulose Fibers | — | 887 | — | 887 | ||||||||||||||||||||||
| Intra-segment Eliminations | (25) | — | — | (25) | ||||||||||||||||||||||
| Corporate & Intersegment Sales | — | — | 130 | 130 | ||||||||||||||||||||||
| Total | $ | 4,385 | $ | 887 | $ | 130 | $ | 5,402 |
(a) Net sales are attributed to countries based on the location of the seller.
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| In millions | Industrial Packaging | Global Cellulose Fibers | Corporate & Intersegment | Total | ||||||||||||||||||||||
| Primary Geographical Markets (a) | ||||||||||||||||||||||||||
| United States | $ | 11,419 | $ | 2,260 | $ | 358 | $ | 14,037 | ||||||||||||||||||
| EMEA | 1,178 | 84 | — | 1,262 | ||||||||||||||||||||||
| Pacific Rim and Asia | 33 | 41 | 3 | 77 | ||||||||||||||||||||||
| Americas, other than U.S. | 652 | — | — | 652 | ||||||||||||||||||||||
| Total | $ | 13,282 | $ | 2,385 | $ | 361 | $ | 16,028 | ||||||||||||||||||
| Operating Segments | ||||||||||||||||||||||||||
| North American Industrial Packaging | $ | 12,206 | $ | — | $ | — | $ | 12,206 | ||||||||||||||||||
| EMEA Industrial Packaging | 1,178 | — | — | 1,178 | ||||||||||||||||||||||
| Global Cellulose Fibers | — | 2,385 | — | 2,385 | ||||||||||||||||||||||
| Intra-segment Eliminations | (102) | — | — | (102) | ||||||||||||||||||||||
| Corporate & Intersegment Sales | — | — | 361 | 361 | ||||||||||||||||||||||
| Total | $ | 13,282 | $ | 2,385 | $ | 361 | $ | 16,028 |
(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 $15 million and $38 million are included in Other current liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2023 and December 31, 2022, respectively. The Company also recorded a contract liability of $115 million related to a previous acquisition. The balance of this contract liability was $94 million and $99 million at September 30, 2023 and December 31, 2022, respectively, and is recorded in Other current liabilities and Other Liabilities in the accompanying condensed consolidated balance sheet.
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 and nine months ended September 30, 2023 and 2022 is provided below:
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| 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 Equity | |||||||||||||||||||||||||||||
| Balance, July 1 | $ | 449 | $ | 4,688 | $ | 9,938 | $ | (1,920) | $ | 4,751 | $ | 8,404 | |||||||||||||||||||||||
| Issuance of stock for various plans, net | — | 17 | — | — | (1) | 18 | |||||||||||||||||||||||||||||
| Repurchase of stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Common stock dividends ($0.4625 per share) | — | — | (165) | — | — | (165) | |||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | 165 | 460 | — | 625 | |||||||||||||||||||||||||||||
| Ending Balance, September 30 | $ | 449 | $ | 4,705 | $ | 9,938 | $ | (1,460) | $ | 4,750 | $ | 8,882 |
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| 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 Equity | |||||||||||||||||||||||||||||
| Balance, January 1 | $ | 449 | $ | 4,725 | $ | 9,855 | $ | (1,925) | $ | 4,607 | $ | 8,497 | |||||||||||||||||||||||
| Issuance of stock for various plans, net | — | (20) | — | — | (76) | 56 | |||||||||||||||||||||||||||||
| Repurchase of stock | — | — | — | — | 219 | (219) | |||||||||||||||||||||||||||||
| Common stock dividends ($1.3875 per share) | — | — | (489) | — | — | (489) | |||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | 572 | 465 | — | 1,037 | |||||||||||||||||||||||||||||
| Ending Balance, September 30 | $ | 449 | $ | 4,705 | $ | 9,938 | $ | (1,460) | $ | 4,750 | $ | 8,882 |
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||
| 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 Equity | |||||||||||||||||||||||||||||
| Balance, July 1 | $ | 449 | $ | 4,675 | $ | 9,557 | $ | (1,489) | $ | 4,149 | $ | 9,043 | |||||||||||||||||||||||
| Issuance of stock for various plans, net | — | 27 | — | — | (2) | 29 | |||||||||||||||||||||||||||||
| Repurchase of stock | — | — | — | — | 270 | (270) | |||||||||||||||||||||||||||||
