10-Q 1 ip-6302018xform10xq.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 June 30, 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 July 27, 2018 was 408,878,065.



INDEX
 
 
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Operations - Three Months and Six Months Ended June 30, 2018 and 2017
 
 
 
 
Condensed Consolidated Statement of Comprehensive Income - Three Months and Six Months Ended June 30, 2018 and 2017
 
 
 
 
Condensed Consolidated Balance Sheet - June 30, 2018 and December 31, 2017
 
 
 
 
Condensed Consolidated Statement of Cash Flows - Six Months Ended June 30, 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
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net Sales
$
5,833

 
$
5,383

 
$
11,454

 
$
10,515

Costs and Expenses
 
 
 
 
 
 
 
Cost of products sold
3,922

 
3,749

 
7,870

 
7,387

Selling and administrative expenses
451

 
393

 
872

 
786

Depreciation, amortization and cost of timber harvested
330

 
334

 
655

 
654

Distribution expenses
403

 
359

 
769

 
707

Taxes other than payroll and income taxes
42

 
41

 
86

 
83

Restructuring and other charges
26

 
(16
)
 
48

 
(16
)
Net (gains) losses on sales and impairments of businesses

 
9

 

 
9

Litigation settlement

 
354

 

 
354

Net bargain purchase gain on acquisition of business

 

 

 
(6
)
Interest expense, net
133

 
137

 
268

 
279

Non-operating pension expense
36

 
46

 
40

 
84

Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings
490

 
(23
)
 
846


194

Income tax provision (benefit)
130

 
(87
)
 
219

 
(14
)
Equity earnings (loss), net of taxes
70

 
20

 
165

 
68

Earnings (Loss) From Continuing Operations
430

 
84

 
792

 
276

Discontinued operations, net of taxes
(23
)
 
(4
)
 
345

 
13

Net Earnings (Loss)
407

 
80

 
1,137

 
289

Less: Net earnings (loss) attributable to noncontrolling interests
2

 

 
3

 

Net Earnings (Loss) Attributable to International Paper Company
$
405

 
$
80

 
$
1,134

 
$
289

Basic Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
1.03

 
$
0.20

 
$
1.91

 
$
0.67

Discontinued operations, net of taxes
(0.05
)
 
(0.01
)
 
0.83

 
0.03

Net earnings (loss)
$
0.98

 
$
0.19

 
$
2.74

 
$
0.70

Diluted Earnings (Loss) Per Share Attributable to International Paper Company Common Shareholders
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
1.02

 
$
0.20

 
$
1.88

 
$
0.66

Discontinued operations, net of taxes
(0.05
)
 
(0.01
)
 
0.83

 
$
0.03

Net earnings (loss)
$
0.97

 
$
0.19

 
$
2.71

 
$
0.69

Average Shares of Common Stock Outstanding – assuming dilution
417.7

 
416.4

 
418.8

 
416.7

Cash Dividends Per Common Share
$
0.4750

 
$
0.4625

 
$
0.9500

 
$
0.9250

Amounts Attributable to International Paper Company Common Shareholders
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
428

 
$
84

 
$
789

 
$
276

Discontinued operations, net of taxes
(23
)
 
(4
)
 
345

 
13

Net earnings (loss)
$
405

 
$
80

 
$
1,134

 
$
289

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
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net Earnings (Loss)
$
407

 
$
80

 
$
1,137

 
$
289

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
Amortization of pension and post-retirement prior service costs and net loss:
 
 
 
 
 
 
 
U.S. plans
85

 
60

 
151

 
117

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

 
2

 

 
1

Change in cumulative foreign currency translation adjustment
(422
)
 
(14
)
 
(380
)
 
134

Net gains/losses on cash flow hedging derivatives:
 
 
 
 
 
 
 
Net gains (losses) arising during the period
(18
)
 
(1
)
 
(21
)
 
8

Reclassification adjustment for (gains) losses included in net earnings (loss)
2

 
(2
)
 

 
(4
)
Total Other Comprehensive Income (Loss), Net of Tax
(353
)
 
