10-Q 1 ip-3312018xform10xq.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2018
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From              to             
 _________________________________________
Commission File Number 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
 
New York
13-0872805
(State or other jurisdiction of
(I.R.S. Employer
incorporation of organization)
Identification No.)
 
 
6400 Poplar Avenue, Memphis, TN
38197
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (901) 419-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange
Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of April 27, 2018 was 414,091,479.



INDEX
 
 
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Operations - Three Months Ended March 31, 2018 and 2017
 
 
 
 
Condensed Consolidated Statement of Comprehensive Income - Three Months Ended March 31, 2018 and 2017
 
 
 
 
Condensed Consolidated Balance Sheet - March 31, 2018 and December 31, 2017
 
 
 
 
Condensed Consolidated Statement of Cash Flows - Three Months Ended March 31, 2018 and 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
INTERNATIONAL PAPER COMPANY
Condensed Consolidated Statement of Operations
(Unaudited)
(In millions, except per share amounts) 
 
Three Months Ended
March 31,
 
2018
 
2017
Net Sales
$
5,621

 
$
5,132

Costs and Expenses
 
 
 
Cost of products sold
3,948

 
3,638

Selling and administrative expenses
421

 
393

Depreciation, amortization and cost of timber harvested
325

 
320

Distribution expenses
366

 
348

Taxes other than payroll and income taxes
44

 
42

Restructuring and other charges
22

 

Net bargain purchase gain on acquisition of business

 
(6
)
Interest expense, net
135

 
142

Non-operating pension expense
4

 
38

Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings
356

 
217

Income tax provision (benefit)
89

 
73

Equity earnings (loss), net of taxes
95

 
48

Earnings (Loss) From Continuing Operations
362

 
192

Discontinued operations, net of taxes
368

 
17

Net Earnings (Loss)
730

 
209

Less: Net earnings (loss) attributable to noncontrolling interests
1

 

Net Earnings (Loss) Attributable to International Paper Company
$
729

 
$
209

Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
 
 
 
Earnings (loss) from continuing operations
$
0.87

 
$
0.47

Discontinued operations, net of taxes
0.89

 
0.04

Net earnings (loss)
$
1.76

 
$
0.51

Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
 
 
 
Earnings (loss) from continuing operations
$
0.86

 
$
0.46

Discontinued operations, net of taxes
0.88

 
0.04

Net earnings (loss)
$
1.74

 
$
0.50

Average Shares of Common Stock Outstanding – assuming dilution
418.2

 
416.0

Cash Dividends Per Common Share
$
0.4750

 
$
0.4625

Amounts Attributable to International Paper Company Common Shareholders
 
 
 
Earnings (loss) from continuing operations
$
361

 
$
192

Discontinued operations, net of taxes
368

 
17

Net earnings (loss)
$
729

 
$
209

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

1


INTERNATIONAL PAPER COMPANY
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)
(In millions)
 
 
Three Months Ended
March 31,
 
2018
 
2017
Net Earnings (Loss)
$
730

 
$
209

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
Amortization of pension and post-retirement prior service costs and net loss:
 
 
 
U.S. plans
66

 
57

Pension and postretirement liability adjustments:
 
 
 
Non-U.S. plans

 
(1
)
Change in cumulative foreign currency translation adjustment
42

 
148

Net gains/losses on cash flow hedging derivatives:
 
 
 
Net gains (losses) arising during the period
(3
)
 
9

Reclassification adjustment for (gains) losses included in net earnings (loss)
(2
)
 
(2
)
Total Other Comprehensive Income (Loss), Net of Tax
103

 
211

Comprehensive Income (Loss)
833

 
420

Net (earnings) loss attributable to noncontrolling interests
(1
)
 

Other comprehensive (income) loss attributable to noncontrolling interests

 
(1
)
Comprehensive Income (Loss) Attributable to International Paper Company
$
832

 
$
419

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

2


INTERNATIONAL PAPER COMPANY
Condensed Consolidated Balance Sheet
(In millions)
 
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and temporary investments
$
1,141

 
$
1,018

Accounts and notes receivable, net
3,416

 
3,287

Contract assets
388

 

Inventories
2,057

 
2,313

Assets held for sale

 
1,377

Other current assets
258

 
282

Total Current Assets
7,260

 
8,277

Plants, Properties and Equipment, net
13,335

 
13,265

Forestlands
453

 
448

Investments
1,490

 
390

Financial Assets of Special Purpose Entities (Note 15)
7,056

 
7,051

Goodwill
3,414

 
3,411

Deferred Charges and Other Assets
1,022

 
1,061

Total Assets
$
34,030

 
$
33,903

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
587

 
$
311

Accounts payable
2,534

 
2,458

Accrued payroll and benefits
352

 
485

Liabilities held for sale

 
805

Other accrued liabilities
992

 
1,043

Total Current Liabilities
4,465

 
5,102

Long-Term Debt
10,759

 
10,846

Nonrecourse Financial Liabilities of Special Purpose Entities (Note 15)
6,293

 
6,291

Deferred Income Taxes
2,480

 
2,291

Pension Benefit Obligation
1,893

 
1,939

Postretirement and Postemployment Benefit Obligation
317

 
326

Other Liabilities
558

 
567

Equity
 
 
 
Common stock, $1 par value, 2018 – 448.9 shares and 2017 – 448.9 shares
449

 
449

Paid-in capital
6,175

 
6,206

Retained earnings
6,783

 
6,180

Accumulated other comprehensive loss
(4,530
)
 
(4,633
)
 
8,877

 
8,202

Less: Common stock held in treasury, at cost, 2018 – 34.8 shares and 2017 – 36.0 shares
1,632

 
1,680

Total International Paper Shareholders’ Equity
7,245

 
6,522

Noncontrolling interests
20

 
19

Total Equity
7,265

 
6,541

Total Liabilities and Equity
$
34,030

 
$
33,903

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

3


INTERNATIONAL PAPER COMPANY
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
 
 
Three Months Ended
March 31,
 
2018
 
2017
Operating Activities
 
 
 
Net earnings (loss)
$
730

 
$
209

Depreciation, amortization and cost of timber harvested
325

 
345

Deferred income tax provision (benefit), net
157

 
7

Restructuring and other charges
22

 

Net gain on transfer of North American Consumer Packaging business to Graphic Packaging
(516
)
 

Net bargain purchase gain on acquisition of business

 
(6
)
Ilim dividends received
116

 
127

Equity (earnings) loss, net
(95
)
 
(48
)
Periodic pension expense, net
42

 
78

Other, net
14

 
45

Changes in current assets and liabilities
 
 
 
Accounts and notes receivable
(122
)
 
(57
)
Contract assets
(22
)
 

Inventories
21

 
(15
)
Accounts payable and accrued liabilities
11

 
22

Interest payable
(34
)
 
(18
)
Other
14

 
(56
)
Cash Provided By (Used For) Operations
663

 
633

Investment Activities
 
 
 
Invested in capital projects
(489
)
 
(374
)
Proceeds from divestitures, net of cash divested
1

 

Proceeds from sale of fixed assets
1

 
1

Other
(2
)
 
(27
)
Cash Provided By (Used For) Investment Activities
(489
)
 
(400
)
Financing Activities
 
 
 
Repurchases of common stock and payments of restricted stock tax withholding
(31
)
 
(46
)
Issuance of debt
223

 
186

Reduction of debt
(34
)
 
(227
)
Change in book overdrafts
(17
)
 
(6
)
Dividends paid
(197
)
 
(191
)
Cash Provided By (Used For) Financing Activities
(56
)
 
(284
)
Effect of Exchange Rate Changes on Cash
5

 
16

Change in Cash and Temporary Investments
123

 
(35
)
Cash and Temporary Investments
 
 
 
Beginning of period
1,018

 
1,033

End of period
$
1,141

 
$
998

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

4


INTERNATIONAL PAPER COMPANY
Condensed Notes to Consolidated Financial Statements
(Unaudited)

The accompanying unaudited condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States and in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments that are necessary for the fair presentation of International Paper Company’s (International Paper’s, the Company’s or our) financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed herein, such adjustments are of a normal, recurring nature. Results for the first three months of the year may not necessarily be indicative of full year results. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which have previously been filed with the Securities and Exchange Commission.


Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This guidance gives entities the option to reclassify stranded tax effects caused by the newly-enacted U.S. Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company is currently evaluating the provisions of this guidance.

Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The objective of this new guidance is the improvement of the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this guidance make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company early adopted the provisions of this guidance on January 1, 2018, with no material impact on the financial statements.

Retirement Benefits

The Company adopted the provision of ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" on January 1, 2018. Under this new guidance, employers present the service costs component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component is eligible for capitalization in assets. Employers present the other components separately from the line items(s) that includes the service cost and outside of any subtotal of operating income. In addition, disclosure of the line(s) used to present the other components of net periodic benefit cost are required if the components are not presented separately in the income statement. The following table details the impact of the retrospective adoption of this standard on 2017 first quarter amounts reported in the accompanying condensed consolidated statement of operations and on full-year amounts for 2017, 2016 and 2015 reported in in the Company's 2017 Form 10-K. The retrospective adoption had no impact on Net earnings (loss).

5


Condensed Consolidated Statement of Operations
 
 
Three Months Ended March 31, 2017
In millions
 
Previously Reported
 
Impact of Adoption Increase/(Decrease)
 
As Revised
Cost of products sold
 
$
3,669

 
$
(31
)
 
$
3,638

Selling and administrative expenses
 
400

 
(7
)
 
393

Non-operating pension expense
 

 
38

 
38

 
 
 
 
 
 
 
 
 
Year Ended December 31, 2017
In millions
 
Previously Reported
 
Impact of Adoption Increase/(Decrease)
 
As Revised
Cost of products sold
 
$
15,300

 
$
(499
)
 
$
14,801

Selling and administrative expenses
 
1,653

 
(32
)
 
1,621

Non-operating pension expense
 

 
531

 
531

 
 
 
 
 
 
 
 
 
Year Ended December 31, 2016
In millions
 
Previously Reported
 
Impact of Adoption Increase/(Decrease)
 
As Revised
Cost of products sold
 
$
14,057

 
$
(639
)
 
$
13,418

Selling and administrative expenses
 
1,484

 
(26
)
 
1,458

Non-operating pension expense
 

 
665

 
665

 
 
 
 
 
 
 
 
 
Year Ended December 31, 2015
In millions
 
Previously Reported
 
Impact of Adoption Increase/(Decrease)
 
As Revised
Cost of products sold
 
$
14,313

 
$
(270
)
 
$
14,043

Selling and administrative expenses
 
1,539

 
(43
)
 
1,496

Non-operating pension expense
 

 
313

 
313


Business Combinations

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." Under the new guidance, an entity must first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If this threshold is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. This guidance was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. The Company adopted the provisions of this guidance on January 1, 2018 with no material impact on the financial statements.

Income Taxes

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This ASU requires companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs rather than defer the income tax effects which is current practice. This new guidance was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. The guidance requires companies to apply a modified retrospective approach with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. The Company adopted the provisions of this guidance on January 1, 2018, with no material impact on the financial statements.







6


Stock Compensation

In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." This guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under this guidance, entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. The Company adopted the provisions of this guidance on January 1, 2018, with no material impact on the financial statements.

Leases

In February 2016, the FASB issued ASU 2016-02, "Leases Topic (842): Leases." This ASU will require most leases to be recognized on the balance sheet which will increase reported assets and liabilities. Lessor accounting will remain substantially similar to current U.S. GAAP. This ASU is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years, and mandates a modified retrospective transition method for all entities. The Company expects to adopt this guidance using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We expect to recognize a liability and corresponding asset associated with in-scope operating and finance leases but are still in the process of determining those amounts and the processes required to account for leasing activity on an ongoing basis.

The Company has formed a global implementation team, including representatives from accounting, tax, legal, global sourcing, information technology, policies and controls and operations. Surveys were developed and utilized to gather initial information regarding existing leases and the various processes that currently exist to procure, track and account for leases globally. The implementation team has selected and began working with a third-party vendor to implement a lease accounting solution to deliver the accounting and disclosures required under the new lease accounting guidance.

Revenue Recognition

On January 1, 2018, the Company adopted the new revenue recognition standard ASC 606, "Revenue from Contracts With Customers," (new revenue standard) and all related amendments, using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of Retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The Company recorded a net increase to opening Retained earnings of $73 million as of January 1, 2018, due to the cumulative impact of adopting the new revenue standard, with the impact primarily related to our customized products. The impacts of the adoption of the new revenue standard on the Company's condensed consolidated financial statements were as follows:

7


Condensed Consolidated Statement of Operations
 
 
Three Months Ended March 31, 2018
In millions
 
As Reported
 
Balances Without Adoption of ASC 606
 
Impact of Adoption Increase/(Decrease)
Net sales
 
$
5,621

 
$
5,599

 
$
22

Cost of products sold
 
3,948

 
3,932

 
16

Distribution expenses
 
366

 
367

 
(1
)
Income tax provision (benefit), net
 
89

 
87

 
2

Earnings (loss) from continuing operations
 
362

 
357

 
5

Net earnings (loss)
 
730

 
725

 
5

Earnings per share attributable to International Paper Company Shareholders
 
 
 
 
 
 
Basic
 
$
1.76

 
$
1.75

 
$
0.01

Diluted
 
1.74

 
1.73

 
0.01

 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet
 
 
March 31, 2018
In millions
 
As Reported
 
Balances Without Adoption of ASC 606
 
Impact of Adoption Increase/(Decrease)
Contract assets
 
$
388

 
$

 
$
388

Inventories
 
2,057

 
2,324

 
(267
)
Other current assets
 
258

 
274

 
(16
)
Other accrued liabilities
 
992

 
975

 
17

Deferred income taxes
 
2,480

 
2,470

 
10

Retained earnings
 
6,783

 
6,705

 
78

 
 
 
 
 
 
 
Condensed Consolidated Statement of Cash Flows
 
 
Three Months Ended March 31, 2018
In millions
 
As Reported
 
Balances Without Adoption of ASC 606
 
Impact of Adoption Increase/(Decrease)
Net earnings (loss)
 
$
730

 
$
725

 
$
5

Deferred income tax provision (benefit), net
 
157

 
171

 
(14
)
Contract assets
 
(22
)
 

 
(22
)
Inventories
 
21

 
5

 
16

Accounts payable and accrued liabilities
 
11

 
12

 
(1
)
Other
 
14

 
(2
)
 
16


Historically, the Company has recognized all of its revenue on a point-in-time basis across its businesses. The trigger for International Paper's point-in-time recognition is when the customer takes title to the goods and assumes the risks and rewards for the goods. As such, the adoption of ASC 606 did not have a material impact on the Company's revenue recognition for point-in-time goods. However, across the majority of our businesses, there are certain goods designed to customers' unique specifications, including customer logos and labels (customized goods). Due to the manually intensive process and significant costs that would be required to rework these products, and in many cases contractual restrictions, the Company has determined that these products do not have an alternative future use under ASC 606.

The majority of the customized goods discussed above are covered by non-cancelable purchase orders or customer agreements and the Company has determined that in most cases, it does have an enforceable right to payment for these goods. As such, the Company's adoption of ASC 606 resulted in the acceleration of revenue for customized products without an alternative future use and where the Company has a legally enforceable right to payment for production of products completed to date. The Company now records a contract asset for revenue recognized on our customized products prior to having an unconditional right to payment from the customer, which generally does not occur until title and risk of loss for the products passes to the customer.


8


Due to the recurring nature of our sales of these customized goods, the impact of adopting ASC 606 is not expected to have a material impact on our operations or our cash flows in any period.


Disaggregated Revenue

A geographic disaggregation of revenues across our company segmentation in the following table provides information to assist in evaluating the nature, timing and uncertainty of revenue and cash flows and how they may be impacted by economic factors.
 