| Common stock dividends ($0.4625 per share) | — | — | (168) | — | — | (168) | |||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | 951 | (97) | — | 854 | |||||||||||||||||||||||||||||
| Ending Balance, September 30 | $ | 449 | $ | 4,702 | $ | 10,340 | $ | (1,586) | $ | 4,417 | $ | 9,488 |
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||
| 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 Equity | |||||||||||||||||||||||||||||
| Balance, January 1 | $ | 449 | $ | 4,668 | $ | 9,029 | $ | (1,666) | $ | 3,398 | $ | 9,082 | |||||||||||||||||||||||
| Issuance of stock for various plans, net | — | 34 | — | — | (74) | 108 | |||||||||||||||||||||||||||||
| Repurchase of stock | — | — | — | — | 1,093 | (1,093) | |||||||||||||||||||||||||||||
| Common stock dividends ($1.3875 per share) | — | — | (511) | — | — | (511) | |||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | 1,822 | 80 | — | 1,902 | |||||||||||||||||||||||||||||
| Ending Balance, September 30 | $ | 449 | $ | 4,702 | $ | 10,340 | $ | (1,586) | $ | 4,417 | $ | 9,488 |
NOTE 5 - OTHER COMPREHENSIVE INCOME
The following table presents changes in Accumulated Other Comprehensive Income (Loss) ("AOCI"), net of tax, for the three months and nine months ended September 30, 2023 and 2022:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Defined Benefit Pension and Postretirement Adjustments | |||||||||||||||||||||||
| Balance at beginning of period | $ | (1,151) | $ | (919) | $ | (1,195) | $ | (962) | |||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 22 | 21 | 66 | 64 | |||||||||||||||||||
| Balance at end of period | (1,129) | (898) | (1,129) | (898) | |||||||||||||||||||
| Change in Cumulative Foreign Currency Translation Adjustments | |||||||||||||||||||||||
| Balance at beginning of period | (761) | (560) | (722) | (694) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (79) | (120) | (118) | 14 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 517 | — | 517 | — | |||||||||||||||||||
| Balance at end of period | (323) | (680) | (323) | (680) | |||||||||||||||||||
| Net Gains and Losses on Cash Flow Hedging Derivatives | |||||||||||||||||||||||
| Balance at beginning of period | (8) | (10) | (8) | (10) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | 2 | — | 2 | |||||||||||||||||||
| Balance at end of period | (8) | (8) | (8) | (8) | |||||||||||||||||||
| Total Accumulated Other Comprehensive Income (Loss) at End of Period | $ | (1,460) | $ | (1,586) | $ | (1,460) | $ | (1,586) |
The following table presents details of the reclassifications out of AOCI for the three months and nine months ended September 30, 2023 and 2022:
| 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, | ||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||
| Defined benefit pension and postretirement items: | |||||||||||||||||||||||||||||
| Prior-service costs | $ | (6) | $ | (6) | $ | (18) | $ | (17) | (a) | Non-operating pension expense (income) | |||||||||||||||||||
| Actuarial gains (losses) | (23) | (22) | (69) | (68) | (a) | Non-operating pension expense (income) | |||||||||||||||||||||||
| Total pre-tax amount | (29) | (28) | (87) | (85) | |||||||||||||||||||||||||
| Tax (expense) benefit | 7 | 7 | 21 | 21 | |||||||||||||||||||||||||
| Net of tax | (22) | (21) | (66) | (64) | |||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustments: | |||||||||||||||||||||||||||||
| Business acquisitions/divestitures | (517) | — | (517) | — | (b) | Discontinued operations, net of taxes | |||||||||||||||||||||||
| Tax (expense) benefit | — | — | — | — | |||||||||||||||||||||||||
| Net of tax | (517) | — | (517) | — | |||||||||||||||||||||||||
| Net gains and losses on cash flow hedging derivatives: | |||||||||||||||||||||||||||||
| Interest rate contracts | — | (2) | — | (2) | Cost of products sold | ||||||||||||||||||||||||
| Tax (expense)/benefit | — | — | — | — | |||||||||||||||||||||||||
| Net of tax | — | (2) | — | (2) | |||||||||||||||||||||||||
| Total reclassifications for the period | $ | (539) | $ | (23) | $ | (583) | $ | (66) |
(a)These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 17 for additional details).
(b)See Note 11 - Equity Method Investments for additional details.
