filings.toolsItem 2. [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](#id7347cf112a94db9986c9e179ce44a9f88)
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Item 2. [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](#id7347cf112a94db9986c9e179ce44a9f88)
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 $165 million ($0.47 per diluted share) in the third quarter of 2023, compared with $235 million ($0.68 per diluted share) in the second quarter of 2023 and $951 million ($2.64 per diluted share) in the third quarter of 2022. The Company generated Adjusted operating earnings (a non-GAAP measure defined below) of $224 million ($0.64 per diluted share) in the third quarter of 2023, compared with $204 million ($0.59 per diluted share) in the second quarter of 2023 and $300 million ($0.83 per diluted share) in the third quarter of 2022.
International Paper executed well in the third quarter 2023 with a focus on taking care of our customers and optimizing our cost structure to better align with the current demand environment. We are encouraged to see that demand continued to modestly recover across our portfolio in the third quarter 2023, and we expect this trend to continue going forward. Operating margins have been under pressure from macroeconomic headwinds impacting sales prices, volumes, and operating costs. In light of this, we are taking additional actions to strengthen our businesses and position them to deliver profitable growth. We are focused on reducing marginal costs throughout our supply chain. Our Building a Better IP initiatives continue to deliver earnings improvement and we exceeded the full year 2023 target in this quarter. In October 2023, we announced strategic actions in our Industrial Packaging and Global Cellulose Fibers businesses to further optimize our mill system and reduce fixed costs. During the third quarter 2023, we completed the sale of our ownership stake in Ilim and Ilim Group for $508 million. International Paper no longer has investments in Russia following completion of this sale.
Comparing our performance in the third quarter 2023 to the second quarter 2023, price and mix was lower in our North American Industrial Packaging business due to index movements, lower export prices and higher export mix as demand improved. Price in our Global Cellulose Fibers business was lower as a result of index movements, partially offset by the benefits from a higher fluff pulp mix. Volume in our North American Industrial Packaging business was stable sequentially, despite one less shipping day. Containerboard shipments were higher across our export and domestic open market channels due to improved demand. Our daily U.S. box shipments were slightly higher sequentially, but down 4% year over year as consumer demand remains constrained. Fluff pulp volumes in our Global Cellulose Fibers business were higher in the third quarter 2023 as demand for fluff pulp improved. This was partially offset by lower sales of commodity grades. We continue to focus on optimizing our business by strategically aligning with the most attractive customers and segments. Operations and costs in our North American Industrial Packaging business benefited by lower economic downtime across the mill system as demand improved. Operations and costs were lower in our Global Cellulose Fibers business benefiting from strong operational performance, lower supply chain costs, lower spending, and higher energy sales. In addition, operations and costs were lower in both businesses due to favorable adjustments related to employee benefits. Maintenance outages were sequentially lower in the third quarter 2023 in our North American Industrial Packaging business due to a seasonally lower outage schedule, and our efforts to further optimize outage spending in this softer demand environment. Maintenance outage expense was sequentially flat in our Global Cellulose Fibers business. Input costs were moderately higher in our North American Industrial Packaging business primarily due to higher costs for energy and recovered fiber, partly offset by lower costs for chemicals. Input costs were lower in our Global Cellulose Fibers business primarily due to lower wood and chemical costs.
Looking ahead to the fourth quarter 2023, as compared to the third quarter 2023, in our Industrial Packaging business, we expect price and mix to be lower primarily due to prior index movements. Volume is expected to be higher on improved demand and seasonality in North America, partially offset by one less shipping day. Operations and costs are expected to be higher on the non-repeat of favorable employee benefit adjustments and partially offset by lower unabsorbed fixed costs from increased production volume. Maintenance outage expense is expected to decrease. Input costs are expected to be higher driven by increased recovered fiber costs, partially offset by lower energy, wood and other raw material costs. In our Global Cellulose Fibers business, relative to the third quarter 2023, we expect price and mix to decrease earnings primarily due to prior index movements. Overall, volume is expected to be flat. We expect higher fluff pulp volumes due to improving demand, offset by lower shipments of commodity grades as we execute our mix optimization strategy. Operations and costs are expected to be
higher due to the non-repeat of favorable employee benefit adjustments along with higher maintenance spending associated with a major turbine outage at one of our mills. Maintenance outage expense is expected to be higher while input costs should be stable.