 
Three Months Ended March 31, 2018
In millions
 
Industrial Packaging
 
Global Cellulose Fibers
 
Printing Papers
 
Corporate and Inter-segment Sales
 
Total
Primary Geographical Markets (a)
 
 
 
 
 
 
 
 
 
 
United States
 
$
3,102

 
$
545

 
$
440

 
$
58

 
$
4,145

EMEA
 
452

 
75

 
336

 
(5
)
 
858

Pacific Rim and Asia
 
34

 
57

 
64

 
16

 
171

Americas, other than U.S.
 
239

 

 
213

 
(5
)
 
447

Total
 
$
3,827

 
$
677

 
$
1,053

 
$
64

 
$
5,621

 
 
 
 
 
 
 
 
 
 
 
Operating Segments
 
 
 
 
 
 
 
 
 
 
North American Industrial Packaging
 
$
3,369

 
$

 
$

 
$

 
$
3,369

EMEA Industrial Packaging
 
362

 

 

 

 
362

Brazilian Industrial Packaging
 
62

 

 

 

 
62

European Coated Paperboard
 
92

 

 

 

 
92

Global Cellulose Fibers
 

 
677

 

 

 
677

North American Printing Papers
 

 

 
458

 

 
458

Brazilian Papers
 

 

 
229

 

 
229

European Papers
 

 

 
319

 

 
319

Indian Papers
 

 

 
52

 

 
52

Intra-segment Eliminations
 
(58
)
 

 
(5
)
 

 
(63
)
Corporate & Inter-segment Sales
 

 

 

 
64

 
64

Total
 
$
3,827

 
$
677

 
$
1,053

 
$
64

 
$
5,621


(a) Net sales are attributed to countries based on the location of the seller.

The nature of the Company's contracts can vary based on the business, customer type and region; however, in all instances it is International Paper's customary business practice to receive a valid order from the customer, in which each parties' rights and related payment terms are clearly identifiable.

Revenue Contract Balances

The opening and closing balances of the Company's contract assets and current contract liabilities are as follows:
In millions
 
Contract Assets (Short-Term)
 
Contract Liabilities (Short-Term)
 
 
 
 
 
Beginning Balance - January 1, 2018
 
$
366

 
$
53

Ending Balance - March 31, 2018
 
388

 
38

Increase / (Decrease)
 
$
22

 
$
(15
)


9


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. 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.

The difference between the opening and closing balances of the Company's contract assets and contract liabilities primarily results from the timing difference between the Company's performance and the point at which we have an unconditional right to payment or receive pre-payment from the customer, respectively.

Performance Obligations and Significant Judgments

International Paper's principal business is to manufacture and sell fiber-based packaging, pulp and paper goods. As a general rule, none of our businesses provide equipment installation or other ancillary services outside producing and shipping packaging, pulp and paper goods to customers.

The Company's revenue is primarily derived from fixed consideration; however, we do have contract terms that give rise to variable consideration, primarily cash discounts and volume rebates. International Paper offers early payment discounts to customers across the Company's businesses. The Company estimates the expected cash discounts and other customer refunds based on the historical experience across the Company's portfolio of customers to record reductions in revenue which is consistent with the most likely amount method outlined in ASC 606. Management has concluded that this method is the best estimate of the consideration the Company will be entitled to from its customers.

Contracts or purchase orders with customers could include a single type of product or it could include multiple types/grades of products. Regardless, the contracted price with the customer is agreed to at the individual product level outlined in the customer contracts or purchase orders. The Company does not bundle prices; however, we do negotiate with customers on pricing and rebates for the same products based on a variety of factors (e.g. level of contractual volume, geographical location, etc.). Management has concluded that the prices negotiated with each individual customer are representative of the stand-alone selling price of the product.

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. Related to customized goods where the Company has a legally enforceable right to payment for the goods, the Company recognizes revenue over time which in this case, is generally as the goods are produced.

Practical Expedients and Exemptions

As part of our adoption of the new revenue standard, the Company has elected to present all sales taxes on a net basis, account for shipping and handling activities as fulfillment activities, recognize the incremental costs of obtaining a contract as expense when incurred if the amortization period of the asset the Company would recognize is one year or less and not record interest income or interest expense when the difference in timing of control transfer and customer payment is one year or less. The election of these practical expedients results in accounting treatments consistent with our historical accounting policies and therefore, these elections and expedients do not have a material impact on comparability of our financial statements.

10



A summary of the changes in equity for the three months ended March 31, 2018 and 2017 is provided below:
 
Three Months Ended
March 31,
 
2018
 
2017
In millions, except per share amounts
Total
International
Paper
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
Total
International
Paper
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, January 1
$
6,522

 
$
19

 
$
6,541

 
$
4,341

 
$
18

 
$
4,359

Adoption of ASC 606 revenue from contracts with customers
73

 

 
73

 

 

 

Issuance of stock for various plans, net
38

 

 
38

 
54

 

 
54

Repurchase of stock
(31
)
 

 
(31
)
 
(46
)
 

 
(46
)
Common stock dividends ($.4750 per share in 2018 and $.4625 per share in 2017)
(199
)
 

 
(199
)
 
(195
)
 

 
(195
)
Transactions of equity method investees
10

 

 
10

 
2

 

 
2

Comprehensive income (loss)
832

 
1

 
833

 
419

 
1

 
420

Ending Balance, March 31
$
7,245

 
$
20

 
$
7,265

 
$
4,575

 
$
19

 
$
4,594



The following table presents changes in accumulated other comprehensive income (AOCI) for the three-months ended March 31, 2018 and 2017:

 
 
Three Months Ended
March 31,
In millions
 
2018
 
2017
Defined Benefit Pension and Postretirement Adjustments
 
 
 
 
Balance at beginning of period
 
$
(2,527
)
 
$
(3,072
)
Other comprehensive income (loss) before reclassifications
 

 
(1
)
Amounts reclassified from accumulated other comprehensive income
 
66

 
57

Balance at end of period
 
(2,461
)
 
(3,016
)
Change in Cumulative Foreign Currency Translation Adjustments
 
 
 
 
Balance at beginning of period
 
(2,111
)
 
(2,287
)
Other comprehensive income (loss) before reclassifications
 
40

 
148

Amounts reclassified from accumulated other comprehensive income
 
2

 

Other comprehensive income (loss) attributable to noncontrolling interest
 

 
(1
)
Balance at end of period
 
(2,069
)
 
(2,140
)
Net Gains and Losses on Cash Flow Hedging Derivatives
 
 
 
 
Balance at beginning of period
 
5

 
(3
)
Other comprehensive income (loss) before reclassifications
 
(3
)
 
9

Amounts reclassified from accumulated other comprehensive income
 
(2
)
 
(2
)
Balance at end of period
 

 
4

Total Accumulated Other Comprehensive Income (Loss) at End of Period
 
$
(4,530
)
 
$
(5,152
)

    

11


The following table presents details of the reclassifications out of AOCI for the three-months ended March 31, 2018 and 2017:
In millions:
 
Amounts Reclassified from Accumulated Other Comprehensive Income
 
Location of Amount Reclassified from AOCI
 
Three Months Ended
March 31,
 
 
 
2018
 
2017
 
 
Defined benefit pension and postretirement items:
 
 
 
 
 
 
 
Prior-service costs
 
$
(4
)
 
$
(6
)
 
(a)
Non-operating pension expense
Actuarial gains (losses)
 
(84
)
 
(87
)
 
(a)
Non-operating pension expense
Total pre-tax amount
 
(88
)
 
(93
)
 
 
 
Tax (expense) benefit
 
22

 
36

 
 
 
Net of tax
 
(66
)
 
(57
)
 
 
 
 
 
 
 
 
 
 
 
Change in cumulative foreign currency translation adjustments:
 
 
 
 
 
 
 
Business acquisitions/divestitures
 
2

 

 
 
Discontinued operations, net of taxes
   Tax (expense) benefit
 

 

 
 
 
Net of tax
 
2

 

 
 
 
 
 
 
 
 
 
 
 
Net gains and losses on cash flow hedging derivatives:
 
 
 
 
 
 
 
Foreign exchange contracts
 
3

 
3

 
(b)
Cost of products sold
Total pre-tax amount
 
3

 
3

 
 
 
Tax (expense)/benefit
 
(1
)
 
(1
)
 
 
 
Net of tax
 
2

 
2

 
 
 
Total reclassifications for the period
 
$
(62
)
 
$
(55
)
 
 
 

(a)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 18 for additional details).
(b)
This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 17 for additional details).