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 from continuing operations and diluted earnings (loss) per share from continuing operations is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions, except per share amounts | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Earnings (loss) from continuing operations | $ | 192 | $ | 887 | $ | 586 | $ | 1,570 | |||||||||||||||
| Weighted average common shares outstanding | 346.0 | 357.8 | 347.2 | 366.8 | |||||||||||||||||||
| Effect of dilutive securities | |||||||||||||||||||||||
| Restricted performance share plan | 2.1 | 2.6 | 1.8 | 3.9 | |||||||||||||||||||
| Weighted average common shares outstanding – assuming dilution | 348.1 | 360.4 | 349.0 | 370.7 | |||||||||||||||||||
| Basic earnings (loss) per share from continuing operations | $ | 0.55 | $ | 2.48 | $ | 1.69 | $ | 4.28 | |||||||||||||||
| Diluted earnings (loss) per share from continuing operations | $ | 0.55 | $ | 2.46 | $ | 1.68 | $ | 4.24 |
NOTE 7 - RESTRUCTURING AND OTHER CHARGES, NET
2023: There were no restructuring and other charges recorded during the nine months ended September 30, 2023.
2022: During the three months and nine months ended September 30, 2022, the Company recorded a $93 million pre-tax charge in Corporate related to early debt extinguishment costs.
NOTE 8 - DIVESTITURES AND IMPAIRMENTS
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 ("Sylvamo"). The transaction was implemented through the distribution of shares of Sylvamo to International Paper's shareholders (the "Distribution"). The Company retained 19.9% of the shares of Sylvamo at the time of the separation with the intent to monetize its investment and provide additional proceeds to the Company. As a result of the Distribution, Sylvamo is an independent public company that trades on the New York Stock Exchange under the symbol "SLVM."
In connection with the Distribution, the Company and Sylvamo 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 the Company and Sylvamo of assets, liabilities and obligations attributable to periods prior to, at and after the Distribution and govern certain relationships between the Company and Sylvamo after the Distribution. The Company has various ongoing operational agreements with Sylvamo under which it sells fiber, paper and other products. Related party sales under these agreements were $230 million and $630 million for the three months and nine months ended September 30, 2022, respectively. Following the sale of the Company's ownership interest in Sylvamo during the third quarter 2022, Sylvamo is no longer considered a related party.
In the second quarter 2022, the Company exchanged 4,132,000 shares of Sylvamo common stock owned by the Company in exchange and as repayment for an approximately $144 million term loan obligation which resulted in the reversal of a $31 million deferred tax liability due to the tax-free exchange of Sylvamo common stock. In the third quarter 2022, the Company exchanged the remaining 4,614,358 shares of Sylvamo common stock owned by the Company in exchange for $167 million and as partial repayment of a $210 million term loan obligation. This also resulted in the reversal of a $35 million deferred tax liability due to the tax-free exchange of Sylvamo common stock. As of the end of the third quarter 2022, the Company no longer had an ownership interest in Sylvamo.
NOTE 9 - 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 stated at cost. Temporary investments totaled $1.0 billion and $690 million at September 30, 2023 and December 31, 2022, respectively.
Accounts and Notes Receivable
| In millions | September 30, 2023 | December 31, 2022 | |||||||||
| Accounts and notes receivable, net: | |||||||||||
| Trade (less allowances of $33 in 2023 and $31 in 2022) | $ | 2,865 | $ | 3,064 | |||||||
| Other | 213 | 220 | |||||||||
| Total | $ | 3,078 | $ | 3,284 |
Inventories
| In millions | September 30, 2023 | December 31, 2022 | |||||||||
| Raw materials | $ | 248 | $ | 267 | |||||||
| Finished pulp, paper and packaging | 965 | 1,071 | |||||||||
| Operating supplies | 628 | 516 | |||||||||
| Other | 88 | 88 | |||||||||
| Total | $ | 1,929 | $ | 1,942 |
Plants, Properties and Equipment
Accumulated depreciation was $18.9 billion and $18.4 billion at September 30, 2023 and December 31, 2022, respectively. Depreciation expense was $248 million and $250 million for the three months ended September 30, 2023 and 2022, respectively, and $715 million and $756 million for the nine months ended September 30, 2023 and 2022, respectively.
Non-cash additions to plants, properties and equipment included within accounts payable were $79 million and $185 million at September 30, 2023 and December 31, 2022, respectively.
There were no insurance recoveries included within capital spending for the nine months ended September 30, 2023. Insurance recoveries included in capital spending were $26 million for the nine months ended September 30, 2022.