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 September 30, | Three Months Ended June 30, | ||||||||||||||||
| In millions | 2023 | 2022 | 2023 | ||||||||||||||
| Net earnings (loss) | $ | 165 | $ | 951 | $ | 235 | |||||||||||
| Less - Discontinued operations (gain) loss | 27 | (64) | (13) | ||||||||||||||
| Earnings (loss) from continuing operations | 192 | 887 | 222 | ||||||||||||||
| Add back - Non-operating pension expense (income) | 13 | (48) | 12 | ||||||||||||||
| Add back - Net special items expense (income) | 29 | 117 | (6) | ||||||||||||||
| Income taxes - Non-operating pension and special items | (10) | (656) | (24) | ||||||||||||||
| Adjusted operating earnings (loss) | $ | 224 | $ | 300 | $ | 204 |
| Three Months Ended September 30, | Three Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | 2023 | |||||||||||||||
| Diluted earnings (loss) per share | $ | 0.47 | $ | 2.64 | $ | 0.68 | |||||||||||
| Less - Discontinued operations (gain) loss per share | 0.08 | (0.18) | (0.04) | ||||||||||||||
| Diluted earnings (loss) per share from continuing operations | 0.55 | 2.46 | 0.64 | ||||||||||||||
| Add back - Non-operating pension expense (income) per share | 0.04 | (0.13) | 0.03 | ||||||||||||||
| Add back - Net special items expense (income) per share | 0.08 | 0.32 | (0.02) | ||||||||||||||
| Income taxes per share - Non-operating pension and special items | (0.03) | (1.82) | (0.06) | ||||||||||||||
| Adjusted operating earnings (loss) per share | $ | 0.64 | $ | 0.83 | $ | 0.59 |
Cash provided by operations, including discontinued operations, totaled $1.3 billion and $1.4 billion for the first nine months of 2023 and 2022, respectively. The Company generated free cash flow of approximately $505 million and $804 million in the first nine 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:
| Nine Months Ended September 30, | |||||||||||
| In millions | 2023 | 2022 | |||||||||
| Cash provided by operations | $ | 1,341 | $ | 1,413 | |||||||
| Adjustments: | |||||||||||
| Cash invested in capital projects, net of insurance recoveries | (836) | (609) | |||||||||
| Free Cash Flow | $ | 505 | $ | 804 |
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 third quarter of 2023, International Paper reported net sales of $4.6 billion, compared with $4.7 billion in the second quarter of 2023 and $5.4 billion in the third quarter of 2022.
Net earnings (loss) totaled $165 million, or $0.47 per diluted share, in the third quarter of 2023. This compared with $235 million, or $0.68 per diluted share, in the second quarter of 2023 and $951 million, or $2.64 per diluted share, in the third quarter of 2022.
Compared with the second quarter of 2023, earnings from continuing operations benefited from higher sales volumes ($5 million), lower operating costs ($109 million), lower mill maintenance outage costs ($28 million), lower net interest expense ($5 million) and lower tax expense ($11 million). These benefits were offset by lower average sales prices and an unfavorable mix ($123 million), higher raw material and freight costs ($5 million), higher corporate and other costs ($9 million) and higher non-operating pension expense ($1 million). Equity earnings, net of taxes, were $1 million lower in the third quarter of 2023 than in the second quarter of 2023. Net special items in the third quarter of 2023 were a charge of $22 million compared with a gain of $27 million in the second quarter of 2023.