Basic earnings per common share are computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings per common share are 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 EPS. A reconciliation of the amounts included in the computation of basic earnings (loss) per share, and diluted earnings (loss) per share is as follows: 
 
Three Months Ended
March 31,
In millions, except per share amounts
2018
 
2017
Earnings (loss) from continuing operations attributable to International Paper Company common shareholders
$
361

 
$
192

Weighted average common shares outstanding
413.5

 
412.1

Effect of dilutive securities
 
 
 
Restricted stock performance share plan
4.7

 
3.9

Weighted average common shares outstanding – assuming dilution
418.2

 
416.0

Basic earnings (loss) per share from continuing operations
$
0.87

 
$
0.47

Diluted earnings (loss) per common share from continuing operations
$
0.86

 
$
0.46


2018: The Company recorded a $22 million pre-tax charge, primarily related to the severance of 221 employees in conjunction with the optimization of our EMEA Packaging business.

2017: There were no restructuring and other charges recorded during the three months ended March 31, 2017.

12



Tangier, Morocco Facility

On June 30, 2017, the Company completed the acquisition of Europac's Tangier, Morocco facility, a corrugated packaging facility, for €40 million (approximately $46 million using the June 30, 2017 exchange rate). After working capital and other post-closing adjustments, final consideration exchanged was €33 million (approximately $38 million using the June 30, 2017 exchange rate).

The following table summarizes the provisional fair value assigned to assets and liabilities acquired as of June 30, 2017:
In millions
June 30, 2017
Cash and temporary investments
$
1

Accounts and notes receivable
7

Inventory
3

Plants, properties and equipment
31

Goodwill
4

Other intangible assets
5

Deferred charges and other assets
5

Total assets acquired
56

Accounts payable and accrued liabilities
5

Long-term debt
11

Other long-term liabilities
2

Total liabilities assumed
18

Net assets acquired
$
38


Adjustments, if any, to provisional amounts will be finalized within the measurement period of up to one year from the acquisition date. Pro forma information related to the acquisition of the Europac business has not been included as it is impractical to obtain the information due to the lack of availability of financial data and does not have a material effect on the Company’s consolidated results of operations.

The Company has accounted for the above acquisition under ASC 805, "Business Combinations" and the results of operations have been included in International Paper's financial statements beginning with the date of acquisition.


Discontinued Operations

2017: On January 1, 2018, the Company completed the transfer of its North American Consumer Packaging business, which included its North American Coated Paperboard and Foodservice businesses, to a subsidiary of Graphic Packaging Holding Company in exchange for a 20.5% ownership interest in a subsidiary of Graphic Packaging Holding Company that holds the assets of the combined business. International Paper is accounting for its ownership interest in the combined business under the equity method. The Company determined the fair value of its investment in the combined business and recorded a pre-tax gain of $516 million ($385 million after taxes), on the transfer in the first quarter of 2018, subject to final working capital settlement. See Note 11 for further discussion on the Company's investment in Graphic Packaging International, LLC.

All historical operating results for North American Consumer Packaging are included in Discontinued operations, net of tax in the accompany consolidated statement of operations. The following summarizes the major classes of line items comprising Earnings (Loss) Before Income Taxes and Equity Earnings reconciled to Discontinued operations, net of tax, related to the transfer of the North American Consumer Packaging business for all periods presented in the consolidated statement of operations:


13


 
Three Months Ended
March 31,
In millions
2018
 
2017
Net Sales
$

 
$
379

Costs and Expenses
 
 
 
Cost of products sold

 
271

Selling and administrative expenses
23

 
23

Depreciation, amortization and cost of timber harvested

 
24

Distribution expenses

 
31

Taxes other than payroll and income taxes

 
3

(Gain) loss on transfer of business
(516
)
 

Earnings (Loss) Before Income Taxes and Equity Earnings
493

 
27

Income tax provision (benefit)
125

 
10

Discontinued Operations, Net of Taxes
$
368

 
$
17


Total cash provided by (used for) operations related to the North American Consumer Packaging business of $(23) million and $23 million for the three months ended March 31, 2018 and March 31, 2017 is included in Cash Provided By (Used For) Operations in the consolidated statement of cash flows. Total cash provided by (used for) investing activities related to the North American Consumer Packaging business of $1 million and $(25) million for the three months ended March 31, 2018 and March 31, 2017, is included in Cash Provided By (Used For) Investing Activities in the consolidated statement of cash flows.

Temporary Investments 

Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $723 million and $661 million at March 31, 2018 and December 31, 2017, respectively.
     
Accounts and Notes Receivable
In millions
March 31, 2018
 
December 31, 2017
Accounts and notes receivable, net:
 
 
 
Trade
$
3,117

 
$
3,017

Other
299

 
270

Total
$
3,416

 
$
3,287


The allowance for doubtful accounts was $75 million and $73 million at March 31, 2018 and December 31, 2017, respectively.

Inventories 
In millions
March 31, 2018
 
December 31, 2017
Raw materials
$
285

 
$
274

Finished pulp, paper and packaging
1,075

 
1,337

Operating supplies
589

 
615

Other
108

 
87

Total
$
2,057

 
$
2,313


Depreciation 

Accumulated depreciation was $20.8 billion and $20.5 billion at March 31, 2018 and December 31, 2017. Depreciation expense was $306 million and $299 million for the three months ended March 31, 2018 and 2017, respectively.

Interest

Interest payments made during the three months ended March 31, 2018 and 2017 were $223 million and $212 million, respectively.

14



Amounts related to interest were as follows: 
 
Three Months Ended
March 31,
In millions
2018
 
2017
Interest expense
$
180

 
$
187

Interest income
45

 
45

Capitalized interest costs
8

 
6


Asset Retirement Obligations

The Company had recorded liabilities of $86 million related to asset retirement obligations at both March 31, 2018 and December 31, 2017.

The Company accounts for the following investments in affiliated companies under the equity method of accounting.

Graphic Packaging International, LLC

On January 1, 2018, the Company completed the transfer of its North American Consumer Packaging business, which includes its North American Coated Paperboard and Foodservice businesses, to a subsidiary of Graphic Packaging International Partners, LLC (GPIP) in exchange for a 20.5% ownership interest in GPIP. GPIP subsequently transferred the North American Consumer Packaging business to Graphic Packaging International, LLC (GPI), a wholly-owned subsidiary of GPIP that holds the assets of the combined business. The Company recorded equity earnings of $2 million for the three months ended March 31, 2018. At March 31, 2018, the Company's investment in GPI was $1.1 billion, which was $525 million more than the Company's proportionate share of the entity's underlying net assets. The difference primarily relates to the basis difference between the fair value of our investment and the underlying net assets and is generally amortized over a period consistent with the underlying long-lived assets. The Company is party to various agreements with GPI under which it sells fiber and other products to GPI. Sales under these agreements were $60 million for the three months ended March 31, 2018.

Summarized financial information for Graphic Packaging International, LLC is presented in the following tables:

Balance Sheet
In millions
March 31, 2018
Current assets
$
1,814

Noncurrent assets
5,297

Current liabilities
975

Noncurrent liabilities
3,274


Income Statement
 
Three Months Ended
March 31,
In millions
2018
Net sales
$
1,476

Gross profit
223

Income from continuing operations
62

Net income
62


Ilim Holding S.A.