Accounts Payable
Under a supplier finance program, International Paper agrees to pay a bank the stated amount of confirmed invoices from its designated suppliers on the original maturity dates of the invoices. International Paper or the bank may terminate the agreement upon at least 90 days’ notice. The supplier invoices that have been confirmed as valid under the program require payment in full on the due date with no terms exceeding 180 days. The accounts payable balance included $115 million and $122 million of supplier finance program liabilities as of September 30, 2023 and December 31, 2022, respectively.
Interest
Interest payments made during the nine months ended September 30, 2023 and 2022 were $333 million and $273 million, respectively.
Amounts related to interest were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Interest expense | $ | 105 | $ | 150 | $ | 311 | $ | 310 | |||||||||||||||
| Interest income | 47 | 27 | 132 | 44 | |||||||||||||||||||
| Capitalized interest costs | 5 | 5 | 16 | 13 |
Asset Retirement Obligations
The Company recorded liabilities in Other Liabilities in the accompanying condensed consolidated balance sheet of $103 million and $105 million related to asset retirement obligations at September 30, 2023 and December 31, 2022, 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 30 years. Total lease costs were $76 million and $68 million for the three months ended September 30, 2023 and 2022, respectively, and $224 million and $192 million for the nine months ended September 30, 2023 and 2022, respectively.
Supplemental Balance Sheet Information Related to Leases
| In millions | Classification | September 30, 2023 | December 31, 2022 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating lease assets | Right-of-use assets | $ | 459 | $ | 424 | |||||||||||||||
| Finance lease assets | Plants, properties and equipment, net (a) | 47 | 49 | |||||||||||||||||
| Total leased assets | $ | 506 | $ | 473 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current | ||||||||||||||||||||
| Operating | Other current liabilities | $ | 151 | $ | 147 | |||||||||||||||
| Finance | Notes payable and current maturities of long-term debt | 11 | 10 | |||||||||||||||||
| Noncurrent | ||||||||||||||||||||
| Operating | Long-term lease obligations | 317 | 283 | |||||||||||||||||
| Finance | Long-term debt | 45 | 49 | |||||||||||||||||
| Total lease liabilities | $ | 524 | $ | 489 |
(a)Finance leases are recorded net of accumulated amortization of $66 million and $59 million as of September 30, 2023 and December 31, 2022, respectively.
NOTE 11 - EQUITY METHOD INVESTMENTS
The Company accounts for the following investment under the equity method of accounting.
Ilim S.A.
On September 18, 2023, pursuant to a previously announced agreement, the Company completed the sale of its 50% equity interest in Ilim S.A. ("Ilim"), which was a joint venture that operated a pulp and paper business in Russia and has subsidiaries including Ilim Group, to its joint venture partners for $484 million in cash. The Company also completed the sale of all of its Ilim Group shares (constituting a 2.39% stake) for $24 million, and divested other non-material residual interests associated with Ilim, to its joint venture partners. Following the completed sales, the Company no longer has an interest in Ilim or any of its subsidiaries. Additionally, we incurred transaction fees of $36 million in connection with the sale of our investment. The Company reclassified currency translation adjustments in AOCI of $517 million to the investment at the completion of the transaction.
As of December 31, 2022 and for all subsequent periods, the Company concluded that the held for sale balance sheet classification criteria had been met and classified the investment as Assets held for sale in the condensed consolidated balance
sheet. Also all current and historical results of the Ilim investment have been presented as Discontinued Operations, net of taxes in the condensed consolidated statement of operations.
Also in conjunction with the previously announced agreement entered into in January 2023 to sell the Company's ownership interests in Ilim and related offer for the Company's shares in Ilim Group, a determination was made that in the fourth quarter of 2022 and for all subsequent periods through the third quarter 2023, the combined book value of our investments, plus associated cumulative translation losses, exceeded fair value based upon the agreed upon transaction price of $484 million for Ilim and the offer price of $24 million for Ilim Group and the company recorded impairment charges as presented in the table below.