Compared with the third quarter of 2022, the third quarter of 2023 benefited from lower raw material and freight costs ($274 million), lower net interest expense ($8 million) and lower tax expense ($10 million). These benefits were offset by lower average sales prices and a unfavorable mix ($249 million), lower sales volumes ($46 million), higher operating costs ($54 million), higher mill maintenance outage costs ($14 million), higher corporate and other costs ($5 million) and higher non-operating pension expense ($46 million). Equity earnings, net of taxes, were flat in the third quarter of 2023 compared with the third quarter of 2022. Net special items in the third quarter of 2023 were a charge of $22 million compared with a gain of $551 million in the third 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 September 18, 2023, the Company completed the sale of 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 | |||||||||||||||||
| September 30, | June 30, | ||||||||||||||||
| In millions | 2023 | 2022 | 2023 | ||||||||||||||
| Net Earnings (Loss) from Continuing Operations | $ | 192 | $ | 887 | $ | 222 | |||||||||||
| Add back (deduct): | |||||||||||||||||
| Income tax provision (benefit) | 39 | (575) | 33 | ||||||||||||||
| Equity (earnings) loss, net of taxes | 1 | 1 | — | ||||||||||||||
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 232 | 313 | 255 | ||||||||||||||
| Interest expense, net | 58 | 123 | 59 | ||||||||||||||
| Less than wholly owned subsidiaries included in operations | — | (1) | — | ||||||||||||||
| Corporate expenses, net | 20 | 15 | 8 | ||||||||||||||
| Corporate net special items | 29 | 62 | — | ||||||||||||||
| Non-operating pension expense (income) | 13 | (48) | 12 | ||||||||||||||
| Adjusted Operating Profit | $ | 352 | $ | 464 | $ | 334 | |||||||||||
| Business Segment Operating Profit (Loss): | |||||||||||||||||
| Industrial Packaging | $ | 325 | $ | 369 | $ | 304 | |||||||||||
| Global Cellulose Fibers | 27 | 95 | 30 | ||||||||||||||
| Total Business Segment Operating Profit (Loss) | $ | 352 | $ | 464 | $ | 334 |
Business Segment Operating Profit (Loss)
Total business segment operating profits (losses) were $352 million in the third quarter of 2023, compared with $334 million in the second quarter of 2023 and $464 million in the third quarter of 2022.
Compared with the second quarter of 2023, business segment operating profits benefited from higher sales volumes ($7 million), lower operating costs ($139 million) and lower mill outage costs ($36 million). These benefits were offset by lower average sales prices and an unfavorable mix ($157 million) and higher raw material and freight costs ($7 million).
Compared with the third quarter of 2022, operating profits in the current quarter benefited from lower raw material and freight costs ($348 million). These benefits were offset by lower average sales prices and an unfavorable mix ($316 million), lower sales volumes ($58 million), higher operating costs ($68 million) and higher mill outage costs ($18 million).
Sales Volumes by Product (a)
Sales volumes of major products 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 thousands of short tons (except as noted) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Industrial Packaging | |||||||||||||||||||||||
| Corrugated Packaging (b) | 2,329 | 2,522 | 7,103 | 7,759 | |||||||||||||||||||
| Containerboard | 677 | 677 | 1,821 | 2,096 | |||||||||||||||||||
| Recycling | 529 | 546 | 1,617 | 1,645 | |||||||||||||||||||
| Saturated Kraft | 40 | 51 | 118 | 146 | |||||||||||||||||||
| Gypsum/Release Kraft | 58 | 66 | 179 | 184 | |||||||||||||||||||
| EMEA Packaging (b) | 299 | 297 | 951 | 1,019 | |||||||||||||||||||
| Industrial Packaging | 3,932 | 4,159 | 11,789 | 12,849 | |||||||||||||||||||
| Global Cellulose Fibers (in thousands of metric tons) (c) | 692 | 750 | 2,005 | 2,182 |
(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 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. This transaction is discussed further in Note 11 - Equity Method Investments of Item 1. Financial Statements.
Discontinued operations includes the equity earnings of the prior Ilim joint venture. Discontinued operations also includes special items charges of $59 million ($50 million after taxes) and $33 million (before and after taxes) for the three months ended September 30, 2023 and June 30, 2023, respectively.
Income Taxes
An income tax provision of $39 million was recorded for the third quarter of 2023 and the reported effective income tax rate was 17%. The effective income tax rate for the third quarter of 2023 was higher than the second quarter of 2023 as the second quarter tax rate reflects a tax benefit related to the closure of the 2015-2016 IRS audit. Excluding a benefit of $7 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 18% for the third quarter of 2023. The operational effective tax rate for the third quarter of 2023 was lower than the second quarter of 2023 primarily due to increased U.S. research and development tax credits and lower than estimated U.S. income taxes on foreign earnings.