The Company has a 50% equity interest in Ilim Holding S.A. and it’s subsidiaries (Ilim) that is a separate business segment, whose primary operations are in Russia. The Company recorded equity earnings (losses), net of taxes, of $92 million and $50 million for the three months ended March 31, 2018 and 2017, respectively. The Company received cash dividends from the joint venture of $116 million and $127 million during the first three months of 2018 and 2017, respectively. At March 31, 2018 and December 31, 2017, the Company's investment in Ilim was $330 million and $338 million, respectively, which was $157

15


million and $154 million, respectively, more than the Company's proportionate share of the joint venture's underlying net assets. The differences primarily relate to purchase price fair value adjustments and currency translation adjustments. The Company is party to a joint marketing agreement with JSC Ilim Group, a subsidiary of Ilim, under which the Company purchases, markets and sells paper produced by JSC Ilim Group. Purchases under this agreement were $53 million and $47 million for the three months ended March 31, 2018 and 2017, respectively.

Summarized financial information for Ilim is presented in the following tables:

Balance Sheet
In millions
March 31, 2018
 
December 31, 2017
Current assets
$
581

 
$
689

Noncurrent assets
1,740

 
1,696

Current liabilities
787

 
1,039

Noncurrent liabilities
1,174

 
972

Noncontrolling interests
11

 
6


Income Statement
 
Three Months Ended
March 31,
In millions
2018
 
2017
Net sales
$
677

 
$
449

Gross profit
375

 
207

Income from continuing operations
189

 
106

Net income
183

 
100



Goodwill

The following table presents changes in goodwill balances as allocated to each business segment for the three-months ended March 31, 2018: 
In millions
Industrial
Packaging
 
Global Cellulose Fibers
 
Printing
Papers
 
Total
Balance as of January 1, 2018
 
 
 
 
 
 
 
Goodwill
$
3,382

 
$
52

  
$
2,150

  
$
5,584

Accumulated impairment losses (a)
(296
)
 

  
(1,877
)
 
(2,173
)
 
3,086

 
52

  
273

  
3,411

Reclassifications and other (b)
2

 

 
1

 
3

Additions/reductions

 

 

 

Balance as of March 31, 2018
 
 
 
 
 
 
 
Goodwill
3,384

 
52

  
2,151

  
5,587

Accumulated impairment losses
(296
)
 

  
(1,877
)
 
(2,173
)
Total
$
3,088

 
$
52

  
$
274

  
$
3,414

 
(a)
Represents accumulated goodwill impairment charges since the adoption of ASC 350, "Intangibles-Goodwill and Other" in 2002.
(b)
Represents the effects of foreign currency translations and reclassifications.


16


Other Intangibles

Identifiable intangible assets comprised the following: 
 
March 31, 2018
 
December 31, 2017
In millions
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Intangible Assets
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Intangible Assets
Customer relationships and lists
$
610

 
$
256

 
$
354

 
$
610

 
$
247

 
$
363

Non-compete agreements
71

 
71

 

 
72

 
72

 

Tradenames, patents and trademarks, and developed technology
173

 
77

 
96

 
172

 
72

 
100

Land and water rights
8

 
2

 
6

 
8

 
2

 
6

Software
27

 
25

 
2

 
24

 
23

 
1

Other
40

 
30

 
10

 
38

 
26

 
12

Total
$
929

 
$
461

 
$
468

 
$
924

 
$
442

 
$
482


The Company recognized the following amounts as amortization expense related to intangible assets: 
 
Three Months Ended
March 31,
In millions
2018
 
2017
Amortization expense related to intangible assets
$
14

 
$
16



International Paper made income tax payments, net of refunds, of $20 million and $29 million for the three months ended March 31, 2018 and 2017, 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 $10 million during the next 12 months.
International Paper uses the flow-through method to account for investment tax credits earned on eligible open loop-biomass facilities and Combined Heat and Power system expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense in the year they are earned rather than a reduction in the asset basis. The Company recorded a tax benefit of $6 million and $0 million for the three months ended March 31, 2018 and 2017, respectively.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("the Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.
The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our initial analysis of the impact of the Tax Act, we recorded a provisional net tax benefit of $1.22 billion in the period ending December 31, 2017. The net tax benefit primarily consisted of a net tax benefit for the re-measurement of U.S. deferred taxes of $1.454 billion and an expense for the Transition Tax of $231 million. For various reasons that are discussed more fully below, as of the quarter ended March 31, 2018, we have not completed our accounting for the income tax effects of the Tax Act.

17


Our accounting for the following elements of the Tax Act is incomplete as of March 31, 2018. The estimates reported in the period ending December 31, 2017, were not adjusted in the period ending March 31, 2018. As of the period ended March 31, 2018, there has been no change or clarification in guidance issued or interpretations or assumptions we have made that caused a change to the estimates reported in the period ending December 31, 2017.
Reduction of U.S. federal corporate tax rate: The Tax Act reduced the corporate tax rate to 21%, effective January 1, 2018. For certain of our deferred tax assets and liabilities, we recorded a provisional net decrease of $1.451 billion with a corresponding adjustment to deferred income tax benefit in the same amount for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analysis related to the Tax Act, including but not limited to, the state tax effect of adjustments made to federal temporary differences.
Deemed Repatriation Transition Tax: This is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of foreign subsidiaries. To determine the amount of the transition tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We were able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $231 million in the tax period ending December 31, 2017.
Valuation Allowances: The Company has assessed whether its U.S. state and local income tax valuation allowance analysis is affected by various aspects of the Tax Act (e.g. deemed repatriation of foreign income, acceleration of cost recovery). Since, as discussed herein, the Company has recorded provisional amounts related to elements of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. For certain of our state deferred tax assets, we recorded a net $3 million provisional decrease in the recorded valuation allowance with a corresponding adjustment to deferred income tax benefit in the same amount for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the Tax Act on state attributes, the resolution of, or changes from, other factors noted herein may result in changes in our recorded valuation allowance.
The Tax Act may impact decisions surrounding the Company’s permanent reinvestment assertions related to its foreign investments and could have an impact on the Company’s accounting for untaxed outside basis differences. We previously considered the earnings in our non-U.S. subsidiaries to be permanently reinvested, and, accordingly deferred income taxes were not provided for such basis differences which totaled approximately $5.9 billion at December 31, 2017. While the transition tax resulted in a reduction in these basis differences, an actual repatriation from our non-U.S. subsidiaries could still be subject to additional taxes, including, but not limited to, foreign withholding taxes and U.S. state income taxes. In light of the Tax Act, the Company is evaluating its global cash management and non-U.S. repatriation strategy but we have yet to determine whether we plan to change our prior assertion. Accordingly, we have not recorded any deferred taxes attributable to our investments in our non-U.S. subsidiaries.
These estimates may change materially due to, among other things, further clarification of existing guidance that may be issued by U.S. taxing authorities or regulatory bodies and/or changes in interpretations and assumptions we have preliminarily made. We will continue to analyze the Tax Act to finalize its financial statement impact, including the mandatory deemed repatriation of foreign earnings, re-measurement of deferred taxes and all other provisions of the legislation and will record the effects of any changes to provisional amounts in the period we can complete our analysis or are first able to make a reasonable estimate, but no later than December 2018.
Because of the complexity of the new Global Intangible Low Tax Income (GILTI) rules, we are continuing to evaluate this provision of the Act and the application of ASC 740. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy related to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on a number of different aspects of our estimated future results of global operations, we are not yet able to reasonably estimate the long-term effects of this provision of the Act. Therefore, we have not recorded any potential deferred tax effects related to GILTI in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method. We expect to complete our accounting within the prescribed measurement period.


Environmental

International Paper 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

18


waste from many different sources. While joint and several liability is authorized under CERCLA and equivalent state laws, as a practical matter, liability for CERCLA cleanups is typically allocated among the many PRPs. There are other remediation costs typically associated with the cleanup of hazardous substances at the Company’s current, closed or formerly-owned facilities, and recorded as liabilities in the balance sheet.