The following summarizes the items comprising Equity Earnings, Impairment Charges, Tax Expense (Benefit), Discontinued Operations and Dividends related to the sale of our equity interest in Ilim:
| In millions | Equity Earnings | Impairment Charges | Tax Expense (Benefit) | Discontinued Operations, net of tax (a) | Dividends | ||||||||||||||||||||||||
| 2022 First Quarter | $ | 93 | $ | — | $ | — | $ | 93 | $ | 204 | |||||||||||||||||||
| 2022 Second Quarter | 95 | — | — | 95 | — | ||||||||||||||||||||||||
| 2022 Third Quarter | 64 | — | — | 64 | — | ||||||||||||||||||||||||
| 2022 Fourth Quarter | 44 | 533 | — | (489) | — | ||||||||||||||||||||||||
| 2023 First Quarter | 43 | 43 | — | — | — | ||||||||||||||||||||||||
| 2023 Second Quarter | 46 | 33 | — | 13 | 13 | ||||||||||||||||||||||||
| 2023 Third Quarter | 23 | 59 | (9) | (27) | — | ||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | 252 | — | — | 252 | 204 | ||||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | 112 | 135 | (9) | (14) | 13 |
(a) Discontinued operations, net of tax is Equity Earnings less Impairment Charges and Tax Expense (Benefit)
Summarized financial information for Ilim through the date of sale is presented in the following table:
Balance Sheet
| In millions | September 18, 2023 | December 31, 2022 | |||||||||
| Current assets | $ | 659 | $ | 766 | |||||||
| Noncurrent assets | 2,745 | 3,663 | |||||||||
| Current liabilities | 1,362 | 1,275 | |||||||||
| Noncurrent liabilities | 1,064 | 2,040 | |||||||||
| Noncontrolling interests | 36 | 40 |
Income Statement (a)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net sales | $ | 420 | $ | 834 | $ | 1,623 | $ | 2,356 | |||||||||||||||
| Gross profit | 176 | 391 | 706 | 1,234 | |||||||||||||||||||
| Income (loss) from continuing operations | 45 | 129 | 221 | 501 | |||||||||||||||||||
| Net income (loss) | 43 | 124 | 211 | 486 |
(a) 2023 amounts reflect results through September 18, 2023.
The Company's remaining equity method investments are not material.
NOTE 12 - 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, 2023:
| In millions | Industrial Packaging | Global Cellulose Fibers | Total | ||||||||||||||
| Balance as of January 1, 2023 | |||||||||||||||||
| Goodwill | $ | 3,413 | $ | 52 | $ | 3,465 | |||||||||||
| Accumulated impairment losses | (372) | (52) | (424) | ||||||||||||||
| 3,041 | — | 3,041 | |||||||||||||||
| Balance as of Sept 30, 2023 | |||||||||||||||||
| Goodwill | 3,413 | 52 | 3,465 | ||||||||||||||
| Accumulated impairment losses | (372) | (52) | (424) | ||||||||||||||
| Total | $ | 3,041 | $ | — | $ | 3,041 |
Other Intangibles
Identifiable intangible assets are recorded in Deferred Charges and Other Assets in the accompanying condensed consolidated balance sheet and comprised the following:
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| In millions | Gross Carrying Amount | Accumulated Amortization | Net Intangible Assets | Gross Carrying Amount | Accumulated Amortization | Net Intangible Assets | |||||||||||||||||||||||||||||
| Customer relationships and lists | $ | 492 | $ | 327 | $ | 165 | $ | 490 | $ | 303 | $ | 187 | |||||||||||||||||||||||
| Tradenames, patents and trademarks, and developed technology | 170 | 152 | 18 | 170 | 146 | 24 | |||||||||||||||||||||||||||||
| Land and water rights | 8 | 2 | 6 | 8 | 2 | 6 | |||||||||||||||||||||||||||||
| Other | 21 | 18 | 3 | 23 | 20 | 3 | |||||||||||||||||||||||||||||
| Total | $ | 691 | $ | 499 | $ | 192 | $ | 691 | $ | 471 | $ | 220 |
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 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Amortization expense related to intangible assets | $ | 9 | $ | 11 | $ | 27 | $ | 33 |
International Paper made income tax payments, net of refunds, of $295 million and $287 million for the nine months ended September 30, 2023 and 2022, 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 $12 million during the next 12 months.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Guarantees
In connection with sales of businesses, property, equipment, forestlands and other assets, International Paper commonly makes representations and warranties relating to such businesses or assets, and may agree to indemnify buyers with respect to tax and environmental liabilities, breaches of representations and warranties, and other matters. Where liabilities for such matters are
determined to be probable and reasonably estimable, accrued liabilities are recorded at the time of sale as a cost of the transaction.