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 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.
An income tax benefit of $575 million was recorded for the third quarter of 2022 and the reported effective income tax rate was (184)%. Excluding a benefit of $668 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 21% for the third quarter of 2022.
The operational effective tax rate is a non-GAAP financial measure and is 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 this presentation provides useful information to investors by providing a meaningful comparison of the income tax rate between past and present periods.
Interest Expense
Net interest expense was $58 million in the third quarter of 2023, compared with $59 million in the second quarter of 2023 and $123 million in the third quarter of 2022. The second quarter of 2023 includes $6 million of interest income related to the settlement of tax audits and the third quarter of 2022 includes $55 million of interest expense related to the 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 | ||||||||||||||||||||||||||||||||||||||
| September 30, | June 30, | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | ||||||||||||||||||||||||||||||||||||
| In millions | Before Tax | After Tax | Before Tax | After Tax | Before Tax | After Tax | ||||||||||||||||||||||||||||||||
| Debt extinguishment costs | $ | — | $ | — | $ | 93 | $ | 70 | $ | — | $ | — | ||||||||||||||||||||||||||
| Environmental remediation reserve adjustment | 29 | 22 | — | — | — | — | ||||||||||||||||||||||||||||||||
| Sylvamo investment | — | — | (16) | (12) | — | — | ||||||||||||||||||||||||||||||||
| Legal settlement | — | — | (15) | (11) | — | — | ||||||||||||||||||||||||||||||||
| Total net special items expense (income) | 29 | 22 | 62 | 47 | — | — | ||||||||||||||||||||||||||||||||
| Non-operating pension expense (income) | 13 | 10 | (48) | (36) | 12 | 9 | ||||||||||||||||||||||||||||||||
| Total net special items and non-operating pension expense (income) | $ | 42 | $ | 32 | $ | 14 | $ | 11 | $ | 12 | $ | 9 |
Net special items expense (income) include the following tax expenses (benefits):
| Three Months Ended | ||||||||||||||||||||
| September 30, | June 30, | |||||||||||||||||||
| In millions | 2023 | 2022 | 2023 | |||||||||||||||||
| Tax benefit related to the timber monetization settlement | $ | — | $ | (604) | $ | — | ||||||||||||||
| Tax benefit related to tax-free exchange of Sylvamo shares | — | (35) | — | |||||||||||||||||
| Tax benefit related to settlement of tax audits | — | — | (23) | |||||||||||||||||
| Total | $ | — | $ | (639) | $ | (23) |
Subsequent Event - Strategic Actions
As previously disclosed on October 18, 2023, the Company has committed to certain actions impacting its Containerboard and
Global Cellulose Fibers businesses as further described below.
Containerboard
The Company 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.
Global Cellulose Fibers
The Company 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.
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 | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | |||||||||||||||||||||||||||||
| Sales | $ | 3,787 | $ | 3,884 | $ | 11,754 | $ | 4,385 | $ | 4,491 | $ | 13,282 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 325 | $ | 304 | $ | 951 | $ | 369 | $ | 560 | $ | 1,326 |
Industrial Packaging net sales for the third quarter of 2023 were 2% lower compared with the second quarter of 2023 and 14% lower compared with the third quarter of 2022. Operating profit was 7% higher in the third quarter of 2023 compared with the second quarter of 2023 and 12% lower compared with the third quarter of 2022.
| North American Industrial Packaging | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | |||||||||||||||||||||||||||||
| Sales (a) | $ | 3,491 | $ | 3,550 | $ | 10,765 | $ | 4,055 | $ | 4,126 | $ | 12,206 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 313 | $ | 284 | $ | 899 | $ | 387 | $ | 550 | $ | 1,337 | |||||||||||||||||||||||
(a)Includes intra-segment sales of $20 million and $25 million for the three months ended September 30, 2023 and 2022, respectively; $17 million and $48 million for the three months ended June 30, 2023 and 2022, respectively; and $69 million and $102 million for the nine months ended September 30, 2023 and 2022, respectively.