Remediation costs are recorded in the consolidated financial statements when they become probable and reasonably estimable. International Paper has estimated the probable liability associated with these matters to be approximately $131 million ($143 million undiscounted) in the aggregate at March 31, 2018. Other than as described below, completion of required remedial actions is not expected to have a material effect on our consolidated financial statements.

Cass Lake: One of the matters included above arises out of a closed wood-treating facility located in Cass Lake, Minnesota. In June 2011, the United States Environmental Protection Agency (EPA) selected and published a proposed soil remedy at the site with an estimated cost of $46 million. The overall remediation reserve for the site is currently $51 million to address the selection of an alternative for the soil remediation component of the overall site remedy, which includes the ongoing groundwater remedy. In October 2011, the EPA released a public statement indicating that the final soil remedy decision would be delayed. In March 2016, the EPA issued a proposed plan concerning clean-up standards at a portion of the site, the estimated cost of which is included within the reserve referenced above. In October 2012, the Natural Resource Trustees for this site provided notice to International Paper and other PRPs of their intent to perform a Natural Resource Damage Assessment. It is premature to predict the outcome of the assessment or to estimate a loss or range of loss, if any, which may be incurred.

Kalamazoo River: The Company is a PRP with respect to the Allied Paper, Inc./Portage Creek/Kalamazoo River Superfund Site in Michigan. The EPA asserts that the site is contaminated by polychlorinated biphenyls (PCBs) primarily as a result of discharges from various paper mills located along the Kalamazoo River, including a paper mill (the Allied Paper Mill) formerly owned by St. Regis Paper Company (St. Regis). The Company is a successor in interest to St. Regis.

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, 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.

In April 2016, the EPA issued a separate unilateral administrative order to the Company and certain other PRPs for a time-critical removal action (TCRA) of PCB-contaminated sediments from a different portion of the site. The Company responded to the unilateral administrative order and agreed along with two other parties to comply with the order subject to its sufficient cause defenses.

In October 2016, the Company and another PRP received a special notice letter from the EPA inviting participation in the remedial design component of the landfill remedy for the Allied Paper Mill. The record of decision establishing the final landfill remedy for the Allied Paper Mill was issued by the EPA in September 2016. The Company responded to the Allied Paper Mill special notice letter in late December 2016. In February 2017, the EPA informed the Company that it would make other arrangements for the performance of the remedial design.

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.


The Company was named as a defendant by Georgia-Pacific Consumer Products LP, Fort James Corporation and Georgia Pacific LLC in a contribution and cost recovery action for alleged pollution at the site. 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. The suit alleges that a mill, during the time it was allegedly owned and operated by St. Regis, discharged PCB contaminated solids and paper residuals resulting from paper de-inking and recycling. NCR Corporation and Weyerhaeuser Company are also named as defendants in the suit. In mid-2011, the suit was transferred from the District Court for the Eastern District of Wisconsin to the District Court for the Western District of Michigan. The trial of the initial liability phase took place in February 2013. Weyerhaeuser conceded prior to trial that it was a liable party with respect to the site. In September 2013, an opinion and order was issued in the suit. The order concluded that the Company (as the successor to St. Regis) was not an “operator,” but was an “owner,” of the mill at issue during a portion of the relevant period and is therefore liable under CERCLA. The order also determined that NCR is a liable party as an "arranger for disposal" of PCBs in waste paper that was de-inked and recycled by mills along the Kalamazoo River. The order did not address the Company's responsibility, if any, for past or future costs. The parties’ responsibility, including that of the Company, was the subject of a second trial, w

19


hich was concluded in late 2015. In March 2018, the Court issued an Opinion addressing the Company's liability for past costs. The Court 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 remediation costs in its decision. As to future remediation costs, the Company remains unable to estimate our maximum reasonably possible loss with respect to this site. However, we do not believe that any material loss is probable.
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 September 2016, the EPA issued a proposed remedial action plan (PRAP) for the site, which identified the preferred remedy as the removal of the contaminated material currently protected by an armored cap. In addition, the EPA selected a preferred remedy for the separate southern impoundment that requires offsite disposal. In January 2017, the PRPs submitted comments on the PRAP.
On October 11, 2017, the EPA issued a Record of Decision (ROD) selecting the final remedy for the site: removal and relocation of the waste material from both the northern and southern impoundments. The EPA did not specify the methods or practices needed to perform this work. While the EPA’s selected remedy was accompanied by a cost estimate of approximately $115 million, we do not believe that estimate provides a reasonable basis for accrual under GAAP because the estimate was based on a technological method for performing the work that we believe is not feasible. Subsequent to the issuance of the ROD, there have been several meetings between the EPA and the PRPs, and the Company continues to work with the EPA and MIMC/WMI to develop the remedial design. To this end, in April 2018, the PRPs entered into an Administrative Order on Consent (AOC) with the EPA, agreeing to work together to develop the remedial design over the next 29 months. 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 the excavation remedy is able to be implemented in a manner protective of human health and the environment, and investigating potential impacts to infrastructure in the vicinity. The Company has identified a number of concerns and uncertainties regarding the remedy described in the ROD and regarding the EPA’s estimates for the costs and time required to implement the selected remedy. Because of ongoing questions regarding cost effectiveness, technical feasibility, timing and other technical data, it is uncertain how the ROD will be implemented. Consequently, while additional losses are probable as a result of the selected remedy, we are currently unable to determine any adjustment to our immaterial recorded liability. It remains reasonably possible that additional losses could be material as the remedial design process with the EPA continues over the coming quarters.

International Paper and MIMC/WMI are also defending an additional lawsuit related to the site brought by approximately 600 individuals who allege property damage and personal injury. Because this case is still in the discovery phase, it is premature to predict the outcome or to estimate a loss or range of loss, if any, which may be incurred.

Antitrust

Containerboard: In June 2016, a lawsuit captioned Ashley Furniture Indus., Inc. v. Packaging Corporation of America (W.D. Wis.), was filed in federal court in Wisconsin against ten defendants, including the Company, Temple-Inland and Weyerhaeuser Company. The Ashley Furniture lawsuit alleges a civil violation of Section 1 of the Sherman Act (in particular, that defendants conspired to limit the supply and thereby increase prices of containerboard products), and also asserts Wisconsin state antitrust claims. In January 2011, International Paper was named as a defendant in a lawsuit filed in state court in Cocke County, Tennessee alleging that International Paper violated Tennessee law by conspiring to limit the supply and fix the prices of containerboard from mid-2005 to the present. Plaintiffs in the state court action seek certification of a class of Tennessee indirect purchasers of containerboard products, damages and costs, including attorneys' fees. No class certification materials have been filed to date in the Tennessee action.

The Company disputes the allegations made in the Ashley Furniture and Tennessee lawsuits and is vigorously defending each. At this time, however, because the actions are in a preliminary stage, we are unable to predict an outcome or estimate a range of reasonably possible loss.

Contract

Signature: In August 2014, a lawsuit captioned Signature Industrial Services LLC et al. v. International Paper Company was filed in state court in Texas. The Signature lawsuit arises out of approximately $1 million in disputed invoices related to the installation of new equipment at the Company's Orange, Texas mill. In addition to the invoices in dispute, Signature and its president allege consequential damages arising from the Company's nonpayment of those invoices. The lawsuit was tried

20


before a jury in Beaumont, Texas, in May 2017. On June 1, 2017, the jury returned a verdict awarding approximately $125 million in damages to the plaintiffs. The Court issued a judgment on December 14, 2017, awarding the plaintiffs a total of approximately $137 million in actual and consequential damages, fees, costs and pre-judgment interest, and awarding post-judgment interest. The Company has appealed this judgment. The Company has numerous and strong bases for appeal, and we believe we will prevail on appeal. Because the appellate proceedings are in a preliminary stage, we are unable to estimate a range of reasonably possible loss, but we expect the amount of any loss to be immaterial.

General

The Company is involved in various other inquiries, administrative proceedings and litigation relating to environmental and safety matters, personal injury, labor and employment, contracts, sales of property, intellectual property and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, the Company believes that the outcome of any of these lawsuits or claims that are pending or threatened or all of them combined (other than those that cannot be assessed due to their preliminary nature) will not have a material effect on its consolidated financial statements.