Brazil Goodwill Tax Matter: The Brazilian Federal Revenue Service has challenged the deductibility of goodwill amortization generated in a 2007 acquisition by Sylvamo do Brasil Ltda. ("Sylvamo Brazil"), which was a wholly-owned subsidiary of the Company, until the October 1, 2021 spin-off of the Printing Papers business, after which it became a subsidiary of Sylvamo. Sylvamo Brazil received assessments for the tax years 2007-2015 totaling approximately $120 million in tax, and $418 million in interest, penalties, and fees as of September 30, 2023 (adjusted for variation in currency exchange rates). After an initial favorable ruling challenging the basis for these assessments, Sylvamo Brazil received subsequent unfavorable decisions from the Brazilian Administrative Council of Tax Appeals. Sylvamo Brazil has appealed these decisions and intends to appeal any future unfavorable administrative judgments to the Brazilian federal courts; however, this tax litigation matter may take many years to resolve. Sylvamo Brazil and International Paper believe the transaction underlying these assessments was appropriately evaluated, and that Sylvamo Brazil's tax position would be sustained, based on Brazilian tax law.
This matter pertains to a business that was conveyed to Sylvamo 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, 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. Under the terms of the agreement, decisions concerning the conduct of the litigation related to this matter, including strategy, settlement, pursuit and abandonment, will be made by the Company. Sylvamo thus has no control over any decision related to this ongoing litigation. The Company intends to vigorously defend this historic tax position against the current assessments and any similar assessments that may be issued for tax years subsequent to 2015. The Brazilian government may enact a tax amnesty program that would allow Sylvamo Brazil to resolve this dispute for less than the assessed amount. As of October 1, 2021, in connection with the recording of the distribution of assets and liabilities resulting from the spin-off transaction, the Company established a liability representing the initial fair value of the contingent liability under the tax matters agreement. The contingent liability was determined in accordance with ASC 460 "Guarantees" based on the probability weighting of various possible outcomes. The initial fair value estimate and recorded liability as of December 31, 2022 was $48 million and remains this amount at September 30, 2023. This liability will not be increased in subsequent periods unless facts and circumstances change such that an amount greater than the initial recognized liability becomes probable and estimable.
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 and 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. International Paper has estimated the probable liability associated with these environmental remediation matters, including those described herein, to be approximately $261 million and $243 million in the aggregate as of September 30, 2023 and December 31, 2022, respectively. Other than as described below, completion of required environmental RAs 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 U.S. 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 soil remedy referenced above.
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 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 ("RD") component of the landfill remedy for the Allied Paper Mill, which is also known as Operable Unit 1. A Record of Decision ("ROD") 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 RD. In the summer 2021, remedial action ("RA") activities were initiated by the EPA. In October 2022, the Company received a unilateral administrative order to perform the RA. As a result, the Company increased its reserve by $27 million in the fourth quarter of 2022.
The total reserve for the Kalamazoo River superfund site was $33 million and $37 million as of September 30, 2023 and December 31, 2022, respectively.
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 Corporation 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 $136 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 (collectively, "GP") 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. In April 2022, the appellate court reversed the Judgment of the Court, finding that the suit against the Company was time-barred by the applicable statute of limitations. In May 2022, GP filed a petition for remaining with the Sixth Circuit Court of Appeals. The Sixth Circuit issued an order denying GP's petition in July 2022. In November 2022, GP filed a petition for writ of certiorari with the U.S. Supreme Court. On October 2, 2023, the U.S. Supreme Court denied GP's writ petition, thus rendering final the Sixth Circuit's decision that GP's suit against the Company was time-barred.
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 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 RD.
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 RD for the northern impoundment. That RD 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, 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 submitted the Final Design Package for the southern impoundment to the EPA, and the EPA approved this plan in May 2021. The EPA issued a Unilateral Administrative Order for RA of the southern impoundment in August 2021. An addendum to the Final 100% RD (Amended April 2021) was submitted to the EPA for the southern impoundment in June 2022. This addendum incorporated additional data collected to date which indicated that additional waste material removal will be required, lengthening the time to complete the RA.
With respect to the northern impoundment, the respondents submitted the final component of the 90% RD to the EPA in November 2022. Upon submittal of the final component, an updated engineering estimate was developed and the Company increased the reserved amount by approximately $21 million, which represents the Company's 50% share of our estimate of the low end of the range of probable remediation costs. While several key technical issues have been resolved, respondents 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. The total reserve for the southern and northern impoundment was $85 million and $95 million as of September 30, 2023 and December 31, 2022, respectively.
