2018
Annual Performance
Summary
2
International Paper has a long relationship with Sanderson Farms, one of the largest poultry producers in the United States. By partnering with our customer to develop innovative packaging solutions, Sanderson Farms is able to serve millions of consumers. Sanderson Farms supplies chicken to grocery stores across the country with our ClimaShield® packaging — About the cover…At International Paper, creating value for the future is all about people: employees, customers, suppliers, community members, shareowners and all other stakeholders. That’s why we’re highlighting a few of these people in our suite of 2018 reports. This cover features an employee, a tree farmer, a child in one of our communities and Dusty Braddock, who works for our customer, Sanderson Farms. Learn more about Dusty below, and about all our stakeholders at InternationalPaper.com/reports. corrugated boxes with an environmentally-friendly moisture barrier. Our team members regularly visit Dusty and his team at Sanderson Farms to ensure we exceed expectations and continue working together toward recyclable packaging solutions.Dusty BraddockCorporate Purchasing, Sanderson FarmsLearn more at InternationalPaper.com/reports25,000Customers in 150 Countries$23 BillionTotal Revenue in 2018More than 52,000 Global EmployeesLEFT TO RIGHTGlobal HeadquartersRegional HeadquartersBoard of DirectorsRay G. Young Executive Vice President and Chief Financial Officer Archer Daniels Midland CompanyClinton A. Lewis, Jr. Executive Vice President and Group President International Operations, Commercial Development, Global Genetics and Aquatic Health Zoetis Inc.William J. Burns President The Carnegie Endowment for International PeaceIlene S. Gordon Presiding Director Retired Executive Chairman Ingredion IncorporatedJ. Steven Whisler Retired Chairman and Chief Executive Officer Phelps Dodge CorporationAhmet C. Dorduncu Chief Executive Officer Akkök GroupJay L. Johnson Retired Chairman and Chief Executive Officer General Dynamics Corporation (Retired December 31, 2018)International Paper Company 6400 Poplar Avenue Memphis, TN 38197 United States of AmericaInternational Paper Asia 8F, Building A Xuhui Vanke Center 55 Ding An Road Shanghai, 200235, ChinaInternational Paper Brazil Avenida Engenheiro Luís Carlos Berrini, 105 - 16 andar, São Paulo, SP, BrazilInternational Paper Europe, Middle East and Africa (EMEA) Chaussée de la Hulpe 166 1170 Brussels, BelgiumInternational Paper India Krishe Sapphire Building 8th Floor Hitech City Main Road, Madhapur Hyderabad 500 081, IndiaInternational Paper Russia Kropotkina Street 1, Litera I Saint Petersburg, 197101, RussiaMark S. Sutton Chairman and Chief Executive Officer International Paper CompanyChristopher M. Connor Retired Executive Chairman The Sherwin-Williams CompanyJacqueline C. Hinman Former Chairman, President and Chief Executive Officer CH2M HILL Companies, Ltd.David J. Bronczek Retired President and Chief Operating Officer FedEx Corporation (Retired February 28, 2019)Not Pictured:Anders Gustafsson Chief Executive Officer Zebra Technologies Corporation (Effective March 1, 2019)Kathryn D. Sullivan Senior Fellow Potomac Institute for Policy Studies and Ambassador-at-Large Smithsonian National Air and Space Museum Dear Fellow
Mark S. Sutton
Chairman and Chief Executive Officer
International Paper delivered
a strong performance in 2018.
More importantly, we strengthened
our businesses and the company.
“We are a strong, resilient company,
and we consistently deliver greater
than cost of capital returns and
generate robust cash flow. We are
confident in our ability to perform
consistently as we navigate dynamic
economic and industry conditions.”
We are well positioned for the challenges we may face. We have the people,
the innovation, the best value chain to solve our customers’ needs, and a
low-cost, high-quality manufacturing system to succeed. We are investing in
high-return projects to strengthen our businesses and grow cash generation.
Our team earned more than $4.3 billion of adjusted earnings before interest,
tax, depreciation and amortization (EBITDA), delivering the second consecutive
year of 16 percent earnings growth. We improved adjusted operating earnings
per diluted share by 52 percent to $5.32 through strong commercial and
operational execution, and we achieved a 13 percent adjusted return on
invested capital, our ninth consecutive year of value-creating returns. We are
proud of our collective accomplishments.
We recognize that safety is our most important measure
of success.
Since 2010, we have reduced serious injuries by nearly 50 percent by building
an active safety culture. Despite this meaningful progress, we experienced an
increase in serious injuries in 2018 and, tragically, three contractors were
fatally injured while performing work in our facilities.
We continue to work with employees, suppliers and contractors to create
layers of protection to ensure everyone returns home safely every day.
2018 ANNUAL PERFORMANCE SUMMARY | 1
We believe an injury-free workplace is possible. We know we still have a long
way to go to achieve this ultimate goal, but we are working on the right things,
and we are committed to keeping each other safe.
We produce fiber-based products that are integral to our
customers’ success. We continue to execute on our strategy
of establishing advantaged positions to serve attractive
markets with innovative customer solutions and responsible
procurement and manufacturing practices to maximize
value creation.
Industrial Packaging delivered outstanding revenue and earnings growth
through our deliberate focus on serving the fastest growing segments and
aligning with the best customers.
Global Cellulose Fibers achieved robust fluff pulp volume by understanding
and addressing customers’ needs through a powerful innovation engine and
service model with global reach and local execution.
Printing Papers delivered a strong performance and continues to generate
significant cash – we are managing the North American business in a
mature demand environment to maximize cash generation and to provide
future options for the company.
Our ownership interests in Ilim and Graphic Packaging contributed $336
million in equity earnings, and provided $153 million in cash dividends to
International Paper.
We generated strong cash from operations in 2018, which
we used to strengthen our balance sheet, return cash to
shareowners and invest to grow our cash generation.
Consistent with our capital allocation framework, we increased our annual
dividend to $2 per share, the seventh consecutive annual increase, and we
repurchased about $700 million of outstanding shares. We also reduced balance
sheet debt by about $500 million. With our focus on creating long-term value,
we invested to increase needed capacity and enhance capabilities to better
serve our customers. These investments will grow our future cash generation.
We improved our environmental footprint and strengthened
our communities.
We continued to make progress on our Vision 2020 sustainability goals and
remain on track to meet or exceed our most important objectives. We also
began developing next-generation goals that will align with certain United
Nations’ Sustainable Development Goals.
In 2018, we donated products, provided volunteers and contributed more than
$21 million to address critical needs in the communities where our employees
live and work. We continue to contribute to building stronger communities.
Who we are
We are one of the world’s
leading producers of
renewable, fiber-based
packaging, pulp and paper.
What we do
We improve people’s lives,
the planet and our
company’s performance by
transforming renewable
resources into products
people depend on every day.
How we do it
We do the right things, in
the right ways, for the right
reasons, all of the time –
this is The IP Way. Together,
The IP Way and our Core
Values of Safety, Ethics and
Stewardship serve as our
guideposts as we carry out
our mission.
The IP Way
Forward
We pursue our vision
and create value for all
stakeholders for generations
to come through our
strategic framework –
The IP Way Forward and
its five drivers: Sustaining
Forests, Investing in People,
Improving the Planet,
Creating Innovative
Products and Delivering
Inspired Performance.
2
| 2018 ANNUAL PERFORMANCE SUMMARY
Outlook
We are a strong, resilient company, and we consistently deliver greater than cost
of capital returns and generate robust cash flow. We are confident in our ability to
perform consistently as we navigate dynamic economic and industry conditions.
We will maximize value creation for our shareowners through strong and
sustainable cash from operations. We will maintain a strong balance sheet and
investment grade credit rating. We will continue to invest in the business to
support future cash generation.
Returning cash to shareholders will continue to be an important component
of our capital allocation framework through a strong and sustainable dividend
of 40 to 50 percent of free cash flow and a consistent cadence of share
repurchases based on value.
On behalf of the International Paper Board of Directors and our more than
52,000 colleagues, thank you for your ongoing support and investment in
International Paper as we pursue our vision to be among the most successful,
sustainable and responsible companies in the world.
Mark S. Sutton
Chairman and Chief Executive Officer
Leadership and
Governance Transitions
Strong governance and leadership are
the foundation of effective execution.
In 2018, several senior leaders accepted
new responsibilities:
• Tim Nicholls, senior vice president and
chief financial officer
• Jean-Michel Ribiéras, senior vice president,
Industrial Packaging the Americas
• Cathy Slater, senior vice president,
Global Cellulose Fibers and IP Asia
Cato Ealy, senior vice president, Corporate
Development, retired after 26 years of service.
Cato helped shape the course of our company,
playing a key role in developing and executing
our transformation plan, which included
several significant divestitures and subsequent
acquisitions. We thank him for his many
contributions and wish him good health and
happiness in retirement.
We welcome our newest
board member:
Anders Gustafsson was elected to the board
effective March 1, 2019. Anders is the chief
executive officer and a board member of
Zebra Technologies Corporation, a publicly-
traded company that manufactures and sells
marking, tracking and computer printing
technologies. Anders brings tremendous
international business experience and unique
technology perspective to his role.
We also recognize and thank the
following retired board members:
John L. Townsend served as a director for
13 years. During his tenure, John contributed
significantly to the pursuit of our vision and
mission and we appreciate his many
contributions. (Retired May 2018)
Jay L. Johnson was elected to our board
in 2013. We appreciate Jay’s global business
acumen and his role in guiding shareowner
involvement and selecting new board
members. (Retired December 2018)
David J. Bronczek has served as a director
since 2006. Dave provided critical business
insights and international perspective to a
wide range of strategic and tactical initiatives.
(Retired February 2019)
2018 ANNUAL PERFORMANCE SUMMARY | 3
Our Businesses
Creating innovative products from responsibly sourced, renewable resources.
Industrial
Packaging
Global
Cellulose Fibers
Printing
Papers
69% of total revenue
12% of total revenue
19% of total revenue
We create packaging products that protect
and promote goods, enable worldwide
commerce and keep consumers safe. We
meet our customers’ most challenging
sales, shipping, storage and display
requirements with sustainable solutions.
In addition to containerboard mills, box
plants and converting operations across
the globe, our North American recycling
business recovers, processes and sells
seven million tons of corrugated
packaging and paper annually.
We create pulp for diapers, tissue and
other personal hygiene products that
promote health and wellness. Cellulose
fiber is a sustainable, renewable raw
material in hundreds of products people
use every day, including baby diapers,
feminine care, adult incontinence and
other non-woven products. Our
innovative specialty pulps are used as a
sustainable alternative across a variety
of industries such as textiles, filtration,
construction material, paints and
coatings and more.
S E G M E N T S
• eCommerce
• Protein
• Fruit and vegetable
• Distribution
• Processed food and beverage
• Durable/non-durable goods
Additionally, we provide high-quality
coated paperboard for consumer
packaging throughout Europe, the
Middle East and Africa (EMEA).
Customers rely on us for pharmaceutical,
healthcare, cosmetics, food and
beverage packaging solutions.
R E V E N U E B Y R E G I O N
88% North America
9% EMEA
2% EMEA Coated Paperboard
1% Brazil
4
| 2018 ANNUAL PERFORMANCE SUMMARY
S E G M E N T S
• Absorbent hygiene products
• Paper
• Tissue
• Textiles
• Filtration
• Paints and coatings
R E V E N U E B Y R E G I O N
94% North America
6% EMEA
Although the majority of revenue for
this business is generated in North
America, we export about 80 percent
of this volume, primarily to Asia and
EMEA with a smaller portion going
to Latin America.
We create papers that facilitate
education and communication. As one
of the world’s largest manufacturers of
uncoated freesheet, we produce a
variety of papers for business and home
use. Customers rely on our signature
brands including Accent® Opaque,
Ballet®, by George®, Chamex®,
Hammermill®, POL™, PRO-DESIGN®,
REY® and SvetoCopy® for a wide range
of printing and converting applications.
E N D U S E
• Printer and copy paper
• Commercial printing
• Book publishing
• Advertising
• Envelopes
• Bills and statements
• Filing
• Specialty packaging
• Labeling
R E V E N U E B Y R E G I O N
45% North America
29% EMEA
22% Brazil
4% India
WE DELIVER VALUE FOR
OUR SHAREOWNERS.
We establish advantaged positions in attractive market segments with
safe, efficient manufacturing operations near sustainable fiber sources.
Adjusted Return On Invested Capital
5-year average:
11% ROIC
11.4%
10.0%
9.9%
9.2%
13.2%
2018
WACC
7.5%
Annualized Dividend
Dollars per share
2014
$1.60
2015
2016
2017
2018
$1.76
$1.85
$1.90
$2.00
2014
2015
2016
2017
2018
WACC: Weighted Adjusted Cost of Capital
7th consecutive year
of increase
9th consecutive year of greater
than cost-of-capital returns
Free Cash Flow
$ Billions
$2.1
$1.7
$1.8
$1.3
$1.9
$2.0
$1.7
$1.5
Free Cash Flow
Cash to Shareowners
$0.9
$0.8
2014
2015
2016
2017
2018
6
| 2018 ANNUAL PERFORMANCE SUMMARY
Leverage
Debt to EBITDA
2014
2015
2016
2017
3.2x
3.2x
4.0x
3.3x
2018
2.8x
Includes balance sheet debt and
Moody’s adjustments for operational
leases and pension gap
WE CREATE PRODUCTS PEOPLE
DEPEND ON EVERY DAY.
We create innovative, sustainable and recyclable
products that help our customers achieve their objectives.
Our broad capabilities, global value chain and innovative products fulfill our customers’ evolving needs
and improve the sustainability of their value chains.
ClimaShield® improves the
recoverability and recyclability
of corrugated boxes with an
environmentally-friendly wax
alternative moisture barrier.
Right Size Packaging is a manufacturing solution
that allows our customers to create efficient-sized
packaging to reduce their freight costs while still
ensuring optimal product protection.
“ International Paper has been our
partner for several years now, and
they’re always bringing us new
ideas. Every year we sit down and we
think of how the industry is growing.
It’s never sitting still or staying the
same. We want to be on the cutting
edge of something new.”
— Dusty Braddock
Corporate Purchasing, Sanderson Farms
Elegance® Fluff Pulp enables our customers to
produce environmentally-responsible absorbent
hygiene products. This sustainable and innovative
technology addresses our customers’ needs by
allowing them to create thin, soft and discreet
products without compromising performance.
We are committed
to innovation and currently
hold 1,400 patents
Accent® Opaque brings paper to life by using
the IP4D app to incorporate augmented reality
technology into print design, helping our customers
create more impact.
We serve more than
25,000 customers in
150 countries
2018 ANNUAL PERFORMANCE SUMMARY | 7
WE MEET CUSTOMERS’ NEEDS
FOR RESPONSIBLY MADE, SUSTAINABLE
PRODUCTS.
Our entire business depends upon the sustainability of forests. We will
continue to lead the world in responsible forest stewardship to ensure
healthy and productive forest ecosystems for generations to come.
Forestland Stewards
World Wildlife Fund
5
years
Our Forestland Stewards partnership with the
National Fish and Wildlife Foundation celebrated
five years of grant-making:
$15 million invested to conserve Southern U.S. forests,
leveraging more than $36 million in matching funds
400,000 acres of wildlife habitat restored and protected
International Paper and World Wildlife Fund (WWF)
have worked together through WWF’s Global Forest & Trade
Network-North America program to advance our shared
goal of sustaining global forests in a way that promotes
responsible fiber supply, benefits biodiversity and climate
and supports communities.
We tackle the toughest issues in our value chain, improve our
environmental footprint and promote the long-term sustainability
of natural capital.
Exceeded
2020 GOAL: REDUCE
GREENHOUSE GAS
EMISSIONS BY
20%
from 2010
As we continue to reduce greenhouse gas
emissions through 2020, we are also developing
the next generation of sustainability goals for
forest stewardship, air emissions, energy and
water stewardship.
NEARLY
75%
of mill energy is derived from
biomass residuals rather than
fossil fuels.
MORE THAN
90%
of water used in our manufacturing
is returned to the environment.
MORE THAN
50%
of strategic suppliers surveyed
improved their sustainability scores
from 2017 to 2018 based on feedback
provided by International Paper.
8
| 2018 ANNUAL PERFORMANCE SUMMARY
AND WE CHAMPION OUR
EMPLOYEES AND COMMUNITIES.
We make sustainable investments to protect and improve the lives of our
employees and mobilize our people, products and resources to address
critical needs in the communities where our employees live and work.
Our Goal: Injury-Free Workplace
At International Paper we invest in
continuous, deliberate improvement
to ensure everyone – employees and
non-employees – goes home safely
every day. In 2018, we focused on:
• Expanding safety leadership
principles and tools to empower
and protect one another
•
Improving our contractor safety
management program
• Sustaining progress in our initiative
to eliminate serious injuries
92%
of employees
believe safety is
a core value at
International Paper
Fostering Diverse
and Inclusive Teams
“A diverse and inclusive
workplace, where employees
feel valued and are treated
with dignity and respect, is
fundamental to our
future success.”
— Fred Towler, chief diversity
officer and vice president,
Human Resources, Talent
Management and Global Mobility
Supporting the Next Generation
In 2018, we hired and trained 163 engineers through our REACH (Recruit, Engage,
Align, College Hires) program. We recruit and develop early-career engineers and
safety professionals for our U.S. mill system, preparing them to become future
leaders. We continually strive to strengthen our technical expertise, and REACH gives
young leaders the tools to make significant contributions to our company.
Responding to Disaster
Hurricane Florence impacted more than 1,000 International Paper team members
who work in facilities along the Southeast U.S. coast.
Nearly 500,000 disaster relief boxes distributed to the Feeding America®
network of food banks
$1.4 million provided to impacted team members
$1.7 million invested in the American Red Cross and Feeding America to better
prepare for and respond to disasters
We invested more than
$21 million in the communities
where our employees live and
work to address critical needs,
nearly doubling our charitable
donations since 2015.
2018 ANNUAL PERFORMANCE SUMMARY | 9
About International Paper
Senior Leaders
L E F T T O R I G H T
C. Cato Ealy
Senior Vice President
Corporate Development
(Retired December 31, 2018)
Catherine I. Slater
Senior Vice President
Global Cellulose Fibers and
IP Asia
Timothy S. Nicholls
Senior Vice President and
Chief Financial Officer
Recognition
Mark S. Sutton
Chairman and
Chief Executive Officer
Tommy S. Joseph
Senior Vice President
Manufacturing, Technology,
EH&S and Global Sourcing
Gregory T. Wanta
Senior Vice President
North American Container
John V. Sims
Senior Vice President and
President IP Europe,
Middle East, Africa and Russia
Sharon R. Ryan
Senior Vice President
General Counsel and
Corporate Secretary
Thomas J. Plath
Senior Vice President
Human Resources and
Global Citizenship
Jean-Michel Ribiéras
Senior Vice President
Industrial Packaging
the Americas
W. Michael Amick, Jr.
Senior Vice President
Paper the Americas
and India
Institutional Investor
Most Honored Company
2019 for 13 consecutive years
Women’s Choice Award®
Best Companies to Work For —
Millennial Women 2018 and 2019
Fortune Magazine
World’s Most Admired Companies®
2019 for 16 years
Ethisphere Institute
World’s Most Ethical Companies®
2019 for 13 consecutive years
IDG Computerworld
100 Best Places to Work in IT
2018 for 10 consecutive years
10
| 2018 ANNUAL PERFORMANCE SUMMARY
Form 10-K
FINANCIAL HIGHLIGHTS
In millions, except per share amounts, at December 31
2018
2017
FINANCIAL SUMMARY
Net Sales
Operating Profit
Earnings from Continuing Operations Before Income Taxes and Equity Earnings
Net Earnings
Net Earnings Attributable to Noncontrolling Interests
Net Earnings Attributable to International Paper Company
Total Assets
Total Shareholders’ Equity Attributable to International Paper Company
PER SHARE OF COMMON STOCK
Basic Earnings Per Share Attributable to International Paper Company
Common Shareholders
Diluted Earnings Per Share Attributable to International Paper Company
Common Shareholders
Cash Dividends
SHAREHOLDER PROFILE
Shareholders of Record at December 31
Shares Outstanding at December 31
Average Common Shares Outstanding
Average Common Shares Outstanding – Assuming Dilution
$ 23,306
2,877
(a)
1,781 (b)
2,017 (b,c)
5
2,012 (b,c)
33,576
7,362
$ 21,743
2,069 (a)
848 (d)
2,144 (d,e)
—
2,144 (d,e)
33,903
6,522
$
4.91 (b,c)
$
4.85 (b,c)
1.9250
$
$
5.19 (d,e)
5.13 (d,e)
1.8625
11,345
400.6
409.1
414.2
11,828
412.9
412.7
417.7
(a) See the reconciliation of net earnings (loss) attributable to International Paper Company to its total industry segment operating profit on
(b)
(c)
(d)
(e)
page 19 and the operating profit table on page 80 for details of operating profit by industry segment.
Includes pre-tax restructuring and other charges, net of $29 million including a charge of $47 million related to the optimization of our
EMEA Packaging business, a gain of $31 million related to the sale of our investment in Liaison Technologies, a charge of $10 million for
debt extinguishment costs and a charge of $3 million for severance associated with the conversion of a paper machine at our Riverdale
mill. Also included are a charge of $424 million for a settlement accounting charge associated with an annuity purchase and transfer of
pension obligations for approximately 23,000 retirees, a charge of $122 million related to the impairment of fixed assets and an intangible
asset in our Brazil Packaging business, charges of $32 million for the removal of abandoned property at our mills, a charge of $12 million
associated with our proposal to acquire Smurfit Kappa, a charge of $9 million for an environmental remediation reserve adjustment, a
charge of $9 million for a legal settlement, a charge of $6 million for accelerated depreciation associated with the Riverdale mill conversion,
and income of $5 million for a litigation settlement recovery.
Includes a tax benefit of $36 million related to the Tax Cuts and Jobs Act, tax expense of $25 million related to foreign tax audits, tax expense
of $19 million related to international investment restructuring and tax expense of $9 million related to state income tax legislative changes.
Also includes net after-tax income of $364 million for the gain on the transfer of the North American Consumer Packaging business and an
after-tax charge of $19 million for transaction costs to transfer the North American Consumer Packaging business.
Includes pre-tax restructuring and other charges, net of $67 million including charges of $83 million for debt extinguishment costs, a gain
of $14 million related to the sale of our investment in ArborGen and a gain of $2 million for other items. Also included are a charge of
$376 million for a settlement accounting charge associated with an annuity purchase and transfer of pension obligations for approximately
45,000 retirees, a charge of $354 million related to the settlement of the Kleen Products anti-trust class action lawsuit, charges of
$20 million for the removal of abandoned property at our mills, a charge of $14 million for the amortization of inventory fair value step-up
for the pulp business acquired in December 2016, charges of $33 million for acquisition and integration costs associated with the pulp
business acquisition, a charge of $9 million for the impairment of the assets of our Foodservice business in Asia, a charge of $10 million
for accelerated amortization of a Brazil Packaging intangible asset, a net bargain purchase gain of $6 million associated with the June 2016
Holmen Paper mill acquisition in Madrid, Spain and a gain of $5 million for interest income related to income tax refund claims.
Includes a provisional net tax benefit of $1.2 billion related to the enactment of the Tax Cuts and Jobs Act, a tax benefit of $113 million related
to income tax refund claims, tax expense of $38 million associated with a 2017 cash pension contribution, tax expense of $34 million related
to international investment restructuring and tax expense of $9 million related to an international tax law change Also includes the operating
earnings of the North American Consumer Packaging business, net after-tax charges of $10 million for costs associated with the transfer of
that business and $28 million for non-operating pension expenses related to curtailment charges and termination benefits.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
For reconciliations of Operating Earnings per share attributable to International Paper Company common shareholders
to diluted earnings (loss) per share attributable to International Paper Company common shareholders, see page 18.
In millions, at December 31
Calculation of Free Cash Flow
Cash provided by operations
(Less)/Add:
2018
2017
2016
2015
2014
$
3,226
$ 1,757
$ 2,478
$ 2,580
$ 3,077
Cash invested in capital projects
Cash contribution to pension plan, net of tax refunds
Kleen settlement
Free Cash Flow
(1,572)
—
—
$ 1,654
(1,391)
1,250
354
$ 1,970
(1,348)
750
—
$ 1,880
(1,487)
750
—
$ 1,843
(1,366)
353
—
$ 2,064
Free cash flow is a non-GAAP measure and the most
directly comparable GAAP measure is cash provided
by operations. Management believes that free cash
flow is useful to investors as a liquidity measure
because it measures the amount of cash generated
that is available, after reinvesting in the business,
to maintain a strong balance sheet, pay dividends,
repurchase stock, service debt and make investments
for future growth. It should not be inferred that
the entire free cash flow amount is available for
discretionary expenditures. By adjusting for certain
items that are not indicative of the Company’s ongoing
performance, free cash flow also enables investors to
perform meaningful comparisons between past and
present periods.
In millions, at December 31
Reconciliation of Operating Earnings Before
Net Interest Expense to Net Earnings Before
Taxes and Equity Earnings
Earnings (Loss) From Continuing Operations
Before Income Taxes and Equity Earnings
Add back: Net Interest Expense
Add back: Special Items Before Taxes
Add back: Non-Operating Pension Expense
Before Taxes
Operating Earnings Before Interest, Taxes and
Equity Earnings
Tax Rate
Operating Earnings Before Interest and
Equity Earnings
Equity Earnings, Net of Tax
Operating Earnings Before Interest
2018
2017
2016
2015
2014
$ 1,781
536
214
494
$
848
572
501
484
$
795
520
182
610
$ 1,132
555
559
$
734
607
1,046
258
212
3,025
2,405
2,107
2,504
2,599
25%
30%
32%
33%
31%
2,269
336
$ 2,605
1,684
177
$ 1,861
1,433
198
$ 1,631
1,678
117
$ 1,795
1,793
(200)
$ 1,593
The Company considers adjusted return on invested
capital (“ROIC”) to be a meaningful indicator of our
operating performance, and we evaluate this metric
because it measures how effectively and efficiently we
use the capital invested in our business. ROIC is not a
measure of financial performance under U.S. generally
accepted accounting principles (“GAAP”) and may not
be defined and calculated by other companies in the
same manner. The Company defines and calculates
ROIC using in the numerator Operating Earnings Before
Interest, the most directly comparable GAAP measure
to which is Earnings Before Income Taxes and Equity
Earnings. The Company calculates Operating Earnings
Before Interest by excluding net interest expense, the
after-tax effect of non-operating pension expense and
items considered by management to be unusual from
the earnings reported under GAAP. 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.
ROIC = Operating Earnings Before Interest / Average
Invested Capital
Average Invested Capital = Equity adjusted to remove pension-related amounts in OCI, net of taxes +
interest-bearing debt
In millions, at December 31
Calculation of Adjusted EBITDA
Earnings from Continuing Operations Before Interest, Income Taxes, Equity Earnings and
Cumulative Effect of Accounting Changes
Depreciation, amortization and cost of timber harvested
Special items
Non-operating pension expense
Adjusted EBITDA
2018
2017
$ 2,317
1,328
208
494
$ 4,347
$ 1,420
1,343
491
484
$ 3,738
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year
ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
transition period from to
Commission File No. 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of incorporation or organization)
13-0872805
(I.R.S. Employer Identification No.)
6400 Poplar Avenue
Memphis, Tennessee
(Address of principal executive offices)
38197
(Zip Code)
Registrant’s telephone number, including area code: (901) 419-9000
_____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $1 per share par value
Name of each exchange on which registered
New York Stock Exchange
_____________________________________________________
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If 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 Act). Yes
No
The aggregate market value of the Company’s outstanding common stock held by non-affiliates of the registrant, computed by reference to the
closing price as reported on the New York Stock Exchange, as of the last business day of the registrant’s most recently completed second fiscal
quarter (June 30, 2018) was approximately $21,249,006,136.
The number of shares outstanding of the Company’s common stock as of February 15, 2019 was 400,236,119.
Documents incorporated by reference:
Portions of the registrant’s proxy statement filed within 120 days of the close of the registrant’s fiscal year in connection with registrant’s 2019
annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.
This page intentionally left blank.
INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018
PART I.
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II.
ITEM 5.
ITEM 6.
ITEM 7.
BUSINESS.
General
Competition and Costs
Marketing and Distribution
Description of Principal Products
Sales Volumes by Product
Research and Development
Environmental Protection
Climate Change
Employees
Executive Officers of the Registrant
Raw Materials
Forward-looking Statements
RISK FACTORS.
UNRESOLVED STAFF COMMENTS.
PROPERTIES.
Forestlands
Mills and Plants
Capital Investments and Dispositions
LEGAL PROCEEDINGS.
MINE SAFETY DISCLOSURES.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
SELECTED FINANCIAL DATA.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Executive Summary
Results of Operations
Description of Business Segments
Business Segment Results
Liquidity and Capital Resources
Critical Accounting Policies and Significant Accounting Estimates
Recent Accounting Developments
Legal Proceedings
Effect of Inflation
Foreign Currency Effects
Market Risk
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INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018
ITEM 7A.
ITEM 8.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Management on Financial Statements, Internal Control over
Financial Reporting and Internal Control Environment and Board of
Directors Oversight
Reports of Deloitte & Touche LLP, Independent Registered Public
Accounting Firm
Consolidated Statement of Operations
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Equity
Notes to Consolidated Financial Statements
Interim Financial Results (Unaudited)
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
CONTROLS AND PROCEDURES.
OTHER INFORMATION.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
EXECUTIVE COMPENSATION.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Additional Financial Data
SIGNATURES
2018 LISTING OF FACILITIES
APPENDIX I
APPENDIX II
2018 CAPACITY INFORMATION
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A-1
A-4
PART I.
ITEM 1. BUSINESS
GENERAL
International Paper Company
(the Company or
International Paper, which may also be referred to as
we or us) is a global producer of renewable fiber-based
packaging, pulp and paper products with manufacturing
operations in North America, Latin America, Europe,
North Africa, India and Russia. We are a New York
corporation, incorporated in 1941 as the successor to
the New York corporation of the same name organized
in 1898. You can learn more about us by visiting our
website at www.internationalpaper.com.
In the United States, at December 31, 2018, the
Company operated 27 pulp, paper and packaging mills,
166 converting and packaging plants, 16 recycling
plants and three bag facilities. Production facilities at
December 31, 2018 in Canada, Europe, India, North
Africa, and Latin America included 16 pulp, paper and
packaging mills, 43 converting and packaging plants,
and two recycling plants. We operate a printing and
packaging products distribution business principally
through nine branches in Asia. At December 31, 2018,
we owned or managed approximately 329,000 acres of
forestland in Brazil and had, through licenses and forest
management agreements, harvesting
rights on
government-owned forestlands in Russia. Substantially
all of our businesses have experienced, and are likely
to continue to experience, cycles relating to industry
capacity and general economic conditions.