45

 
(250
)
 
256

Comprehensive Income (Loss)
54

 
125

 
887

 
545

Net (earnings) loss attributable to noncontrolling interests
(2
)
 

 
(3
)
 

Other comprehensive (income) loss attributable to noncontrolling interests
2

 
(1
)
 
2

 
(2
)
Comprehensive Income (Loss) Attributable to International Paper Company
$
54

 
$
124

 
$
886

 
$
543

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

2


INTERNATIONAL PAPER COMPANY
Condensed Consolidated Balance Sheet
(In millions)
 
June 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and temporary investments
$
1,073

 
$
1,018

Accounts and notes receivable, net
3,526

 
3,287

Contract assets
381

 

Inventories
2,050

 
2,313

Assets held for sale

 
1,377

Other current assets
242

 
282

Total Current Assets
7,272

 
8,277

Plants, Properties and Equipment, net
13,193

 
13,265

Forestlands
396

 
448

Investments
1,538

 
390

Financial Assets of Special Purpose Entities (Note 15)
7,061

 
7,051

Goodwill
3,378

 
3,411

Deferred Charges and Other Assets
958

 
1,061

Total Assets
$
33,796

 
$
33,903

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
684

 
$
311

Accounts payable
2,478

 
2,458

Accrued payroll and benefits
424

 
485

Liabilities held for sale

 
805

Other accrued liabilities
1,032

 
1,043

Total Current Liabilities
4,618

 
5,102

Long-Term Debt
10,805

 
10,846

Nonrecourse Financial Liabilities of Special Purpose Entities (Note 15)
6,295

 
6,291

Deferred Income Taxes
2,502

 
2,291

Pension Benefit Obligation
1,840

 
1,939

Postretirement and Postemployment Benefit Obligation
315

 
326

Other Liabilities
557

 
567

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

 
449

Paid-in capital
6,219

 
6,206

Retained earnings
6,988

 
6,180

Accumulated other comprehensive loss
(4,881
)
 
(4,633
)
 
8,775

 
8,202

Less: Common stock held in treasury, at cost, 2018 – 40.0 shares and 2017 – 36.0 shares
1,931

 
1,680

Total International Paper Shareholders’ Equity
6,844

 
6,522

Noncontrolling interests
20

 
19

Total Equity
6,864

 
6,541

Total Liabilities and Equity
$
33,796

 
$
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)
 
 
Six Months Ended
June 30,
 
2018
 
2017
Operating Activities
 
 
 
Net earnings (loss)
$
1,137

 
$
289

Depreciation, amortization and cost of timber harvested
655

 
702

Deferred income tax provision (benefit), net
196

 
304

Restructuring and other charges
48

 
(16
)
Litigation settlement

 
354

Net gain on transfer of North American Consumer Packaging business
(488
)
 

Net bargain purchase gain on acquisition of business

 
(6
)
Net (gains) losses on sales and impairments of businesses

 
9

Equity method dividends received
122

 
127

Equity (earnings) loss, net
(165
)
 
(68
)
Periodic pension expense, net
115

 
158

Other, net
57

 
73

Changes in current assets and liabilities
 
 
 
Accounts and notes receivable
(333
)
 
(230
)
Contract assets
(17
)
 

Inventories
(26
)
 
21

Accounts payable and accrued liabilities
142

 
(110
)
Interest payable
2

 
(1
)
Other
19

 
(328
)
Cash Provided By (Used For) Operations
1,464

 
1,278

Investment Activities
 
 
 
Invested in capital projects
(929
)
 
(664
)
Acquisitions, net of cash acquired

 
(44
)
Net settlement on transfer of North American Consumer Packaging business
(40
)
 

Proceeds from sale of fixed assets
2

 
17

Other
3

 
(39
)
Cash Provided By (Used For) Investment Activities
(964
)
 
(730
)
Financing Activities
 
 
 
Repurchases of common stock and payments of restricted stock tax withholding
(331
)
 
(46
)
Issuance of debt
411

 
132

Reduction of debt
(73
)
 