North American Industrial Packaging average sales margins in the third quarter of 2023 were lower compared to the second quarter of 2023 driven by lower average sales prices for corrugated boxes and containerboard from index movements and an unfavorable geographic mix. Sales volumes were higher for containerboard while volumes for corrugated boxes were lower, reflecting one less shipping day in the third quarter of 2023. Total maintenance and economic downtime was about 160,000 short tons lower in the third quarter of 2023 compared with the second quarter of 2023, due to lower economic downtime. Operating costs were lower driven by lower economic downtime and favorable adjustments related to employee benefit costs. Planned maintenance downtime costs were lower in the third quarter of 2023 compared with the second quarter of 2023. Input costs were higher, primarily for energy, freight and recovered fiber.
Compared with the third quarter of 2022, sales volumes in the third quarter of 2023 were lower for corrugated boxes reflecting the soft demand environment as consumers continued to focus spending on non-discretionary goods and services and retailers and manufacturers pulled down inventory levels. Sales volumes for export containerboard were higher. Total maintenance and economic downtime was about 46,000 short tons higher in the third quarter of 2023, due to higher economic downtime partially offset by lower maintenance downtime. Average sales prices for boxes and containerboard were lower reflecting index movements. Operating costs increased, driven by economic downtime and inflation on goods and services, partially offset by favorable adjustments related to employee benefit costs. Planned maintenance downtime costs were higher in the third quarter of 2023 compared with the third quarter of 2022. Input costs were significantly lower driven by recovered fiber, energy costs and wood.
Entering the fourth quarter of 2023, sales volumes are expected to be higher compared to the third quarter of 2023. There is one less shipping day in the fourth quarter of 2023. Average sales margins are expected to be lower. Operating costs are expected to be higher. Planned maintenance downtime costs are expected to be lower in the fourth quarter of 2023 compared with the third quarter of 2023. Input costs are expected to be higher driven by recovered fiber.
| EMEA Industrial Packaging | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | |||||||||||||||||||||||||||||
| Sales | $ | 316 | $ | 351 | $ | 1,058 | $ | 355 | $ | 413 | $ | 1,178 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 12 | $ | 20 | $ | 52 | $ | (18) | $ | 10 | $ | (11) |
EMEA Industrial Packaging sales volumes for corrugated boxes in the third quarter of 2023 were seasonally lower compared with the second quarter of 2023. Average sales margins for corrugated boxes were lower, reflecting an unfavorable product mix. Average sales margins for containerboard were lower. Operating costs were lower. There were no planned maintenance outages in either the third quarter of 2023 or the second quarter of 2023. Input costs were lower driven by chemicals and recovered fiber.
Compared with the third quarter of 2022, sales volumes in the third 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 lower. There were no planned maintenance outages in either the third quarter of 2023 or the third quarter of 2022. Input costs were significantly lower primarily for energy and recovered fiber.
Looking ahead to the fourth quarter of 2023, sales volumes for corrugated boxes are expected to be seasonally higher. Average sales margins are expected to be higher. Operating and input costs are expected to be higher. Planned maintenance downtime costs are expected to be higher in the fourth quarter of 2023.
Global Cellulose Fibers
| Total Global Cellulose Fibers | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| In millions | 3rd Quarter | 2nd Quarter | Nine Months | 3rd Quarter | 2nd Quarter | Nine Months | |||||||||||||||||||||||||||||
| Sales | $ | 725 | $ | 698 | $ | 2,234 | $ | 887 | $ | 788 | $ | 2,385 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 27 | $ | 30 | $ | 41 | $ | 95 | $ | 25 | $ | 71 |
Global Cellulose Fibers net sales in the third quarter of 2023 were 4% higher compared with the second quarter of 2023 and 18% lower than in the third quarter of 2022. Operating profit was 10% lower in the third quarter of 2023 compared with the second quarter of 2023 and was 72% lower compared with the third quarter of 2022.