For management and financial reporting purposes, our
three segments:
businesses are separated
Industrial Packaging; Global Cellulose Fibers; and
Printing Papers.
into
A description of these business segments can be found
Item 7. Management’s
on pages 23 and 24 of
Discussion and Analysis of Financial Condition and
Results of Operations. The Company’s 50% equity
interest in Ilim S.A. (Ilim) is also a separate reportable
industry segment.
quality
product
From 2014 through 2018, International Paper’s capital
expenditures approximated $7.2 billion, excluding
mergers and acquisitions. These expenditures reflect
our continuing efforts to use our capital strategically to
improve
environmental
performance, as well as lower costs and maintain
reliability of operations. Capital spending in 2018 was
approximately $1.6 billion and is expected to be
approximately $1.4 billion in 2019. You can find more
information about capital expenditures on page 28 of
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
and
Discussions of acquisitions can be found on page 29 of
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
You can find discussions of restructuring charges and
other special items on pages 22 and 23 of Item 7.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Throughout this Annual Report on Form 10-K, we
“incorporate by reference” certain information in parts
of other documents filed with the Securities and
Exchange Commission (SEC). The SEC permits us to
disclose important information by referring to it in that
manner. Please refer to such information. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K, along with all other
reports and any amendments thereto filed with or
furnished to the SEC, are publicly available free of
charge on the Investor Relations section of our website
at www.internationalpaper.com as soon as reasonably
practicable after we electronically file such material with,
or furnish it to, the SEC. The information contained on
or connected to our website is not incorporated by
reference into this Form 10-K and should not be
considered part of this or any other report that we filed
with or furnished to the SEC.
COMPETITION AND COSTS
The pulp, paper and packaging sectors are large and
fragmented, and the areas into which the Company sells
its principal products are very competitive. Our products
compete with similar products produced by other forest
products companies. We also compete, in some
instances, with companies in other industries and
against substitutes for wood-fiber products.
Many factors influence the Company’s competitive
position, including price, cost, product quality and
services. You can find more information about the impact
of these factors on operating profits on pages 17 through
28 of Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations. You can
find information about the Company’s manufacturing
capacities on page A-4 of Appendix II.
MARKETING AND DISTRIBUTION
The Company sells products directly to end users and
converters, as well as through agents, resellers and
paper distributors.
DESCRIPTION OF PRINCIPAL PRODUCTS
The Company’s principal products are described on
pages 23 and 24 of Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.
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SALES VOLUMES BY PRODUCT
Sales volumes of major products for 2018, 2017 and 2016 were as follows:
Sales Volumes by Product (a)
In thousands of short tons (except as noted)
Industrial Packaging
Corrugated Packaging (b)
Containerboard
Recycling
Saturated Kraft
Gypsum/Release Kraft
Bleached Kraft
EMEA Packaging (b) (c)
Asian Box (b) (d)
Brazilian Packaging (c)
European Coated Paperboard
Industrial Packaging
Global Cellulose Fibers (in thousands of metric tons) (e)
Printing Papers
U.S. Uncoated Papers
European and Russian Uncoated Papers
Brazilian Uncoated Papers
Indian Uncoated Papers
Printing Papers
2018
2017
2016
10,624
3,229
2,282
196
227
31
1,476
—
351
390
18,806
3,573
1,886
1,440
1,125
263
4,714
10,413
3,294
2,257
181
229
27
1,518
—
357
398
18,674
3,708
1,915
1,483
1,167
253
4,818
10,392
3,091
2,450
182
200
24
1,477
208
371
393
18,788
1,870
1,872
1,536
1,114
241
4,763
Includes third-party and inter-segment sales and excludes sales of equity investees.
(a)
(b) Volumes for corrugated box sales reflect consumed tons sold (CTS). Board sales by these businesses reflect invoiced tons.
(c) Excludes newsprint sales volumes at the Madrid, Spain mill through Q3 2017.
(d)
(e)
Includes sales volumes through the date of sale on June 30, 2016.
Includes North American, European and Brazilian volumes and internal sales to mills. Includes sales volumes from the pulp business acquired
beginning December 1, 2016.
RESEARCH AND DEVELOPMENT
The Company operates its primary research and
development center in Loveland, Ohio, as well as
several other product development facilities, including
the Global Cellulose Fibers technology center in
Federal Way, Washington.
We direct research and development activities to short-
term, long-term and technical assistance needs of
customers and operating divisions, and to process,
equipment and product innovations. Activities include
product development within the operating divisions;
studies on innovation and improvement of pulping,
bleaching,
recovery, paper making,
converting and coating processes; packaging design
and materials development; mechanical packaging
systems, environmentally sensitive printing inks and
reduction of environmental discharges; re-use of raw
materials in manufacturing processes; recycling of
consumer and packaging paper products; energy
conservation; applications of computer controls to
chemical
operations;
innovations
manufacturing
and
improvement of products; and development of various
new products. Our development efforts specifically
address product safety, as well as the minimization of
solid waste. The cost to the Company of its research
and development operations was $30 million in 2018,
$28 million in 2017, and $20 million in 2016.
We own numerous patents, copyrights, trademarks,
trade secrets and other intellectual property rights
relating to our products and to the processes for their
production. We also license intellectual property rights
to and from others where advantageous or necessary.
Many of the manufacturing processes are among our
trade secrets. Some of our products are covered by
U.S. and non-U.S. patents and are sold under well
known trademarks. We derive a competitive advantage
by protecting our trade secrets, patents, trademarks
and other intellectual property rights, and by using them
as required to support our businesses.
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ENVIRONMENTAL PROTECTION
on
the
impacts
environment,
International Paper is subject to extensive federal and
state environmental regulation, as well as similar
regulations internationally. Our continuing objectives
include: (1) controlling emissions and discharges from
our facilities into the air, water and groundwater to avoid
adverse
and
(2) maintaining compliance with applicable laws and
regulations. The Company spent $47 million in 2018 for
capital projects to control environmental releases into
the air and water, and to assure environmentally sound
management and disposal of waste. We expect to spend
$70 million in 2019 for environmental capital projects.
Capital expenditures for 2020 environmental projects
are anticipated to be approximately $70 million. Capital
expenditures for 2021 environmental projects are
estimated to be $95 million.
The Company has completed capital projects to meet
the U.S. Environmental Protection Agency's (EPA)
Boiler MACT (maximum achievable control technology)
regulations that require owners of specified boilers to
meet revised air emissions standards for certain
substances. Since 2016, lawsuits challenging all or
portions of the Boiler MACT regulations have resulted
in the U.S. Court of Appeals for the D.C. Circuit
the Boiler MACT
remanding certain portions of
regulations to the EPA for reconsideration of certain
standards in the regulations. We have not identified any
additional Boiler MACT capital project expenditures that
might result from the outcome of the remands to the
EPA.
Amendments lowering National Ambient Air Quality
Standards (NAAQS) for sulfur dioxide (SO2), nitrogen
dioxide (NO2), fine particulate (PM2.5), and ozone have
been finalized by the EPA in recent years but to date
have not had a material impact on the Company.
CLIMATE CHANGE
In an effort to mitigate the potential climate change
impacts from human activities, various international,
national and sub-national (regional, state and local)
governmental actions have been or may be undertaken.
Presently, these efforts have not materially impacted
International Paper, but such efforts may have a material
impact on the Company in the future.
International Efforts
A successor program to the 1997 Kyoto Protocol, the
Paris Agreement, went into effect in November 2016
and continued international efforts and voluntary
commitments
the emissions of
greenhouse gases (GHGs). Consistent with this
objective, participating countries aim to balance GHG
toward reducing
3
emissions generation and removal in the second half of
this century or, in effect, achieve net-zero global GHG
emissions.
As part of the Paris Agreement, many countries,
including the U.S. and EU member states, established
non-binding emissions reduction targets. The U.S. non-
binding commitment is for GHG emissions to be 7%
below 2005 GHG emissions levels by 2020 and 26% to
28% below by 2025. Other countries in which we do
business made similar non-binding commitments. On
August 4, 2017, the U.S. filed official notice to withdraw
from the Paris Agreement. Notwithstanding the notice
of withdrawal by the U.S., the Company’s voluntary GHG
reductions, which are set out in our annual Global
Citizenship report, remain roughly in line with the
percentages of the U.S. prior target reductions. It is not
clear at this time what, if any, further reductions by the
Company might be required by the countries in which
we operate. Due to this uncertainty, it is not possible at
this time to estimate the potential impacts of these
agreements on the Company.
To assist member countries in meeting obligations under
the Kyoto Protocol, the EU established and continues
to operate an Emissions Trading System (EU ETS).
Currently, we have two sites directly subject to regulation
under Phase III of the EU ETS, one in Poland and one
in France. Other sites that we operate in the EU
experience indirect impacts of the EU ETS through
purchased power pricing. Neither the direct nor indirect
impacts of the EU ETS have been material to the
Company, but they could be material to the Company in
the future depending on how the Paris Agreement's non-
binding commitments or allocation of and market prices
for GHG credits under existing rules evolve over the
coming years.
U.S. Efforts, including State, Regional and Local
Measures
In the U.S., the 1997 Kyoto Protocol was not ratified and
Congress has not passed GHG legislation. The EPA
manages regulations to: (i) control GHGs from mobile
sources by adopting transportation fuel efficiency
standards; (ii) control GHG emissions from new Electric
Generating Units (EGUs); (iii) require reporting of GHGs
from sources of GHGs greater than 25,000 tons per
year; (iv) in 2015, require states to develop plans to
reduce GHGs from utility EGUs and (v) in 2016 EPA took
the first steps in the process of developing emissions
standards for existing sources in the oil and gas sector.
A few U.S. states have enacted or are considering legal
measures to require the reduction of emissions of GHGs
by companies and public utilities, primarily through the
development of GHG emission inventories or regional
GHG cap-and-trade programs. California has already
enacted such a program and similar actions are being
considered by Washington. The Company does not
have any sites currently subject to California's GHG
regulatory plan. There may be indirect impacts from
changing input costs (such as electricity) at some of our
California converting operations but these have yet to
manifest themselves in material impacts. Although we
are monitoring proposed programs in other states, it is
unclear what impacts, if any, state-level GHG rules will
have on the Company’s operations.
Summary
Regulation of GHGs continues to evolve in various
countries in which we do business. While it is likely that
there will be increased governmental action regarding
GHGs and climate change in the future, it is unclear
when such actions will occur and at this time it is not
reasonably possible to estimate Company costs of
compliance with rules that have not yet been adopted
or implemented and may not be adopted or implemented
in the future. In addition to possible direct impacts, future
legislation and regulation could have indirect impacts on
International Paper, such as higher prices
for
transportation, energy and other inputs, as well as more
protracted air permitting processes, causing delays and
higher costs to implement capital projects. International
Paper has controls and procedures in place to stay
informed about developments concerning possible
climate change legislation and regulation in the U.S. and
in other countries where we operate. We regularly
assess whether such legislation or regulation may have
a material effect on the Company, its operations or
financial condition, and whether we have any related
disclosure obligations.
International Paper plays a significant role in responding
to the climate change challenge. Our entire business
depends upon the sustainability of forests. We transform
renewable resources into recyclable products that
people depend on every day. This cycle begins with
sourcing renewable fiber from responsibly managed
forests, and at the end of use our products are recycled
into new products at a higher rate than any other base
material. We will continue to lead the world in
responsible forest stewardship to ensure healthy and
productive forest ecosystems for generations to come.
Our efforts to advance sustainable forest management
and restore forest landscapes are an important lever for
mitigating climate change through carbon storage in
forests. Furthermore, we use biomass and
manufacturing residuals (rather than fossil fuels) to
generate a substantial majority of the manufacturing
energy at our mills.
Additional information regarding climate change and
International Paper is available in our 2017 Global
found on our website at
Citizenship
www.internationalpaper.com, though this information is
not incorporated by reference into this Form 10-K and
report
4
should not be considered part of this or any other report
that we file with or furnish to the SEC.
EMPLOYEES
As of December 31, 2018, we have approximately
53,000 employees, nearly 33,000 of whom are located
in
the United States. Of our U.S. employees,
approximately 23,000 are hourly, with unions
representing approximately 14,000 employees.
Approximately 11,000 of this number are represented
by the United Steelworkers union (USW).
International Paper, the USW, and several other unions
have entered into two master agreements covering
various mills and converting facilities. These master
agreements cover several specific items, including
wages, select benefit programs, successorship,
employment security, and health and safety. Individual
facilities continue to have local agreements for other
subjects not covered by the master agreements. If local
facility agreements are not successfully negotiated at
the time of expiration, under the terms of the master
agreements the local contracts will automatically renew
with the same terms in effect. The master agreements
cover the majority of our union represented mills and
converting facilities. In addition, International Paper is
party to a master agreement with District Council 2,
International Brotherhood of Teamsters, covering
additional converting facilities.
EXECUTIVE OFFICERS OF THE REGISTRANT
Mark S. Sutton, 57, chairman (since January 1, 2015)
& chief executive officer (since November 1, 2014).
Mr. Sutton previously served as president & chief
operating officer from June 1, 2014 to October 31,
2014, senior vice president - industrial packaging from
November 2011 to May 31, 2014, senior vice president
- printing and communications papers of the Americas
from 2010 until 2011, senior vice president - supply
chain from 2008 to 2009, vice president - supply chain
from 2007 until 2008, and vice president - strategic
planning from 2005 until 2007. Mr. Sutton joined
International Paper in 1984. Mr. Sutton serves on the
board of directors of The Kroger Company. He is a
member of The Business Council and the Business
Roundtable and serves on the American Forest &
the
Paper Association board of directors and
international advisory board of the Moscow School of
Management - Skolkovo. He was appointed chairman
of the U.S. Russian Business Council and was also
appointed to the U.S. Section of the U.S.-Brazil CEO
Forum. He also serves on the board of directors of
Memphis Tomorrow and board of governors for New
Memphis Institute. Mr. Sutton has been a director since
June 1, 2014.
W. Michael Amick, Jr., 55, senior vice president -
paper the Americas & India since January 1, 2017. Mr.
Amick previously served as senior vice president -
North American papers & consumer packaging from
July 2016 until December 2016, senior vice president
- North American papers, pulp & consumer packaging
from November 2014 until June 2016, vice president
- president, IP India, from August 2012 to October
2014, and vice president and general manager for the
coated paperboard business from 2010 to 2012. Mr.
Amick joined International Paper in 1990.
Tommy S. Joseph, 59, senior vice president -
manufacturing, technology, EH&S and global sourcing
since January 2010. Mr. Joseph previously served as
senior vice president - manufacturing, technology,
EH&S from February 2009 until December 2009, and
vice president - technology from 2005 until February
2009. Mr. Joseph is a director of Ilim in which
International Paper holds a 50% interest, and of its
subsidiary, Ilim Group. Mr. Joseph joined International
Paper in 1983.
Timothy S. Nicholls, 57, senior vice president & chief
financial officer since June 2018. Mr. Nicholls previously
served as senior vice president - industrial packaging
the Americas from January 2017 through June 2018,
senior vice president - industrial packaging from
November 2014 through December 2016, senior vice
president - printing and communications papers of the
Americas from November 2011 through October 2014,
senior vice president and chief financial officer from
2007 until 2011, vice president and executive project
leader of IP Europe during 2007, and vice president and
chief financial officer - IP Europe from 2005 until 2007.
Mr. Nicholls joined International Paper in 1991.
Thomas J. Plath, 55, senior vice president - human
resources and global citizenship since March 1, 2017.
Mr. Plath previously served as vice president - human
resources, global businesses from November 2014
through February 2017, and vice president - HR
manufacturing, technology, EH&S and global supply
chain from April 2013 to November 2014. Mr. Plath
joined International Paper in 1991.
Jean-Michel Ribieras, 56, senior vice president -
industrial packaging the Americas since June 2018. Mr.
Ribieras previously served as senior vice president -
global cellulose fibers from July 2016 through June
2018, senior vice president - president, IP Europe,
Middle East, Africa & Russia from 2013 until June 2016,
and president - IP Latin America from 2009 until 2013.
Mr. Ribieras joined International Paper in 1993.
Sharon R. Ryan, 59, senior vice president, general
counsel & corporate secretary since November 2011.
Ms. Ryan previously served as vice president, acting
general counsel & corporate secretary from May 2011
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until November 2011, vice president from March 2011
until May 2011, associate general counsel, chief ethics
and compliance officer from 2009 until 2011, and
associate general counsel from 2006 until 2009. Ms.
Ryan joined International Paper in 1988.
John V. Sims, 56, senior vice president - president,
IP Europe, Middle East, Africa & Russia since July
2016. Mr. Sims previously served as vice president
and general manager, European papers from March
2016 until June 2016, vice president & general
manager, North American papers from 2013 until
February 2016, and vice president, finance and
strategy, industrial packaging, from 2009 until 2013.
Mr. Sims is a director of Ilim in which International
Paper holds a 50% interest, and of its subsidiary, Ilim
Group. Mr. Sims joined International Paper in 1994.
Catherine I. Slater, 55, senior vice president - global
cellulose fibers & IP Asia since June 2018. Ms. Slater
previously served as senior vice president - consumer
packaging from December 2016 through December
2017. Ms. Slater joined International Paper from
Weyerhaeuser Company in December 2016, effective
with the completion of the acquisition of Weyerhaeuser’s
cellulose fibers business, which she previously led. Ms.
Slater’s 24-year career with Weyerhaeuser included
leadership roles in manufacturing, printing papers,
consumer products, wood products and the cellulose
fibers business.
Gregory T. Wanta, 53, senior vice president - North
American container since November 2016. Mr. Wanta
has served in a variety of roles of increasing
in manufacturing and commercial
responsibility
in specialty papers, coated
roles
leadership
paperboard, printing papers,
foodservice and
industrial packaging, including vice president, central
region, Container the Americas, from January 2012
through October 2016. Mr. Wanta joined International
Paper in 1991.
RAW MATERIALS
Raw materials essential to our businesses include wood
fiber, purchased in the form of pulpwood, wood chips
and old corrugated containers (OCC), and certain
chemicals, including caustic soda and starch. For further
supply purchase
concerning
information
agreements, see page 30.
fiber
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K
(including the exhibits hereto) that are not historical in
nature may be considered “forward-looking” statements
within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are often
“should,”
identified by
the words,
“may,”
“will,”
“continue,” “anticipate,” “believe,” “expect,” “plan,”
“appear,” “project,” “estimate,” “intend,” and words of a
similar nature. These statements are not guarantees of
future performance and reflect management’s current
views with respect to future events, which are subject
to risks and uncertainties that could cause actual results
to differ materially from those expressed or implied in
these statements. Factors which could cause actual
results to differ include but are not limited to: (i) the level
of our indebtedness and changes in interest rates; (ii)
industry conditions, including but not limited to changes
in the cost or availability of raw materials, energy and
transportation costs, competition we face, cyclicality and
changes in consumer preferences, demand and pricing
for our products; (iii) global economic conditions and
political changes, including but not limited to the
impairment of financial institutions, changes in currency
exchange rates, credit ratings issued by recognized
credit rating organizations, the amount of our future
pension funding obligation, changes in tax laws and
pension and health care costs; (iv) unanticipated
expenditures related to the cost of compliance with
existing and new environmental and other governmental
regulations and to actual or potential litigation; (v)
whether we experience a material disruption at one of
our manufacturing facilities; (vi) risks inherent in
conducting business through a joint venture; and (vii)
our ability to achieve the benefits we expect from all
acquisitions, divestitures and restructurings. These and
other factors that could cause or contribute to actual
results differing materially from such forward-looking
statements are discussed in greater detail below in “Item
1A. Risk Factors.” We undertake no obligation to publicly
update any forward-looking statements, whether as a
result of new information, future events or otherwise.
ITEM 1A. RISK FACTORS
The Company faces risks in the normal course of
business and through global, regional, and local events
that could have an adverse impact on its reputation,
operations, and financial performance. The Board of
Directors exercises oversight of
the Company’s
enterprise risk management program, which includes
strategic, operational and financial matters, as well as
compliance and legal risks. The Audit and Finance
Committee coordinates the risk oversight role exercised
by the Board’s standing committees and management,
and it receives updates on the risk management
processes twice per year.
In addition to the risks and uncertainties discussed
elsewhere in this Annual Report on Form 10-K
(particularly in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations), or in the Company’s other filings with the
Securities and Exchange Commission, the following are
some important factors that could cause the Company’s
actual results to differ materially from those projected in
any forward-looking statement.
RISKS RELATING TO INDUSTRY CONDITIONS
CHANGES IN THE COST OR AVAILABILITY OF RAW
MATERIALS, ENERGY AND TRANSPORTATION
COULD AFFECT OUR PROFITABILITY. We rely
heavily on the use of certain raw materials (principally
virgin wood fiber, recycled fiber, caustic soda and
starch), energy sources (principally biomass, natural
gas, electricity and fuel oil) and third-party companies
that transport our goods. The market price of virgin wood
fiber varies based upon availability and source. The
global supply and demand for recycled fiber may be
affected by trade policies between countries, individual
governments' legislation and regulations, as well as
changes in the global economy. In addition, the increase
in demand of products manufactured, in whole or in part,
from recycled fiber, on a global basis, may cause
occasional significant fluctuations in recycled fiber
prices. Energy prices, in particular prices for oil and
natural gas, have fluctuated dramatically in the past and
may continue to fluctuate in the future. The availability
of labor and the market price for diesel fuel may affect
our costs for third-party transportation. Our profitability
has been, and will continue to be, affected by changes
in the costs and availability of such raw materials, energy
sources and transportation sources.
OUR
AFFECT
INDUSTRIES
THE
IN WHICH WE OPERATE
EXPERIENCE BOTH ECONOMIC CYCLICALITY
AND CHANGES IN CONSUMER PREFERENCES.
FLUCTUATIONS IN THE PRICES OF, AND THE
DEMAND FOR, OUR PRODUCTS COULD
MATERIALLY
FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND
CASH FLOWS. Substantially all of our businesses have
experienced, and are likely to continue to experience,
cycles relating to industry capacity and general
economic conditions. The length and magnitude of
these cycles have varied over time and by product. In
addition, changes in consumer preferences may
increase or decrease the demand for our products.
These consumer preferences affect the prices of our
products. Consequently, our financial results are
sensitive to changes in the pricing and demand for our
products.
IN THE UNITED STATES AND
COMPETITION
INTERNATIONALLY COULD NEGATIVELY IMPACT
OUR FINANCIAL RESULTS. We operate
in a
competitive environment, both in the United States and
internationally, in all of our operating segments. Product
innovations, manufacturing and operating efficiencies,
and marketing, distribution and pricing strategies
pursued or achieved by competitors could negatively
impact our financial results.
6
RISKS RELATING TO MARKET AND ECONOMIC
FACTORS
ADVERSE DEVELOPMENTS
IN GENERAL
BUSINESS AND ECONOMIC CONDITIONS COULD
HAVE AN ADVERSE EFFECT ON THE DEMAND FOR
OUR PRODUCTS AND OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. General economic
conditions may adversely affect industrial non-durable
goods production, consumer spending, commercial
printing
activity, white-collar
employment levels and consumer confidence, all of
which impact demand for our products. In addition,
volatility in the capital and credit markets, which impacts
interest rates, currency exchange rates and the
availability of credit, could have a material adverse effect
on our business, financial condition and our results of
operations.
advertising
and
IN
INTERNATIONAL CONDITIONS
CHANGES
COULD ADVERSELY AFFECT OUR BUSINESS AND
RESULTS OF OPERATIONS. Our operating results
and business prospects could be substantially affected
by risks related to the countries outside the United States
in which we have manufacturing facilities or sell our
products. Specifically, Russia, Brazil, Poland, India, and
Turkey, where we have substantial manufacturing
facilities, are countries that are exposed to economic
and political instability in their respective regions of the
world. Fluctuations in the value of local currency versus
the U.S. dollar, downturns in economic activity, adverse
tax consequences or rulings, nationalization or any
change in social, political or labor conditions in any of
these countries or regions could negatively affect our
financial results. Trade protection measures in favor of
local producers of competing products, including
tax benefits and other
governmental subsidies,
measures giving
local producers a competitive
advantage over International Paper, may also adversely
impact our operating results and business prospects in
these countries. Likewise, disruption in existing trade
agreements or
friction between
countries (e.g., the U.S. and China) could have a
negative effect on our business and results of operations
by restricting the free flow of goods and services across
borders. In addition, our international operations are
subject to regulation under U.S. law and other laws
related to operations in foreign jurisdictions. For
example, the Foreign Corrupt Practices Act prohibits
U.S. companies and their representatives from offering,
promising, authorizing or making payments to foreign
officials for the purpose of obtaining or retaining
business abroad. Failure to comply with domestic or
in various adverse
result
foreign
consequences, including the imposition of civil or
criminal sanctions and the prosecution of executives
overseeing our international operations.
laws could
increased
trade
THE LEVEL OF OUR INDEBTEDNESS COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND IMPAIR OUR ABILITY TO OPERATE OUR
BUSINESS. As of December 31, 2018, International
Paper had approximately $10.7 billion of outstanding
indebtedness. The level of our indebtedness could have
important consequences to our financial condition,
operating results and business, including the following:
•
•
•
•
•
•
financing
it may limit our ability to obtain additional debt or
equity
for working capital, capital
expenditures, product development, dividends,
share repurchases, debt service requirements,
acquisitions and general corporate or other
purposes;
a portion of our cash flows from operations will be
dedicated to payments on indebtedness and will
not be available for other purposes, including
future
operations, capital expenditures and
business opportunities;
the debt service requirements of our indebtedness
could make it more difficult for us to satisfy other
obligations;
our indebtedness that is subject to variable rates
and, in the instance such variable rates use the
London Interbank Offered Rate (LIBOR) as a
benchmark, exposes us to a possible increase in
debt service obligations in the event that the
method for determining LIBOR changes, LIBOR is
replaced by an alternative reference rate or LIBOR
is phased out altogether;
it may limit our ability to adjust to changing market
conditions and place us at a competitive
disadvantage compared to our competitors that
have less debt; and
it may increase our vulnerability to a downturn in
general economic conditions or in our business,
and may make us unable to carry out capital
spending that is important to our growth.
In addition, we are subject to agreements that require
meeting and maintaining certain financial ratios and
covenants. A significant or prolonged downturn in
general business and economic conditions may affect
our ability to comply with these covenants or meet those
financial ratios and tests and could require us to take
action to reduce our debt or to act in a manner contrary
to our current business objectives.
IN CREDIT RATINGS
ISSUED BY
CHANGES
NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATIONS COULD ADVERSELY AFFECT
OUR COST OF FINANCING AND HAVE AN ADVERSE
7
EFFECT ON THE MARKET PRICE OF OUR
SECURITIES. Maintaining an investment-grade credit
rating is an important element of our financial strategy,
and a downgrade of the Company’s ratings below
investment grade will likely eliminate our ability to
access the commercial paper market, may limit our
access to the capital markets, have an adverse effect
on the market price of our securities, increase our cost
of borrowing and require us to post collateral for
derivatives in a net liability position. The Company’s
desire to maintain its investment grade rating may cause
the Company to take certain actions designed to
improve its cash flow, including sale of assets,
suspension or reduction of our dividend and reductions
in capital expenditures and working capital.
the
terms of
Under
the agreements governing
approximately $1.4 billion of our debt as of
December 31, 2018, the applicable interest rate on such
debt may increase upon each downgrade in our credit
rating below investment grade. As a result, a downgrade
in our credit rating below investment grade may lead to
an increase in our interest expense. There can be no
assurance that such credit ratings will remain in effect
for any given period of time or that such ratings will not
be lowered, suspended or withdrawn entirely by the
rating agencies, if, in each rating agency’s judgment,
circumstances so warrant. Any such downgrade,
suspension or withdrawal of our credit ratings could
adversely affect our cost of borrowing, limit our access
to the capital markets or result in more restrictive
covenants in agreements governing the terms of any
future indebtedness that we may incur.
12, Income Taxes, on pages 58 through 62, in Item 8.
Financial Statements and Supplementary Data for
further information.
OUR PENSION AND HEALTH CARE COSTS ARE
SUBJECT TO NUMEROUS FACTORS WHICH
COULD CAUSE THESE COSTS TO CHANGE. We
have defined benefit pension plans covering
substantially all U.S. salaried employees hired prior to
July 1, 2004 (or later for certain acquired populations,
as described in Note 18. Retirement Plans, on pages
70 through 77, in Item 8. Financial Statements and
Supplementary Data) and substantially all hourly and
union employees regardless of hire date. The Company
has frozen participation under these plans for U.S.
salaried employees, including credited services and
compensation on or after January 1, 2019; however, the
pension freeze does not affect benefits accrued through
December 31, 2018. We provide retiree health care
benefits to certain former U.S. hourly employees, as well
as financial assistance towards the cost of individual
retiree medical coverage for certain former U.S. salaried
employees. Our pension costs are dependent upon
numerous factors resulting from actual plan experience
and assumptions of future experience. Pension plan
assets are primarily made up of equity and fixed income
investments. Fluctuations in actual equity market
returns, changes in general interest rates and changes
in the number of retirees may result in increased pension
costs
in
assumptions regarding current discount rates and
expected rates of return on plan assets could increase
pension costs.
future periods. Likewise, changes
in
DOWNGRADES IN THE CREDIT RATINGS OF
BANKS ISSUING CERTAIN LETTERS OF CREDIT
WILL INCREASE OUR COST OF MAINTAINING
CERTAIN INDEBTEDNESS AND MAY RESULT IN
THE ACCELERATION OF DEFERRED TAXES. We are
subject to the risk that a bank with currently issued
irrevocable letters of credit supporting installment notes
delivered to Temple-Inland in connection with Temple-
Inland's 2007 sales of forestlands may be downgraded
below a required rating. Since 2007, certain banks have
fallen below the required ratings threshold and were
successfully replaced, or waivers were obtained
regarding their replacement. As a result of continuing
uncertainty in the banking environment, a number of the
letter-of-credit banks currently in place remain subject
to risk of downgrade and the number of qualified
replacement banks remains limited. The downgrade of
one or more of these banks may subject the Company
to additional costs of securing a replacement letter-of-
credit bank or could result in an acceleration of payments
of up to $538 million in deferred income taxes if
replacement banks cannot be obtained. The deferred
taxes are currently recorded
the Company's
consolidated financial statements. See Note 14,
Variable Interest Entities, on pages 65 and 66, and Note
in
OUR PENSION PLANS ARE CURRENTLY
UNDERFUNDED ON A PROJECTED BENEFIT
OBLIGATION BASIS, AND OVER TIME WE MAY BE
REQUIRED TO MAKE CASH PAYMENTS TO THE
PLANS, REDUCING THE CASH AVAILABLE FOR
OUR BUSINESS. We record a liability associated with
our pension plans equal to the excess of the benefit
obligation over the fair value of plan assets. The benefit
liability recorded under the provisions of Accounting
Standards Codification (ASC) 715, “Compensation –
Retirement Benefits,” at December 31, 2018 was $1.8
billion. The amount and timing of future contributions will
depend upon a number of factors, including the actual
earnings and changes in values of plan assets and
changes in interest rates.
RISKS RELATING TO OUR OPERATIONS
FACILITIES
MATERIAL DISRUPTIONS AT ONE OF OUR
COULD
MANUFACTURING
NEGATIVELY IMPACT OUR FINANCIAL RESULTS.
We operate our facilities in compliance with applicable
rules and regulations and take measures to minimize
the risks of disruption at our facilities. A material
disruption at our corporate headquarters or one of our
manufacturing facilities could prevent us from meeting
8
customer demand, reduce our sales and/or negatively
impact our financial condition. Any of our manufacturing
facilities, or any of our machines within an otherwise
operational
operations
could
unexpectedly due to a number of events, including:
facility,
cease
•
•
•
•
•
•
•
•
•
•
•
•
fires, floods, earthquakes, hurricanes or other
catastrophes;
the effect of a drought or reduced rainfall on its
water supply;
the effect of other severe weather conditions on
equipment and facilities;
terrorism or threats of terrorism;
domestic and international laws and regulations
applicable to our Company and our business
partners, including joint venture partners, around
the world;
unscheduled maintenance outages;
prolonged power failures;
an equipment failure;
a chemical spill or release;
explosion of a boiler or other equipment;
damage or disruptions caused by third parties
operating on or adjacent
to one of our
manufacturing facilities;
disruptions in the transportation infrastructure,
including roads, bridges, railroad tracks and
tunnels;
• widespread outbreak of an illness or any other
communicable disease, or any other public health
crisis;
•
•
labor difficulties; and
other operational problems.