(248
)
Change in book overdrafts
(24
)
 
(6
)
Dividends paid
(393
)
 
(382
)
Cash Provided By (Used For) Financing Activities
(410
)
 
(550
)
Cash Included in Assets Held for Sale

 
(4
)
Effect of Exchange Rate Changes on Cash
(35
)
 
14

Change in Cash and Temporary Investments
55

 
8

Cash and Temporary Investments
 
 
 
Beginning of period
1,018

 
1,033

End of period
$
1,073

 
$
1,041

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 six 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
items 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 that includes the service cost and outside of any subtotal of operating income. In addition, disclosure of the lines 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 second quarter and six months ended June 30, 2017 amounts reported in the accompanying condensed consolidated statement of operations and on full-year amounts for 2017, 2016 and 2015 reported 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
June 30, 2017
In millions
 
Previously Reported
 
Impact of Adoption Increase/(Decrease)
 
As Revised
Cost of products sold
 
$
3,789

 
$
(40
)
 
$
3,749

Selling and administrative expenses
 
399

 
(6
)
 
393

Non-operating pension expense
 

 
46

 
46

 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
In millions
 
Previously Reported
 
Impact of Adoption Increase/(Decrease)
 
As Revised
Cost of products sold
 
$
7,458

 
$
(71
)
 
$
7,387

Selling and administrative expenses
 
799

 
(13
)
 
786

Non-operating pension expense
 

 
84

 
84

 
 
 
 
 
 
 
 
 
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

 
$
(638
)
 
$
13,419

Selling and administrative expenses
 
1,484

 
(26
)
 
1,458

Non-operating pension expense
 

 
664

 
664

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

 
$
(268
)
 
$
14,045

Selling and administrative expenses
 
1,539

 
(43
)
 
1,496

Non-operating pension expense
 

 
311

 
311


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

6


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.

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. In July 2018, the FASB issued ASU 2018-11, "Leases Topic (842): Targeted Improvements." This ASU provides companies an option to apply the transition provisions of the new lease standard at its adoption date instead of at the earliest comparative period presented in its financial statements. The Company expects to adopt the new lease guidance using the newly approved transition method. 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 begun 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
June 30, 2018
In millions, except per share amounts
 
As Reported
 
Balances Without Adoption of ASC 606
 
Impact of Adoption Increase/(Decrease)
Net sales
 
$
5,833

 
$
5,837

 
$
(4
)
Cost of products sold
 
3,922

 
3,930

 
(8
)
Distribution expenses
 
403

 
401

 
2

Income tax provision (benefit), net
 
130

 
130

 

Earnings (loss) from continuing operations
 
430

 
428

 
2

Net earnings (loss)
 
407

 
405

 
2

Earnings per share attributable to International Paper Company Shareholders
 
 
 
 
 
 
Basic
 
$
0.98

 
$
0.98

 
$

Diluted
 
0.97

 
0.97

 

Condensed Consolidated Statement of Operations
 
 
Six Months Ended
June 30, 2018
In millions, except per share amounts
 
As Reported
 
Balances Without Adoption of ASC 606
 
Impact of Adoption Increase/(Decrease)
Net sales
 
$
11,454

 
$
11,437

 
$
17

Cost of products sold
 
7,870

 
7,863

 
7

Distribution expenses
 
769

 
767

 
2

Income tax provision (benefit), net
 
219

 
217

 
2

Earnings (loss) from continuing operations
 
792

 
786

 
6

Net earnings (loss)
 
1,137

 
1,131

 
6

Earnings per share attributable to International Paper Company Shareholders
 
 
 
 
 
 
Basic
 
$
2.74

 
$
2.73

 
$
0.01

Diluted
 
2.71

 
2.70

 
0.01

 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet
 
 
June 30, 2018
In millions, except per share amounts
 
As Reported
 
Balances Without Adoption of ASC 606
 
Impact of Adoption Increase/(Decrease)
Contract assets
 
$
381

 
$

 
$
381

Inventories
 
2,050

 
2,308

 
(258
)
Other current assets
 
242

 
250

 
(8
)
Other accrued liabilities
 
1,032

 
1,014

 
18

Deferred income taxes
 
2,502

 
2,484

 
18

Retained earnings
 
6,988

 
6,909

 
79

 
 