Versailles Pond: The Company is a responsible party for the investigation and remediation of Versailles Pond, a 57-acre dammed river impoundment that historically received paperboard mill wastewater in Sprague, Connecticut. A comprehensive investigation has determined that Versailles Pond is contaminated with PCBs, mercury, and metals. A preliminary remediation plan was prepared in third quarter 2023. The Company increased the reserve amount for the site by approximately $29 million during the third quarter of 2023 to account for the estimated cost to implement the remediation plan. Negotiations with state and federal governmental officials are ongoing regarding the scope and timing of the remediation.
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. The Company's total recorded liability with respect to pending and future asbestos-related claims was $102 million, net of estimated insurance recoveries and $105 million, net of estimated insurance recoveries as of September 30, 2023 and December 31, 2022, respectively. While it is reasonably possible that the Company may incur losses in excess of its recorded liability with respect to asbestos-related matters, we are unable to estimate any loss or range of loss in excess of such liability, and 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. In August 2019, the ICA issued its decision and assessed IP Italy a fine of €29 million (approximately $31 million at the then-current exchange rates) which was recorded in the third quarter of 2019. We appealed the ICA decision and our appeal was denied in May 2021. We further appealed the decision to the Italian Council of State ("Council of State"), and in March 2023 the Council of State largely upheld the ICA’s findings, but referred the calculation of IP Italy’s fine back to the ICA, finding that it was disproportionately high based on the conduct found. We have further appealed the Council of State decision to uphold the ICA’s findings. The Company and other producers also have been named in lawsuits, and we have received other claims, by a number of customers in Italy for damages associated with the alleged anticompetitive conduct. We do not believe material losses arising from such private lawsuits and claims are probable.
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. 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 15 - VARIABLE INTEREST ENTITIES
Variable Interest Entities
As of September 30, 2023, 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 1 in the Company’s Annual Report.
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 condensed consolidated 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 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Revenue (a) | $ | 36 | $ | 23 | $ | 105 | $ | 36 | |||||||||||||||
| Expense (b) | 34 | 18 | 100 | 34 | |||||||||||||||||||
| Cash receipts (c) | 33 | 8 | 88 | 11 | |||||||||||||||||||
| Cash payments (d) | 32 | 11 | 89 | 21 |
(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, 2023 and 2022, 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, 2023 and 2022, 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.
On September 2, 2022, the Company and the Internal Revenue Service agreed to settle the previously disclosed timber monetization restructuring tax matter involving wholly-owned, special purpose entities (the "2015 Financing Entities"). Under this agreement, the Company was required to fully resolve the matter and pay $252 million in U.S. federal income taxes. As a result, interest was charged upon closing of the audit. The amount of interest expense recognized in 2022 was $58 million. As of September 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 paid $163 million in U.S. federal income taxes and $30 million in interest during the first quarter of 2023 and fully satisfied the payment terms of the settlement agreement regarding the 2015 Financing Entities timber monetization restructuring tax matter during the second quarter of 2023. 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.
The borrowing capacity of the Company's commercial paper program is $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 September 30, 2023, the Company had no borrowings outstanding under the program.
At September 30, 2023, International Paper’s credit facilities totaled $1.9 billion. The credit facilities generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. The credit facilities previously included a $1.5 billion contractually committed bank facility with a maturity date of June 2026. 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. The liquidity facilities also included up to $500 million of uncommitted financings based on eligible receivables balances under a receivables securitization program that expires in June 2025. At September 30, 2023, the Company had no borrowings outstanding under the receivables securitization program.
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. Additionally, during the first quarter of 2023, the Company issued an approximately $72 million environmental development bond ("EDB") with an interest rate of 4.00% and a maturity date of April 1, 2026. The proceeds from this issuance were used to repay an approximately $72 million outstanding EDB that matured on April 1, 2023.
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 EDBs 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.
During the third quarter of 2023, the Company repaid an approximately $70 million EDB with an interest rate of 2.90% that matured on September 1, 2023. Additionally, the Company repaid $80 million of commercial paper that was outstanding at June 30, 2023.
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, 2023, we were in compliance with our debt covenants.
At September 30, 2023, the fair value of International Paper’s $5.7 billion of debt was approximately $5.1 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 1 in the Company’s Annual Report.
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 hourly and union employees who work at a participating business unit. The Pension Plan was frozen as of January 1, 2019 for salaried participants.