Any such downtime or facility damage could prevent us
from meeting customer demand for our products and/
or require us to make unplanned expenditures. If one of
these machines or facilities were to incur significant
downtime, our ability to meet our production targets and
satisfy customer requirements could be impaired,
resulting in lower sales and having a negative effect on
our business and financial results.
CERTAIN OPERATIONS ARE CONDUCTED BY
JOINT VENTURES THAT WE CANNOT OPERATE
SOLELY FOR OUR BENEFIT. Certain operations in
Russia are carried on by a joint venture, Ilim. In joint
ventures, we share ownership and management of a
company with one or more parties who may or may not
9
have the same goals, strategies, priorities or resources
as we do. In general, joint ventures are intended to be
operated for the benefit of all co-owners, rather than for
our exclusive benefit. Operating a business as a joint
venture often
requires additional organizational
formalities as well as time-consuming procedures for
sharing information and making decisions. In joint
ventures, we are required to pay more attention to our
relationship with our co-owners as well as with the joint
venture, and if a co-owner changes, our relationship
may be adversely affected. In addition, the benefits from
a successful joint venture are shared among the co-
owners, so we receive only our portion of those benefits.
WE MAY NOT ACHIEVE THE EXPECTED BENEFITS
JOINT
FROM ACQUISITIONS,
VENTURES,
DIVESTITURES, CAPITAL
INVESTMENTS AND
OTHER CORPORATE TRANSACTIONS. Our strategy
for long-term growth, productivity and profitability
depends, in part, on our ability to accomplish prudent
acquisitions,
joint ventures, divestitures, capital
investments and other corporate transactions and to
realize the benefits we expect from such transactions,
and we are subject to the risk that we may not achieve
the expected benefits. Among the benefits we expect
from potential as well as completed acquisitions and
joint ventures are synergies, cost savings, growth
to new markets (or a
opportunities or access
combination thereof), and in the case of divestitures, the
realization of proceeds from the sale of businesses and
assets to purchasers who place higher strategic value
on such businesses and assets than does International
Paper. In January 2018, for example, we completed a
transaction transferring our North American Consumer
Packaging business to Graphic Packaging in exchange
for, among other things, an equity interest in the
combined business of 20.5%. The success of the
transaction and the value of our equity interest will
depend on variables we do not control, such as the
financial performance of the combined business and on
the ability of the combined business
to realize
anticipated growth opportunities, cost savings and other
synergies.
TO
AND
SUBJECT
EMPLOYEE
INFORMATION
WE ARE
TECHNOLOGY RISKS RELATED TO BREACHES OF
SECURITY PERTAINING TO SENSITIVE COMPANY,
CUSTOMER,
VENDOR
INFORMATION AS WELL AS BREACHES IN THE
TECHNOLOGY USED TO MANAGE OPERATIONS
AND OTHER BUSINESS PROCESSES. Our business
operations rely upon secure information technology
systems for data capture, processing, storage and
reporting. Despite careful security and controls design,
implementation, updating and independent third party
verification, our information technology systems, and
those of our third party providers, could become subject
to employee error or malfeasance, cyber attacks, or
natural disasters. Network, system, application and data
breaches could result in operational disruptions or
information misappropriation including, but not limited
to, interruption to systems availability, denial of access
to and misuse of applications required by our customers
to conduct business with International Paper. Access to
internal applications required to plan our operations,
source materials, manufacture and ship finished goods
and account for orders could be denied or misused.
Theft of intellectual property or trade secrets, and
inappropriate disclosure of confidential company,
employee, customer or vendor information, could stem
from such
these operational
disruptions and/or misappropriation of information could
result in lost sales, business delays, negative publicity,
government enforcement and could have a material
effect on our business.
incidents. Any of
RISKS RELATING TO LEGAL PROCEEDINGS AND
COMPLIANCE COSTS
laws,
WE ARE SUBJECT TO A WIDE VARIETY OF LAWS,
REGULATIONS AND OTHER GOVERNMENT
REQUIREMENTS THAT MAY CHANGE
IN
SIGNIFICANT WAYS, AND THE COST OF
COMPLIANCE WITH SUCH REQUIREMENTS
COULD IMPACT OUR BUSINESS AND RESULTS OF
OPERATIONS. Our operations are subject to regulation
under a wide variety of U.S. federal and state and non-
U.S.
regulations and other government
requirements -- including, among others, those relating
to the environment, health and safety, labor and
employment, data privacy, tax, trade and health care.
There can be no assurance that laws, regulations and
government requirements will not be changed, applied
or interpreted in ways that will require us to modify our
operations and objectives or affect our returns on
investments by restricting existing activities and
products, subjecting them to escalating costs.
For example, we have incurred, and expect that we will
continue to incur, significant capital, operating and other
expenditures complying with applicable environmental
laws and regulations. There can be no assurance that
future remediation requirements and compliance with
existing and new laws and requirements, including with
global climate change laws and regulations, will not
require significant expenditures, or
that existing
reserves for specific matters will be adequate to cover
future costs. We could also incur substantial fines or
sanctions, enforcement actions (including orders
limiting our operations or
requiring corrective
measures), natural resource damages claims, cleanup
and closure costs, and third-party claims for property
damage and personal injury as a result of violations of,
or liabilities under, environmental laws, regulations,
codes and common law. The amount and timing of
environmental expenditures is difficult to predict, and, in
some cases, liability may be imposed without regard to
10
contribution or to whether we knew of, or caused, the
release of hazardous substances.
As another example, we are subject to a number of labor
and employment laws and regulations that could
significantly increase our operating costs and reduce
our operational flexibility. Additionally, we are subject to
complex and evolving U.S. and international privacy
laws and regulations, including those pertaining to the
handling of personal data, such as the General Data
Protection Regulation (GDPR). Government authorities
around the world are considering, or are in the process
of implementing, new data protection regulations. Many
of these laws and regulations are subject to uncertain
application, interpretation or enforcement standards
that could result in claims, changes to our business
practices, penalties, increased operating costs or other
impacts on our businesses.
As a final example, the application of tax law is subject
to interpretation and is subject to audit by taxing
authorities. Additionally, administrative guidance can be
incomplete or vary from legislative intent, and therefore
the application of the tax law is uncertain. While we
believe the positions reported by the Company comply
with relevant tax laws and regulations, taxing authorities
could interpret our application of certain laws and
regulations differently. We are currently subject to tax
audits in the U.S., Brazil, Poland, Russia and other
taxing jurisdictions around the world. In some cases,
we have appealed and may continue to appeal,
assessments by taxing authorities in the court system.
As such, tax controversy matters may result in
previously unrecorded tax expenses, higher future tax
expenses or the assessment of interest and penalties.
RESULTS OF LEGAL PROCEEDINGS COULD HAVE
A MATERIAL EFFECT ON OUR CONSOLIDATED
FINANCIAL STATEMENTS. The costs and other effects
of pending litigation against us cannot be determined
with certainty. Although we do not believe that the
outcome of any pending or threatened lawsuits or claims
will have a material effect on our business or
consolidated financial statements, there can be no
assurance that the outcome of any lawsuit or claim will
be as expected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
FORESTLANDS
As of December 31, 2018, the Company owned or
managed approximately 329,000 acres of forestlands in
forest
Brazil, and had,
rights on
management agreements, harvesting
licenses and
through
government-owned forestlands in Russia. All owned
lands in Brazil are independently third-party certified for
sustainable forestry under the Brazilian National Forest
Certification Program (CERFLOR) and the Forest
Stewardship Council (FSC).
MILLS AND PLANTS
A listing of our production facilities by segment, the vast
majority of which we own, can be found in Appendix I
hereto, which is incorporated herein by reference.
The Company’s facilities are in good operating condition
and are suited for the purposes for which they are
presently being used. We continue to study the
economics of modernization or adopting other
alternatives for higher cost facilities.
CAPITAL INVESTMENTS AND DISPOSITIONS
Given the size, scope and complexity of our business
interests, we continually examine and evaluate a wide
variety of business opportunities and planning
alternatives, including possible acquisitions and sales
or other dispositions of properties. You can find a
discussion about
level of planned capital
investments for 2019 on page 30, and dispositions and
restructuring activities as of December 31, 2018, on
pages 21
Item 7. Management’s
Discussion and Analysis of Financial Condition and
Results of Operations, and on page 52 and pages 54
Item 8. Financial Statements and
and 55 of
Supplementary Data.
through 23 of
the
ITEM 3. LEGAL PROCEEDINGS
Information concerning the Company’s legal proceedings
is set forth in Note 13 Commitments and Contingent
Liabilities on pages 62 through 65 of Item 8. Financial
Statements and Supplementary Data.
from
Additionally, in the third quarter of 2018, the Company
resource damages penalty
received a natural
assessment of RUB 18.8 million
(approximately
$275,000) arising
the Company’s voluntary
in
disclosure of mercury contamination
sediment in a river tributary that traverses the site of the
Company’s mill in Svetogorsk, Russia. The mercury
contamination is associated with a former manufacturing
facility located on the Svetogorsk mill site. The Company
is cooperating with the Russian government to resolve
the matter.
identified
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
As of the filing of this Annual Report on Form 10-K, the
Company’s common shares are traded on the New York
Stock Exchange (NYSE: IP). As of February 15, 2019,
there were approximately 11,316 record holders of
common stock of the Company.
The table below presents information regarding the
Company’s purchases of its equity securities for the time
periods presented.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Period
October 1, 2018 - October 31, 2018
November 1, 2018 - November 30, 2018
December 1, 2018 - December 31, 2018
Total
Total Number of Shares
Purchased (a)
Average Price Paid per
Share
Total Number of Shares (or
Units) Purchased as Part of
Publicly Announced
Programs
Maximum Number
(or Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs (in billions)
2,225,310 $
1,475,242
725,363
4,425,915
44.94
45.79
45.51
2,225,188 $
1,474,900
712,442
2.33
2.27
2.23
(a) 13,385 shares were acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs.
During these periods, 4,412,530 shares were purchased under our share repurchase program, which was approved by our Board of Directors
and announced on July 8, 2014 and October 9, 2018. Through this program, which does not have an expiration date, we were authorized to
purchase, in open market transactions (including block trades), privately negotiated transactions or otherwise, up to $3.5 billion aggregate
amount of shares of our common stock. As of February 15, 2019, approximately $2.19 billion aggregate amount of shares of our common
stock remained authorized for purchase under this program.
11
PERFORMANCE GRAPH
The performance graph shall not be deemed to be
“soliciting material” or to be “filed” with the Commission
or subject to Regulation 14A or 14C, or to the liabilities
of Section 18 of the Exchange Act of 1934, as amended.
The following graph compares a $100 investment in
Company stock on December 31, 2013 with a $100
investment in our Return on Invested Capital (ROIC)
Peer Group and the S&P 500 also made at market close
on December 31, 2013. The graph portrays total return,
2013–2018, assuming reinvestment of dividends.
Note 1. The companies included in the ROIC Peer Group are Domtar Inc., Fibria Celulose S.A., Graphic Packaging Holding Company, Klabin
S.A., Metsa Board Corporation, Mondi Group, Packaging Corporation of America, Smurfit Kappa Group, Stora Enso Group, and UPM-
Kymmene Corp. MeadWestvaco Corp. and Rock-Tenn Company are included in the ROIC Peer Group results through 2014 and
subsequently, after the merger of those companies, WestRock was added to the Peer group beginning in 2015.
Note 2.
Returns are calculated in $USD.
12
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY (a)
Dollar amounts in millions, except per share
amounts and stock prices
RESULTS OF OPERATIONS
Net sales
Costs and expenses, excluding interest
Earnings (loss) from continuing operations
before income taxes and equity earnings
Equity earnings (loss), net of taxes
Discontinued operations, net of taxes
Net earnings (loss)
Noncontrolling interests, net of taxes
Net earnings (loss) attributable to International
Paper Company
FINANCIAL POSITION
2018
2017
2016
2015
2014
$ 23,306
20,989
$ 21,743
20,323
$ 19,495
18,180
$ 20,675
18,988
$ 21,889
20,548
1,781
(b)
336
345
2,017
5
(c)
(b-d)
(e)
848
177
34
(f)
2,144
(e-g)
—
(h)
(i)
(h-j)
795
198
102
902
(2)
1,132
(k)
734
(n)
117
85
917
(21)
(l)
(k-m)
(200)
77
536
(19)
(o)
(n-p)
2,012
(b-d)
2,144
(e-g)
904
(h-j)
938
(k-m)
555
(n-p)
Current assets less current liabilities
$ 2,302
$
3,175
$
2,601
$
2,244
$
2,719
Plants, properties and equipment, net
Forestlands
Total assets
Notes payable and current maturities of long-
term debt
Long-term debt
Total shareholders’ equity
BASIC EARNINGS PER SHARE
ATTRIBUTABLE TO INTERNATIONAL
PAPER COMPANY COMMON
SHAREHOLDERS
Earnings (loss) from continuing operations
$
Discontinued operations
Net earnings (loss)
DILUTED EARNINGS PER SHARE
ATTRIBUTABLE TO INTERNATIONAL
PAPER COMPANY COMMON
SHAREHOLDERS
Earnings (loss) from continuing operations
$
13,067
402
33,576
639
10,015
7,362
4.07
0.84
4.91
4.02
0.83
4.85
1.925
13,265
448
33,903
311
10,846
6,522
$
$
5.11
0.08
5.19
5.05
0.08
5.13
1.863
13,003
456
33,093
239
11,075
4,341
$
$
1.95
0.25
2.20
1.93
0.25
2.18
1.783
11,000
366
30,271
426
8,844
3,884
$
$
2.05
0.20
2.25
2.03
0.20
2.23
1.640
11,794
507
28,369
742
8,584
5,115
$
$
1.12
0.18
1.30
1.10
0.19
1.29
1.450
Discontinued operations
Net earnings (loss)
Cash dividends
COMMON STOCK PRICES
High
Low
Year-end
FINANCIAL RATIOS
Current ratio
Total debt to capital ratio
Return on shareholders’ equity
CAPITAL EXPENDITURES
NUMBER OF EMPLOYEES
$ 66.94
$
58.96
$
54.68
$
57.90
$
55.73
37.55
40.36
1.5
0.59
28.4%
49.60
57.94
1.6
0.63
43.9%
32.50
53.06
1.6
0.72
22.1%
$ 1,572
53,000
$
1,391
56,000
$
1,348
55,000
36.76
37.70
1.6
0.70
20.0%
$1,487
56,000
44.24
53.58
1.5
0.65
7.7%
$1,366
58,000
13
(d) Includes the following tax expenses (benefits):
In millions
State income tax legislative changes
Tax benefit of Tax Cuts and Jobs Act
International investment restructuring
Foreign tax audits
Total
2017:
(e) Includes the following charges (gains):
2018
$
$
9
(36)
19
25
17
In millions
2017
Before
Tax
After
Tax
Gain on sale of investment in ArborGen
$
(14) $
(9)
Costs associated with the pulp business
acquired in 2016
Amortization of Weyerhaeuser inventory
fair value step-up
Holmen bargain purchase gain
Abandoned property removal
Kleen Products settlement
Asia Foodservice sale
Brazil Packaging wood supply
accelerated amortization
Debt extinguishment costs
Interest income on income tax refund
claims
Other items
Total special items
Non-operating pension expense
Total
33
14
(6)
20
354
9
10
83
(5)
(2)
$
$
496
484
980
$
$
20
8
(6)
13
219
4
7
51
(3)
(2)
302
298
600
(f) Includes the operating earnings of the North American Consumer
Packaging business for the full year. Also includes the following
charges (gains):
In millions
North American Consumer Packaging
transaction costs
Non-operating pension expense
Total
2017
Before
Tax
After
Tax
$
$
17
45
62
$
$
10
28
38
(g) Includes the following tax expenses (benefits):
In millions
International legal entity restructuring
Income tax refund claims
Cash pension contribution
International tax law change
Tax benefit of Tax Cuts and Jobs Act
Total
2017
$
34
(113)
38
9
(1,222)
$ (1,254)
FINANCIAL GLOSSARY
Current ratio—
current assets divided by current liabilities.
Total debt to capital ratio—
long-term debt plus notes payable and current
maturities of long-term debt divided by long-term
debt, notes payable and current maturities of long-
term debt and total shareholders’ equity.
Return on shareholders’ equity—
net earnings attributable to International Paper
Company divided by average shareholders’ equity
(computed monthly).
FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY
(a) All prior periods presented have been restated to reflect the North
American Consumer Packaging business and the xpedx business
as discontinued operations (excluding cash flow related items) and
prior period amounts have been adjusted to conform with current
year presentation, if applicable.
2018:
(b) Includes the following charges (gains):
In millions
2018
Before
Tax
After
Tax
Smurfit-Kappa acquisition proposal costs
Legal settlement
$
Litigation settlement recovery
Environmental remediation reserve
adjustment
EMEA Packaging optimization
Abandoned property removal
Riverdale mill conversion costs
Brazil Packaging impairment
Debt extinguishment costs
Gain on sale of investment in Liaison
Technologies
Total special items
Non-operating pension expense
Total
(c) Includes the following charges (gains):
In millions
North American Consumer Packaging
transaction costs
North American Consumer Packaging
gain on transfer
Total
$
12
9
(5)
9
47
32
9
122
10
9
7
(4)
7
34
24
7
81
7
(31)
(23)
$ 214
494
$ 708
$ 149
371
$ 520
2018
Before
Tax
After
Tax
$
25
$
19
(488)
(364)
$ (463) $ (345)
14
2016:
2015:
(h) Includes the following charges (gains):
(k) Includes the following charges (gains):
In millions
2016
Before
Tax
After
Tax
In millions
2015
Before
Tax
After
Tax
Riegelwood mill conversion costs
$
9
$
India Packaging evaluation write-off
Write-off of certain regulatory pre-
engineering costs
Early debt extinguishment costs
Costs associated with the newly
acquired pulp business
Asia Box impairment / restructuring
Gain on sale of investment in Arizona
Chemical
Turkey mill closure
17
8
29
31
70
(8)
7
6
11
5
18
21
58
(5)
6
Amortization of Weyerhaeuser inventory
fair value step-up
Total special items
Non-operating pension expense
Total
19
182
610
792
$
$
11
131
375
506
$
$
(i) Includes the operating earnings of the North American Consumer
Packaging business for the full year. Also includes the following
charges (gains):
Riegelwood mill conversion costs, net of
proceeds from sale of the Carolina
Coated Bristols brand
$
8
$
Timber monetization restructuring
Early debt extinguishment costs
IP-Sun JV impairment
Legal reserve adjustment
Refund and state tax credits
Impairment of Orsa goodwill and trade
name intangible
Other items
Total special items
Non-operating pension expense
Total
16
207
174
15
(4)
137
6
559
258
817
$
$
$
$
4
10
133
180
9
(2)
137
5
476
157
633
(l) Includes the operating earnings of the North American Consumer
Packaging business for the full year .
(m) Includes the following tax expenses (benefits):
In millions
xpedx legal settlement
Total
2016
Before
Tax
After
Tax
$
$
8
8
$
$
5
5
In millions
IP-Sun JV impairment
Cash pension contribution
Other items
Total
2014:
2015
$
(67)
23
7
$
(37)
(j) Includes the following tax expenses (benefits):
(n) Includes the following charges (gains):
In millions
Cash pension contribution
$
U.S. Federal audit
Brazil goodwill
International legal entity restructuring
Luxembourg tax rate change
2016
23
(14)
(57)
(6)
31
Total
$
(23)
In millions
Temple-Inland integration
Courtland mill shutdown
Early debt extinguishment costs
India legal contingency resolution
Multi-employer pension plan withdrawal
liability
Foreign tax amnesty program
Asia Industrial Packaging goodwill
impairment
Loss on sale by investee and impairment
of investment
Other items
Total special items
Non-operating pension expense
Total
2014
Before
Tax
After
Tax
$
16
$
554
276
(20)
35
32
10
338
169
(20)
21
17
100
100
47
12
$ 1,052
$
212
$ 1,264
$
36
9
680
129
809
15
(o) Includes the operating earnings of the North American Consumer
Packaging business and the xpedx business prior to the spin-off,
and the following charges (gains):
In millions
xpedx spinoff
Building Products divestiture
xpedx restructuring
Total
2014
Before
Tax
After
Tax
$
$
24
16
1
$
41
$
16
9
(1)
24
(p) Includes the following tax expenses (benefits):
In millions
State legislative tax change
Internal restructuring
Other items
Total
2014
$
10
(90)
(1)
$
(81)
16
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
Full-year 2018 net earnings were $2.0 billion ($4.85 per
diluted share) compared with net earnings of $2.1 billion
($5.13 per diluted share) for full-year 2017. Full-year
2017 net earnings included a provisional net tax benefit
of $1.2 billion ($2.93 per diluted share) related to the U.S.
enactment of the Tax Cuts and Jobs Act of 2017 reported
as a special item.
International Paper delivered strong earnings, returns
and cash generation in 2018, driven by solid commercial
and operational performance across our
three
businesses. Business segment operating profit improved
by approximately $800 million to $2.9 billion in 2018,
driven primarily by price and mix improvements, with
revenue growth of 7.2%. We continued to grow value for
our shareholders with a return which was significantly
above our cost of capital and marks our ninth consecutive
year with value-creating returns. The Company made
strategic investments to strengthen our businesses.
Among these, we completed the final phase of our multi-
year North American containerboard mill system
optimization projects, which gives us the added flexibility
we need around capacity, products and geographies. We
also
in our North American corrugated
packaging system to enhance our capabilities and
fastest growing
strengthen our position with
segments. In our EMEA Packaging business, we
completed the conversion of the Madrid, Spain mill and
started production of high-performance, lightweight
recycled containerboard to capture the integrated margin
with our EMEA box system.
International Paper
continued to deliver strong cash generation in 2018,
which we used to strengthen our balance sheet and return
cash to shareholders. We decreased balance sheet debt
by about $500 million, and we returned $1.5 billion to
shareholders through dividends of about $800 million and
share repurchases of about $700 million. The Company
increased its dividend for the seventh consecutive year
and reduced shares outstanding by 3%.
invested
the
The Company’s 2018 results include significant price and
mix improvements driven by price realization across our
three business segments. Improved mix contributed to
the Company’s strong performance, particularly in our
Global Cellulose Fibers business where we continued to
grow fluff pulp volume. Weather events in North America
and startup costs associated with the Madrid, Spain mill
negatively
planned
maintenance outages were higher. Input costs increased
in 2018, driven by higher wood fiber, chemicals,
distribution and energy costs, and were partially offset by
lower recovered fiber costs. Equity earnings increased
operations,
impacted
and
by $159 million to $336 million in 2018, driven by excellent
commercial and operational performance in our Ilim joint
venture and first-year equity earnings from Graphic
Packaging International Partners, LLC (GPIP). In total,
our equity investments provided $153 million in cash
dividends to International Paper in 2018.
Looking ahead to the first quarter 2019, domestic industry
conditions remain healthy. We anticipate lower seasonal
demand in North America Industrial Packaging and Brazil
Papers, as well as lower export volume in Industrial
Packaging, as customer destocking continues. In Global
Cellulose Fibers we anticipate lower volume due to
slower growth in developing markets and customer
destocking, as well as a temporary setback in fluff pulp
from poor execution of a mix
volume resulting
improvement plan. Consequently, we expect downward
pressure on export price and mix in Industrial Packaging
and Global Cellulose Fibers during the first quarter.
Operating costs are expected to increase in our three
business segments due to lower volume, higher seasonal
energy consumption and timing of spending. In addition,
planned maintenance outage expense is expected to
increase significantly as we move from a low-outage
fourth quarter to a heavy-outage first quarter, with first-
half 2019 representing nearly 80% of total planned
maintenance outage expense in 2019. Input costs are
expected to be stable in Industrial Packaging and Global
Cellulose Fibers and increase modestly in Printing
Papers, mainly due to higher wood costs in North
America. Lastly, we expect equity earnings for our Ilim
joint venture to remain stable in the first quarter.
Looking to full-year 2019, we remain focused on
maximizing value creation for our shareholders. We
anticipate meaningful growth in cash generation driven
by commercial and operational excellence, lower capital
expenditures and higher dividends from our equity
investments. We continue to see healthy box demand in
North America Industrial Packaging and expect solid
demand growth for fluff pulp used in absorbent hygiene
products. In Global Cellulose Fibers we expect our fluff
pulp volume to recover as we execute on our mix
improvement initiatives. In Printing Papers, the business
is performing very well and we have good momentum as
we move into 2019, with expected price realization from
recent price increases. In Europe, the benefits of the
Madrid, Spain mill will accelerate through the year. We
expect lower planned maintenance outage expense and
capital investments of $1.4 billion, which is about $200
million lower than 2018. Our Ilim joint venture is well
positioned to thrive through near-term destocking in
softwood market pulp in China and we expect to receive
about $200 million in cash dividends from the joint venture
in 2019. All in, we expect strong cash generation, which
we will use to maximize value for our shareholders by
strengthening our balance sheet and returning cash to
shareholders. We are committed to a strong and
17
competitive dividend and have a $2.2 billion share
repurchase authority remaining.
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. Net earnings (loss) and
Diluted earnings (loss) per share attributable to common
shareholders are the most directly comparable GAAP
measures. The Company calculates Adjusted Operating
Earnings by excluding the after-tax effect of non-
operating pension expense,
items considered by
management to be unusual and discontinued operations
from the earnings reported under GAAP. Adjusted
Operating Earnings Per Share is calculated by dividing
Adjusted Operating Earnings by diluted average shares
of common stock outstanding. Management uses this
measure to focus on on-going operations, and believes
that it is useful to investors because it enables them to
perform meaningful comparisons of past and present
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.
The following are reconciliations of Earnings (loss)
to Adjusted
to common shareholders
attributable
operating earnings (loss) attributable
to common
shareholders.
Earnings (Loss) Attributable to
Shareholders
Less - Discontinued operations (gain)
loss
Earnings (Loss) from Continuing
Operations
Add back - Non-operating pension
expense (income)
Add back - Net special items expense
(income)
Income tax effect - Non-operating
pension and special items expense
Adjusted Operating Earnings (Loss)
Attributable to Shareholders
2018
2017
2016
$ 2,012 $ 2,144 $ 904
(345)
(34)
(102)
1,667
2,110
802
494
484
610
214
496
182
(171)
(1,634)
(309)
$ 2,204 $ 1,456 $ 1,285
Diluted Earnings (Loss) Per Share
Attributable to Shareholders
Less - Discontinued operations (gain)
loss per share
Diluted Earnings (Loss) Per Share
from Continuing Operations
Add back - Non-operating pension
expense (income) per share
Add back - Net special items expense
(income) per share
Income tax effect per share - Non-
operating pension and special items
expense
2018
2017
2016
$ 4.85 $ 5.13 $ 2.18
(0.83)
(0.08)
(0.25)
4.02
5.05
1.93
1.19
1.16
1.47
0.52
1.19
0.44
(0.41)
(3.91)
(0.75)
Adjusted Operating Earnings (Loss) Per
Share Attributable to Shareholders
$ 5.32 $ 3.49 $ 3.09
Three Months
Ended
December 31,
2018
Three Months
Ended
September 30,
2018
Three Months
Ended
December 31,
2017
$
316
$
562
$
1,460
—
316
429
(15)
—
562
25
142
8
1,468
386
106
(60)
(88)
(1,430)
$
670
$
641
$
530
Three Months
Ended
December 31,
2018
Three Months
Ended
September 30,
2018
Three Months
Ended
December 31,
2017
$
0.78
$
1.37
$
3.50
—
—
0.02
0.78
1.37
3.52
1.05
0.06
0.92
(0.04)
0.34
0.25
(0.14)
(0.21)
(3.42)
$
1.65
$
1.56
$
1.27
Earnings (Loss)
Attributable to
Shareholders
Less - Discontinued
operations (gain)
loss
Earnings (Loss)
from Continuing
Operations
Add back - Non-
operating pension
expense (income)
Add back - Net
special items
expense (income)
Income tax effect -
Non-operating
pension and special
items expense
Adjusted Operating
Earnings (Loss)
Attributable to
Shareholders
Diluted Earnings
(Loss) Per Share
Attributable to
Shareholders
Less - Discontinued
operations (gain)
loss per share
Diluted Earnings
(Loss) Per Share
from Continuing
Operations
Add back - Non-
operating pension
expense (income)
per share
Add back - Net
special items
expense (income)
per share
Income tax effect
per share - Non-
operating pension
and special items
expense
Adjusted Operating
Earnings (Loss)
Per Share
Attributable to
Shareholders
18
$
3,226 $
1,757 $
2,478
Add back (deduct)
Free Cash Flow is a non-GAAP measure and the most
directly comparable GAAP measure is cash provided by
operations. Management believes that free cash flow is
useful to investors as a liquidity measure because it
measures the amount of cash generated that is available,
after reinvesting in the business, to maintain a strong
balance sheet, pay dividends, repurchase stock, service
debt and make investments for future growth. It should
not be inferred that the entire free cash flow amount is
available for discretionary expenditures. By adjusting for
certain items that are not indicative of the Company's
ongoing performance, free cash flow also enables
investors to perform meaningful comparisons between
past and present periods.
The Company generated Free Cash Flow of
approximately $1.7 billion, $2.0 billion and $1.9 billion in
2018, 2017 and 2016, respectively. The following are
reconciliations of free cash flow to cash provided by
operations:
2018
2017
2016
In millions
Cash provided by
operations
Adjustments:
Cash invested in capital
projects
Cash contribution to
pension plan
Cash payment for Kleen
Settlement
(1,572)
(1,391)
(1,348)
—
—
1,250
354
750
—
Free Cash Flow
$
1,654 $
1,970 $
1,880
In millions
Cash provided by
operations
Adjustments:
Cash invested in
capital projects
Free Cash Flow
Three Months
Ended
December 31,
2018
Three Months
Ended
September 30,
2018
Three Months
Ended
December 31,
2017
$
$
821 $
941 $
1,188
(286)
535 $
(357)
584 $
(456)
732
Results of Operations
Business Segment Operating Profits are used by
International Paper’s management to measure the
earnings performance of its businesses. Management
uses this measure to focus on on-going operations and
believes that it is useful to investors because it enables
them to perform meaningful comparisons of past and
present operating results. International Paper believes
that using this information, along with net earnings,
provides a more complete analysis of the results of
operations by year. Business Segment Operating Profits
are defined as earnings (loss) from continuing operations
before income taxes and equity earnings, but including
19
the impact of equity earnings and noncontrolling
interests, excluding interest expense, net, corporate
items, net, corporate special items, net, and non-
operating pension expense. Business Segment
Operating Profits are defined by the Securities and
Exchange Commission as a non-GAAP
financial
measure, and are not GAAP alternatives to net income
or any other operating measure prescribed by accounting
principles generally accepted in the United States.
three segments:
International Paper operates
Industrial Packaging, Global Cellulose Fibers and
Printing Papers.
in
The following table presents a reconciliation of net
earnings (loss) from continuing operations attributable to
International Paper Company to its total Business
Segment Operating Profit:
In millions
2018
2017
2016
Net Earnings (Loss) From
Continuing Operations Attributable
to International Paper Company
$ 1,667 $ 2,110 $ 802
Income tax provision (benefit)
445
(1,085)
193
Equity (earnings) loss, net of taxes
(336)
(177)
(198)
Noncontrolling interests, net of taxes
5
—
(2)
Earnings (Loss) From Continuing
Operations Before Income Taxes and
Equity Earnings
Interest expense, net
Noncontrolling interests/equity earnings
included in operations
Corporate items, net
Corporate special items, net (income)
expense
Non-operating pension expense
Business Segment Operating Profit
Industrial Packaging
Global Cellulose Fibers
Printing Papers
1,781
536
(10)
67
9
494
848
572
(2)
91
76
484
795
520
1
121
55
610
$ 2,877 $ 2,069 $ 2,102
$ 2,093 $ 1,547 $ 1,741
251
533
65
457
(179)
540
Business Segment Operating Profit
$ 2,877 $ 2,069 $ 2,102
Business Segment Operating Profits in 2018 included a
net loss from special items of $205 million compared with
$425 million in 2017 and $127 million in 2016.