 
 
 
 
 
Condensed Consolidated Statement of Cash Flows
 
 
Six Months Ended
June 30, 2018
In millions, except per share amounts
 
As Reported
 
Balances Without Adoption of ASC 606
 
Impact of Adoption Increase/(Decrease)
Net earnings (loss)
 
$
1,137

 
$
1,131

 
$
6

Deferred income tax provision (benefit), net
 
196

 
202

 
(6
)
Contract assets
 
(17
)
 

 
(17
)
Inventories
 
(26
)
 
(33
)
 
7

Accounts payable and accrued liabilities
 
142

 
140

 
2

Other
 
19

 
11

 
8


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

8


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.

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 tables provide 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
June 30, 2018
In millions
 
Industrial Packaging
 
Global Cellulose Fibers
 
Printing Papers
 
Corporate and Inter-segment Sales
 
Total
Primary Geographical Markets (a)
 
 
 
 
 
 
 
 
 
 
United States
 
$
3,336

 
$
573

 
$
477

 
$
53

 
$
4,439

EMEA
 
427

 
70

 
324

 
(4
)
 
817

Pacific Rim and Asia
 
36

 
48

 
59

 
13

 
156

Americas, other than U.S.
 
223

 
1

 
200

 
(3
)
 
421

Total
 
$
4,022

 
$
692

 
$
1,060

 
$
59

 
$
5,833

 
 
 
 
 
 
 
 
 
 
 
Operating Segments
 
 
 
 
 
 
 
 
 
 
North American Industrial Packaging
 
$
3,582

 
$

 
$

 
$

 
$
3,582

EMEA Industrial Packaging
 
344

 

 

 

 
344

Brazilian Industrial Packaging
 
56

 

 

 

 
56

European Coated Paperboard
 
86

 

 

 

 
86

Global Cellulose Fibers
 

 
692

 

 

 
692

North American Printing Papers
 

 

 
493

 

 
493

Brazilian Papers
 

 

 
222

 

 
222

European Papers
 

 

 
302

 

 
302

Indian Papers
 

 

 
51

 

 
51

Intra-segment Eliminations
 
(46
)
 

 
(8
)
 

 
(54
)
Corporate & Inter-segment Sales
 

 

 

 
59

 
59

Total
 
$
4,022

 
$
692

 
$
1,060

 
$
59

 
$
5,833


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


9


 
 
Six Months Ended
June 30, 2018
In millions
 
Industrial Packaging
 
Global Cellulose Fibers
 
Printing Papers
 
Corporate & Intersegment
 
Total
Primary Geographical Markets (a)
 
 
 
 
 
 
 
 
 
 
United States
 
$
6,438

 
$
1,118

 
$
917

 
$
111

 
$
8,584

EMEA
 
879

 
145

 
660

 
(9
)
 
1,675

Pacific Rim and Asia
 
70

 
105

 
123

 
29

 
327

Americas, other than U.S.
 
462

 
1

 
413

 
(8
)
 
868

Total
 
$
7,849

 
$
1,369

 
$
2,113

 
$
123

 
$
11,454

 
 
 
 
 
 
 
 
 
 
 
Operating Segments
 
 
 
 
 
 
 
 
 
 
North American Industrial Packaging
 
$
6,951

 
$

 
$

 
$

 
$
6,951

EMEA Industrial Packaging
 
706

 

 

 

 
706

Brazilian Industrial Packaging
 
118

 

 

 

 
118

European Coated Paperboard
 
178

 

 

 

 
178

Global Cellulose Fibers
 

 
1,369

 

 

 
1,369

North American Printing Papers
 

 

 
951

 

 
951

Brazilian Papers
 

 

 
451

 

 
451

European Papers
 

 

 
621

 