Variable Interest Entities

As of March 31, 2018, the fair value of the Timber Notes and Extension Loans is $4.68 billion and $4.22 billion, respectively, for the 2015 Financing Entities. The Timber Notes and Extension Loans are classified as Level 2 within the fair value hierarchy, which is further defined in Note 14 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Activity between the Company and the 2015 Financing Entities was as follows:
 
Three Months Ended
March 31,
In millions
2018
 
2017
Revenue (a)
$
24

 
$
24

Expense (a)
32

 
32

Cash receipts (b)
47

 
47

Cash payments (c)
64

 
64

 
(a)
The revenue and expense are included in Interest expense, net in the accompanying statement of operations.
(b)
The cash receipts are interest received on the Financial assets of special purpose entities.
(c)
The cash payments represent interest paid on Nonrecourse financial liabilities of special purpose entities.

As of March 31, 2018, the fair value of the Timber Notes and Extension Loans is $2.22 billion and $2.07 billion, respectively, for the 2007 Financing Entities. The Timber Notes and Extension Loans are classified as Level 2 within the fair value hierarchy, which is further defined in Note 14 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Activity between the Company and the 2007 Financing Entities was as follows: 
 
Three Months Ended
March 31,
In millions
2018
 
2017
Revenue (a)
$
15

 
$
13

Expense (b)
14

 
15

Cash receipts (c)
9

 
6

Cash payments (d)
12

 
9

 
(a)
The revenue is included in Interest expense, net in the accompanying statement of operations and includes approximately $5 million for each of the three months ended March 31, 2018 and 2017, respectively, of accretion income for the amortization of the purchase accounting 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 for each of the three months ended March 31, 2018 and 2017, respectively, of accretion expense for the amortization of the purchase accounting 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.

21


(d)
The cash payments are interest paid on Nonrecourse financial liabilities of special purpose entities.

In December 2017, International Paper received $660 million in cash proceeds from a new loan entered into as part of the transfer of the North American Consumer Packaging business to a subsidiary of Graphic Packing Holding Company discussed in Note 9. The Company used the cash proceeds, together with available cash, to pay down existing debt of approximately $900 million. The $660 million term loan was subsequently assumed by Graphic Packaging International, LLC on January 1, 2018 and was classified as Liabilities held for sale at December 31, 2017, in the accompanying consolidated balance sheet.

In June 2016, International Paper entered into a commercial paper program with a borrowing capacity of $750 million. 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 March 31, 2018, the Company had $375 million of borrowings outstanding under the program at a weighted average interest rate of 2.33%.

At March 31, 2018, the fair value of International Paper’s $11.3 billion of debt was approximately $11.8 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 14 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.


As a multinational company we are exposed to market risks, such as changes in interest rates, currency exchanges rates and commodity prices.

For detailed information regarding the Company’s hedging activities and related accounting, refer to Note 14 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

The notional amounts of qualifying and non-qualifying financial instruments used in hedging transactions were as follows:
In millions
March 31, 2018
 
December 31, 2017
Derivatives in Cash Flow Hedging Relationships:
 
 
 
Foreign exchange contracts (a)
$
376

 
$
329

Derivatives Not Designated as Hedging Instruments:
 
 
 
Electricity contract
8

 
13

Foreign exchange contracts
6

 
10


(a)
These contracts had maturities of two years or less as of March 31, 2018.

The following table shows gains or losses recognized in AOCI, net of tax, related to derivative instruments: 
 
Gain (Loss)
Recognized in
AOCI
on Derivatives
(Effective Portion)
 
Three Months Ended
March 31,
In millions
2018
 
2017
Foreign exchange contracts
$

 
$
9

Interest rate contracts
(3
)
 

Total
$
(3
)
 
$
9


During the next 12 months, the amount of the March 31, 2018 AOCI balance, after tax, that is expected to be reclassified to earnings is a gain of $4 million.


22


The amounts of gains and losses recognized in the statement of operations on qualifying and non-qualifying financial instruments used in hedging transactions were as follows:
 
Gain (Loss)
Reclassified from
AOCI
(Effective Portion)
Location of Gain (Loss)
Reclassified from AOCI
(Effective Portion)
 
Three Months Ended
March 31,
 
 
In millions
2018
 
2017
 
 
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
Foreign exchange contracts
$
2

 
$
2

 
Cost of products sold
Total
$
2

 
$
2

 
 

 
Gain (Loss) Recognized
Location of Gain (Loss)
In 
Statement
of Operations
 
Three Months Ended
March 31,
 
 
In millions
2018
 
2017
 
 
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
Electricity contract
$
(2
)
 
$
(1
)
 
Cost of products sold
Total
$
(2
)
 
$
(1
)
 
 

Fair Value Measurements

For a discussion of the Company’s fair value measurement policies under the fair value hierarchy, refer to Note 14 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period.

The following table provides a summary of the impact of our derivative instruments in the balance sheet:

Fair Value Measurements
Level 2 – Significant Other Observable Inputs
 
 
Assets
 
Liabilities
 
In millions
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Foreign exchange contracts – cash flow
$
9

(a) 
$
11

(b)
$
2

(c)
$
1

(c)
Total derivatives designated as hedging instruments
9

  
11

 
2

  
1

  
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Electricity contract




8

(d)
8

(d)
Total derivatives not designated as hedging instruments

  

 
8

  
8

  
Total derivatives
$
9

  
$
11

 
$
10

  
$
9

  
 
(a)
Includes $8 million recorded in Other current assets and $1 million recorded in Deferred charges and other assets in the accompanying balance sheet.
(b)
Includes $10 million recorded in Other current assets and $1 million recorded in Deferred charges and other assets in the accompanying balance sheet.
(c)
Included in Other accrued liabilities in the accompanying balance sheet.
(d)
Includes $5 million recorded in Other accrued liabilities and $3 million recorded in Other liabilities in the accompanying consolidated balance sheet.

The above contracts are subject to enforceable master netting arrangements that provide rights of offset with each counterparty when amounts are payable on the same date in the same currency or in the case of certain specified defaults. Management has made an accounting policy election to not offset the fair value of recognized derivative assets and derivative liabilities in the

23


balance sheet. The amounts owed to the counterparties and owed to the Company are considered immaterial with respect to each counterparty and in the aggregate with all counterparties.


International Paper sponsors and maintains the Retirement Plan of International Paper Company (the Pension Plan), a tax-qualified defined benefit pension plan that provides retirement benefits to substantially all U.S. salaried employees and hourly employees (receiving salaried benefits) hired prior to July 1, 2004, and substantially all other U.S. hourly and union employees who work at a participating business unit regardless of hire date. These employees generally are eligible to participate in the Pension Plan upon attaining 21 years of age and completing one year of eligibility service. U.S. salaried employees and hourly employees (receiving salaried benefits) hired after June 30, 2004, are not eligible for the Pension Plan, but receive a company contribution to their individual savings plan accounts; however, salaried employees hired by Temple Inland prior to March 1, 2007 or Weyerhaeuser Company's Cellulose Fibers division prior to December 1, 2011 also participate in the Pension Plan.
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).

The Company will freeze participation, including credited service and compensation, for salaried employees under the Pension Plan, the Pension Restoration Plan and the two SERP plans for all service on or after January 1, 2019. This change will not affect benefits accrued through December 31, 2018.

Net periodic pension expense for our qualified and nonqualified U.S. defined benefit plans comprised the following: 
 
Three Months Ended
March 31,
In millions
2018
 
2017
Service cost
$
38

 
$
40

Interest cost
118

 
138

Expected return on plan assets
(200
)
 
(192
)
Actuarial loss
82

 
85

Amortization of prior service cost
4

 
7

Net periodic pension expense
$
42

 
$
78


The components of net periodic pension expense other than the service cost component are included in Non-operating pension expense in the Consolidated Statement of Operations.