Operationally, compared with 2017, the benefits from
higher average sales price realizations and mix ($1.3
billion) and higher sales volumes ($13 million) were
partially offset by higher input costs ($180 million), higher
maintenance outage costs ($122 million) and higher
operating costs ($472 million).
Corporate items, net, includes operating profits (losses)
of previously divested businesses of $0 million in both
2018 and 2017 and $(2) million in 2016.
• Printing Papers’ profits of $533 million represented
a $76 million increase in operating profits from 2017.
The benefits from higher average sales price
realizations, net of mix, were partially offset by lower
sales volumes, higher
input costs, higher
maintenance outage costs and higher operating
costs. Operating profits in 2018 included charges of
$9 million associated with
the announced
conversion of a paper machine at our Riverdale mill
to containerboard production and a charge of $1
million for the removal of abandoned property at our
mills. Operating profits in 2017 included charges of
$2 million for the removal of abandoned property at
our mills.
Liquidity and Capital Resources
For the year ended December 31, 2018, International
Paper generated $3.2 billion of cash flow from operations
compared with $1.8 billion in 2017 and $2.5 billion in
2016. Cash flow from operations included $1.25 billion
and $750 million of cash pension contributions in 2017
and 2016, respectively. Capital spending for 2018 totaled
$1.6 billion, or 118% of depreciation and amortization
expense. Our liquidity position remains strong, supported
by approximately $2.1 billion of credit facilities that we
liquidity
believe are adequate
requirements. Maintaining an investment-grade credit
rating for our long-term debt continues to be an important
element in our overall financial strategy.
to meet
future
We expect another strong year of cash generation in
2019, which we will use to maximize shareholder value
by strengthening our balance sheet, returning meaningful
cash to shareholders through dividends and share
repurchases and investing organically to grow future
cash generation.
Capital spending for 2019 is planned at $1.4 billion, or
about 104% of depreciation and amortization, including
approximately $400 million of strategic investments.
RESULTS OF OPERATIONS
in
While the operating results for International Paper’s
various business segments are driven by a number of
business-specific
International
factors, changes
Paper’s operating results are closely tied to changes in
general economic conditions in North America, Europe,
Russia, Latin America, India, North Africa and the Middle
East. Factors that impact the demand for our products
include
industrial non-durable goods production,
consumer spending, commercial printing and advertising
activity, white-collar employment levels, and movements
in currency exchange rates.
Product prices are affected by general economic trends,
inventory levels, currency exchange rate movements and
worldwide capacity utilization. In addition to these
The principal changes in operating profit by business
segment were as follows:
•
Industrial Packaging’s profits of $2.1 billion were
$546 million higher than in 2017 as the benefits of
higher average sales price realizations, net of mix,
higher sales volumes and lower input costs were
partially offset by higher operating costs and higher
maintenance outage costs. In addition, operating
profits in 2018 included a charge of $122 million
related to the impairment of fixed assets and an
intangible asset in our Brazil Packaging business,
charges of $47 million related to the optimization of
our EMEA Packaging business, charges of $20
million for the removal of abandoned property at our
mills and income of $5 million related to a litigation
settlement recovery. In 2017, operating profits
included a charge of $354 million related to the
settlement of the Kleen Products anti-trust class
action lawsuit, charges of $14 million for the removal
of abandoned property at our mills, a charge of $10
million for the accelerated amortization of an
intangible asset in Brazil and a gain of $6 million for
a net bargain purchase gain associated with the
2016 acquisition of Holmen Paper's newsprint mill
in Madrid, Spain.
• Global Cellulose Fibers' operating profit of $251
million was $186 million favorable versus 2017 as
the benefits of higher average sales price
realizations and improved mix were partially offset
by lower sales volumes, higher input costs, higher
maintenance outage costs and higher operating
costs. Operating profits in 2018 included a charge
of $11 million for the removal of abandoned property
at our mills. In 2017, operating earnings included
$33 million of costs associated with the acquisition
and integration of the pulp business acquired in late
2016 from Weyerhaeuser, a charge of $14 million
for the amortization of the remaining inventory fair
value adjustment associated with that acquisition
and a charge of $4 million for the removal of
abandoned property at our mills.
20
revenue-related factors, net earnings are impacted by
various cost drivers, the more significant of which include
changes in raw material costs, principally wood, recycled
fiber and chemical costs; energy costs; freight costs; mill
outage costs; salary and benefits costs, including
pensions; and manufacturing conversion costs.
The following is a discussion of International Paper’s
results of operations for the year ended December 31,
2018, and the major factors affecting these results
compared to 2017 and 2016.
For the year ended December 31, 2018, International
Paper reported net sales of $23.3 billion, compared with
$21.7 billion in 2017 and $19.5 billion in 2016.
International net sales (including U.S. exports) totaled
$8.8 billion or 38% of total sales in 2018. This compares
with international net sales of $8.4 billion in 2017 and $6.9
billion in 2016.
Full year 2018 net earnings attributable to International
Paper Company totaled $2.0 billion ($4.85 per diluted
share), compared with net earnings of $2.1 billion ($5.13
per diluted share) in 2017 and $904 million ($2.18 per
diluted share) in 2016. Amounts in all periods include the
results of discontinued operations.
Earnings from continuing operations attributable to
International Paper Company after taxes in 2018, 2017
and 2016 were as follows:
In millions
2018
2017
2016
Earnings from continuing
operations attributable to
International Paper
Company
$ 1,667 (a) $ 2,110 (b) $ 802 (c)
(a)
(b)
(c)
Includes $166 million of net special items charges and $371
million of non-operating pension expense which included a pre-
tax charge of $424 million ($318 million after taxes) for a
settlement accounting charge associated with an annuity
purchase and transfer of pension obligations for approximately
23,000 retirees.
Includes $952 million of net special items income which included
a provisional net tax benefit of $1.2 billion related to the enactment
of the Tax Cut and Jobs Act and $298 million of non-operating
pension expense which included a pre-tax charge of $376 million
($232 million after taxes) for a settlement accounting charge
associated with an annuity purchase and transfer of pension
obligations for approximately 45,000 retirees.
Includes $108 million of net special items charges and $375
million of non-operating pension expense which included a pre-
tax charge of $439 million ($270 million after taxes) for a
settlement accounting charge associated with payments under a
term-vested lump sum buyout.
Compared with 2017, the benefits from higher sales
volumes, higher average sales price realizations, net of
mix, lower corporate and other costs, lower net interest
expense and lower tax expense, were partially offset by
higher operating costs, higher input costs and higher
maintenance outage costs. In addition, 2018 results
21
included higher equity earnings, net of taxes, relating to
the Company’s investments in Ilim and GPIP.
See Business Segment Results on pages 24 through 28
for a discussion of the impact of these factors by segment.
Discontinued Operations
2018:
In 2018, discontinued operations included an after-tax
gain of $364 million on the transfer of the North American
Consumer Packaging business and after-tax charges of
$19 million for costs associated with the transfer.
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.
International Paper
received a 20.5% ownership interest in GPIP, a subsidiary
of Graphic Packaging Holding Company, that holds the
assets of the combined business. As a result of this
transfer, all prior year amounts have been adjusted to
reflect
the North American Consumer Packaging
business as a discontinued operation. See Note 8
Divestitures and Impairments on pages 54 and 55 of Item
8. Financial Statements and Supplementary Data for
further discussion.
Included in discontinued operations were the operating
earnings of the North American Consumer Packaging
business, an after-tax charge of $10 million for costs
associated with the transfer and an after-tax charge of
$28 million for non-operating pension expenses related
to curtailment charges and termination benefits in
connection with this same transaction.
2016:
In 2016, discontinued operations included the operating
earnings of the North American Consumer Packaging
business and an after-tax charge of $5 million expense
associated with a legal settlement related to the xpedx
business.
Income Taxes
A net income tax provision of $445 million was recorded
for 2018, including a tax benefit of $36 million to revise
our 2017 estimated tax related to the enactment of the
Tax Cuts and Jobs Act, tax expense of $25 million related
to foreign tax audits, tax expense of $19 million related to
an international investment restructuring and tax expense
of $9 million related to state income tax legislative
changes. Excluding these items, a $65 million net tax
benefit for other special items and a $123 million tax
benefit related to non-operating pension expense, the tax
provision was $616 million, or 25% of pre-tax earnings
before equity earnings.
A net income tax benefit of $1.1 billion was recorded for
2017, including a provisional net tax benefit of $1.2 billion
related to the enactment of the Tax Cuts and Jobs Act,
tax benefits of $113 million related to income tax refund
claims, tax expense of $9 million related to an international
tax law change, tax expense of $34 million related to
international investment restructuring and tax expense of
$38 million associated with a cash pension contribution.
Excluding these items, a $194 million net tax benefit for
other special items and a $186 million tax benefit related
to non-operating pension expense, the tax provision was
$549 million, or 30% of pre-tax earnings before equity
earnings.
A net income tax provision of $193 million was recorded
for 2016, including tax benefits of $63 million related to
legal entity restructurings, tax expense of $31 million
associated with a tax rate change in Luxembourg, tax
expense of $23 million associated with a $750 million cash
pension contribution, and a tax benefit of $14 million
related to the closure of a federal tax audit. Excluding
these items, a $51 million net tax benefit for other special
items and a $235 million tax benefit related to non-
operating pension expense, the tax provision was $502
million, or 32% of pre-tax earnings before equity earnings.
Equity Earnings, Net of Taxes
Equity earnings, net of taxes, consisted principally of the
Company’s share of earnings from its 50% investment in
Ilim of $290 million, $183 million and $199 million in 2018,
2017 and 2016, respectively, and from its 20.5%
ownership interest in GPIP of $46 million in 2018 (see
pages 27 and 28).
Interest Expense and Noncontrolling Interest
Net corporate interest expense totaled $536 million in
2018, $572 million in 2017 and $520 million in 2016. Net
interest expense in 2017 includes $5 million of interest
income associated with income tax refund claims. The
decrease in 2018 compared with 2017 was due to lower
in 2017
average outstanding debt. The
compared with 2016 was due to higher average
outstanding debt.
increase
Net earnings attributable to noncontrolling interests were
$5 million in 2018, compared with $0 million in 2017 and
a loss of $2 million in 2016. The increase in 2018 was
primarily due to improved earnings in our India Papers
business.
Special Items
Restructuring and Other Charges, Net
International Paper continually evaluates its operations
for improvement opportunities targeted to (a) focus our
portfolio on our core businesses, (b) realign capacity to
operate fewer facilities with the same revenue capability
and close high cost facilities, and (c) reduce costs.
During 2018, 2017 and 2016, pre-tax restructuring and
other charges, net totaling $29 million, $67 million and
$54 million were recorded. Details of these charges were
as follows:
Restructuring and Other, Net
In millions
2018
2017
2016
Business Segments
EMEA Packaging
optimization
Riverdale mill paper machine
conversion severance
reserve
Turkey mill closure
Corporate
Early debt extinguishment
costs (see Note 15)
$
47 (a) $ —
$ —
3 (b)
—
50
—
—
—
—
7 (a)
7
$
10
$ 83
$
29
Gain on sale of investment in
Liaison Technologies
(31)
Gain on sale of investment in
ArborGen
India Packaging business
evaluation write-off
Gain on sale of investment in
Arizona Chemical
Riegelwood mill conversion
costs net of proceeds from
the sale of Carolina Coated
Bristols brand
Other Items
—
—
—
—
—
(21)
—
(14)
—
—
—
(2)
67
Total
$
29
$ 67
$
(a) Recorded in the Industrial Packaging business segment.
(b) Recorded in the Printing Papers business segment.
—
—
17
(8)
9
—
47
54
22
Other Corporate Special Items
In addition, other pre-tax corporate special items totaling
$30 million, $0 million and $8 million were recorded in
2018, 2017 and 2016, respectively. Details of these
charges were as follows:
Other Corporate Items
In millions
Smurfit-Kappa acquisition proposal
costs
Environmental remediation reserve
adjustment
Legal settlement
Write-off of certain regulatory pre-
engineering costs
2018
2017
2016
$
12 $ — $ —
9
9
—
—
—
—
—
—
8
8
Total
$
30 $ — $
Impairments of Goodwill
No goodwill impairment charges were recorded in 2018,
2017 or 2016.
Net Losses on Sales and Impairments of Businesses
Net losses on sales and impairments of businesses
included in special items totaled a pre-tax loss of $122
million in 2018 related to the impairment of an intangible
asset and fixed assets in the Brazil Packaging business,
a pre-tax loss of $9 million in 2017 related to the write
down of the long-lived assets of the Company's Asia
foodservice business to fair value and a pre-tax loss of
$70 million related to severance and the impairment of
the IP Asia Packaging business in 2016. See Note 8
Divestitures and Impairments on pages 54 and 55 of Item
8. Financial Statements and Supplementary Data for
further discussion.
DESCRIPTION OF BUSINESS SEGMENTS
International Paper’s business segments discussed
below 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.
Industrial Packaging
in
International Paper is the largest manufacturer of
containerboard
the United States. Our U.S.
production capacity is over 13 million tons annually. Our
products include linerboard, medium, whitetop, recycled
linerboard, recycled medium and saturating kraft. About
80% of our production is converted into corrugated
boxes and other packaging by our 179 North American
container plants. Additionally, we recycle approximately
23
one million tons of OCC and mixed and white paper
through our 18 recycling plants. Our container plants are
supported by regional design centers, which offer total
packaging solutions and supply chain initiatives. In
EMEA, our operations include one recycled fiber
containerboard mill
recycled
containerboard mill in Spain and 26 container plants in
France, Italy, Spain, Morocco and Turkey. In Brazil, our
operations include three containerboard mills and four
box plants.
in Morocco, a
International Paper also produces high quality coated
paperboard for a variety of packaging end uses with
428,000 tons of annual capacity at our mills in Poland
and Russia.
Global Cellulose Fibers
Our cellulose fibers product portfolio includes fluff,
market and specialty pulps. International Paper is the
largest producer of fluff pulp which is used to make
absorbent hygiene products like baby diapers, feminine
care, adult incontinence and other non-woven products.
Our market pulp is used for tissue and paper products.
We continue to invest in exploring new innovative uses
for our products, such as our specialty pulps, which are
used for non-absorbent end uses including textiles,
filtration, construction material, paints and coatings,
reinforced plastics and more. Our products are made in
the United States, Canada, France, Poland, and Russia
and are sold around the world. International Paper
facilities have annual dried pulp capacity of about
4 million metric tons.
Printing Papers
laser printers and digital
International Paper is one of the world’s largest
producers of printing and writing papers. The primary
product in this segment is uncoated papers. This
business produces papers for use in copiers, desktop
imaging. End-use
and
applications
include advertising and promotional
materials such as brochures, pamphlets, greeting cards,
books, annual reports and direct mail. Uncoated papers
also produces a variety of grades that are converted by
our customers into envelopes, tablets, business forms
and file folders. Uncoated papers are sold under private
label and International Paper brand names that include
Hammermill, Springhill, Williamsburg, Postmark,
Accent, Great White, Chamex, Ballet, Rey, Pol, and
Svetocopy. The mills producing uncoated papers are
located in the United States, France, Poland, Russia,
Brazil and India. The mills have uncoated paper
production capacity of over 4 million tons annually.
Brazilian operations function through International
Paper do Brasil, Ltda, which owns or manages
approximately 329,000 acres of forestlands in Brazil.
Industrial Packaging
In millions
Net Sales
Operating Profit (Loss)
Brazil Packaging impairment
EMEA Packaging optimization
Litigation settlement recovery
Abandoned property removal
Kleen Products anti-trust
settlement
Holmen mill bargain purchase
gain
Brazil Packaging wood supply
accelerated amortization
Turkey mill closure
Asia Packaging restructuring
and impairment
2018
2016
2017
$ 15,900 $ 15,077 $ 14,226
2,093 $ 1,547 $ 1,741
$
—
—
—
—
122
47
(5)
20
—
—
—
14
—
—
—
—
—
354
(6)
10
—
—
—
—
—
7
70
Operating Profit Before Special
Items
$
2,277 $ 1,919 $ 1,818
Industrial Packaging net sales for 2018 increased 5% to
$15.9 billion compared with $15.1 billion in 2017, and
12% compared with $14.2 billion in 2016. Operating
profits before special items in 2018 were 19% higher than
in 2017 and 25% higher than in 2016. Comparing 2018
with 2017, benefits from higher average sales price
realizations, net of mix ($712 million), higher sales
volumes ($33 million) and lower input costs ($2 million)
were partially offset by higher operating costs ($333
million) and higher maintenance outage costs ($56
million).
North American Industrial Packaging
In millions
Net Sales (a)
Operating Profit (Loss)
Litigation settlement recovery
Abandoned property removal
Kleen Products anti-trust
settlement
2018
2016
2017
$ 14,187 $ 13,329 $ 12,450
2,292 $ 1,504 $ 1,757
$
—
—
(5)
20
—
14
—
354
—
Operating Profit Before Special
Items
$
2,307 $ 1,872 $ 1,757
(a) Includes intra-segment sales of $233 million for 2018, $172
million for 2017 and $143 million for 2016.
Ilim
located
In October 2007, International Paper and Ilim completed
a 50:50 joint venture to operate a pulp and paper
business located in Russia. Ilim’s facilities include three
paper mills
in Bratsk, Ust-Ilimsk, and
Koryazhma, Russia, with combined total pulp and paper
capacity of over 3.4 million metric tons. Ilim has
exclusive harvesting rights on timberland and forest
areas exceeding 18.9 million acres (7.66 million
hectares).
GPIP
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 Graphic
Packaging International Partners, LLC (GPIP), a
subsidiary of Graphic Packaging Holding Company, in
exchange for a 20.5% ownership interest in GPIP. GPIP
subsequently
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.
transferred
Products and brand designations appearing in italics are
trademarks of International Paper or a related company.
BUSINESS SEGMENT RESULTS
The following tables present net sales and operating
profit (loss) which is the Company's measure of segment
profitability. The tables include a detail of special items
in each year, where applicable, in order to show operating
profit before special items.
Industrial Packaging
Demand for Industrial Packaging products is closely
correlated with non-durable industrial goods production,
as well as with demand for processed foods, poultry, meat
and agricultural products. In addition to prices and
volumes, major factors affecting the profitability of
Industrial Packaging are raw material and energy costs,
freight costs, mill outage costs, manufacturing efficiency
and product mix.
24
Industrial Packaging's
sales volumes
North American
increased in 2018 compared with 2017 reflecting higher
box shipments, partially offset by lower shipments of
containerboard to both the domestic and export markets.
In 2018, the business took about 518,000 tons of
maintenance downtime compared with about 416,000
tons of total downtime in 2017, of which about 35,000
were non-maintenance downtime and 381,000 were
maintenance downtime. Average sales prices were
significantly higher for boxes and for containerboard in
export markets. Substantially lower input costs for
recycled fiber were partially offset by higher costs for
wood, energy, chemicals and
freight. Planned
maintenance downtime costs were $50 million higher in
2018, than in 2017. Operating costs increased due to
inflation, distribution costs and weather-related
production constraints in early 2018.
Looking ahead to the first quarter of 2019, compared with
the fourth quarter of 2018, sales volumes for boxes are
expected to be seasonally lower despite two more
shipping days. Shipments of containerboard to export
markets are also expected to decline, reflecting slowing
market demand in China and EMEA. Based on pricing to
date in the current quarter, average sales prices for boxes
are expected to be flat, while average sales prices for
export containerboard are expected to be lower. Input
costs, primarily for wood and energy, are expected to be
higher. Planned maintenance downtime spending should
be about $102 million higher. Manufacturing operating
costs will be negatively impacted by lower volume and
inflation, while distribution costs are also expected to
increase.
EMEA Industrial Packaging
In millions
Net Sales
Operating Profit (Loss)
EMEA Packaging optimization
Holmen mill net bargain
purchase gain
Turkey mill closure
$
$
2018
2017
2016
1,355 $ 1,334 $ 1,227
15
—
(120) $
47
6 $
—
—
—
(6)
—
—
7
22
Operating Profit Before Special
Items
$
(73) $
— $
EMEA Industrial Packaging's sales volumes in 2018 were
lower than in 2017, reflecting weaker market demand for
fruit and vegetable boxes in the Euro-zone and slowing
economic conditions in Turkey. Average sales margins
decreased slightly, as higher containerboard costs were
only partially offset by higher sales prices for boxes. Input
costs for energy were flat. Operating costs rose due to
inflation and higher costs associated with the new plant
in Tangier, Morocco. Earnings were also negatively
impacted by the conversion and ramp-up of the Madrid
mill.
Entering the first quarter of 2019, compared with the
fourth quarter of 2018, sales volumes are expected to be
seasonally higher. Average sales margins are expected
25
to reflect the full realization of box price increases and
further board cost reductions. Operating costs will benefit
from the continued integration of our Madrid mill.
Earnings are expected to be favorably impacted by the
increased
recycled
containerboard at the Madrid mill.
production
volumes
of
Brazilian Industrial Packaging
In millions
Net Sales
Operating Profit (Loss)
Brazil Packaging impairment
Brazil Packaging wood supply
accelerated amortization
2018
2017
2016
$
$
232 $
(151) $
122
251 $
(35) $
—
232
(43)
—
—
10
—
Operating Profit Before Special
Items
$
(29) $
(25) $
(43)
Brazilian Industrial Packaging's sales volumes in 2018
increased, compared with 2017 for boxes, but this was
offset by decreased containerboard shipments. Average
sales margins improved reflecting higher sales prices,
partially offset by an unfavorable mix. Input costs
increased, primarily for recycled fiber, utilities and
chemicals. Operating costs were negatively impacted by
inflation, but benefited from lower overhead costs.
Planned maintenance downtime costs were $1 million
lower in 2018, compared with 2017. In addition, a
nationwide truckers' strike during the second quarter
negatively impacted operating profit by approximately $3
million.
Looking ahead to the first quarter of 2019, compared with
the fourth quarter of 2018, sales volumes are expected
to be higher, primarily for containerboard. Based on
pricing to date in the current quarter, average sales
margins are expected to improve. Input costs are
expected to be lower for recycled fiber and freight, and
operating costs will also be lower. In late 2018, the
Company announced that it was exploring strategic
options for its Brazil Packaging business.
European Coated Paperboard
In millions
Net Sales
Operating Profit (Loss)
2018
2017
2016
$
$
359 $
335 $
72 $
72 $
327
93
European Coated Paperboard's sales volumes in 2018
compared with 2017, decreased in Europe, but were
partially offset by an increase in Russia. Average sales
margins were higher in both Russia and Europe,
reflecting higher average sales prices and a more
favorable mix. Input costs were higher mainly for wood
and energy in both regions. Planned maintenance
downtime costs were $6 million higher in 2018 than in
2017, primarily at the Kwidzyn mill.
Looking forward to the first quarter of 2019, compared
with the fourth quarter of 2018, sales volumes are
expected to be stable in both Europe and Russia.
Average sales margins are expected to be higher in
Europe due to a more favorable mix. In Russia, average
sales margins should be stable. Input costs are expected
to be lower for purchased pulp, wood and energy.
Maintenance outage costs should be flat due to no
outages in the fourth quarter and no planned outages in
the first quarter.
Asian Industrial Packaging
In millions
Net Sales
Operating Profit (Loss)
Asia Packaging restructuring
and impairment
Operating Profit Before Special
Items
$
$
$
2018
2017
2016
— $
— $
— $
— $
133
(81)
—
—
70
— $
— $
(11)
On June 30, 2016, the Company completed the sale of
its corrugated packaging business
in China and
Southeast Asia
to Xiamen Bridge Hexing Equity
Investment Partnership Enterprise. See Note 8
Divestitures and Impairments on pages 54 and 55 of Item
8. Financial Statements and Supplementary Data for
further discussion of the sale of this business.
Global Cellulose Fibers
Demand
is closely
for Cellulose Fibers products
correlated with changes in demand for absorbent hygiene
products and is further affected by changes in currency
rates that can benefit or hurt producers in different
geographic regions. Principal cost drivers include
manufacturing efficiency, raw material and energy costs,
mill outage costs, and freight costs.
partially offset by lower sales volumes ($3 million), higher
input costs ($41 million), higher planned maintenance
downtime costs ($41 million) and higher operating costs
($97 million).
Sales volumes in 2018 were about flat with 2017. Sales
prices increased across all product lines. Average sales
margins also benefited from a favorable product mix
reflecting an increase in sales of absorbent pulp. Input
costs were higher, primarily for wood and chemicals.
Planned maintenance downtime costs were $31 million
higher in 2018. Operating costs increased due to higher
distribution and inventory valuation costs. Hurricane
Florence negatively impacted earnings by $38 million,
net of insurance proceeds. In Europe and Russia,
average sales prices increased significantly. Input costs
were higher for wood, energy and chemicals. Planned
maintenance downtime costs were $10 million higher in
2018 than in 2017, primarily at the Saillat mill.
Entering the first quarter of 2019, sales volumes will be
lower due to production constraints resulting from
planned maintenance outages, softer market demand in
developing markets and customer destocking, as well
as a temporary setback in fluff pulp volume resulting from
poor execution of a mix improvement plan. Based on
pricing to date in the current quarter, average sales prices
are expected to decrease particularly fo softwood pulp
to decrease
in China.
for chemicals. Planned maintenance downtime costs
should be $20 million higher than in the fourth quarter
of 2018. Manufacturing operating costs are expected to
rise due to lower volume, seasonality and inflation. In
Europe and Russia, sales volumes are expected to be
lower, while sales margins should be stable.
r
Input costs are expected
Global Cellulose Fibers
In millions
Net Sales
2018
2017
2016
$ 2,819 $ 2,551 $ 1,092
Printing Papers
Operating Profit (Loss)
$
251 $
65 $
(179)
Acquisition and integration costs
Abandoned property removal
Inventory fair value step-up
amortization
Operating Profit Before Special
Items
—
11
—
33
4
14
31
—
19
$
262 $
116 $
(129)
Global Cellulose Fibers results include the net sales and
operating profit associated with the pulp business
acquired from Weyerhaeuser, from the date of acquisition
on December 1, 2016. See Note 7 Acquisitions and Joint
Ventures on pages 52 through 54 of Item 8. Financial
Statements and Supplementary Data for additional
information about the acquisition.
Net sales for 2018 increased to $2.8 billion, compared
with $2.6 billion in 2017 and $1.1 billion in 2016.
Operating profits before special items in 2018 were
significantly higher than in both 2017 and 2016.
Comparing 2018 with 2017, benefits from higher average
sales price realizations and mix ($328 million) were
Demand
is closely
for Printing Papers products
correlated with changes in commercial printing and
advertising activity, direct mail volumes and, for uncoated
in white-collar
cut-size products, with changes
employment levels that affect the usage of copy and laser
printer
include
manufacturing efficiency, raw material and energy costs,
mill outage costs and freight costs.
paper. Principal
drivers
cost
Printing Papers
In millions
Net Sales
Operating Profit (Loss)
Riverdale mill conversion
Abandoned property removal
Operating Profit Before Special
Items
2018
2016
2017
$ 4,375 $ 4,157 $ 4,058
540
$
—
—
533 $
9
1
457 $
—
2
$
543 $
459 $
540
Printing Papers net sales for 2018 of $4.4 billion increased
5%, compared with $4.2 billion in 2017, and 8%,
compared with $4.1 billion in 2016. Operating profits
before special items in 2018 were 18% higher than in
26
2017 and 1% higher than in 2016. Comparing 2018 with
2017, benefits
from higher average sales price
realizations, net of mix ($309 million), were partially offset
by lower sales volumes ($17 million), higher input costs
($141 million), higher planned maintenance downtime
costs ($25 million) and higher operating costs ($42
million).
North American Printing Papers
In millions
Net Sales
Operating Profit (Loss)
Riverdale mill conversion
Abandoned property removal
Operating Profit Before Special
Items
2016
2018
2017
$ 1,956 $ 1,833 $ 1,890
236
$
—
—
160 $
9
1
132 $
—
2
$
170 $
134 $
236
North American Printing Papers' sales volumes for 2018 were
lower than in 2017, primarily due to lower sales to export
markets. Average sales margins improved due to sales
price increases for both cutsize paper and rolls, net of an
unfavorable mix. Input costs were higher for wood and
chemicals. Planned maintenance downtime costs were
$1 million higher in 2018. Operating costs were higher
primarily due to inflation and distribution costs, and
included $5 million, net of insurance recoveries, related
to Hurricane Florence.
Entering the first quarter of 2019, sales volumes are
expected to be lower due to capacity constraints resulting
from planned maintenance outages. Average sales
margins should be steady, reflecting the full-quarter
impact of late-2018 sales price increases. Operating
costs are expected to be higher due to seasonality and
inflation. Input costs should be higher, primarily for wood
and chemicals. Planned maintenance downtime costs
will increase by about $3 million in the 2019 first quarter.
Brazilian Papers
In millions
Net Sales (a)
Operating Profit (Loss)
2018
2017
2016
$
$
978 $
972 $
227 $
194 $
897
173
(a) Includes intra-segment sales of $13 million for 2018, $24
million for 2017 and $5 million for 2016.
Brazilian Papers' sales volumes for uncoated freesheet
paper in 2018, were lower compared with 2017 in both
the domestic and export markets. Average domestic and
export sales prices were higher due to the realization of
multiple price increases implemented in 2018. Raw
material costs increased for pulp, chemicals and energy.
Operating costs were negatively impacted by inflation
and a nationwide truckers' strike in the second quarter.
Planned maintenance downtime costs were $4 million
higher in 2018.
Looking ahead to 2019, compared with the fourth quarter
of 2018, sales volumes for uncoated freesheet paper in
the first quarter are expected to be seasonally weaker in
27
the domestic market. Average sales margins are
expected to decrease as price pressures in the Latin
American export markets and an unfavorable mix more
than offset the partial realization of announced domestic
sales price increases. Input costs are expected to be
stable. Maintenance outage costs should be flat due to
no outages in the fourth quarter and no planned outages
in the first quarter.
European Papers
In millions
Net Sales
Operating Profit (Loss)
2018
2017
$ 1,252 $ 1,187 $ 1,109
142
$
129 $
136 $
2016
European Papers' sales volumes for uncoated freesheet
paper in 2018 were higher in Russia, but lower in Europe
compared with 2017. Average sales prices increased for
uncoated freesheet paper in both regions following price
increases implemented in late 2017, and throughout
2018. Input costs were higher for wood, energy,
purchased pulp and chemicals. Planned maintenance
downtime costs were $20 million higher in 2018, than in
2017, primarily at the Saillat mill.