 
621

Indian Papers
 

 

 
103

 

 
103

Intra-segment Eliminations
 
(104
)
 

 
(13
)
 

 
(117
)
Corporate & Inter-segment Sales
 

 

 

 
123

 
123

Total
 
$
7,849

 
$
1,369

 
$
2,113

 
$
123

 
$
11,454


(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 - June 30, 2018
 
381

 
32

Increase / (Decrease)
 
$
15

 
$
(21
)

A contract asset is created when the Company recognizes revenue on its customized products prior to having an unconditional right to payment from the customer, which generally does not occur until title and risk of loss passes to the customer.
A contract liability is created when customers prepay for goods prior to the Company transferring those goods to the customer. The contract liability is reduced once control of the goods is transferred to the customer. The majority of our customer prepayments are received during the fourth quarter each year for goods that will be transferred to customers over the following twelve months.

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.



10


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.


A summary of the changes in equity for the six months ended June 30, 2018 and 2017 is provided below:
 
Six Months Ended
June 30,
 
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
75

 

 
75

 
94

 

 
94

Repurchase of stock
(331
)
 

 
(331
)
 
(46
)
 

 
(46
)
Common stock dividends ($.9500 per share in 2018 and $.9250 per share in 2017)
(399
)
 

 
(399
)
 
(390
)
 

 
(390
)
Transactions of equity method investees
18

 

 
18

 
3

 

 
3

Comprehensive income (loss)
886

 
1

 
887

 
543

 
2

 
545

Ending Balance, June 30
$
6,844

 
$
20

 
$
6,864

 
$
4,545

 
$
20

 
$
4,565






11



The following table presents changes in accumulated other comprehensive income (AOCI) for the three months and six months ended June 30, 2018 and 2017:

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
 
2018
 
2017
 
2018
 
2017
Defined Benefit Pension and Postretirement Adjustments
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(2,461
)
 
$
(3,016
)
 
$
(2,527
)
 
$
(3,072
)
Other comprehensive income (loss) before reclassifications
 

 
2

 

 
1

Amounts reclassified from accumulated other comprehensive income
 
85

 
60

 
151

 
117

Balance at end of period
 
(2,376
)
 
(2,954
)
 
(2,376
)
 
(2,954
)
Change in Cumulative Foreign Currency Translation Adjustments
 
 
 
 
 
 
 
 
Balance at beginning of period
 
(2,069
)
 
(2,140
)
 
(2,111
)
 
(2,287
)
Other comprehensive income (loss) before reclassifications
 
(422
)
 
(14
)
 
(382
)
 
134

Amounts reclassified from accumulated other comprehensive income
 

 

 
2

 

Other comprehensive income (loss) attributable to noncontrolling interest
 
2

 
(1
)
 
2

 
(2
)
Balance at end of period
 
(2,489
)
 
(2,155
)
 
(2,489
)
 
(2,155
)
Net Gains and Losses on Cash Flow Hedging Derivatives
 
 
 
 
 
 
 
 
Balance at beginning of period
 

 
4

 
5

 
(3
)
Other comprehensive income (loss) before reclassifications
 
(18
)
 
(1
)
 
(21
)
 
8

Amounts reclassified from accumulated other comprehensive income
 
2

 
(2
)
 

 
(4
)
Balance at end of period
 
(16
)
 
1

 
(16
)
 
1

Total Accumulated Other Comprehensive Income (Loss) at End of Period
 
$
(4,881
)
 
$
(5,108
)
 
$
(4,881
)
 
$
(5,108
)





























12


The following table presents details of the reclassifications out of AOCI for the three months and six months ended June 30, 2018 and 2017:
In millions:
 
Amounts Reclassified from Accumulated Other Comprehensive Income
 
Location of Amount Reclassified from AOCI
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2018
 
2017
 
2018
 
2017
 
 
Defined benefit pension and postretirement items:
 
 
 
 
 
 
 
 
 
 
 
Prior-service costs
 
$
(3
)
 
$
(7
)
 
(7
)
 
(13
)
 