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).
Net periodic pension expense (income) 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 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Service cost | $ | 12 | $ | 21 | $ | 36 | $ | 64 | |||||||||||||||
| Interest cost | 115 | 85 | 345 | 254 | |||||||||||||||||||
| Expected return on plan assets | (133) | (162) | (398) | (487) | |||||||||||||||||||
| Actuarial loss | 23 | 21 | 69 | 65 | |||||||||||||||||||
| Amortization of prior service cost | 6 | 6 | 18 | 17 | |||||||||||||||||||
| Net periodic pension expense (income) | $ | 23 | $ | (29) | $ | 70 | $ | (87) |
The components of net periodic pension expense (income) other than the Service cost component are included in Non-operating pension expense (income) in the Condensed 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 2023 or 2022. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $16 million for the nine months ended September 30, 2023.
NOTE 18 - STOCK-BASED COMPENSATION
The Company 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, 2023, 5.6 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 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Total stock-based compensation expense (selling and administrative) | $ | 7 | $ | 26 | $ | 33 | $ | 98 | |||||||||||||||
| Income tax benefits related to stock-based compensation | — | — | 11 | 13 |
At September 30, 2023, $75 million, net of estimated forfeitures, of compensation cost related to time-based and performance-based 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 1.5 years.
Long-Term Incentive Plan
During the first nine months of 2023, the Company granted 1.6 million performance units at an average grant date fair value of $37.83 and 1.3 million time-based units at an average grant date fair value of $34.63.
NOTE 19 - BUSINESS SEGMENT INFORMATION
International Paper’s business segments, Industrial Packaging and Global Cellulose Fibers, are consistent with the internal structure used to manage these businesses. Both segments are differentiated on a common product, common customer basis consistent with the business segmentation generally used in the Forest Products industry.
Business segment operating profits (losses) 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 (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.
Net sales by business segment for the three months and nine months ended September 30, 2023 and 2022 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Industrial Packaging | $ | 3,787 | $ | 4,385 | $ | 11,754 | $ | 13,282 | |||||||||||||||
| Global Cellulose Fibers | 725 | 887 | 2,234 | 2,385 | |||||||||||||||||||
| Corporate and Intersegment Sales | 101 | 130 | 327 | 361 | |||||||||||||||||||
| Net Sales | $ | 4,613 | $ | 5,402 | $ | 14,315 | $ | 16,028 |
Operating profit (loss) by business segment for the three months and nine months ended September 30, 2023 and 2022 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| In millions | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Industrial Packaging | $ | 325 | $ | 369 | $ | 951 | $ | 1,326 | |||||||||||||||
| Global Cellulose Fibers | 27 | 95 | 41 | 71 | |||||||||||||||||||
| Business Segment Operating Profit (Loss) | $ | 352 | 464 | $ | 992 | $ | 1,397 | ||||||||||||||||
| Earnings (loss) from continuing operations before income taxes and equity earnings | $ | 232 | $ | 313 | $ | 708 | $ | 1,189 | |||||||||||||||
| Interest expense, net | 58 | 123 | 179 | 266 | |||||||||||||||||||
| Adjustment for less than wholly owned subsidiaries | — | (1) | — | (2) | |||||||||||||||||||
| Corporate expenses, net | 20 | 15 | 36 | 54 | |||||||||||||||||||
| Corporate net special items | 29 | 62 | 29 | 34 | |||||||||||||||||||
| Non-operating pension expense (income) | 13 | (48) | 40 | (144) | |||||||||||||||||||
| Business Segment Operating Profit (Loss) | $ | 352 | $ | 464 | $ | 992 | $ | 1,397 |
On October 18, 2023, the Company announced that it plans to permanently close its containerboard mill in Orange, Texas by the end of the year. The Company expects the closure to result in pre-tax noncash asset write-off and accelerated depreciation charges of approximately $395 million and pre-tax cash severance and other shutdown charges of approximately $55 million. The Company expects to record these charges in the fourth quarter of 2023.
The Company also announced plans to permanently cease production on two of its pulp machines at its Riegelwood, North Carolina and Pensacola, Florida mills by the end of the year. The Company estimates that the machine shutdowns will result in pre-tax noncash asset write-off and accelerated depreciation charges of approximately $200 million and pre-tax cash severance and other shutdown charges of approximately $14 million. The Company expects to record these charges in the fourth quarter of 2023.
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