Entering 2019, sales volumes for uncoated freesheet
paper in the first quarter are expected to increase in
Europe, but decrease in Russia. Average sales prices
are expected to be higher in Europe due to the continued
realization of a fourth-quarter 2018 price increase, and
higher in Russia. Input costs should be lower in Europe,
mainly for wood and energy, but higher in Russia,
primarily for wood and chemicals. Maintenance outage
costs should be flat due to no outages in the fourth quarter
and no planned outages in the first quarter.
Indian Papers
In millions
Net Sales
Operating Profit (Loss)
2018
2017
2016
$
$
202 $
17 $
189 $
(5) $
167
(11)
Indian Papers' sales volumes in 2018 were higher than in
2017 due to improved paper machine productivity.
Average sales prices also increased. Input costs were
higher for chemicals and recycled fiber, but were partially
offset by lower wood costs. Operating costs were lower
improved mill performance
in 2018,
efficiencies, while planned maintenance downtime costs
were flat compared with 2017.
reflecting
Looking ahead to the first quarter of 2019, sales volumes
are expected to be slightly higher than in the 2018 fourth
quarter. Based on pricing to date in the current quarter,
average sales prices are expected to be stable.
Equity Earnings, Net of Taxes – Ilim
International Paper accounts for its investment in Ilim , a
separate reportable industry segment, using the equity
method of accounting.
The Company recorded equity earnings, net of taxes,
related to Ilim of $290 million in 2018, compared with
earnings of $183 million in 2017, and $199 million in 2016.
Operating results recorded in 2018 included an after-tax
non-cash foreign exchange loss of $82 million, compared
with an after-tax foreign exchange gain of $15 million in
2017 and an after-tax foreign exchange gain of $25
million in 2016, primarily on the remeasurement of Ilim's
U.S. dollar denominated net debt.
Ilim delivered outstanding performance in 2018, driven
largely by higher price realization and strong demand.
Sales volumes for the joint venture increased year over
year for shipments to China of softwood pulp and
linerboard, but were offset by decreased sales of
hardwood pulp to China. Sales volumes in the Russian
market increased for softwood pulp and hardwood pulp,
but decreased for linerboard. Average sales price
realizations were significantly higher in 2018 for sales of
softwood pulp, hardwood pulp and linerboard to China
and other export markets. Average sales price
realizations in Russian markets increased year over year
for all products. Input costs were higher in 2018, primarily
for wood, fuel and chemicals. Distribution costs were
negatively impacted by tariffs and inflation. The Company
received cash dividends from the joint venture of $128
million in 2018, $133 million in 2017 and $58 million in
2016.
Entering the first quarter of 2019, sales volumes are
expected to be lower than in the fourth quarter of 2018,
due to the seasonal slowdown in China and fewer trading
days. Based on pricing to date in the current quarter,
average sales prices are expected to decrease for
hardwood pulp, softwood pulp and linerboard to China.
Input costs are projected to be relatively flat, while
distribution costs are expected to increase.
Equity Earnings - GPIP
International Paper recorded equity earnings of $46
million on its 20.5% ownership position in GPIP in 2018.
The Company received cash dividends
the
investment of $25 million in 2018.
from
LIQUIDITY AND CAPITAL RESOURCES
Overview
A major factor in International Paper’s liquidity and capital
resource planning is its generation of operating cash flow,
which is highly sensitive to changes in the pricing and
demand for our major products. While changes in key
cash operating costs, such as energy, raw material, mill
outage and transportation costs, do have an effect on
operating cash generation, we believe that our focus on
pricing and cost controls has improved our cash flow
generation over an operating cycle.
Cash uses during 2018 were primarily focused on
working capital requirements, capital spending, debt
reductions and returning cash to shareholders through
dividends and share repurchases under the Company's
share repurchase program.
Cash Provided by Operating Activities
Cash provided by operations, including discontinued
operations, totaled $3.2 billion in 2018, compared with
$1.8 billion for 2017, and $2.5 billion for 2016. Cash used
by working capital components (accounts receivable,
contract assets and inventory less accounts payable and
accrued liabilities, interest payable and other) totaled
$439 million in 2018, compared with cash used by
working capital components of $402 million in 2017, and
cash provided by working capital components of $71
million in 2016.
Investment Activities
Including discontinued operations, investment activities
in 2018 increased from 2017, as 2018 included higher
capital spending. In 2016, investment activity included
the purchase of Weyerhaeuser's pulp business for $2.2
billion in cash, the purchase of the Holmen business for
$57 million in cash, net of cash acquired, and proceeds
from the sale of the Asia Packaging business of $108
million, net of cash divested. The Company maintains an
average capital spending target around depreciation and
amortization levels, or modestly above, due to strategic
plans over the course of an economic cycle. Capital
spending was $1.6 billion in 2018, or 118% of
depreciation and amortization, compared with $1.4 billion
in 2017, or 98% of depreciation and amortization, and
$1.3 billion, or 110% of depreciation and amortization in
2016. Across our segments, capital spending as a
percentage of depreciation and amortization ranged from
69.8% to 132.1% in 2018.
following
table shows capital spending
The
for
operations by business segment for the years ended
December 31, 2018, 2017 and 2016, excluding amounts
related to discontinued operations of $111 million in 2017
and $107 million in 2016.
In millions
Industrial Packaging
Global Cellulose Fibers
Printing Papers
Subtotal
Corporate and other
Capital Spending
2018
2017
2016
$ 1,061 $
183
303
1,547
836 $
188
235
1,259
832
174
215
1,221
20
$ 1,572 $ 1,280 $ 1,241
21
25
Capital expenditures in 2019 are currently expected to
be about $1.4 billion, or 104% of depreciation and
amortization, including approximately $400 million of
strategic investments.
28
Acquisitions and Joint Ventures
See Note 7 Acquisitions and Joint Ventures on pages 52
through 54 of Item 8. Financial Statements and
Supplementary Data for a discussion of the Company's
acquisitions.
Financing Activities
Amounts related to early debt extinguishment during the
years ended December 31, 2018, 2017 and 2016 were
as follows:
In millions
Debt reductions (a)
2018
2017
2016
$ 780 $ 993 $ 266
Pre-tax early debt extinguishment costs
(b)
10
83
29
(a) Reductions related to notes with interest rates ranging from
1.57% to 9.38% with original maturities from 2018 to 2032 for
the years ended December 31, 2018, 2017 and 2016.
(b) Amounts are included in Restructuring and other charges in the
accompanying consolidated statements of operations.
2018: Financing activities during 2018 included debt
issuances of $490 million and retirements of $1.0 billion
for a net decrease of $518 million.
International Paper utilizes interest rate swaps to change
the mix of fixed and variable rate debt and manage
interest expense. At December 31, 2018, International
Paper had interest rate swaps with a notional amount of
$700 million and maturities ranging from 2024 to 2026
(see Note 16 Derivatives and Hedging Activities on pages
67 through 70 of Item 8. Financial Statements and
Supplementary Data). During 2018, the inclusion of the
offsetting interest income from short-term investments
reduced the effective interest rate from 4.8% to 4.6%.
In June 2018, the borrowing capacity of the commercial
paper program was increased from $750 million to $1.0
billion. Under the terms of the program, individual
maturities on borrowings may vary, but may not exceed
one year from the date of issuance. Interest bearing notes
may be issued either as fixed notes or floating rate notes.
As of December 31, 2018, 2017 and 2016, the Company
had $465 million, $180 million and $165 million,
respectively, outstanding under this program.
Other financing activities during 2018 included the net
repurchase of approximately 12.3 million shares of
treasury stock, including restricted stock tax withholding.
Repurchases of common stock and payments of
restricted stock withholding taxes totaled $732 million,
including $700 million related to shares repurchased
under the Company's share repurchase program. On
October 9, 2018,
the Company announced an
authorization to repurchase $2 billion of the Company's
common stock to supplement remaining amounts under
prior share repurchase authorizations, bringing total
29
share repurchase authorizations since 2013 to $5.0
billion. The Company will continue to repurchase such
shares in open market repurchase transactions. Under
the $5.0 billion share repurchase program, the Company
has repurchased 58.0 million shares at an average price
of $47.68, for a total of approximately $2.8 billion, as of
December 31, 2018.
In October 2018, International Paper announced that the
quarterly dividend would be increased from $0.4750 per
share to $0.50 per share, effective for the 2018 fourth
quarter.
2017: Financing activities during 2017 included debt
issuances of $1.9 billion and retirements of $1.4 billion
for a net increase of $483 million.
At December 31, 2017, International Paper had no
interest rate swap contracts outstanding. During 2017,
the inclusion of the offsetting interest income from short-
term investments reduced the effective interest rate from
5.0% to 4.7%.
In 2017, International Paper issued $1.0 billion of 4.35%
senior unsecured notes with a maturity date in 2048. The
proceeds from this offering, together with a combination
of available cash and other borrowings, were used to
make a $1.25 billion voluntary cash contribution to the
Company's pension plan.
In December 2017,
International Paper received $660 million in cash
proceeds from a new loan entered into by International
Paper as part of the transfer of the North American
Consumer Packaging business to a subsidiary of Graphic
Packing Holding Company discussed
in Note 8
Divestitures and Impairments on pages 54 and 55 of Item
8. Financial Statements and Supplementary Data). The
Company used the cash proceeds, together with
available cash,
to pay down existing debt of
approximately $900 million of notes with interest rates
ranging from 1.92% to 9.38% and original maturities from
2018 to 2021. Pre-tax early debt retirement costs of $83
million related to the debt repayments, including $82
million of cash premiums, are included in Restructuring
and other charges in the accompanying consolidated
statement of operations for the year ended December 31,
2017. The $660 million term loan was subsequently
assumed by a subsidiary of GPIP from International
Paper on January 1, 2018, and was classified as
Liabilities held for sale at December 31, 2017, in the
accompanying consolidated balance sheet.
Other financing activities during 2017 included the net
issuance of approximately 1.7 million shares of treasury
stock,
tax withholding.
restricted stock
Payments of restricted stock withholding taxes and
repurchases totaled $47 million.
including
In October 2017, International Paper announced that the
quarterly dividend would be increased from $0.4625 per
share to $0.4750 per share, effective for the 2017 fourth
quarter.
2016: Financing activities during 2016 included debt
issuances of $3.8 billion and retirements of $1.9 billion
for a net increase of $1.9 billion.
At December 31, 2016, International Paper had no
interest rate swap contracts outstanding. During 2016,
the amortization of deferred gains on previously
terminated swaps had no impact on the weighted
average cost of long-term recourse debt. The inclusion
of
from short-term
investments reduced the effective rate from 5.3% to
4.8%.
the offsetting
interest
income
In 2016, International Paper issued $1.1 billion of 3.00%
senior unsecured notes with a maturity date in 2027, and
$1.2 billion of 4.40% senior unsecured notes with a
maturity date in 2047, the proceeds from which were
primarily used to fund the acquisition of Weyerhaeuser's
pulp business.
the Company repaid
approximately $266 million of notes with an interest rate
of 7.95% and an original maturity of 2018. Pre-tax early
debt retirement costs of $29 million related to the debt
repayments, including the $31 million of cash premiums,
are included in restructuring and other charges in the
accompanying consolidated statement of operations for
the twelve months ended December 31, 2016.
In addition,
In December 2016, International Paper entered into a
new $1.5 billion contractually committed credit facility that
expires in December 2021, and has a facility fee of 0.15%
payable annually.
Other financing activities during 2016 included the net
repurchase of approximately 0.9 million shares of
treasury stock, including restricted stock tax withholding.
Repurchases of common stock and payments of
restricted stock withholding taxes totaled $132 million,
including $100 million related to shares repurchased
under the Company's share repurchase program.
In October 2016, International Paper announced that the
quarterly dividend would be increased from $0.44 per
share to $0.46 per share, effective for the 2016 fourth
quarter.
Variable Interest Entities
Information concerning variable interest entities is set
forth in Note 14 Variable Interest Entities on pages 65
and 66 of
Item 8. Financial Statements and
Supplementary Data.
30
Liquidity and Capital Resources Outlook for 2019
Capital Expenditures and Long-Term Debt
International Paper expects to be able to meet projected
capital expenditures, service existing debt and meet
working capital and dividend requirements during 2019
with current cash balances and cash from operations.
Additionally, the Company has existing credit facilities
totaling $2.1 billion at December 31, 2018.
The Company will continue to rely upon debt and capital
markets for the majority of any necessary long-term
funding not provided by operating cash flows. Funding
decisions will be guided by our capital structure planning
objectives. The primary goals of the Company’s capital
structure planning are to maximize financial flexibility and
preserve liquidity while reducing interest expense. The
majority of International Paper’s debt is accessed
through global public capital markets where we have a
wide base of investors. The Company was in compliance
with all its debt covenants at December 31, 2018, and
was well below the thresholds stipulated under the
covenants as defined in our credit agreements.
Maintaining an investment grade credit rating is an
important element of International Paper’s financing
strategy. At December 31, 2018, the Company held long-
term credit ratings of BBB (stable outlook) and Baa2
(stable outlook) by S&P and Moody’s, respectively.
Contractual obligations for future payments under
existing debt and lease commitments and purchase
obligations at December 31, 2018, were as follows:
In millions
Debt maturities
Lease obligations
Purchase obligations (a)
2019
2020
2021
2022
2023
Thereafter
$
639 $
83 $
441 $
487 $
348 $
8,656
160
3,211
125
654
77
578
49
487
28
413
118
1,857
Total (b)
$ 4,010 $
862 $ 1,096 $ 1,023 $
789 $
10,631
(a)
Includes $1.4 billion relating to fiber supply agreements entered
into at the time of the 2006 Transformation Plan forestland sales
and in conjunction with the 2008 acquisition of Weyerhaeuser
Company’s Containerboard, Packaging and Recycling
business. Also includes $1.1 billion relating to fiber supply
agreements assumed in conjunction with the 2016 acquisition
of Weyerhaeuser's pulp business.
(b) Not included in the above table due to the uncertainty of the
amount and timing of the payment are unrecognized tax benefits
of approximately $193 million. Also not included in the above
table is $206 million of Deemed Repatriation Transition Tax
associated with the 2017 Tax Cuts and Jobs Act which will be
settled from 2019 - 2026.
We consider the undistributed earnings of our foreign
subsidiaries as of December 31, 2018, to be permanently
reinvested and, accordingly, no U.S. income taxes have
been provided thereon (see Note 12 Income Taxes on
pages 58 through 62 of Item 8. Financial Statements and
Supplementary Data). We do not anticipate the need to
repatriate funds to the United States to satisfy domestic
liquidity needs arising in the ordinary course of business,
including liquidity needs associated with our domestic
debt service requirements.
Pension Obligations and Funding
to minimum
that are subject
At December 31, 2018, the projected benefit obligation
for the Company’s U.S. defined benefit plans determined
under U.S. GAAP was approximately $1.7 billion higher
than the fair value of plan assets, excluding non-U.S.
plans. Approximately $1.5 billion of this amount relates
to plans
funding
requirements. Under current IRS funding rules, the
calculation of minimum funding requirements differs from
the calculation of the present value of plan benefits (the
projected benefit obligation) for accounting purposes. In
December 2008, the Worker, Retiree and Employer
Recovery Act of 2008 (WERA) was passed by the U.S.
Congress which provided for pension funding relief and
technical corrections. Funding contributions depend on
the funding method selected by the Company, and the
timing of its implementation, as well as on actual
demographic data and the targeted funding level. The
Company continually reassesses the amount and timing
of any discretionary contributions and elected to make
contributions totaling $1.25 billion for the year ended
December 31, 2017 and $750 million for the year ended
December 31, 2016. No voluntary contributions were
made in 2018. At this time, we do not expect to have any
required contributions to our plans in 2019, although the
Company may elect
future voluntary
future
contributions. The
contributions, which could be material, will depend on a
number of factors, including the actual earnings and
changes in values of plan assets and changes in interest
rates.
timing and amount of
to make
During the fourth quarter of 2018, the Company entered
into an agreement with The Prudential Insurance
Company of America to purchase a group annuity
contract and transfer approximately $1.6 billion of
International Paper's U.S. qualified pension plan
projected benefit obligations, subject to customary
closing conditions. The transaction closed on October 2,
2018 and was funded with pension plan assets. Under
the transaction, at the end of 2018, Prudential assumed
responsibility
for pension benefits and annuity
administration for approximately 23,000 retirees or their
beneficiaries receiving less than $1,000 in monthly
benefit payments from the plan. Settlement accounting
rules required a remeasurement of the qualified plan as
of October 2, 2018 and the Company recognized a non-
cash pension settlement charge of $424 million before
tax in the fourth quarter of 2018.
During the fourth quarter of 2017, the Company entered
into an agreement with The Prudential Insurance
Company of America to purchase a group annuity
31
contract and transfer approximately $1.3 billion of
International Paper's U.S. qualified pension plan
projected benefit obligations. The transaction closed on
October 3, 2017 and was funded with pension plan
assets. Under the transaction, at the end of 2017,
Prudential assumed responsibility for pension benefits
and annuity administration for approximately 45,000
retirees or their beneficiaries receiving less than $450 in
monthly benefit payments from the plan. Settlement
accounting rules required a remeasurement of the
qualified plan as of October 3, 2017 and the Company
recognized a non-cash pension settlement charge of
$376 million before tax in the fourth quarter of 2017. In
addition, large payments from the non-qualified pension
plan also required a remeasurement as of October 2,
2017 and a non-cash settlement charge of $7 million was
also recognized in the fourth quarter of 2017.
During the first quarter of 2016, International Paper
announced a voluntary, limited-time opportunity for
former employees who are participants in the Retirement
Plan of International Paper Company (the Pension Plan)
to request early payment of their entire Pension Plan
benefit in the form of a single lump sum payment. The
amount of total payments under this program was
approximately $1.2 billion, and were made from Plan trust
assets on June 30, 2016. Based on the level of payments
made, settlement accounting rules applied and resulted
in a plan remeasurement as of the June 30, 2016
payment date. As a result of settlement accounting, the
Company
the
unamortized net actuarial loss, after remeasurement,
resulting in a $439 million non-cash charge to the
Company's earnings in the second quarter of 2016.
Additional payments of $8 million and $9 million were
made during the third and fourth quarters, respectively,
due to mandatory cash payouts and a small lump sum
payout, and the Pension Plan was subsequently
remeasured at September 30, 2016 and December 31,
2016. As a result of settlement accounting, the Company
recognized non-cash settlement charges of $3 million in
both the third and fourth quarters of 2016.
recognized a pro-rata portion of
Ilim Shareholder’s Agreement
that
In October 2007, in connection with the formation of the
Ilim joint venture, International Paper entered into a
shareholder’s agreement
includes provisions
relating to the reconciliation of disputes among the
partners. This agreement provides that at any time, either
the Company or its partners may commence procedures
specified under the deadlock agreement. If these or any
other deadlock procedures under the shareholder's
agreement are commenced, although it is not obligated
to do so, the Company may in certain situations choose
to purchase its partners' 50% interest in Ilim. Any such
transaction would be subject to review and approval by
Russian and other relevant anti-trust authorities. Based
on the provisions of the agreement, the Company
estimates that the current purchase price for its partners'
50% interests would be approximately $2.4 billion, which
could be satisfied by payment of cash or International
Paper common stock, or some combination of the two,
at the Company's option. The purchase by the Company
of its partners’ 50% interest in Ilim would result in the
consolidation of Ilim's financial position and results of
operations in all subsequent periods. The parties have
informed each other that they have no current intention
to commence procedures specified under the deadlock
provisions of the shareholder’s agreement.
CRITICAL ACCOUNTING POLICIES AND
SIGNIFICANT ACCOUNTING ESTIMATES
requires
International Paper
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States
to establish
accounting policies and to make estimates that affect
both the amounts and timing of the recording of assets,
liabilities, revenues and expenses. Some of these
estimates require judgments about matters that are
inherently uncertain.
Accounting policies whose application may have a
significant effect on the reported results of operations and
financial position of International Paper, and that can
require judgments by management that affect their
application, include the accounting for contingencies,
impairment or disposal of long-lived assets and goodwill,
pensions and
taxes. The Company has
discussed the selection of critical accounting policies and
the effect of significant estimates with the Audit and
Finance Committee of the Company’s Board of Directors.
income
Contingent Liabilities
Accruals for contingent liabilities, including legal, and
environmental matters, are recorded when it is probable
that a liability has been incurred or an asset impaired and
the amount of the loss can be reasonably estimated.
Liabilities accrued for legal matters require judgments
regarding projected outcomes and range of loss based
on historical experience and recommendations of legal
counsel. Liabilities for environmental matters require
evaluations of relevant environmental regulations and
estimates of future remediation alternatives and costs.
The Company utilizes
legal and
environmental experts to develop estimates of its legal
and environmental obligations, supplemented as needed
by third-party specialists to analyze its most complex
contingent liabilities.
in-house
its
We calculate our workers' compensation reserves based
on estimated actuarially calculated development factors.
The workers' compensation reserves are reviewed at
least quarterly to determine the adequacy of the accruals
and related financial statement disclosure. While we
believe that our assumptions are appropriate, the
ultimate settlement of workers' compensation reserves
32
may differ significantly from amounts we have accrued
in our consolidated financial statements.
Impairment of Long-Lived Assets and Goodwill
An impairment of a long-lived asset exists when the
asset’s carrying amount exceeds its fair value, and is
recorded when the carrying amount is not recoverable
through cash flows from future operations or disposals.
A goodwill impairment exists when the carrying amount
of goodwill exceeds its fair value. Assessments of
possible impairments of long-lived assets and goodwill
are made when events or changes in circumstances
indicate that the carrying value of the asset may not be
recoverable through future operations. Additionally,
evaluation for possible impairment of goodwill and
intangible asset balances is required annually. The
amount and timing of any impairment charges based on
these assessments may require the estimation of future
cash flows or the fair market value of the related assets
based on management’s best estimates of certain key
factors, including future selling prices and volumes,
operating, raw material, energy and freight costs, and
various other projected operating economic factors and
other intended uses of the assets. As these key factors
change in future periods, the Company will update its
impairment analysis to reflect its latest estimates and
projections.
ASU 2011-08, "Intangibles - Goodwill and Other," allows
entities testing goodwill for impairment the option of
performing a qualitative (Step 0) assessment before
calculating the fair value of a reporting unit for the goodwill
impairment test. If a Step 0 assessment is performed, an
entity is no longer required to calculate the fair value of
a reporting unit unless the entity determines that, based
on that Step 0 assessment, it is more likely than not that
its fair value is less than its carrying value.
During 2018, a determination was made that the current
carrying value of the long-lived assets of the Brazil
Packaging business exceeded their estimated fair value
due to a change in the outlook for the business.
Management engaged a third party to assist with
determining the fair value of the business and the fixed
assets. The fair value of the business was calculated
using a probability-weighted approach based on
discounted future cash flows, market multiples, and
transaction multiples and the fair value of the fixed assets
was determined using a market approach. As a result, a
pre-tax charge of $122 million ($81 million, net of tax)
was recorded related to the impairment of an intangible
asset and fixed assets.
The Company performed its annual testing of its reporting
units for possible goodwill impairments by applying the
qualitative Step 0 analysis to its reporting units as of
October 1, 2018. For the current year evaluation, the
Company assessed various assumptions, events and
circumstances that would have affected the estimated
fair value of the reporting units. The results of this
assessment indicated that it is not more likely than not
that the fair values of the Company's reporting units were
less than the carrying values of the reporting units.
In addition, the Company considered whether there were
any events or circumstances outside of the annual
evaluation that would reduce the fair value of its reporting
units below their carrying amounts and necessitate a
goodwill impairment evaluation. In consideration of all
relevant factors, there were no indicators that would
require goodwill impairment subsequent to October 1,
2018.
settlement portfolio selected from a universe of high
quality corporate bonds.
The expected long-term rate of return on U.S. pension
plan assets used to determine net periodic cost for the
year ended December 31, 2018 was 7.50%.
Increasing (decreasing) the expected long-term rate of
return on U.S. plan assets by an additional 0.25% would
decrease
(increase) 2019 pension expense by
approximately $22 million, while a (decrease) increase
of 0.25% in the discount rate would (increase) decrease
pension expense by approximately $27 million.
No goodwill impairment charges were recorded in 2018,
2017 or 2016.
Actual rates of return earned on U.S. pension plan assets
for each of the last 10 years were:
Pension Benefit Obligations
The charges recorded for pension benefit obligations are
determined annually in conjunction with International
Paper’s consulting actuary, and are dependent upon
various assumptions including the expected long-term
rate of return on plan assets, discount rates, projected
future compensation increases and mortality rates.
The calculations of pension obligations and expenses
require decisions about a number of key assumptions
that can significantly affect liability and expense amounts,
including the expected long-term rate of return on plan
assets and the discount rate used to calculate plan
liabilities.
Benefit obligations and fair values of plan assets as of
December 31, 2018, for International Paper’s pension
plan were as follows:
Year
2018
2017
2016
2015
2014
Return
(3.0)%
19.3 %
7.1 %
1.3 %
6.4 %
Year
2013
2012
2011
2010
2009
Return
14.1%
14.1%
2.5%
15.1%
23.8%
The 2012, 2013 and 2014 returns above represent
weighted averages of International Paper and Temple-
Inland asset returns. International Paper and Temple-
Inland assets were combined in October 2014. The
annualized time-weighted rate of return earned on U.S.
pension plan assets was 6.0% and 9.8% for the past five
and ten years, respectively. The following graph shows
the growth of a $1,000 investment in International Paper’s
U.S. Pension Plan Master Trust. The graph portrays the
time-weighted rate of return from 2008 – 2018.
In millions
U.S. qualified pension
U.S. nonqualified pension
Non-U.S. pension
$
Benefit
Obligation
Fair Value of
Plan Assets
8,735
—
161
10,124 $
343
215
The
table below shows assumptions used by
International Paper to calculate U.S. pension obligations
for the years shown:
Discount rate
Rate of compensation increase
2018
2017
2016
4.30%
2.25%
3.60%
3.75%
4.10%
3.75%
International Paper determines
these actuarial
assumptions, after consultation with our actuaries, on
December 31 of each year or more frequently if required,
to calculate liability information as of that date and
pension expense for the following year. The expected
long-term rate of return on plan assets is based on
projected rates of return for current and planned asset
classes in the plan’s investment portfolio. The discount
rate assumption was determined based on a hypothetical
33
ASC 715, “Compensation – Retirement Benefits,”
provides for delayed recognition of actuarial gains and
losses, including amounts arising from changes in the
estimated projected plan benefit obligation due to
changes in the assumed discount rate, differences
between the actual and expected return on plan assets,
and other assumption changes. These net gains and
losses are recognized in pension expense prospectively
over a period that approximates the average remaining
service period of active employees expected to receive
benefits under the plans to the extent that they are not
offset by gains and losses in subsequent years.
Net periodic pension plan expenses, calculated for all of
International Paper’s plans, were as follows:
could elect to make voluntary contributions in the future.
There are no required contributions to the U.S. qualified
plan in 2019. The nonqualified defined benefit plans are
funded to the extent of benefit payments, which totaled
$29 million for the year ended December 31, 2018.
2018
2017
2016
2015
2014
Income Taxes
In millions
Pension expense
U.S. plans
Non-U.S. plans
Net expense
$ 632 $ 717 $ 809 $ 461 $ 387
4
5
4
6
—
$ 636 $ 722 $ 813 $ 467 $ 387
The decrease in 2018 pension expense primarily reflects
lower interest cost on a lower 2018 projected benefit
obligation along with the current year absence of a
termination benefits
curtailment
associated with
the North American Consumer
Packaging transaction, partially offset by a higher
settlement loss in the current year associated with the
October 2018 annuity purchase transaction.
loss and special
Assuming that discount rates, expected long-term
returns on plan assets and rates of future compensation
increases remain the same as of December 31, 2018,
projected future net periodic pension plan expenses
would be as follows:
In millions
Pension expense
U.S. plans
Non-U.S. plans
Net expense
2020
2019
$
$
88 $
4
92 $
103
4
107
The Company estimates that it will record net pension
expense of approximately $103 million for its U.S. defined
benefit plans in 2019, compared to expense of $632
million in 2018. The 2018 expense includes $424 million
of settlement accounting charges. Excluding these
settlement charges, the estimated decrease in net
pension expense in 2019 is primarily due to lower
amortization of actuarial losses and lower service cost
partially offset by lower asset returns due to the annuity
purchase and a decrease in the expected long-term
return on asset assumption from 7.50% in 2018 to 7.25%
in 2019.
The market value of plan assets for International Paper’s
U.S. qualified pension plan at December 31, 2018 totaled
approximately $8.7 billion, consisting of approximately
32% equity securities, 51% debt securities, 11% real
estate funds and 6% other assets.
The Company’s funding policy for its qualified pension
plans is to contribute amounts sufficient to meet legal
funding requirements, plus any additional amounts that
the Company may determine
to be appropriate
considering the funded status of the plan, tax deductibility,
the cash flows generated by the Company, and other
factors. The Company continually reassesses the
amount and timing of any discretionary contributions and
International Paper records its global tax provision based
on the respective tax rules and regulations for the
jurisdictions in which it operates. Where the Company
believes that a tax position is supportable for income tax
purposes, the item is included in its income tax returns.
Where treatment of a position is uncertain, liabilities are
recorded based upon the Company’s evaluation of the
“more likely than not” outcome considering technical
merits of the position based on specific tax regulations
and facts of each matter. Changes to recorded liabilities
are only made when an identifiable event occurs that
changes the likely outcome, such as settlement with the
relevant tax authority, the expiration of statutes of
limitation for the subject tax year, change in tax laws, or
recent court cases that are relevant to the matter.
Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit
will not be realized. Significant judgment is required in
evaluating the need for and magnitude of appropriate
valuation allowances against deferred tax assets. The
realization of these assets is dependent on generating
future
income, as well as successful
implementation of various tax planning strategies.
taxable
While International Paper believes that these judgments
and estimates are appropriate and reasonable under the
circumstances, actual resolution of these matters may
differ from recorded estimated amounts.
RECENT ACCOUNTING DEVELOPMENTS
See Note 2 Recent Accounting Developments on pages
47 and 48 of
Item 8. Financial Statements and
Supplementary Data for a discussion of new accounting
pronouncements.
LEGAL PROCEEDINGS
legal proceedings
Information concerning the Company’s environmental
and
in Note 13
Commitments and Contingent Liabilities on pages 62
through 65 of Item 8. Financial Statements and
Supplementary Data.
is set
forth
EFFECT OF INFLATION
While inflationary increases in certain input costs, such
as energy, wood fiber and chemical costs, have an impact
on the Company’s operating results, changes in general
inflation have had minimal impact on our operating results
34
in each of the last three years. Sales prices and volumes
are more strongly influenced by economic supply and
demand factors in specific markets and by exchange rate
fluctuations than by inflationary factors.
FOREIGN CURRENCY EFFECTS
local currency
International Paper has operations in a number of
countries. Its operations in those countries also export
to, and compete with, imports from other regions. As
such, currency movements can have a number of direct
and indirect impacts on the Company’s
financial
statements. Direct impacts include the translation of
international operations’
financial
statements into U.S. dollars and the remeasurement
impact associated with non-functional currency financial
assets and liabilities. Indirect impacts include the change
in competitiveness of imports into, and exports out of, the
United States (and the impact on local currency pricing
of products that are traded internationally). In general, a
weaker U.S. dollar and stronger local currency is
beneficial to International Paper. The currencies that
have the most impact are the Euro, the Brazilian real, the
Polish zloty and the Russian ruble.
MARKET RISK
We use financial instruments, including fixed and variable
rate debt, to finance operations, for capital spending
programs and
for general corporate purposes.
Additionally, financial instruments, including various
derivative contracts, are used to hedge exposures to
interest rate, commodity and foreign currency risks. We
do not use financial instruments for trading purposes.