(a)
Non-operating pension expense
Actuarial gains (losses)
 
(110
)
 
(90
)
 
(194
)
 
(177
)
 
(a)
Non-operating pension expense
Total pre-tax amount
 
(113
)
 
(97
)
 
(201
)
 
(190
)
 
 
 
Tax (expense) benefit
 
28

 
37

 
50

 
73

 
 
 
Net of tax
 
(85
)
 
(60
)
 
(151
)
 
(117
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
(4
)
 
2

 
(1
)
 
5

 
(b)
Cost of products sold
Total pre-tax amount
 
(4
)
 
2

 
(1
)
 
5

 
 
 
Tax (expense)/benefit
 
2

 

 
1

 
(1
)
 
 
 
Net of tax
 
(2
)
 
2

 

 
4

 
 
 
Total reclassifications for the period
 
$
(87
)
 
$
(58
)
 
$
(149
)
 
$
(113
)
 
 
 

(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
June 30,
 
Six Months Ended
June 30,
In millions, except per share amounts
2018
 
2017
 
2018
 
2017
Earnings (loss) from continuing operations attributable to International Paper Company common shareholders
$
428

 
$
84

 
$
789

 
$
276

Weighted average common shares outstanding
413.2

 
412.9

 
413.4

 
412.5

Effect of dilutive securities
 
 
 
 
 
 
 
Restricted stock performance share plan
4.5

 
3.5

 
5.4

 
4.2

Weighted average common shares outstanding – assuming dilution
417.7

 
416.4

 
418.8

 
416.7

Basic earnings (loss) per share from continuing operations
$
1.03

 
$
0.20

 
$
1.91

 
$
0.67

Diluted earnings (loss) per common share from continuing operations
$
1.02

 
$
0.20

 
$
1.88

 
$
0.66


2018: During the three months ended June 30, 2018, the Company recorded a $26 million pre-tax charge, in the Industrial Packaging segment, related to approximately $12 million of severance, $6 million in accelerated depreciation, $2 million in accelerated amortization, and $6 million in other charges in conjunction with the optimization of our EMEA Packaging business.


13


During the three months ended March 31, 2018, the Company recorded a $22 million pre-tax charge, in the Industrial Packaging segment, primarily related to the severance charges in conjunction with the optimization of our EMEA Packaging business. The majority of the severance charges recorded year to date are expected to be paid over the remainder of the year.

2017: During the three months ended June 30, 2017, restructuring and other charges totaling a $16 million benefit before taxes were recorded. Details of these charges were as follows:
In millions
Three Months Ended June 30, 2017
Gain on sale of investment in ArborGen
$
(14
)
Other
(2
)
Total
$
(16
)

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

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 final 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
4

Total assets acquired
55

Accounts payable and accrued liabilities
4

Long-term debt
11

Other long-term liabilities
2

Total liabilities assumed
17

Net assets acquired
$
38


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

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

14


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. During the second quarter of 2018, the Company recorded a pre-tax charge of $28 million ($21 million after tax) to adjust the previously recorded gain on the transfer. 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 accompanying 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:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2018
 
2017
 
2018
 
2017
Net Sales
$

 
$
389

 
$

 
$
768

Costs and Expenses
 
 
 
 
 
 
 
Cost of products sold

 
316

 

 
587

Selling and administrative expenses
2

 
22

 
25

 
45

Depreciation, amortization and cost of timber harvested

 
22

 

 
48

Distribution expenses

 
32

 

 
62

Taxes other than payroll and income taxes

 
3

 

 
5

(Gain) loss on transfer of business
28

 

 
(488
)
 

Earnings (Loss) Before Income Taxes and Equity Earnings
(30
)
 
(6
)
 
463

 
21

Income tax provision (benefit)
(7
)
 
(2
)
 
118

 
8

Discontinued Operations, Net of Taxes
$
(23
)
 
$
(4
)
 
$
345

 
$
13


Total cash provided by (used for) operations related to the North American Consumer Packaging business of $(25) million and $86 million for the six months ended June 30, 2018 and June 30, 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 $(40) million and $(52) million for the six months ended June 30, 2018 and June 30, 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 $708 million and $661 million at June 30, 2018 and December 31, 2017, respectively.
     