Sales volumes in the third quarter of 2023, compared with the second quarter of 2023, were higher as seasonality was more than offset by an improving demand environment. Total maintenance and economic downtime was about 17,000 short tons lower in the third quarter of 2023 compared with the second quarter of 2023 driven by both economic and maintenance downtime. Average sales margins were lower, reflecting price index movement partially offset by a favorable product mix. Operating costs were lower driven by distribution and favorable adjustments related to employee benefit costs. Planned maintenance downtime costs in the third quarter of 2023 were lower compared with the second quarter of 2023. Input costs were lower, primarily for wood and chemicals.
Compared with the third quarter of 2022, sales volumes in the third quarter of 2023 were lower driven by customer inventory destocking. Total maintenance and economic downtime was about 143,000 short tons higher in the third quarter of 2023, due to economic downtime. Average sales margins were lower reflecting lower average sales prices and an unfavorable product mix. Operating costs were lower driven by lower distribution costs and favorable adjustments related to employee benefit costs. Planned maintenance downtime costs in the third quarter of 2023 were higher compared with the third quarter of 2022. Input costs were lower primarily for energy and chemicals.
Entering the fourth quarter of 2023, sales volumes are expected to be lower as higher fluff pulp volumes are more than offset by lower volumes for commodity grades. Average sales margins are expected to be lower. Planned maintenance downtime costs in the fourth quarter of 2023 are expected to be higher compared with the third quarter of 2023. Operating costs are expected to be higher. Input costs are expected to be lower.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $1.3 billion for the first nine months of 2023, compared with $1.4 billion for the comparable 2022 nine-month period.
Investments in capital projects, net of insurance recoveries, totaled $836 million in the first nine months of 2023, compared to $609 million in the first nine 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 nine months of 2023 included an $83 million net increase in debt versus a $202 million net decrease in debt during the comparable 2022 nine-month period.
See Note 16 - Debt of Item 1. Financial Statements for a discussion of various debt-related actions taken by the Company during the nine months ended September 30, 2023.
Amounts related to early debt extinguishments during the three 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 | |||||||||||||||||||
| Early debt reductions (a) | $ | — | $ | 498 | $ | — | $ | 503 | |||||||||||||||
| Pre-tax early debt extinguishment (gain) loss, net | — | 93 | — | 93 |
(a)Reductions related to notes with interest rates ranging from 6.40% to 8.70% with original maturities from 2023 to 2039 and 4.35% to 8.70% with original maturities from 2023 to 2048 for the three and nine months ended September 30, 2022, respectively.
At September 30, 2023, contractual obligations for future payments of debt maturities (including finance lease liabilities disclosed in Note 10 - Leases and excluding the timber monetization structure disclosed in Note 15 - Variable Interest Entities) by calendar year were as follows: $93 million in 2023; $135 million in 2024; $191 million in 2025; $143 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 September 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 September 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 September 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 16 - 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 September 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 September 30, 2023, the Company had no outstanding borrowings under the 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 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.
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.
International Paper expects 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. 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 nine 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 ("Board") 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 September 30, 2023.
During the first nine months of 2022, International Paper used approximately 1.5 million shares of treasury stock for various incentive plans. International Paper also acquired 24.4 million shares of treasury stock, including restricted stock tax withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $1.09 billion, including $1.07 billion related to shares repurchased under the Company's repurchase program.
Cash dividend payments related to common stock totaled $482 million and $509 million for the first nine months of 2023 and 2022, respectively. Dividends were $1.3875 per share for the first nine 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. 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 agreed 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 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 may 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 may require management’s judgments. The Company has not made any changes in these critical accounting policies during the first nine 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 greenhouse gases 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, military conflict (including the Russia/Ukraine conflict, the conflict in Israel and surrounding areas, the possible expansion of such conflicts, and the potential geopolitical and economic consequences associated therewith), 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) risks inherent in conducting business through joint ventures; (ix) our ability to achieve the benefits expected from, and other risks associated with, acquisitions, joint ventures, divestitures, spinoffs and other corporate transactions, (x) cybersecurity and information technology risks, including as a result of security breaches and cybersecurity incidents; (xi) loss contingencies and pending, threatened or future litigation, including with respect to environmental related matters; (xii) our exposure to claims under our agreements with Sylvamo Corporation; (xii) 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 (xiv) 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 reports filed with the U.S. Securities and Exchange Commission. 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.
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