Information
International Paper’s debt
obligations is included in Note 15 Debt and Lines of Credit
on pages 66 and 67 of Item 8. Financial Statements and
Supplementary Data. A discussion of derivatives and
hedging activities is included in Note 16 Derivatives and
Hedging Activities on pages 67 through 70 of Item 8.
Financial Statements and Supplementary Data.
related
to
The fair value of our debt and financial instruments varies
due to changes in market interest and foreign currency
rates and commodity prices since the inception of the
related instruments. We assess this market risk utilizing
a sensitivity analysis. The sensitivity analysis measures
the potential loss in earnings, fair values and cash flows
based on a hypothetical 10% change (increase and
decrease) in interest and currency rates and commodity
prices.
Interest Rate Risk
Our exposure to market risk for changes in interest rates
relates primarily to short- and long-term debt obligations
and investments in marketable securities. We invest in
35
investment-grade securities of financial institutions and
money market mutual funds with a minimum rating of AAA
and limit exposure to any one issuer or fund. Our
investments in marketable securities at December 31,
2018 and 2017 are stated at cost, which approximates
market due to their short-term nature. Our interest rate
risk exposure related to these investments was not
material.
We issue fixed and floating rate debt in a proportion that
management deems appropriate based on current and
projected market conditions. Derivative instruments,
such as, interest rate swaps, may be used to execute this
strategy. At December 31, 2018 and 2017, the fair value
of the net liability of financial instruments with exposure
to interest rate risk was approximately $9.2 billion and
$11.1 billion, respectively. The potential decline in fair
value resulting from a 10% adverse shift in quoted interest
rates would have been approximately $538 million and
$679 million at December 31, 2018 and 2017,
respectively.
Commodity Price Risk
The objective of our commodity exposure management
is to minimize volatility in earnings due to large
fluctuations in the price of commodities. Commodity swap
or forward purchase contracts may be used to manage
risks associated with market fluctuations in energy prices.
Foreign Currency Risk
transacts business
in many
International Paper
currencies and is also subject to currency exchange rate
risk through investments and businesses owned and
operated in foreign countries. Our objective in managing
the associated foreign currency risks is to minimize the
effect of adverse exchange rate fluctuations on our after-
tax cash flows. We address these risks on a limited basis
by entering into cross-currency and interest rate swaps,
or foreign exchange contracts. At December 31, 2018
and 2017, the net fair value of financial instruments with
exposure to foreign currency risk was approximately a
$8 million liability and a $10 million asset, respectively.
The potential loss in fair value for such financial
instruments from a 10% adverse change in quoted
foreign currency exchange rates would have been
approximately $29 million at both December 31, 2018
and 2017.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See the preceding discussion and Note 16 Derivatives
and Hedging Activities on pages 67 through 70 of Item 8.
Financial Statements and Supplementary Data.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
REPORT OF MANAGEMENT ON:
Financial Statements
The management of International Paper Company is
responsible for the preparation of the consolidated
financial statements in this annual report and for
establishing and maintaining adequate internal controls
over financial reporting. The consolidated financial
statements have been prepared using accounting
principles generally accepted in the United States of
America considered appropriate in the circumstances
to present fairly the Company’s consolidated financial
position, results of operations and cash flows on a
consistent basis. Management has also prepared the
other information in this annual report and is responsible
for its accuracy and consistency with the consolidated
financial statements.
As can be expected in a complex and dynamic business
environment, some financial statement amounts are
based on estimates and judgments. Even though
estimates and judgments are used, measures have
been taken to provide reasonable assurance of the
integrity and reliability of the financial information
contained in this annual report. We have formed a
Disclosure Committee to oversee this process.
The accompanying consolidated financial statements
have been audited by the independent registered public
accounting firm Deloitte & Touche LLP. During its audits,
Deloitte & Touche LLP was given unrestricted access to
all financial records and related data, including minutes
of all meetings of stockholders and the board of directors
and all committees of the board. Management believes
that all representations made to the independent
auditors during their audits were valid and appropriate.
Internal Control Over Financial Reporting
The management of International Paper Company is
also responsible for establishing and maintaining
adequate internal control over financial reporting.
Internal control over financial reporting is the process
designed by, or under the supervision of, our principal
executive officer and principal financial officer, and
effected by our Board of Directors, management and
other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the
for external
preparation of
purposes. All internal control systems have inherent
limitations, including the possibility of circumvention and
overriding of controls, and therefore can provide only
reasonable assurance of achieving the designed control
objectives. The Company’s internal control system is
supported by written policies and procedures, contains
financial statements
self-monitoring mechanisms, and is audited by the
internal audit function. Appropriate actions are taken by
management to correct deficiencies as they are
identified.
financial
The Company has assessed the effectiveness of its
reporting as of
internal control over
December 31, 2018. In making this assessment, it used
the criteria described in “Internal Control – Integrated
Framework (2013)” issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, management
believes that, as of December 31, 2018, the Company’s
internal control over financial reporting was effective.
registered public
independent
The Company’s
accounting firm, Deloitte & Touche LLP, has issued its
report on the effectiveness of the Company’s internal
control over financial reporting. The report appears on
pages 38 and 39.
Internal Control Environment And Board Of
Directors Oversight
in
legal standards
Our internal control environment includes an enterprise-
wide attitude of integrity and control consciousness that
establishes a positive “tone at the top.” This is
exemplified by our ethics program that includes long-
standing principles and policies on ethical business
conduct that require employees to maintain the highest
ethical and
the conduct of
International Paper business, which have been
distributed to all employees; a toll-free telephone
helpline whereby any employee may anonymously
report suspected violations of law or International
Paper’s policy; and an office of ethics and business
practice. The internal control system further includes
careful selection and training of supervisory and
management personnel, appropriate delegation of
authority and division of responsibility, dissemination of
throughout
accounting and business policies
International Paper, and an extensive program of
internal audits with management follow-up.
the performance of
The Board of Directors, assisted by the Audit and
Finance Committee (Committee), monitors the integrity
of the Company’s financial statements and financial
reporting procedures,
the
Company’s internal audit function and independent
auditors, and other matters set forth in its charter. The
Committee, which consists of independent directors,
meets regularly with representatives of management,
and with the independent auditors and the Internal
Auditor, with and without management representatives
in attendance, to review their activities. The Committee’s
Charter takes into account the New York Stock
Exchange rules relating to Audit Committees and the
SEC rules and regulations promulgated as a result of
the Sarbanes-Oxley Act of 2002. The Committee has
36
reviewed and discussed the consolidated financial
statements for the year ended December 31, 2018,
including critical accounting policies and significant
management judgments, with management and the
independent auditors. The Committee’s
report
recommending
financial
statements in this Annual Report on Form 10-K will be
set forth in our Proxy Statement.
inclusion of such
the
MARK S. SUTTON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
TIMOTHY S. NICHOLLS
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
37
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
International Paper Company:
evaluating
the accounting principles used and
significant estimates made by management, as well as
evaluating the overall presentation of the financial
statements. We believe that our audits provide a
reasonable basis for our opinion.
Opinion on the Financial Statements
/s/ Deloitte & Touche LLP
We have audited the accompanying consolidated
balance sheets of International Paper Company and
subsidiaries (the "Company") as of December 31, 2018
and 2017, the related consolidated statements of
operations, comprehensive income, changes in equity,
and cash flows for each of the three years in the period
ended December 31, 2018, and the related notes
(collectively referred to as the "financial statements"). In
our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company
as of December 31, 2018 and 2017, and the results of
its operations and its cash flows for each of the three
years in the period ended December 31, 2018, in
conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards
of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal
control over financial reporting as of December 31,
2018, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of
the Treadway
Commission and our report dated February 20, 2019,
expressed an unqualified opinion on the Company's
internal control over financial reporting.
Basis for Opinion
the Company's
These financial statements are the responsibility of the
Company's management. Our responsibility is to
express an opinion on
financial
statements based on our audits. We are a public
accounting firm registered with the PCAOB and are
required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are
free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and
performing procedures that respond to those risks.
Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the
included
financial statements. Our audits also
38
Memphis, Tennessee
February 20, 2019
We have served as the Company's auditor since
2002.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM, ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of
International Paper Company:
Opinion on
Reporting
Internal Control over Financial
We have audited the internal control over financial
International Paper Company and
reporting of
subsidiaries (the “Company”) as of December 31, 2018,
based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee
the Treadway
of Sponsoring Organizations of
Commission (COSO). In our opinion, the Company
maintained, in all material respects, effective internal
control over financial reporting as of December 31,
2018, based on criteria established in Internal Control -
Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards
of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated financial
statements as of and for the year ended December 31,
2018, of the Company, and our report dated February
20, 2019 expressed an unqualified opinion on those
financial statements.
Basis for Opinion
is responsible
for
The Company’s management
maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Report of Management on Internal
Control over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and
are required to be independent with respect to the
Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material
respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of
internal control based on the assessed risk, and
performing such other procedures as we considered
necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over
Financial Reporting
Because of its inherent limitations, internal control over
financial
reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Memphis, Tennessee
February 20, 2019
reporting
financial statements
A company’s internal control over financial reporting is
a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
for external
preparation of
purposes in accordance with generally accepted
accounting principles. A company’s internal control over
financial
those policies and
includes
procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit
preparation of financial statements in accordance with
generally accepted accounting principles, and that
receipts and expenditures of the company are being
made only in accordance with authorizations of
management and directors of the company; and (3)
provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a
material effect on the financial statements.
39
CONSOLIDATED STATEMENT OF OPERATIONS
In millions, except per share amounts, for the years ended December 31
NET SALES
COSTS AND EXPENSES
Cost of products sold
Selling and administrative expenses
Depreciation, amortization and cost of timber harvested
Distribution expenses
Taxes other than payroll and income taxes
Restructuring and other charges, net
Net (gains) losses on sales and impairments of businesses
Litigation settlement
Net bargain purchase gain on acquisition of business
Interest expense, net
Non-operating pension expense
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY
EARNINGS (LOSSES)
Income tax provision (benefit)
Equity earnings (loss), net of taxes
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
Discontinued operations, net of taxes
NET EARNINGS (LOSS)
Less: Net earnings (loss) attributable to noncontrolling interests
NET EARNINGS (LOSS) ATTRIBUTABLE TO INTERNATIONAL PAPER
COMPANY
BASIC EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY
COMMON SHAREHOLDERS
Earnings (loss) from continuing operations
Discontinued operations, net of taxes
Net earnings (loss)
DILUTED EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY
COMMON SHAREHOLDERS
Earnings (loss) from continuing operations
Discontinued operations, net of taxes
Net earnings (loss)
AMOUNTS ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS
Earnings (loss) from continuing operations
Discontinued operations, net of taxes
Net earnings (loss)
The accompanying notes are an integral part of these financial statements.
2018
2017
2016
$ 23,306 $ 21,743 $ 19,495
15,555
14,802
13,419
1,723
1,328
1,567
171
29
122
—
—
536
494
1,621
1,343
1,434
169
67
9
354
(6)
572
530
1,781
848
445
336
1,672
345
2,017
5
(1,085)
177
2,110
34
2,144
—
1,458
1,124
1,237
154
54
70
—
—
520
664
795
193
198
800
102
902
(2)
$
2,012 $
2,144 $
904
$
$
$
$
$
$
4.07 $
5.11 $
0.84
0.08
4.91 $
5.19 $
4.02 $
5.05 $
0.83
0.08
4.85 $
5.13 $
1,667 $
2,110 $
345
34
2,012 $
2,144 $
1.95
0.25
2.20
1.93
0.25
2.18
802
102
904
40
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
In millions for the years ended December 31
NET EARNINGS (LOSS)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Amortization of pension and postretirement prior service costs and net loss:
U.S. plans (less tax of $196, $280 and $343)
Non-U.S. plans (less tax of $0, $0 and $0)
Pension and postretirement liability adjustments:
U.S. plans (less tax of $6, $69 and $283)
Non-U.S. plans (less tax of $1, $1 and $4)
Change in cumulative foreign currency translation adjustment (less tax of $1, $0 and $0)
Net gains/losses on cash flow hedging derivatives:
Net gains (losses) arising during the period (less tax of $5, $4 and $3)
Reclassification adjustment for (gains) losses included in net earnings (less tax of $1, $2 and $3)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Comprehensive Income (Loss)
Net (Earnings) Loss Attributable to Noncontrolling Interests
Other Comprehensive (Income) Loss Attributable to Noncontrolling Interests
2018
2017
2016
$
2,017 $
2,144 $
902
588
1
18
4
(473)
(10)
2
130
2,147
(5)
3
486
—
56
3
177
15
(7)
730
2,874
—
(1)
545
—
(451)
3
260
(6)
(7)
344
1,246
2
2
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY
$
2,145 $
2,873 $
1,250
The accompanying notes are an integral part of these financial statements.
41
CONSOLIDATED BALANCE SHEET
In millions, except per share amounts, at December 31
2018
2017
ASSETS
Current Assets
Cash and temporary investments
Accounts and notes receivable (less allowances of $81 in 2018 and $73 in 2017)
Contract assets
Inventories
Assets held for sale
Other current assets
Total Current Assets
Plants, Properties and Equipment, net
Forestlands
Investments
Financial Assets of Special Purpose Entities (Note 14)
Goodwill
Deferred Charges and Other Assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current Liabilities
Notes payable and current maturities of long-term debt
Accounts payable
Accrued payroll and benefits
Liabilities held for sale
Other accrued liabilities
Total Current Liabilities
Long-Term Debt
Nonrecourse Financial Liabilities of Special Purpose Entities (Note 14)
Deferred Income Taxes
Pension Benefit Obligation
Postretirement and Postemployment Benefit Obligation
Other Liabilities
Commitments and Contingent Liabilities (Note 13)
Equity
Common stock $1 par value, 2018 - 448.9 shares & 2017 - 448.9 shares
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less: Common stock held in treasury, at cost, 2018 – 48.310 shares and 2017 – 35.975 shares
Total International Paper Shareholders’ Equity
Noncontrolling interests
Total Equity
TOTAL LIABILITIES AND EQUITY
The accompanying notes are an integral part of these financial statements.
42
$
589 $ 1,018
3,521
3,287
395
2,241
—
250
—
2,313
1,377
282
6,996
8,277
13,067
13,265
402
1,648
7,070
3,374
1,019
448
390
7,051
3,411
1,061
$ 33,576 $ 33,903
$
639 $
311
2,413
2,458
535
—
1,107
4,694
485
805
1,043
5,102
10,015
10,846
6,298
2,600
1,762
264
560
6,291
2,291
1,939
326
567
449
6,280
7,465
449
6,206
6,180
(4,500)
(4,633)
9,694
2,332
7,362
21
8,202
1,680
6,522
19
7,383
6,541
$ 33,576 $ 33,903
2018
2017
2016
$ 2,017 $ 2,144 $
1,423
1,328
(1,113)
133
29
67
— (1,250)
717
—
(6)
9
133
(177)
212
632
(488)
—
122
153
(336)
75
(342)
(32)
(236)
151
(8)
28
3,226
(1,572)
(8)
(40)
—
23
28
(1,569)
(732)
490
(1,008)
(1)
(789)
(6)
—
(2,046)
(40)
(429)
(370)
—
(87)
114
1
(60)
1,757
(1,391)
(45)
—
4
26
15
(1,391)
(47)
1,907
(1,424)
26
(769)
(84)
(8)
(399)
18
(15)
902
1,227
136
54
(750)
809
—
—
70
58
(198)
99
(94)
—
11
98
41
15
2,478
(1,348)
(2,228)
—
108
19
(49)
(3,498)
(132)
3,830
(1,938)
—
(733)
(31)
(14)
982
21
(17)
1,018
1,033
1,050
589 $ 1,018 $ 1,033
$
CONSOLIDATED STATEMENT OF CASH FLOWS
In millions for the years ended December 31
OPERATING ACTIVITIES
Net earnings (loss)
Depreciation, amortization, and cost of timber harvested
Deferred income tax provision (benefit), net
Restructuring and other charges, net
Pension plan contributions
Periodic pension expense, net
Net gain on transfer of North American Consumer Packaging business
Net bargain purchase gain on acquisition of business
Net (gains) losses on sales and impairments of businesses
Equity method dividends received
Equity (earnings) losses, net
Other, net
Changes in current assets and liabilities
Accounts and notes receivable
Contract assets
Inventories
Accounts payable and accrued liabilities
Interest payable
Other
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
INVESTMENT ACTIVITIES
Invested in capital projects
Acquisitions, net of cash acquired
Net settlement on transfer of North American Consumer Packaging business
Proceeds from divestitures, net of cash divested
Proceeds from sale of fixed assets
Other
CASH PROVIDED BY (USED FOR) INVESTMENT ACTIVITIES
FINANCING ACTIVITIES
Repurchases of common stock and payments of restricted stock tax withholding
Issuance of debt
Reduction of debt
Change in book overdrafts
Dividends paid
Net debt tender premiums paid
Other
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Effect of Exchange Rate Changes on Cash
Change in Cash and Temporary Investments
Cash and Temporary Investments
Beginning of the period
End of the period
The accompanying notes are an integral part of these financial statements.
43
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
In millions
BALANCE, JANUARY 1,
2016
Issuance of stock for various
plans, net
Repurchase of stock
Dividends
Transactions of equity
method investees
Divestiture of noncontrolling
interests
Other
Comprehensive income (loss)
BALANCE, DECEMBER 31,
2016
Issuance of stock for various
plans, net
Repurchase of stock
Dividends
Transactions of equity
method investees
Comprehensive income (loss)
BALANCE, DECEMBER 31,
2017
Adoption of ASC 606
revenue from contracts
with customers
Issuance of stock for
various plans, net
Repurchase of stock
Dividends
Transactions of equity
method investees
Comprehensive income
(loss)
BALANCE, DECEMBER 31,
2018
Common
Stock
Issued
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
International
Paper
Shareholders’
Equity
Noncontrolling
Interests
Total
Equity
$
449 $ 6,243 $
4,649 $
(5,708) $
1,749 $
3,884 $
25 $ 3,909
—
—
—
—
—
—
—
(6)
—
—
(48)
—
—
—
—
—
(743)
—
—
8
904
—
—
—
—
—
—
346
(128)
132
—
—
—
—
—
449
6,189
4,818
(5,362)
1,753
—
—
—
—
—
42
—
—
(25)
—
—
—
(782)
—
2,144
—
—
—
—
729
(120)
47
—
—
—
449
6,206
6,180
(4,633)
1,680
—
—
—
—
—
—
—
62
—
—
12
—
73
—
—
(800)
—
—
—
—
—
—
2,012
133
—
(80)
732
—
—
—
122
(132)
(743)
(48)
—
8
1,250
4,341
162
(47)
(782)
(25)
2,873
6,522
73
142
(732)
(800)
12
2,145
—
—
—
—
(3)
—
(4)
122
(132)
(743)
(48)
(3)
8
1,246
18
4,359
—
—
—
—
1
162
(47)
(782)
(25)
2,874
19
6,541
—
—
—
—
—
2
73
142
(732)
(800)
12
2,147
$
449 $ 6,280 $
7,465 $
(4,500) $
2,332 $
7,362 $
21 $ 7,383
The accompanying notes are an integral part of these financial statements.
44
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 SUMMARY OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
International Paper (the Company) is a global paper and
packaging company with primary markets and
manufacturing operations in North America, Europe, Latin
America, North Africa, India and Russia. Substantially all
of our businesses have experienced, and are likely to
continue to experience, cycles relating to available
industry capacity and general economic conditions.
FINANCIAL STATEMENTS
These consolidated financial statements have been
in conformity with accounting principles
prepared
generally accepted in the United States that require the
use of management’s estimates. Actual results could
differ from management’s estimates.
On January 1, 2018, the Company completed the
previously announced transfer of its North American
Consumer Packaging business, which includes its North
American Coated Paperboard and Foodservice
businesses, to a subsidiary of Graphic Packaging Holding
Company. The Company received a 20.5% ownership
interest in a subsidiary of Graphic Packaging Holding
Company that holds the assets of the combined business.
See Note 8 for further discussion.
CONSOLIDATION
financial statements
the
The consolidated
accounts of International Paper and its wholly-owned,
controlled majority-owned and financially controlled
subsidiaries. All significant intercompany balances and
transactions are eliminated.
include
EQUITY METHOD INVESTMENTS
is applied
The equity method of accounting
for
investments in affiliated companies when the Company
has significant influence over the investee’s operations,
or when the investee is structured with separate capital
accounts and our investment is considered more than
minor, which is the case for our 20.5% investment in
Graphic Packaging International Partners, LLC (GPIP).
Our material equity method investments are described in
Note 10.
reported in discontinued operations if the disposal
represents a strategic shift that has or will have a major
effect on the Company's operations and financial results
when the following occurs: (1) a component (or group of
components) meets the criteria to be classified as held
for sale; (2) the component or group of components is
disposed of by sale; or (3) the component or group of
components is disposed of other than by sale (for
example, by abandonment or in a distribution to owners
in a spinoff). For any component classified as held for sale
or disposed of by sale or other than by sale, qualifying for
presentation as a discontinued operation, the Company
reports the results of operations of the discontinued
operations (including any gain or loss recognized on the
disposal or loss recognized on classification as held for
sale of a discontinued operation), less applicable income
taxes (benefit), as a separate component in the
consolidated statement of operations for current and all
prior periods presented.
REVENUE RECOGNITION
Generally, the Company recognizes revenue on a point-
in-time basis when the customer takes title to the goods
and assumes the risks and rewards for the goods. For
customized goods where the Company has a legally
enforceable right to payment for the goods, the Company
recognizes revenue over time, which generally is, as the
goods are produced.
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.
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 or transfer and customer payment is one year
or less.
DISCONTINUED OPERATIONS
TEMPORARY INVESTMENTS
A discontinued operation may include a component or a
group of components of the Company's operations. A
disposal of a component or a group of components is
Temporary investments with an original maturity of three
months or less are treated as cash equivalents and are
stated at cost, which approximates market value.
45
INVENTORIES
Inventories are valued at the lower of cost or market value
include all costs directly associated with
and
manufacturing
and
products: materials,
manufacturing overhead. In the United States, costs of
raw materials and finished pulp and paper products, are
generally determined using the last-in, first-out method.
Other inventories are valued using the first-in, first-out or
average cost methods.
labor
PLANTS, PROPERTIES AND EQUIPMENT
Plants, properties and equipment are stated at cost, less
accumulated depreciation. Expenditures for betterments
are capitalized, whereas normal repairs and maintenance
are expensed as incurred. The units-of-production
method of depreciation is used for pulp and paper mills,
and the straight-line method is used for other plants and
equipment.
in excess of their estimated fair values, the fair values of
the individual assets and liabilities of the respective
reporting units are then determined to calculate the
amount of any goodwill impairment charge required, if
any. See Note 11 for further discussion.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment upon the
occurrence of events or changes in circumstances that
indicate that the carrying value of the assets may not be
recoverable. A recoverability test is performed based on
undiscounted cash flows, requiring judgments as to
whether assets are held and used or held for sale, the
weighting of operational alternatives being considered by
management and estimates of the amount and timing of
expected future cash flows from the use of the long-lived
assets generated by their use. Impaired assets are
recorded at their estimated fair value. See Note 8 for
further discussion.
GOODWILL
INCOME TAXES
Annual evaluation for possible goodwill impairment is
performed as of the beginning of the fourth quarter of each
year, with additional interim evaluation performed when
management believes that it is more likely than not, that
events or circumstances have occurred that would result
in the impairment of a reporting unit’s goodwill.
the
then
two-step goodwill
The Company has the option to evaluate goodwill for
impairment by first performing a qualitative (Step 0)
assessment of events and circumstances to determine
whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after
assessing the totality of events or circumstances, the
Company determines that it is not more likely than not
that the fair value of a reporting unit is less than its carrying
amounts,
impairment
evaluation is not required to be performed. If the Company
determines that it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, or if
the Company does not elect the option to perform an initial
qualitative assessment, the Company is required to
perform the traditional two-step goodwill impairment
evaluation. In performing this evaluation, the Company
estimates the fair value of its reporting units using the
expected discounted future cash flows for each reporting
unit. Key assumptions in the impairment analysis
considered by management include the discount rate,
long-term growth rate, tax rate, inflation rate and foreign
exchange rates. These estimated fair values are then
analyzed for reasonableness by comparing them to
historic market transactions for businesses in the industry,
and by comparing the sum of the reporting unit fair values
and other corporate assets and liabilities divided by
diluted common shares outstanding to the Company’s
traded stock price on the evaluation date. For reporting
units whose recorded value of net assets plus goodwill is
46
International Paper uses the asset and liability method of
accounting for income taxes whereby deferred income
taxes are recorded for the future tax consequences
attributable to differences between the financial statement
and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered
or settled. Deferred tax assets and liabilities are
remeasured to reflect new tax rates in the periods rate
changes are enacted.
International Paper records its worldwide tax provision
based on the respective tax rules and regulations for the
jurisdictions in which it operates. Where the Company
believes that a tax position is supportable for income tax
purposes, the item is included in its income tax returns.
Where treatment of a position is uncertain, liabilities are
recorded based upon the Company’s evaluation of the
“more likely than not” outcome considering the technical
merits of the position based on specific tax regulations
and the facts of each matter. Changes to recorded
liabilities are made only when an identifiable event occurs
that changes the likely outcome, such as settlement with
the relevant tax authority, the expiration of statutes of
limitation for the subject tax year, a change in tax laws,
or a recent court case that addresses the matter.
While the judgments and estimates made by the
Company are based on management’s evaluation of the
technical merits of a matter, assisted as necessary by
consultation with outside
consultants, historical
experience and other assumptions that management
believes are appropriate and reasonable under current
circumstances, actual resolution of these matters may
differ from recorded estimated amounts, resulting in
adjustments that could materially affect future financial
statements.
RETIREMENT BENEFITS
ENVIRONMENTAL REMEDIATION COSTS
Costs associated with environmental
remediation
obligations are accrued when such costs are probable
and reasonably estimable. Such accruals are adjusted as
further information develops or circumstances change.
Costs of
for environmental
remediation obligations are discounted to their present
value when the amount and timing of expected cash
payments are reliably estimable.
future expenditures
TRANSLATION OF FINANCIAL STATEMENTS
Balance sheets of international operations are translated
into U.S. dollars at year-end exchange rates, while
statements of operations are translated at average rates.
Adjustments
statement
translations are included as cumulative translation
adjustments in Accumulated other comprehensive loss.
resulting
financial
from
NOTE 2 RECENT ACCOUNTING DEVELOPMENTS
Other than as described below, no new accounting
pronouncement issued or effective during the fiscal year
has had or is expected to have a material impact on the
consolidated financial statements.
FAIR VALUE MEASUREMENT
In August 2018, the FASB issued ASU 2018-13, "Fair
Value Measurement (Topic 820): Disclosure Framework
- Changes to the Disclosure Requirements for Fair Value
Measurement." The new guidance modifies disclosure
requirements related to fair value measurement. This
guidance is effective for annual reporting periods
beginning after December 15, 2019, and interim periods
within those years. Implementation on a prospective or
retrospective basis varies by specific disclosure
requirement. Early adoption is permitted. The Company
early adopted the provisions of this guidance in 2018
with no material impact on the financial statements.
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. The
Company is finalizing its evaluation of the provisions of
this guidance.
47
In August 2018, the FASB issued ASU 2018-14,
"Compensation - Retirement Benefits - Defined Benefit
Plans - General (Topic 715-20): Disclosure Framework
— Changes to the Disclosure Requirements for Defined
Benefit Plans." This guidance adds, removes, and
clarifies disclosure requirements related to defined
benefit pension and other postretirement plans. This
guidance is effective for annual reporting periods
beginning after December 15, 2020. Early adoption is
permitted. This guidance should be applied on a
retrospective basis to all periods presented. The
Company early adopted the provisions of this guidance
in 2018 with no material impact on the financial
statements.
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 retrospective adoption had no
impact on Net earnings (loss).
INTANGIBLES
the
requirements
In August 2018, the FASB issued ASU 2018-15,
"Intangibles - Goodwill and Other - Internal-Use
Software (Subtopic 350-40): Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract." The guidance
aligns the requirements for capitalizing implementation
costs incurred in a hosting arrangement that is a service
contract with
for capitalizing
implementation costs incurred to develop or obtain
internal-use software (and hosting arrangements that
license). The
include an
accounting for the service element of a hosting
arrangement that is a service contract is not affected by
the amendments in this guidance. This guidance is
effective for annual reporting periods beginning after
December 15, 2019, and interim periods within those
fiscal years. Early adoption is permitted. The Company
is currently evaluating the provisions of this guidance.
internal-use software
In January 2017, the FASB issued ASU 2017-04,
"Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment." This
guidance eliminates the requirement to calculate the
implied fair value of goodwill under Step 2 of today's
goodwill impairment test to measure a goodwill
impairment charge. Instead, entities will record an
impairment charge based on the excess of a reporting
unit's carrying amount over its fair value. This guidance
should be applied prospectively and is effective for
annual reporting periods beginning after December 15,
2019, for any impairment test performed in 2020. Early
adoption is permitted for annual and interim goodwill
impairment testing dates after January 1, 2017. The
Company is currently evaluating the provisions of this
guidance; however, we do not anticipate adoption
having a 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 will adopt this guidance using the newly
approved transition method. We will recognize a liability
and corresponding asset associated with in-scope
operating and finance leases and are in the final stages
of determining those amounts and the processes
required to account for leasing activity on an ongoing
basis. On adoption, we expect to recognize additional
assets and liabilities of approximately $500 million
based on the present value of the remaining minimum
rental payments.
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 operating 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
consolidated financial statements were as follows:
Consolidated Statement of Operations
Balances
As
Reported
Under
ASC 606
2018
Balances
Without
Adoption
of ASC
606
Impact of
Adoption
Increase/
(Decrease)
In millions, except per
share amounts
Net sales
$
23,306
$
23,274
$
15,555
1,567
15,535
1,563
445
443
1,672
2,017
1,666
2,011
Cost of products sold
Distribution expenses
Income tax provision
(benefit), net
Earnings (loss) from
continuing operations
Net earnings (loss)
Earnings per share
attributable to
International Paper
Company Shareholders
32
20
4
2
6
6
Basic
Diluted
$
$
4.91
4.85
$
4.90
4.84
0.01
0.01
Consolidated Balance Sheet
Balances
As
Reported
Under
ASC 606
2018
Balances
Without
Adoption
of ASC
606
Impact of
Adoption
Increase/
(Decrease)
In millions, except per
share amounts
Contract assets
$
395
$
— $
Inventories
Other current assets
Other accrued liabilities
Deferred income taxes
Retained earnings
2,241
250
1,107
2,600
7,465
2,511
278
1,088
2,601
7,386
395
(270)
(28)
19
(1)
79
Consolidated Statement of Cash Flows
Balances
As
Reported
Under
ASC 606
2018
Balances
Without
Adoption
of ASC
606
Impact of
Adoption
Increase/
(Decrease)
In millions, except per
share amounts
Net earnings (loss)
$
2,017
$
2,011
$
6
Deferred income tax
provision (benefit), net
Contract assets
Inventories
Accounts payable and
accrued liabilities
Other
133
(32)
(236)
151
28
159
—
(256)
147
—
(26)
(32)
20
4
28
48
NOTE 3 - REVENUE RECOGNITION
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.
Reportable Segments
Primary Geographical Markets (a)
United States
EMEA
Pacific Rim and Asia
Americas, other than U.S.