The Company’s funding policy for our pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plan, tax deductibility, the cash flows generated by the Company, and other factors. No cash contributions were made to the qualified pension plan in the first three months of 2018 and 2017. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $14 million for the three months ended March 31, 2018.


International Paper has an Incentive Compensation Plan (ICP) which is administered by the Management Development and Compensation Committee of the Board of Directors (the Committee). The ICP authorizes the grants of restricted stock, restricted or deferred stock units, performance awards payable in cash or stock upon the attainment of specified performance goals, dividend equivalents, stock options, stock appreciation rights, other stock-based awards and cash-based awards at the discretion of the Committee. As of March 31, 2018, 11.8 million shares were available for grant under the ICP.

Stock-based compensation expense and related income tax benefits were as follows: 
 
Three Months Ended
March 31,
In millions
2018
 
2017
Total stock-based compensation expense (selling and administrative)
$
31

 
$
42

Income tax benefits related to stock-based compensation
22

 
48



24


At March 31, 2018, $177 million, net of estimated forfeitures, of compensation cost related to unvested restricted performance shares, executive continuity awards and restricted stock attributable to future service had not yet been recognized. This amount will be recognized in expense over a weighted-average period of 2.3 years.

Performance Share Plan

During the first three months of 2018, the Company granted 1.8 million performance units at an average grant date fair value of $62.97.


International Paper’s business segments, Industrial Packaging, Global Cellulose Fibers and Printing Papers, are consistent with the internal structure used to manage these businesses. All segments are differentiated on a common product, common customer basis consistent with the business segmentation generally used in the Forest Products industry.

The Company also holds a 50% interest in Ilim Holding S.A. and a 20.5% interest in Graphic Packaging International LLC, which are separate reportable industry segments. See Note 11 for details of the Company's ownership in each of these investments.

Business segment operating profits are used by International Paper's management to measure the earnings performance of its businesses. Management believes that this measure allows a better understanding of trends in costs, operating efficiencies, prices and volumes. Business segment operating profits are defined as earnings (loss) from continuing operations before income taxes and equity earnings, but including the impact of equity earnings and noncontrolling interests, excluding corporate items, corporate special items and non-operating pension expense.

Sales by business segment for the three months and three months ended March 31, 2018 and 2017 were as follows: 
 
Three Months Ended
March 31,
 
In millions
2018
 
2017
 
Industrial Packaging
$
3,827

 
$
3,577

 
Global Cellulose Fibers
677

 
564

 
Printing Papers
1,053

 
995

 
Corporate and Intersegment Sales
64

 
(4
)
 
Net Sales
$
5,621

 
$
5,132

 

Operating profit by business segment for the three months ended March 31, 2018 and 2017 were as follows: 
 
Three Months Ended
March 31,
 
In millions
2018
 
2017
 
Industrial Packaging
$
437

 
$
384

 
Global Cellulose Fibers
11

 
(70
)
 
Printing Papers
64

 
100

 
Business Segment Operating Profits
512

  
414

  
 
 
 
 
 
Earnings (loss) from continuing operations before income taxes and equity earnings
356

 
217

 
Interest expense, net
135

 
142

 
Noncontrolling interests/equity earnings adjustment
(1
)
  

  
Corporate items, net
9

 
24

 
Corporate special items, net
9

 

 
Non-operating pension expense
4

 
31



$
512

  
$
414

  
 


25


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY

Net earnings (loss) attributable to International Paper common shareholders were $729 million ($1.74 per diluted share) in the first quarter of 2018, compared with $1.5 billion ($3.50 per diluted share) in the fourth quarter of 2017 and $209 million ($0.50 per diluted share) in the first quarter of 2017. Adjusted Operating Earnings is a non-GAAP measure and is defined as net earnings from continuing operations (a GAAP measure) excluding special items and non-operating pension expense. International Paper generated Adjusted Operating Earnings Attributable to International Paper Common Shareholders of $395 million ($0.94 per diluted share) in the first quarter of 2018, compared with $530 million ($1.27 per diluted share) in the 2017 fourth quarter and $232 million ($0.56 per diluted share) in the 2017 first quarter.

International Paper delivered solid performance in the first quarter and strong year-over-year earnings growth from the combination of healthy global demand for our products and the continued realization of recent price increases across all three of our business segments. We successfully executed approximately one-third of our 2018 planned maintenance outages during the quarter, and managed through weather-related disruptions and other unusual events. During the 2018 first quarter, our Ilim joint venture generated record equity earnings, and delivered $116 million in cash dividends to International Paper.
The Company continued to experience price realization momentum across its portfolio during the 2018 first quarter as a result of recent pricing initiatives. As expected, volumes were seasonally lower than the 2017 fourth quarter across all three of our businesses; however, underlying demand remains strong. In addition to the impact of seasonality, volumes in our Global Cellulose Fibers business were impacted by lower shipments due to ongoing rail service issues in Canada. Input costs were higher versus the 2017 fourth quarter, driven by higher seasonal wood costs, as well as, higher chemical and fuel costs, which were partially offset by lower costs for recovered fiber. Supply chain cost pressures continued to be a headwind across all North American operations during the 2018 first quarter, driven by tight rail and truck capacity. Operationally, we performed well in the 2018 first quarter despite challenging weather conditions and a heavy planned maintenance outage quarter. Operations were impacted by weather disruptions, primarily frigid conditions across the eastern United States and heavy rainfall in the southern United States, as well as other unusual events, including unplanned downtime at our Kwidzyn, Poland mill. Finally, we reported equity earnings from our 20.5% ownership interest in Graphic Packaging for the first time during the 2018 first quarter.
Looking ahead to the 2018 second quarter, we expect to see continuing benefits from previous price increases in our North American Industrial Packaging business along with continued realization of previous price increases and improved mix in our Global Cellulose Fibers and Printing Papers businesses. Volumes are expected to be seasonally higher in our North American Industrial Packaging and Printing Papers businesses while sequentially flat in our Global Cellulose Fibers business. Operations are expected to benefit from the non-repeat of the challenging weather conditions experienced during the 2018 first quarter. Maintenance outages are expected to again be high as we anticipate the completion of approximately 75% of our total annual maintenance outages by the end of the second quarter. Input costs are expected to remain largely flat in our Printing Papers and Global Cellulose Fibers businesses while our Industrial Packaging business should benefit from lower OCC costs. We also anticipate the start-up of the Madrid mill later in the second quarter, which will produce 400,000 metric tons of light-weight recycled containerboard for our European packaging business. For our Ilim joint venture, seasonally stronger sales volumes are expected to be partially offset by a heavy maintenance quarter.
Adjusted Operating Earnings and Adjusted Operating Earnings Per Share are non-GAAP measures and are defined as net earnings from continuing operations (a GAAP measure) excluding special items and non-operating pension expense. Diluted earnings (loss) and Diluted earnings (loss) per share attributable to common shareholders are the most direct comparable GAAP measures. The Company calculates Adjusted Operating Earnings by excluding the after-tax effect of items considered by management to be unusual from the earnings reported under GAAP, non-operating pension expense (includes all U.S. pension costs, excluding service costs and prior service costs), and discontinued operations. 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 operating results. 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.

26


The following are reconciliations of Diluted earnings (loss) attributable to common shareholders to Adjusted Operating Earnings attributable to common shareholders.
 
Three Months Ended
March 31,
 
Three Months Ended December 31,
In millions
2018
 
2017
 
2017
Diluted Earnings (Loss) Attributable to Shareholders
$
729

 
$
209

 
$
1,460

Add back - Discontinued operations (gain) loss
(368
)
 
(17
)
 
8

Diluted Earnings (Loss) from Continuing Operations
361

 
192

 
1,468

Add Back - Non-operating pension (income) expense
4

 
31

 
386

Add Back - Net special items expense (income)
40

 
14

 
106

Income tax effect - Non-operating pension and special items expense
(10
)
 
(5
)
 
(1,430
)
Adjusted Operating Earnings (Loss) Attributable to Shareholders
$
395

 
$
232

 
$
530

 
Three Months Ended
March 31,
 
Three Months Ended December 31,
In millions
2018