Accounts and Notes Receivable
In millions
June 30, 2018
 
December 31, 2017
Accounts and notes receivable, net:
 
 
 
Trade
$
3,230

 
$
3,017

Other
296

 
270

Total
$
3,526

 
$
3,287


The allowance for doubtful accounts was $74 million and $73 million at June 30, 2018 and December 31, 2017, respectively.


15


Inventories 
In millions
June 30, 2018
 
December 31, 2017
Raw materials
$
271

 
$
274

Finished pulp, paper and packaging
1,053

 
1,337

Operating supplies
591

 
615

Other
135

 
87

Total
$
2,050

 
$
2,313


Depreciation 

Accumulated depreciation was $20.8 billion and $20.5 billion at June 30, 2018 and December 31, 2017. Depreciation expense was $309 million and $310 million for the three months ended June 30, 2018 and 2017, respectively and $615 million and $609 million for the six months ended June 30, 2018 and 2017, respectively.

Interest

Interest payments made during the six months ended June 30, 2018 and 2017 were $378 million and $387 million, respectively.

Amounts related to interest were as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2018
 
2017
 
2018
 
2017
Interest expense
$
183

 
$
186

 
$
363

 
$
373

Interest income
50

 
49

 
95

 
94

Capitalized interest costs
9

 
6

 
17

 
12


Asset Retirement Obligations

The Company had recorded liabilities of $86 million related to asset retirement obligations at June 30, 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 $15 million and $17 million for the three months and six months ended June 30, 2018, respectively. The Company received cash dividends from GPIP of $6 million for the three months and six months ended June 30, 2018. At June 30, 2018, the Company's investment in GPI was $1.1 billion, which was $528 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 in equity earnings 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 $58 million and $118 million for the three months and six months ended June 30, 2018, respectively.









16


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

Balance Sheet
In millions
June 30, 2018
Current assets
$
1,805

Noncurrent assets
5,255

Current liabilities
1,000

Noncurrent liabilities
3,174


Income Statement
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2018
 
2018
Net sales
$
1,509

 
$
2,985

Gross profit
235

 
458

Income from continuing operations
81

 
143

Net income
81

 
143


Ilim Holding S.A.

The Company has a 50% equity interest in Ilim Holding S.A. and it’s subsidiaries (Ilim) whose primary operations are in Russia. The Company recorded equity earnings (losses), net of taxes, of $57 million and $21 million for the three months ended June 30, 2018 and 2017, respectively and $149 million and $71 million for the six months ended June 30, 2018 and 2017, respectively. The Company received cash dividends from the joint venture of $116 million and $127 million during the first six months of 2018 and 2017, respectively. At June 30, 2018 and December 31, 2017, the Company's investment in Ilim was $374 million and $338 million, respectively, which was $154 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 currency translation adjustments and the basis difference between the fair value of our investment at acquisition and the underlying net assets. 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 $56 million and $51 million for the three months ended June 30, 2018 and 2017, respectively, and $109 million and $98 million for the six months ended June 30, 2018 and 2017, respectively.

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

Balance Sheet
In millions
June 30, 2018
 
December 31, 2017
Current assets
$
699

 
$
689

Noncurrent assets
1,656

 
1,696

Current liabilities
477

 
1,039

Noncurrent liabilities
1,427

 
972

Noncontrolling interests
12

 
6


Income Statement
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
In millions
2018
 
2017
 
2018
 
2017
Net sales
$
698

 
$
546

 
$
1,375

 
$
995

Gross profit
402

 
256

 
776

 
463

Income from continuing operations
116

 
44

 
305

 
151

Net income
112

 
42

 
295

 
143


17




Goodwill

The following table presents changes in goodwill balances as allocated to each business segment for the six-months ended June 30, 2018: 
In millions
Industrial
Packaging
 
Global Cellulose Fibers