Total
Operating Segments
North American Industrial Packaging
EMEA Industrial Packaging
Brazilian Industrial Packaging
European Coated Paperboard
Global Cellulose Fibers
North American Printing Papers
Brazilian Papers
European Papers
Indian Papers
Intra-segment Eliminations
Corporate & Inter-segment Sales
Total
$
$
2018
Industrial
Packaging
Global
Cellulose
Fibers
Printing
Papers
Corporate &
Intersegment
Total
$
13,167
$
2,336
$
1,903
$
203
$
17,609
1,704
142
887
304
179
—
1,330
245
897
(17)
39
(13)
3,321
605
1,771
15,900
$
2,819
$
4,375
$
212
$
23,306
14,187
$
— $
— $
— $
1,355
232
359
—
—
—
—
—
(233)
—
—
—
—
2,819
—
—
—
—
—
—
—
—
—
—
1,956
978
1,252
202
(13)
—
$
15,900
$
2,819
$
4,375
$
—
—
—
—
—
—
—
—
—
212
212
14,187
1,355
232
359
2,819
1,956
978
1,252
202
(246)
212
$
23,306
(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
Beginning Balance - January 1, 2018
Ending Balance - December 31, 2018
Increase / (Decrease)
Contract Assets
(Short-Term)
Contract Liabilities
(Short-Term)
$
$
366
$
395
29
$
53
56
3
49
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 difference between
the price and quantity at comparable points in time for
goods which we have an unconditional right to payment
or receive pre-payment from the customer, respectively.
Performance
Judgments
Obligations
and
Significant
International Paper's principal business
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.
is
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,
location, etc.). Management has
geographical
concluded that the prices negotiated with each individual
customer are representative of the stand-alone selling
price of the product.
NOTE 4 EARNINGS PER SHARE ATTRIBUTABLE
TO INTERNATIONAL PAPER COMPANY COMMON
SHAREHOLDERS
Basic earnings per share is computed by dividing
earnings by the weighted average number of common
shares outstanding. Diluted earnings per share is
computed assuming that all potentially dilutive securities
were converted into common shares.
There are no adjustments required to be made to net
income for purposes of computing basic and diluted
EPS.
A reconciliation of the amounts included in the
computation of basic earnings (loss) per share from
continuing operations, and diluted earnings (loss) per
share from continuing operations is as follows:
In millions, except per share amounts
2018
2017
2016
Earnings (loss) from continuing
operations attributable to
International Paper common
shareholders
Weighted average common shares
outstanding
Effect of dilutive securities:
$ 1,667
$ 2,110
$ 802
409.1
412.7
411.1
Restricted performance share plan
5.1
5.0
4.5
Weighted average common shares
outstanding – assuming dilution
414.2
417.7
415.6
Basic earnings (loss) per share
from continuing operations
Diluted earnings (loss) per share
from continuing operations
$ 4.07
$ 5.11
$ 1.95
$ 4.02
$ 5.05
$ 1.93
50
NOTE 5 OTHER COMPREHENSIVE INCOME
The following table presents changes in AOCI, net of tax, reported in the consolidated financial statements for the years
ended December 31:
In millions
Defined Benefit Pension and Postretirement Adjustments
Balance at beginning of period
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Balance at end of period
Change in Cumulative Foreign Currency Translation Adjustments
Balance at beginning of period
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest
Balance at end of period
Net Gains and Losses on Cash Flow Hedging Derivatives
Balance at beginning of period
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Balance at end of period
2018
2017
2016
$
(2,527) $
22
589
(1,916)
(3,072) $
59
486
(2,527)
(2,111)
(475)
2
3
(2,581)
5
(10)
2
(3)
(2,287)
178
(1)
(1)
(2,111)
(3)
15
(7)
5
(3,169)
(448)
545
(3,072)
(2,549)
263
(3)
2
(2,287)
10
(6)
(7)
(3)
(5,362)
Total Accumulated Other Comprehensive Income (Loss) at End of Period
$
(4,500) $
(4,633) $
Reclassifications out of AOCI for the three years ended December 31 were as follows:
In millions
Defined benefit pension and postretirement items:
Prior-service costs
Actuarial gains/(losses)
Total pre-tax amount
Tax (expense)/benefit
Net of tax
Change in cumulative foreign currency translation
adjustments:
Business acquisitions/divestiture
Tax (expense)/benefit
Net of tax
Net gains and losses on cash flow hedging derivatives:
Foreign exchange contracts
Total pre-tax amount
Tax (expense)/benefit
Net of tax
Amount Reclassified from Accumulated
Other Comprehensive Income
2018
2017
2016
Location of Amount
Reclassified from AOCI
$
(11) $
(33) $
(37) (a) Non-operating pension expense
(774)
(785)
196
(589)
(2)
—
(2)
(3)
(3)
1
(2)
(733)
(766)
280
(486)
1
—
1
9
9
(2)
7
(851) (a) Non-operating pension expense
(888)
343
(545)
3 (b)
Discontinued operations, net of
taxes
—
3
10 (c) Cost of products sold
10
(3)
7
Total reclassifications for the period, net of tax
$
(593) $
(478) $
(535)
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 18 for
additional details).
(b) Amounts for 2016 and 2017 were reclassed to Net (gains) losses on sales and impairment of businesses.
(c) This accumulated other comprehensive income component is included in our derivatives and hedging activities (see Note 16 for additional
details).
51
NOTE 6 RESTRUCTURING CHARGES AND
OTHER ITEMS
2018: During 2018, restructuring and other charges,
net, totaling $29 million before taxes were recorded.
These charges included:
In millions
EMEA packaging restructuring (a)
Gain on sale of investment in Liaison Technologies
Inc.
Early debt extinguishment costs (see Note 15)
Riverdale mill conversion severance (b)
Total
2018
47
(31)
10
3
29
$
$
(a) Includes $33 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. The majority of the severance
charges recorded were paid throughout the year.
(b) Includes severance related to 51 employees.
2017: During 2017, restructuring and other charges,
net, totaling $67 million before taxes were recorded.
These charges included:
In millions
Early debt extinguishment costs (see Note 15)
Gain on sale of investment in ArborGen
Other
Total
2017
83
(14)
(2)
67
$
$
2016: During 2016, total restructuring and other
charges, net, of $54 million before taxes were recorded.
These charges included:
In millions
2016
Early debt extinguishment costs (see Note 15)
$
India packaging evaluation write-off
Gain on sale of investment in Arizona Chemical
Riegelwood mill conversion costs (a)
Turkey mill closure (b)
Total
$
29
17
(8)
9
7
54
(a)
(b)
Includes $3 million of accelerated depreciation, $3 million of
inventory write-off charges and $3 million of other charges.
Includes $4 million of accelerated depreciation and $3 million
of severance charges which is related to 85 employees.
NOTE 7 ACQUISITIONS AND JOINT VENTURES
TANGIER, MOROCCO FACILITY
2017: On June 30, 2017, the Company completed the
acquisition of Europac's Tangier, Morocco facility, a
corrugated packaging
for €40 million
(approximately $46 million using the June 30, 2017
facility,
exchange rate). After working capital and other post-
close 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
$
Accounts and notes receivable
Inventory
Plants, properties and equipment
Goodwill
Other intangible assets
Deferred charges and other assets
Total assets acquired
Accounts payable and accrued liabilities
Long-term debt
Other long-term liabilities
Total liabilities assumed
Net assets acquired
$
1
7
3
31
4
5
4
55
4
11
2
17
38
Since the date of acquisition, Net sales of $6 million and
Earnings (loss) from continuing operations before
income taxes and equity earnings of $(1) million from
the acquired business have been included in the
Company's consolidated statement of operations for the
year ended December 31, 2017. 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 U.S. GAAP
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.
WEYERHAEUSER PULP BUSINESS
2016: On December 1, 2016, the Company finalized the
for
purchase of Weyerhaeuser's pulp business
approximately $2.2 billion in cash, subject to post-
closing adjustments. Under the terms of the agreement,
International Paper acquired four fluff pulp mills, one
northern bleached softwood kraft mill and two converting
facilities of modified fiber, located in the United States,
Canada and Poland.
52
The following table summarizes the final fair values
assigned to assets and liabilities acquired as of
December 1, 2016:
In millions
December 1, 2016
closed January 1, 2016, the consolidated results would
have reflected Net sales of $20.8 billion and Earnings
(loss) from continuing operations before income taxes
and equity earnings of $942 million for the year ended
December 31, 2016.
Cash and temporary investments
$
Accounts and notes receivable
Inventory
Other current assets
Plants, properties and equipment
Goodwill
Other intangible assets
Deferred charges and other assets
Total assets acquired
Accounts payable and accrued liabilities
Long-term debt
Other long-term liabilities
Total liabilities assumed
12
195
238
11
1,711
52
212
6
2,437
114
104
28
246
Net assets acquired
$
2,191
In connection with the allocation of fair value, inventories
were written up by $33 million to their estimated fair
value. During 2017 and 2016, $14 million before taxes
($8 million after taxes) and $19 million before taxes ($12
million after taxes), respectively, were expensed to Cost
of products sold as the related inventory was sold.
Since the date of acquisition, Net sales of $111 million
and Earnings (loss) from continuing operations before
income taxes and equity earnings of $(21) million from
the acquired business are included in the Company's
consolidated statement of operations for the year ended
December 31, 2016. Additionally, Selling and
administrative expenses for 2016 include $28 million in
charges before taxes ($18 million after taxes) for
integration costs associated with the acquisition.
The identifiable intangible assets acquired in connection
with the acquisition of the Weyerhaeuser pulp business
included the following:
In millions
Asset Class:
Customer relationships and lists
Trade names, patents, trademarks
and developed technology
Other
Total
Average
Remaining
Useful Life
(at acquisition
date)
24 years
8 years
10 years
Estimated
Fair Value
$
$
95
113
4
212
On an unaudited pro forma basis, assuming the
acquisition of the newly acquired pulp business had
53
The 2016 pro forma information includes adjustments
for additional amortization expense on identifiable
intangible assets of $18 million and eliminating the write-
off of the estimated fair value of inventory of $(19) million
and non-recurring integration costs associated with the
acquisition of $30 million, including $12 million of deal
costs.
forma consolidated
The unaudited pro
financial
information was prepared for comparative purposes
only and includes certain adjustments, as noted above.
They do not reflect the effect of costs or synergies that
would have been expected to result from the integration
of the acquisition. The pro forma information does not
purport to represent International Paper's actual results
of operations as if the transaction described above
would have occurred as of January 1, 2016, nor is it
necessarily an indicator of future results.
HOLMEN PAPER NEWSPRINT MILL
2016: On June 30, 2016, the Company completed the
acquisition of Holmen Paper's newsprint mill in Madrid,
Spain. Under the terms of the acquisition agreement,
International Paper purchased the Madrid newsprint
mill, as well as, associated recycling operations and a
50% ownership interest in a cogeneration facility. The
Company completed the conversion of the mill to
produce recycled containerboard with an expected
capacity of 440,000 tons, supporting the Company's
corrugated packaging business in EMEA.
The Company's aggregate purchase price for the mill,
recycling operations and 50% ownership of the
cogeneration facility was €53 million (approximately $59
million using June 30, 2016 exchange rate). The
assignment of fair value to assets acquired and liabilities
assumed was completed in the first quarter of 2017 and
is presented in the table below.
In millions
Current assets
Equity method investments
Plants, properties and equipment
Other long-term assets
Total assets acquired
Short-term liabilities
Long-term liabilities
Total liabilities assumed
Net assets acquired
$
$
June 30, 2016
14
14
60
5
93
9
16
25
68
The final fair values assigned indicated that the sum of
the cash consideration paid was less than the fair value
of the underlying net assets, after adjustments, by $6
million, resulting in a bargain purchase gain being
recorded on this transaction. The amount of revenue
and earnings recognized since the acquisition date are
$90 million and a net loss of $2 million, respectively, for
the year ended December 31, 2016. Pro forma
information related to the acquisition of the Holmen
businesses 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 acquisitions
under ASC 805, "Business Combinations" and the
results of operations have been included in International
Paper's financial statements beginning with the dates
of acquisition.
NOTE 8 DIVESTITURES AND IMPAIRMENTS
DISCONTINUED OPERATIONS
transferred
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 Graphic
Packaging International Partners, LLC (GPIP), a
subsidiary of Graphic Packaging Holding Company, in
exchange for a 20.5% ownership interest in GPIP. GPIP
subsequently
the North American
Consumer Packaging business to Graphic Packaging
International, LLC (GPI), a wholly-owned subsidiary of
GPIP. Prior to the transaction, International Paper also
received $660 million in cash proceeds from a new loan
entered into by International Paper on December 8,
2017, which the Company used to pay down existing
debt. The loan was subsequently assumed by GPI from
International Paper on the transaction closing date and
was classified as Liabilities held for sale in the
accompanying
sheet.
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 to be $1.1 billion
and recorded a pre-tax gain of $488 million ($364 million,
net of tax) in 2018. The fair value was calculated using
a market approach using inputs classified as Level 2
and Level 3 within the fair value hierarchy, which is
further defined in Note 16.
consolidated
balance
All current and historical operating results for North
in
American Consumer Packaging are
Discontinued operations, net of
the
accompanying consolidated statement of operations.
The following summarizes the major classes of line
items comprising Earnings (Loss) Before Income Taxes
to Discontinued
and Equity Earnings reconciled
included
tax,
in
Operations, net of tax, related to the transfer of the North
American Consumer Packaging business for all prior
periods presented in the consolidated statement of
operations:
In millions
Net Sales
Costs and Expenses
Cost of products sold
Selling and administrative
expenses
Depreciation, amortization and
cost of timber harvested
Distribution expenses
Taxes other than payroll and
income taxes
(Gain) loss on transfer of
business
Interest expense, net
Earnings (Loss) Before Income
Taxes and Equity Earnings
Income tax provision (benefit)
2018
2017
2016
$
— $ 1,559 $ 1,584
— 1,179
1,095
25
—
—
—
(488)
—
463
118
110
80
126
11
—
1
52
18
91
103
124
10
—
—
161
54
Discontinued Operations, Net of
Taxes
$
345 $
34 $
107
At December 31, 2017, all assets and liabilities of North
American Consumer Packaging are classified as
current assets held for sale and current liabilities held
for sale in the accompanying consolidated balance
sheet. The following summarizes the major classes of
assets and liabilities of North American Consumer
Packaging reconciled to total Assets held for sale and
total Liabilities held for sale in the accompanying
consolidated balance sheet:
In millions
Accounts and notes receivable
Inventories
Other current assets
Plants, properties and equipment
Deferred charges and other assets
Total Assets Held for Sale
Accounts payable
Accrued payroll and benefits
Other accrued liabilities
Long-term debt
Other liabilities
$
2017
143
185
3
1,021
25
$ 1,377
$
104
25
17
651
8
Total Liabilities Held for Sale
$
805
Total cash provided by (used for) operations related to
the North American Consumer Packaging business of
$(25) million, $207 million and $268 million for 2018,
2017 and 2016, respectively, is included in Cash
Provided By (Used For) Operations in the consolidated
statement of cash flows. Total cash used for investing
activities related to the North American Consumer
Packaging business of $40 million, $111 million and
$114 million for 2018, 2017 and 2016, respectively, is
54
included in Cash Provided By (Used For) Investing
Activities in the consolidated statement of cash flows.
OTHER DIVESTITURES AND IMPAIRMENTS
2018: During 2018, a determination was made that the
current carrying value of the long-lived assets of the
Brazil Packaging business exceeded their estimated fair
value due to a change in the outlook for the business.
Management engaged a third party to assist with
determining the fair value of the business and the fixed
assets. The fair value of the business was calculated
using a probability-weighted approach based on
discounted future cash flows, market multiples, and
transaction multiples and the fair value of the fixed
assets was determined using a market approach. As a
result, a pre-tax charge of $122 million ($81 million, net
of tax) was recorded related to the impairment of an
intangible asset and fixed assets. This charge is
included in Net (gains) losses on sales and impairments
of businesses in the accompanying consolidated
statement of operations and is included in the results for
the Industrial Packaging segment. In the fourth quarter
of 2018, the Company announced that it was exploring
strategic options for its Brazil Packaging business.
2017: On September 7, 2017, the Company completed
the sale of its foodservice business in China to
Huhtamaki Hong Kong Limited. Proceeds received
totaled approximately RMB 129 million ($18 million
using the September 30, 2017 exchange rate). Under
the terms of the transaction, and after post-closing
received
adjustments,
approximately RMB 49 million in exchange for its
ownership interest in two China foodservice entities and
RMB 80 million for the sale of notes receivable from the
acquired entities.
International
Paper
Subsequent to the announced agreement in June 2017,
a determination was made that the current book value
of the asset group exceeded its estimated fair value of
$7 million, which was the agreed upon selling price. As
a result, a pre-tax charge of $9 million was recorded
during the second quarter of 2017, to write down the
long-lived assets of this business to their estimated fair
value. Amounts related to this business included in the
Company's statement of operations were immaterial for
all periods presented.
2016: On June 30, 2016, the Company completed the
sale of its corrugated packaging business in China and
Southeast Asia to Xiamen Bridge Hexing Equity
Investment Partnership Enterprise. Under the terms of
the transaction and after post-closing adjustments,
International Paper received a total of approximately
RMB 957 million (approximately $144 million at the June
30, 2016 exchange rate), which included the buyer's
assumption of a liability for outstanding loans of
approximately $55 million which are payable up to three
55
years from the closing of the sale. There was no
remaining balance on the outstanding loans payable to
International Paper as of December 31, 2018.
Based on the final sales price, a determination was
made that the current book value of the asset group was
not recoverable. As a result, a pre-tax charge of $46
million was recorded during 2016 in the Company's
Industrial Packaging segment to write down the long-
lived assets of this business to their estimated fair value.
In addition, the Company recorded a pre-tax charge of
$24 million for severance that was contingent upon the
sale of this business. The 2016 net loss totaling $70
million related to the impairment and severance of IP
Asia Packaging is included in Net (gains) losses on sales
and impairments of businesses in the accompanying
consolidated statement of operations.
The amount of pre-tax losses related to the IP Asia
the Company's
included
Packaging business
consolidated statement of operations was $83 million
for year ended December 31, 2016.
in
NOTE 9 SUPPLEMENTARY FINANCIAL
STATEMENT INFORMATION
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 $402
million and $661 million at December 31, 2018 and 2017,
respectively.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable, net, by classification
were:
In millions at December 31
2018
2017
Accounts and notes receivable:
Trade
Other
Total
INVENTORIES
In millions at December 31
Raw materials
Finished pulp, paper and packaging
products
Operating supplies
Other
Inventories
$ 3,249 $ 3,017
272
270
$ 3,521 $ 3,287
2018
2017
$
260 $
274
1,241
1,337
641
99
615
87
$ 2,241 $ 2,313
International Paper’s U.S.
The last-in, first-out inventory method is used to value
most of
inventories.
Approximately 70% of total raw materials and finished
products inventories were valued using this method.
The last-in, first-out inventory reserve was $329 million
and $293 million at December 31, 2018 and 2017,
respectively.
PLANTS, PROPERTIES AND EQUIPMENT
In millions at December 31
2018
2017
Pulp, paper and packaging facilities
$ 32,329 $ 32,523
Other properties and equipment
Gross cost
Less: Accumulated depreciation
1,232
1,291
33,561
33,814
20,494
20,549
Plants, properties and equipment, net
$ 13,067 $ 13,265
Non-cash additions to plants, property and equipment
included within accounts payable were $135 million,
$275 million and $172 million at December 31, 2018,
2017 and 2016, respectively.
Annual straight-line depreciable lives generally are, for
buildings - 20 to 40 years, and for machinery and
equipment - 3 to 20 years. Depreciation expense was
$1.2 billion, $1.2 billion and $1.0 billion for the years
ended December 31, 2018, 2017 and 2016,
respectively. Cost of products sold excludes
depreciation and amortization expense.
INTEREST
Interest payments of $772 million, $782 million and $682
million were made during the years ended December
31, 2018, 2017 and 2016, respectively.
Amounts related to interest were as follows:
In millions
Interest expense
Interest income
Capitalized interest costs
2018
2017
2016
$
734 $
758 $
198
30
186
25
695
175
28
At both December 31, 2018 and December 31, 2017,
we had recorded liabilities of $86 million related to asset
retirement obligations.
NOTE 10 - EQUITY METHOD INVESTMENTS
The Company accounts for the following investments
in affiliated companies under the equity method of
accounting.
GRAPHIC PACKAGING INTERNATIONAL PARTNERS, 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 Graphic
Packaging International Partners, LLC (GPIP), a
subsidiary of Graphic Packaging Holding Company, in
exchange for a 20.5% ownership interest in GPIP. GPIP
the North American
subsequently
transferred
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 $46 million
for the year ended December 31, 2018. The Company
received cash dividends from GPIP of $25 million during
the Company's
2018. At December 31, 2018,
investment in GPIP was $1.1 billion, which was $562
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.
Management engaged a third party to assist with
determining the fair value of the intangible assets and
the fixed assets. The fair value of the intangible assets
were calculated using income and market approaches
and the fair value of the fixed assets was calculated
using a cost approach. The fair values were determined
using inputs classified as Level 2 and Level 3 within the
fair value hierarchy, which is further defined in Note 16.
The Company is party to various agreements with GPI
under which it sells fiber and other products to GPI.
Sales under these agreements were $240 million for
the year ended December 31, 2018.
Summarized financial information for GPIP is presented
in the following tables:
Balance Sheet
In millions
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
In millions
Net sales
Gross profit
Income from continuing operations
Net income
ILIM S.A. (Ilim)
$
$
2018
1,757
5,292
1,148
3,156
2018
6,023
946
336
337
The Company also holds a 50% equity interest in Ilim,
which has subsidiaries whose primary operations are
in Russia. The Company recorded equity earnings
(losses), net of taxes, of $290 million, $183 million, and
$199 million in 2018, 2017, and 2016, respectively, for
Ilim. Equity earnings (losses) includes an after-tax
foreign exchange (loss) gain of $(82) million, $15
million, and $25 million in 2018, 2017 and 2016,
respectively, primarily on the remeasurement of U.S.
dollar-denominated net debt. The Company received
cash dividends from the joint venture of $128 million
and $133 million in 2018 and 2017, respectively. At
56
ASSET RETIREMENT OBLIGATIONS
Income Statement
December 31, 2018 and 2017,
the Company's
investment in Ilim, which is recorded in Investments in
the consolidated balance sheet, was $478 million and
$338 million, respectively, which was $145 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
the Company
Ilim, under which
purchases, markets and sells paper produced by JSC
Ilim Group. Purchases under this agreement were $214
million, $205 million and $170 million for the years
ended December 31, 2018, 2017 and 2016,
respectively.
Summarized financial information for Ilim is presented
in the following tables:
Balance Sheet
In millions
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Noncontrolling interests
Income Statement
$
2018
2017
$
981
1,710
545
1,470
11
689
1,696
1,039
972
6
In millions
Net sales
Gross profit
2018
2017
2016
$
$
2,713
1,549
$
2,150
1,047
1,927
957
Income from
continuing operations
Net income
592
571
379
362
419
391
The audited U.S. GAAP financial statements for Ilim are
included in Exhibit 99.1 to this Form 10-K.
NOTE 11 GOODWILL AND OTHER INTANGIBLES
GOODWILL
The following table presents changes in the goodwill balances as allocated to each business segment for the years ended
December 31, 2018 and 2017:
In millions
Balance as of December 31, 2016
Goodwill
Accumulated impairment losses
Currency translation and other (a)
Additions/reductions
Balance as of December 31, 2017
Goodwill
Accumulated impairment losses
Currency translation and other (a)
Additions/reductions
Balance as of December 31, 2018
Goodwill
Accumulated impairment losses
Total
Industrial
Packaging
Global
Cellulose
Fibers
Printing
Papers
Total
$
3,375
$
19
$
2,143
$
5,537
(296)
3,079
3
4 (b)
3,382
(296)
3,086
(1)
(2) (d)
3,379
(296)
—
19
—
33 (c)
52
—
52
—
—
52
—
(1,877)
266
8
(1)
2,150
(1,877)
273
(34)
—
2,116
(1,877)
(2,173)
3,364
11
36
5,584
(2,173)
3,411
(35)
(2)
5,547
(2,173)
$
3,083
$
52
$
239
$
3,374
(a) Represents the effects of foreign currency translations and reclassifications.
(b) Reflects the acquisition of the Moroccan box plant.
(c) Reflects the acquisition and purchase price adjustments of the Weyerhaeuser pulp business.
(d) Reflects a reduction from tax benefits generated by the deduction of goodwill amortization for tax purposes in the U.S.
57
the Company
The Company performed its annual evaluation of its
reporting units for possible goodwill impairments by
applying the qualitative Step 0 analysis to its reporting
units as of October 1, 2018. For the current year
evaluation,
various
assumptions, events and circumstances that would have
affected the estimated fair value of the reporting units.
The results of this assessment indicated that it is not more
likely than not that the fair values of the Company's
reporting units were less than the carrying values of the
reporting units.
assessed
In addition, the Company considered whether there were
any events or circumstances subsequent to the annual
evaluation that would reduce the fair value of its reporting
units below their carrying amounts and necessitate
another goodwill impairment evaluation. In consideration
of all relevant factors, there were no indicators that would
require goodwill impairment subsequent to October 1,
2018.
OTHER INTANGIBLES
Identifiable intangible assets comprised the following:
In millions at December 31
Customer relationships and lists
Non-compete agreements
Tradenames, patents and trademarks, and
developed technology
Land and water rights
Software
Other
Total
2018
2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Intangible
Assets
Gross
Carrying
Amount
Accumulated
Amortization
Net Intangible
Assets
$
$
542 $
67
174
8
26
30
847 $
247 $
67
90
2
25
23
454 $
295 $
—
84
6
1
7
393 $
610 $
72
172
8
24
38
924 $
247 $
72
72
2
23
26
442 $
363
—
100
6
1
12
482
The Company recognized the following amounts as amortization expense related to intangible assets:
In millions
Amortization expense related to intangible assets
2018
2017
2016
$
59 $
77 $
54
Based on current intangibles subject to amortization, estimated amortization expense for each of the succeeding years
is as follows: 2019 – $48 million, 2020 – $46 million, 2021 – $46 million, 2022 – $44 million, 2023 – $40 million, and
cumulatively thereafter – $163 million.
NOTE 12 INCOME TAXES
The components of International Paper’s earnings from
continuing operations before income taxes and equity
earnings by taxing jurisdiction were as follows:
In millions
Earnings (loss)
U.S.
Non-U.S.
2018
2017
2016
$ 1,450 $
297 $
331
551
411
384
Earnings (loss) from continuing
operations before income taxes
and equity earnings
$ 1,781 $
848 $
795
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
58
income taxes on dividends
foreign subsidiaries; (3) generally eliminating U.S.
federal
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)
the deduction on U.S. manufacturing
eliminating
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 provided guidance
on accounting for the tax effects of the Tax Act. SAB 118
provided 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 had to 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 was incomplete but it
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). For certain of our state
deferred tax assets, we recorded a net $3 million
recorded valuation
provisional decrease
allowance with a corresponding adjustment to deferred
income tax benefit in the same amount for the year
ended December 31, 2017. The Company has
the SAB 118
the conclusion of
determined at
measurement period that the Tax Act had no additional
direct impact on the state and local income tax valuation
allowance. Therefore the accounting for this item is
complete and no change was recorded in the year ended
December 31, 2018.
the
in
Global Intangible Low-Taxed Income (GILTI): The Tax
Act subjects a U.S. shareholder to current tax on GILTI
earned by certain foreign subsidiaries. The FASB Staff
Q&A, Topic 740 No. 5, "Accounting for Global Intangible
Low-Taxed Income," states that an entity can make an
accounting policy election to either recognize deferred
taxes for temporary differences expected to reverse as
GILTI in future years, or provide for the tax expense
related to GILTI in the year the tax is incurred. We have
elected to recognize the tax on GILTI as a period
expense in the period the tax is incurred.
Undistributed Earnings of Subsidiaries: The
Company provides for foreign withholding taxes and any
applicable U.S. state income taxes on earnings intended
to be repatriated from non-U.S. subsidiaries, which we
believe will be limited in the future to each year's current
earnings. No provision for these taxes on approximately
$1.7 billion of undistributed earnings of non-U.S.
subsidiaries as of December 31, 2018 has been made,
as these earnings are considered indefinitely invested.
Determination of the amount of taxes that might be paid
on these undistributed earnings if eventually remitted in
a taxable manner is not practicable.
If management decided to monetize the Company’s
foreign investments, we would recognize the tax cost
related to the excess of the book value over the tax basis
of those investments. This would include foreign
withholding taxes and any applicable U.S. Federal and
state income taxes. Determination of the tax cost that
that would be incurred upon monetization of the
Company’s foreign investments is not practicable;
however, we do not believe it would be material.
was able to determine a reasonable estimate, it was
required to record a provisional estimate in the financial
statements. The Company has completed its analysis
of the one-time impacts of the Tax Act within the one
year measurement period.
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. During the SAB 118 measurement period in the
year ended December 31, 2018, we recorded an
additional net tax benefit of $36 million associated with
the one-time effects of the Tax Act.
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. After the completion of
the federal income tax return during the third quarter and
state tax returns in the fourth quarter, we recognized an
adjustment of $11 million from the remeasurement of
certain temporary differences. The tax benefit of the
measurement-period adjustment on the 2018 effective
tax rate was approximately 0.6%. A total decrease of the
deferred tax liabilities by $1.462 billion has been
recorded to date with a corresponding adjustment of
$1.462 billion to income tax benefit.
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 period ended December 31, 2017.
On the basis of revised E&P computations that were
calculated during the SAB 118 measurement period, as
well as the impacts of guidance received from the IRS
pertaining to the Transition Tax computation, we
recognized an adjustment of $25 million related to the
Transition Tax obligation. The tax benefit of the
measurement-period adjustment on the 2018 effective
tax rate was approximately 1.4%. A total Transition Tax
obligation of $206 million has been recorded.
59
The provision (benefit) for income taxes from continuing
operations (excluding noncontrolling interests) by taxing
jurisdiction was as follows:
In millions
2018
2017
2016
Earnings (loss) from continuing
operations before income taxes
and equity earnings
$ 1,781
$
848
$ 795
In millions
2018
2017
2016
Statutory U.S. income tax rate
21%
35 %
35%
Current tax provision (benefit)
U.S. federal
U.S. state and local
Non-U.S.
Deferred tax provision (benefit)
U.S. federal
U.S. state and local
Non-U.S.
Income tax provision (benefit)
$
227 $
(73) $
37
165
(23)
112
429 $
16 $
12 $ (1,150) $
50
(46)
9
40
16 $ (1,101) $
445 $ (1,085) $
$
$
$
$
(7)
(12)
76
57
134
27
(25)
136
193
The Company’s deferred income tax provision (benefit)
includes a $13 million benefit, a $1.459 billion benefit
and a $18 million provision for 2018, 2017 and 2016,
respectively, for the effect of various changes in non-
U.S. and U.S. federal and state tax rates.
International Paper made income tax payments, net of
refunds, of $388 million, $7 million and $90 million in
2018, 2017 and 2016, respectively.
A reconciliation of income tax expense using the
statutory U.S. income tax rate compared with the actual
income tax provision follows:
Tax expense (benefit) using
statutory U.S. income tax rate
State and local income taxes
Impact of rate differential on
non-U.S. permanent differences
and earnings
Tax expense (benefit) on
manufacturing activities
Non-deductible business
expenses
Sale of non-strategic assets
Tax audits
Subsidiary liquidation
Deemed repatriation, net of
foreign tax credits
U.S. federal tax rate change
Foreign derived intangible
income deduction
US tax on non-U.S. earnings
(GILTI and Subpart F)
Foreign tax credits
General business and other tax
credits
Other, net
374
72
35
(1)
27
—
28
—
(25)
(13)
(25)
19
(15)
(26)
(5)
297
(7)
(36)
23
7
—
—
—
231
(1,451)
—
44
(96)
(86)
(11)
278
8
(26)
(10)
9
12
(14)
(63)
—
—
—
21
(11)
(15)
4
Income tax provision (benefit) $
445
$(1,085)
$ 193
Effective income tax rate
25% (128)%
24%
The tax effects of significant temporary differences,
representing deferred income tax assets and liabilities
at December 31, 2018 and 2017, were as follows:
In millions
Deferred income tax assets:
2018
2017
Postretirement benefit accruals
$
89 $
Pension obligations
Alternative minimum and other tax
credits
Net operating and capital loss
carryforwards
Compensation reserves
Other
Gross deferred income tax assets
Less: valuation allowance (a)
Net deferred income tax asset
Deferred income tax liabilities:
Intangibles
Investments
465
291
594
191
164
102
516
416
665
174
139
1,794
2,012
(441)
(429)
1,353 $
1,583
(152) $
(139)
(255)
—
$
$
Plants, properties and equipment
(1,826)
(2,000)
Forestlands, related installment sales,
and investment in subsidiary
(1,453)
(1,454)
Gross deferred income tax liabilities
$ (3,686) $ (3,593)
Net deferred income tax liability
$ (2,333) $ (2,010)
60
(a) The net change in the total valuation allowance for the years
ended December 31, 2018 and 2017 was an increase of $12
million and an increase of $26 million, respectively.
estimated
interest and penalties associated with
unrecognized tax benefits at December 31, 2018 and
2017, respectively.
Deferred income tax assets and liabilities are recorded
in the accompanying consolidated balance sheet under
the captions Deferred charges and other assets and
Deferred income taxes. There was a decrease in
deferred income tax assets principally relating to the
utilization of U.S. Federal alternative minimum tax
credits as permitted under Tax Reform. Deferred tax
liabilities increased primarily due to the tax deferral of
the book gain recognized on the transfer of the North
American Consumer Packaging business
to a
subsidiary of Graphic Packaging Holding Company. Of
the $1.5 billion of deferred tax liabilities for forestlands,
related installment sales, and investment in subsidiary,
$884 million is attributable to an investment in subsidiary
and relates to a 2006 International Paper installment
sale of forestlands and $538 million is attributable to a
2007 Temple-Inland installment sale of forestlands (see
Note 14).
A reconciliation of the beginning and ending amount of
unrecognized
the years ended
December 31, 2018, 2017 and 2016 is as follows:
tax benefits
for
In millions
2018
2017
2016
Balance at January 1
$
(188) $
(98) $
(150)
(Additions) reductions based on
tax positions related to current
year
(Additions) for tax positions of prior
years
Reductions for tax positions of
prior years
Settlements
Expiration of statutes of
limitations
Currency translation adjustment
(7)
(54)
(37)
(40)
5
2
2
3
4
6
1
(7)
(4)
(3)
33
19
5
2
Balance at December 31
$
(220) $
(188) $
(98)
If the Company were to prevail on the unrecognized tax
benefits recorded, substantially all of the balances at
December 31, 2018, 2017 and 2016 would benefit the
effective tax rate.
The Company accrues interest on unrecognized tax
benefits as a component of interest expense. Penalties,
if incurred, are recognized as a component of income
tax expense. The Company had approximately $21
million and $17 million accrued for the payment of
61
The major jurisdictions where the Company files income
tax returns are the United States, Brazil, France, Poland
and Russia. Generally, tax years 2006 through 2017
remain open and subject to examination by the relevant
tax authorities. The Company
faces
challenges regarding the amount of taxes due. These
challenges include positions taken by the Company
related to the timing, nature, and amount of deductions
and the allocation of income among various tax
jurisdictions. Pending audit settlements and
the
expiration of statute of limitations could reduce the
uncertain tax positions by $30 million during the next
twelve months.
frequently
The Brazilian Federal Revenue Service has challenged
the deductibility of goodwill amortization generated in a
2007 acquisition by International Paper do Brasil Ltda.,
a wholly-owned subsidiary of the Company. The
Company received assessments for the tax years
2007-2015 totaling approximately $150 million in tax,
and $380 million in interest and penalties as of
December 31, 2018 (adjusted for variation in currency
exchange rates). After a previous favorable ruling
challenging the basis for these assessments, we
received an unfavorable decision in October 2018 from
the Brazilian Administrative Council of Tax Appeals. The
Company intends to further appeal the matter in the
Brazilian federal courts in 2019; however, this tax
litigation matter may take many years to resolve. The
Company believes that it has appropriately evaluated
the transaction underlying these assessments, and has
concluded based on Brazilian tax law, that its tax position
would be sustained. The Company intends to vigorously
defend its position against the current assessments and
any similar assessments that may be issued for tax
years subsequent to 2015.
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 during 2018 and
recorded a tax benefit of $68 million during 2017 related
to
tax years
2013-2017.
Investment Tax Credits earned
in
The following details the scheduled expiration dates of
the Company’s net operating loss and income tax credit
carryforwards:
In millions
U.S. federal and
non-U.S. NOLs
State taxing
jurisdiction NOLs (a)
U.S. federal, non-
U.S. and state tax
credit carryforwards
(a)
U.S. federal and
state capital loss
carryforwards (a)
Total
Less: valuation
allowance (a)
Total, net
2019
Through
2028
2029
Through
2038
Indefinite
Total
$
53 $
— $
417 $
470
80
162
2
42
11
—
—
122
118
291
—
2
$
$
297 $
53 $
535 $
885
(192)
(8)
(198)
(398)
105 $
45 $
337 $
487
(a) State amounts are presented net of federal benefit.
NOTE 13 COMMITMENTS AND CONTINGENT
LIABILITIES
OPERATING LEASES
Certain property, machinery and equipment are leased
under cancelable and non-cancelable agreements.
At December 31, 2018,
future minimum
commitments under existing non-cancelable operating
leases were as follows:
total
In millions
2019
2020
2021
2022
2023 Thereafter
Lease
obligations
$
160 $ 125 $ 77 $ 49 $
28 $
118
Rent expense was $196 million, $157 million and $150
million for 2018, 2017 and 2016, respectively.
GUARANTEES
indemnify buyers with
In connection with sales of businesses, property,
equipment, forestlands and other assets, International
Paper commonly makes representations and warranties
relating to such businesses or assets, and may agree
to
tax and
environmental liabilities, breaches of representations
and warranties, and other matters. Where liabilities for
such matters are determined to be probable and subject
to reasonable estimation, accrued
liabilities are
recorded at the time of sale as a cost of the transaction.
respect
to
ENVIRONMENTAL AND LEGAL PROCEEDINGS
Environmental
International Paper has been named as a potentially
responsible party (PRP) in environmental remediation
actions under various federal and state laws, including
62
the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA). Many of
these proceedings involve the cleanup of hazardous
substances at large commercial landfills that received
waste from many different sources. While joint and
several liability is authorized under CERCLA and
equivalent state laws, as a practical matter, liability for
CERCLA cleanups is typically allocated among the
many PRPs. There are other remediation costs typically
associated with the cleanup of hazardous substances
at the Company’s current, closed 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
International Paper has
reasonably estimable.
estimated the probable liability associated with these
matters to be approximately $128 million ($138 million
undiscounted) in the aggregate as of December 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 $49 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 known as Operable Unit 5, Area 1,
and (ii) demanding reimbursement of EPA past costs
totaling $37 million, including $19 million in past costs
previously demanded by the EPA. The Company
responded to the special notice letter. In December
2016, the EPA issued a unilateral administrative
order to the Company and other PRPs to perform the
remedy. The Company responded to the unilateral
administrative order, agreeing to comply with the
order subject to its sufficient cause defenses.
• 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. As noted below, the Company is involved
in allocation/apportionment litigation with regard to the
site. Accordingly, it is premature to predict the outcome
or estimate our maximum reasonably possible loss with
respect to this site. However, we do not believe that any
material loss is probable.
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.
63
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, which was concluded in late 2015. In June
2018, the Court issued its Final Judgment and Order,
which fixed the past cost amount at approximately $50
million (plus interest to be determined) and allocated to
the Company a 15% share of responsibility for those
past costs. The Court did not address responsibility for
future costs in its decision. In July 2018, the Company
and each of the other parties filed notices appealing the
Final Judgment and prior orders incorporated into that
Judgment. As to future remediation costs, we remain
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 numerous 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 subsequent 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 an excavation remedy is able to be implemented in a
manner protective of human health and
the
environment, and investigating potential impacts of
remediation activities to infrastructure in the vicinity.
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.
The Company has determined, however, that even if the
ROD cannot be implemented, a sheet pile "engineered
barrier" can be constructed, which would enhance the
existing remedy and could also be used should the ROD
be determined to be feasible and implementable. We
have increased our recorded liability accordingly to
reflect the estimated cost of constructing this barrier.
Because of ongoing questions
regarding cost
effectiveness, technical feasibility, timing and other
technical data, however, 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 further 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
ten defendants,
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
the
Company, Temple-Inland and Weyerhaeuser Company.
The Ashley Furniture lawsuit alleged 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
asserted Wisconsin state antitrust claims. In January
including
2019, the parties filed a stipulation to dismiss the Ashley
Furniture lawsuit with prejudice, and the case is now
in
closed. The Company made no payment
consideration for the dismissal.
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
the
Company disputes
Tennessee lawsuit and is vigorously defending it. At this
time, however, because the action is in a preliminary
stage, we are unable to predict an outcome or estimate
a range of reasonably possible loss.
the allegations made
in
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 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 presented in its briefing
numerous and strong bases for appeal, and we believe
we will prevail on appeal. Because the appellate
proceedings are ongoing, 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, tax 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
other 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
64
a material effect on
financial
statements. See Note 12 for details regarding a tax
matter.
its consolidated
NOTE 14 VARIABLE INTEREST ENTITIES
In connection with the 2006 sale of approximately 5.6
million acres of
International Paper
received installment notes (the Timber Notes) totaling
approximately $4.8 billion.
forestlands,
The Timber Notes were used as collateral for borrowings
from third party lenders, which effectively monetized the
Timber Notes through the creation of newly formed
special purposes entities
(the Entities). The
monetization structure preserved the tax deferral that
resulted from the 2006 forestlands sales. As of
December 31, 2018, this deferred tax liability was $884
million.
During 2015, International Paper initiated a series of
actions in order to extend the 2006 monetization
structure and maintain the long-term nature of the
deferred tax liability. The Entities, with assets and
liabilities primarily consisting of the Timber Notes and
third-party bank loans (the Extension Loans), were
restructured which resulted in the formation of wholly-
owned, bankruptcy-remote special purpose entities (the
2015 Financing Entities).
The Timber Notes are shown in Financial assets of
the accompanying
special purpose entities on
consolidated balance sheet and mature in August 2021
unless extended for an additional five years. These
notes, which do not require principal payments prior to
their maturity, are supported by approximately $4.8
billion of irrevocable letters of credit.
The Extension Loans are shown in Nonrecourse
financial liabilities of special purpose entities on the
accompanying consolidated balance sheet and mature
in the fourth quarter of 2020. These bank loans, totaling
approximately $4.2 billion, are nonrecourse to the
Company, and are secured by approximately $4.8 billion
of Timber Notes, the irrevocable letters of credit
supporting the Timber Notes and approximately $150
million of International Paper debt obligations. The $150
million of International Paper debt obligations are
eliminated in the consolidation of the 2015 Financing
Entities and are not reflected in the Company’s
consolidated balance sheet. Provisions of
loan
agreements related to approximately $1.1 billion of the
Extension Loans require the bank issuing letters of credit
supporting the Timber Notes pledged as collateral to
maintain a credit rating at or above a specified threshold.
In the event the credit rating of the letter of credit bank
is downgraded below the specified threshold, the letters
of credit must be replaced within 60 days with letters of
credit from a qualifying financial institution.
65
As of December 31, 2018 and 2017, the fair value of the
Timber Notes was $4.7 billion and $4.8 billion,
respectively, and the fair value of the Extension Loans
was $4.2 billion and $4.3 billion for the years ended 2018
and 2017. The Timber Notes and Extension Loans are
classified as Level 2 within the fair value hierarchy, which
is further defined in Note 16.
Activity between the Company and the 2015 Financing
Entities was as follows:
In millions
Revenue (a)
Expense (a)
Cash receipts (b)
Cash payments (c)
2016
2017
2018
$ 95 $ 95 $ 95
128
128
77
95
98
128
128
95
128
(a) The revenue and expense are included in Interest expense,
net in the accompanying consolidated 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.
In connection with the acquisition of Temple-Inland in
February 2012, two special purpose entities became
wholly-owned subsidiaries of International Paper.
The use of the two wholly-owned special purpose
entities discussed below preserved the tax deferral that
resulted from the 2007 Temple-Inland timberlands
sales. As of December 31, 2018, this deferred tax liability
was $538 million, which will be settled with the maturity
of the notes in 2027.
In October 2007, Temple-Inland sold 1.55 million acres
of timberland for $2.4 billion. The total consideration
consisted almost entirely of notes due in 2027 issued
by the buyer of the timberland, which Temple-Inland
contributed to two wholly-owned, bankruptcy-remote
special purpose entities. The notes are shown in
Financial assets of special purpose entities in the
accompanying consolidated balance sheet and are
supported by $2.4 billion of irrevocable letters of credit
issued by three banks, which are required to maintain
minimum credit ratings on their long-term debt. As of
December 31, 2018 and 2017, the fair value of the notes
was $2.2 billion and $2.3 billion, respectively. These
notes are classified as Level 2 within the fair value
hierarchy, which is further defined in Note 16.
In December 2007, Temple-Inland's two wholly-owned
special purpose entities borrowed $2.1 billion which is
shown in Nonrecourse financial liabilities of special
purpose entities. The loans are repayable in 2027 and
are secured by the $2.4 billion of notes and the
irrevocable letters of credit securing the notes, and are
nonrecourse to us. The loan agreements provide that if
a credit rating of any of the banks issuing the letters of
credit is downgraded below the specified threshold, the
letters of credit issued by that bank must be replaced
within 30 days with letters of credit from another
qualifying financial institution. As of December 31, 2018
and 2017, the fair value of this debt was $2.0 billion and
$2.1 billion for the years ended 2018 and 2017,
respectively. This debt is classified as Level 2 within the
fair value hierarchy, which is further defined in Note 16.
A summary of long-term debt follows:
In millions at December 31
2018
2017
8.7% note – due 2038
7.5% note – due 2021
7.3% note – due 2039
6 7/8% notes – due 2023 – 2029
6.65% note – due 2037
$
264 $
406
721
131
4
144
585
264
409
721
131
4
143
585
Activity between the Company and the 2007 financing
entities was as follows:
6.4% to 7.75% debentures due 2025 – 2027
6.0% note – due 2041
In millions
Revenue (a)
Expense (b)
Cash receipts (c)
Cash payments (d)
2016
2017
2018
$ 72 $ 49 $ 37
37
15
27
67
48
57
48
28
39
(a) The revenue is included in Interest expense, net, in the
accompanying consolidated statement of operations and
includes approximately $19 million for the years ended
December 31, 2018, 2017 and 2016, 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 consolidated statement of operations and
includes approximately $7 million for the years ended
December 31, 2018, 2017 and 2016, 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.
(d) The cash payments are interest paid on Nonrecourse financial
liabilities of special purpose entities.
NOTE 15 DEBT AND LINES OF CREDIT
Amounts related to early debt extinguishment during the
years ended December 31, 2018, 2017 and 2016 were
as follows:
In millions
Debt reductions (a)
2018
2017
2016
$
780 $ 993 $ 266
Pre-tax early debt extinguishment
costs (b)
10
83
29
(a) Reductions related to notes with interest rates ranging from
1.57% to 9.38% with original maturities from 2018 to 2032 for
the years ended December 31, 2018, 2017 and 2016.
(b) Amounts are included in Restructuring and other charges in
the accompanying consolidated statements of operations.
In June 2018, the borrowing capacity of the commercial
paper program was increased from $750 million to $1.0
billion. 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 notes or floating rate notes. As
of December 31, 2018, the Company had $465 million
outstanding under this program.
66
5.00% to 5.15% notes – due 2035 – 2046
1,288
1,281
4.8% note – due 2044
4.75% note – due 2022
799
355
796
817
3.00% to 4.40% notes – due 2024 – 2048
4,481
4,775
Floating rate notes – due 2018 – 2023 (a)
Environmental and industrial development
bonds – due 2018 – 2035 (b)
Other (c)
Total (d)
Less: current maturities
Long-term debt
908
566
2
650
585
(4)
10,654
11,157
639
311
$ 10,015 $ 10,846
(a) The weighted average interest rate on these notes was 3.5%
in 2018 and 2.6% in 2017.
(b) The weighted average interest rate on these bonds was 5.5%
(c)
in 2018 and 6.0% in 2017.
Includes $60 million and $70 million of debt issuance costs as
of December 31, 2018 and 2017, respectively.
(d) The fair market value was approximately $10.6 billion at
December 31, 2018 and $12.3 billion at December 31, 2017.
Total maturities of long-term debt over the next five years
are 2019 – $639 million; 2020 – $83 million; 2021 – $441
million; 2022 – $487 million; and 2023 – $348 million.
At December 31, 2018, International Paper’s credit
facilities (the Agreements) totaled $2.1 billion. The
Agreements generally provide for interest rates at a
floating rate index plus a pre-determined margin
dependent upon International Paper’s credit rating. The
include a $1.5 billion contractually
Agreements
committed bank facility that expires in December 2021,
and has a facility fee of 0.15% payable annually. The
liquidity facilities also include up to $600 million of
uncommitted financings based on eligible receivables
balances under a receivables securitization program
that expires in December 2019. At December 31, 2018,
there were no borrowings under either the bank facility
or receivables securitization program.
financial covenants require
The Company’s
the
maintenance of a minimum net worth, as defined in our
debt agreements, of $9 billion and a total debt-to-capital
ratio of less than 60%. Net worth is defined as the sum
of common stock, paid-in capital and retained earnings,
To manage this exchange rate risk, we have historically
utilized a combination of forward contracts, options and
currency swaps. Contracts that qualify are designated
as cash flow hedges of certain forecasted transactions
denominated in foreign currencies. The effective portion
of the changes in fair value of these instruments is
reported in AOCI and reclassified into earnings in the
same financial statement line item and in the same
period or periods during which the related hedged
transactions affect earnings. The ineffective portion,
which is not material for any year presented, is
immediately recognized in earnings.
in value of certain non-qualifying
The change
instruments used
foreign exchange
to manage
exposure of intercompany financing transactions and
certain balance sheet items subject to revaluation is
immediately recognized
in earnings, substantially
offsetting the foreign currency mark-to-market impact of
the related exposure.
COMMODITY RISK MANAGEMENT
Certain raw materials used in our production processes
are subject to price volatility caused by weather, supply
conditions, political and economic variables and other
unpredictable factors. To manage the volatility in
earnings due to price fluctuations, we may utilize swap
contracts or forward purchase contracts.
Derivative instruments are reported in the consolidated
balance sheets at their fair values, unless the derivative
instruments qualify for the normal purchase normal sale
(NPNS) exception under GAAP and such exception has
been elected. If the NPNS exception is elected, the fair
values of such contracts are not recognized on the
balance sheet.
Contracts that qualify are designated as cash flow
hedges of forecasted commodity purchases. The
effective portion of the changes in fair value for these
instruments is reported in AOCI and reclassified into
earnings in the same financial statement line item and
in the same period or periods during which the hedged
transactions affect earnings. The ineffective and non-
qualifying portions, which are not material for any year
presented, are immediately recognized in earnings. The
change in the fair value of certain non-qualifying
instruments used to reduce commodity price volatility is
immediately recognized in earnings.
less treasury stock plus any cumulative goodwill
impairment charges. The calculation also excludes
accumulated other comprehensive income/loss and
Nonrecourse Financial Liabilities of Special Purpose
Entities. The total debt-to-capital ratio is defined as total
debt divided by the sum of total debt plus net worth. As
of December 31, 2018, we were in compliance with our
debt covenants.
NOTE 16 DERIVATIVES AND HEDGING
ACTIVITIES
International Paper periodically uses derivatives and
other financial instruments to hedge exposures to
interest
risks.
rate, commodity and currency
International Paper does not hold or issue financial
instruments for trading purposes. For hedges that meet
the hedge accounting criteria, International Paper, at
inception, formally designates and documents the
instrument as a fair value hedge, a cash flow hedge or
a net investment hedge of a specific underlying
exposure.
INTEREST RATE RISK MANAGEMENT
Our policy is to manage interest cost using a mixture of
fixed-rate and variable-rate debt. To manage this risk in
a cost-efficient manner, we enter into interest rate swaps
whereby we agree to exchange with the counterparty,
at specified intervals, the difference between fixed and
variable interest amounts calculated by reference to a
notional amount.
Interest rate swaps that meet specific accounting criteria
are accounted for as fair value or cash flow hedges. For
fair value hedges, the changes in the fair value of both
the hedging instruments and the underlying debt
obligations are immediately recognized in interest
expense. For cash flow hedges, the effective portion of
the changes in the fair value of the hedging instrument
is reported in Accumulated other comprehensive
income (AOCI) and reclassified into interest expense
over the life of the underlying debt. The ineffective
portion for both cash flow and fair value hedges, which
is not material for any year presented, is immediately
recognized in earnings.
FOREIGN CURRENCY RISK MANAGEMENT
We manufacture and sell our products and finance
operations in a number of countries throughout the world
and, as a result, are exposed to movements in foreign
currency exchange rates. The purpose of our foreign
currency hedging program is to manage the volatility
associated with the changes in exchange rates.
67
The notional amounts of qualifying and non-qualifying
instruments used in hedging transactions were as
follows:
The following table shows gains or losses recognized
in AOCI, net of tax, related to derivative instruments:
December 31,
2018
December 31,
2017
In millions
Derivatives in Cash Flow
Hedging Relationships:
Foreign exchange contracts
(a)
Derivatives in Fair Value
Hedging Relationships:
Interest rate contracts
Derivatives Not Designated as
Hedging Instruments:
Electricity contract
Foreign exchange contracts
407
700
8
19
In millions
Foreign exchange
contracts
329
Interest rate contracts
Total
Gain (Loss)
Recognized in AOCI on Derivatives
(Effective Portion)
2018
2017
2016
$
$
(10) $
—
(10) $
15 $
—
15 $
4
(10)
(6)
—
13
10
During the next 12 months, the amount of the
December 31, 2018 AOCI balance, after tax, that is
expected to be reclassified to earnings is a loss of $4
million.
(a) These contracts had maturities of two years or less as of
December 31, 2018.
The amounts of gains and losses recognized in the consolidated statement of operations on qualifying and non-qualifying
financial instruments used in hedging transactions were as follows:
In millions
2018
2017
2016
Gain (Loss)
Reclassified from
AOCI
into Income
(Effective Portion)
Location of Gain
(Loss)
Reclassified
from AOCI
into Income
(Effective Portion)
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts
Interest rate contracts
Total
$
$
(1)
(1)
(2)
$
$
8
(1)
7
$
$
7
Cost of products sold
Interest expense, net
—
7
Gain (Loss)
Recognized
in Income
Location of Gain
(Loss)
in Consolidated
Statement of
Operations
In millions
2018
2017
2016
Derivatives in Fair Value Hedging Relationships:
Interest rate contracts
Debt
Total
Derivatives Not Designated as Hedging Instruments:
Electricity Contracts
Foreign exchange contracts
Interest rate contracts
Total
$
16
$ —
$ —
Interest expense, net
(16)
—
—
Interest expense, net
$ —
$ —
$ —
$
$
2
1
—
3
$ (10)
$ —
Cost of products sold
—
—
Cost of products sold
1 (a)
5 (b)
Interest expense, net
$
(9)
$
5
(a) Excluding gain of $1 million related to debt reduction recorded to Restructuring and other charges.
(b) Excluding gain of $2 million related to debt reduction recorded to Restructuring and other charges.
Fair Value Measurements
International Paper’s financial assets and liabilities that
are recorded at fair value consist of derivative contracts,
including interest rate swaps, foreign currency forward
contracts, options and other financial instruments that
are used to hedge exposures to interest rate, commodity
and currency risks. For these financial instruments, fair
value is determined at each balance sheet date using
an income approach.
68
for
The guidance
fair value measurements and
disclosures sets out a fair value hierarchy that groups
fair value measurement inputs into the following three
classifications:
Level 1: Quoted market prices in active markets for
identical assets or liabilities.
Level 2: Observable market-based inputs other than
quoted prices
that are
observable for the asset or liability, either directly or
indirectly.
included within Level 1
interest rate and present valued using the appropriate
derived interest rate curve.
Foreign Exchange Contracts
Foreign currency forward and option contracts are
valued using standard valuation models. Significant
inputs used in these standard valuation models are
foreign currency forward and interest rate curves and
a volatility measurement. The fair value of each contract
is present valued using the applicable interest rate. All
significant inputs are readily available in public markets,
or can be derived from observable market transactions.
Level 3: Unobservable inputs for the asset or liability
reflecting the reporting entity’s own assumptions or
external inputs from inactive markets.
Electricity Contract
Transfers between levels are recognized at the end of
the reporting period. All of International Paper’s
derivative fair value measurements use Level 2 inputs.
Below is a description of the valuation calculation and
the inputs used for each class of contract:
Interest Rate Contracts
Interest rate contracts are valued using swap curves
obtained from an independent market data provider. The
market value of each contract is the sum of the fair value
of all future interest payments between the contract
counterparties, discounted to present value. The fair
value of the future interest payments is determined by
comparing the contract rate to the derived forward
The Company is party to an electricity contract used to
manage market fluctuations in energy pricing. The
Company's electricity contract is valued using the Mid-
C index forward curve obtained from the Intercontinental
Exchange. The market value of the contract is the sum
of the fair value of all future purchase payments between
the contract counterparties, discounted to present
value. The fair value of the future purchase payments
is determined by comparing the contract price to the
forward price and present valued using International
Paper's cost of capital.
Since the volume and level of activity of the markets that
each of the above contracts are traded in has been
normal, the fair value calculations have not been
adjusted for inactive markets or disorderly transactions.
The following table provides a summary of the impact of our derivative instruments in the consolidated balance sheet:
Fair Value Measurements
Level 2 – Significant Other Observable Inputs
In millions
Derivatives designated as hedging instruments
Foreign exchange contracts – cash flow
Interest rate contracts – fair value
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Electricity contract
Foreign exchange contracts
Total derivatives not designated as hedging
instruments
Total derivatives
Assets
Liabilities
December 31,
2018
December 31,
2017
December 31,
2018
December 31,
2017
$
$
$
3
16
$
11
—
$
10
—
1
—
19 (a)
11 (b)
10 (c)
1 (c)
—
—
—
19
$
—
—
—
11
4
1
5 (c)
$
15
$
8
—
8 (d)
9
(a)
(b)
(c)
(d)
Includes $2 million recorded in Other current assets and $17 million recorded in Deferred charges and other assets in the accompanying
consolidated balance sheet.
Included in Other current assets in the accompanying consolidated balance sheet.
Included in Other accrued liabilities in the accompanying consolidated balance sheet.
Includes $5 million recorded in Other accrued liabilities and $3 million recorded in Other liabilities in the accompanying consolidated balance
sheet.
69
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 consolidated 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.
Credit-Risk-Related Contingent Features
International Paper evaluates credit risk by monitoring
its exposure with each counterparty to ensure that
exposure stays within acceptable policy limits. Credit
risk is also mitigated by contractual provisions with the
majority of our banks. Certain of the contracts include a
credit support annex that requires the posting of
collateral by the counterparty or International Paper
based on each party’s rating and level of exposure.
Based on the Company’s current credit rating, the
collateral threshold is generally $15 million.
If the lower of the Company’s credit rating by Moody’s
or S&P were to drop below investment grade, the
Company would be required to post collateral for all of
its derivatives in a net liability position, although no
derivatives would terminate. As of December 31, 2018
and 2017, there were no derivative instruments
containing credit-risk-related contingent features in a
net liability position. The Company was not required to
post any collateral as of December 31, 2018 or 2017.
NOTE 17 CAPITAL STOCK
The authorized capital stock at both December 31,
2018 and 2017, consisted of 990,850,000 shares of
common stock, $1 par value; 400,000 shares of
cumulative $4 preferred stock, without par value (stated
value $100 per share); and 8,750,000 shares of serial
preferred stock, $1 par value. The serial preferred stock
is issuable in one or more series by the Board of
Directors without further shareholder action.
The following is a rollforward of shares of common stock
for the three years ended December 31, 2018, 2017
and 2016:
In thousands
Balance at January 1, 2016
Issuance of stock for various plans, net
Repurchase of stock
Balance at December 31, 2016
Issuance of stock for various plans, net
Repurchase of stock
Balance at December 31, 2017
Issuance of stock for various plans,
net
Repurchase of stock
Balance at December 31, 2018
NOTE 18 RETIREMENT PLANS
Common Stock
Issued
448,916
—
—
448,916
—
—
448,916
Treasury
36,776
(2,745)
3,640
37,671
(2,577)
881
35,975
—
(1,721)
— 14,056
48,310
448,916
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 to participate in the Pension Plan, but
receive a company contribution to their individual
savings plan accounts (see Other U.S. Plans); 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).
70
The Company also has three unfunded nonqualified
defined benefit pension plans: a Pension Restoration
Plan available to employees hired prior to July 1, 2004
that provides retirement benefits based on eligible
compensation in excess of limits set by the Internal
Revenue Service, and two supplemental retirement
plans for senior managers (SERP), which is an
alternative retirement plan for salaried employees who
are senior vice presidents and above or who are
designated by the chief executive officer as participants.
These nonqualified plans are only funded to the extent
of benefits paid, which totaled $29 million, $40 million
and $21 million in 2018, 2017 and 2016, respectively,
and which are expected to be $27 million in 2019.
service
credited
including
Notwithstanding the foregoing, the Company has frozen
participation,
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 does not affect benefits accrued
through December 31, 2018. For service after this date,
employees affected by
receive
Retirement Savings Account contributions as described
later in this Note 18.
freeze will
the
Many non-U.S. employees are covered by various
retirement benefit arrangements, some of which are
considered to be defined benefit pension plans for
accounting purposes.
OBLIGATIONS AND FUNDED STATUS
The following table shows the changes in the benefit
obligation and plan assets for 2018 and 2017, and the
plans’ funded status.
2018
2017
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
$13,264 $ 247 $13,683 $ 219
153
467
5
8
160
536
(1,653)
(1,089)
(2)
(1,295)
(17)
913
—
—
2
—
—
—
—
33
3
(677)
(9)
(769)
4
9
(4)
2
5
—
—
(8)
—
(17)
—
20
$10,467 $ 215 $13,264 $ 247
$11,368 $ 176 $10,312 $ 153
(332)
29
(677)
(1,653)
—
—
(2)
10
(9)
(2)
—
(12)
1,830
1,290
(769)
(1,295)
—
—
10
10
(8)
(4)
3
12
$ 8,735 $ 161 $11,368 $ 176
$ (1,732) $
(54) $ (1,896) $
(71)
In millions
Change in projected benefit
obligation:
Benefit obligation,
January 1
Service cost
Interest cost
Settlements
Actuarial loss (gain)
Acquisitions
Divestitures
Plan amendments
Benefits paid
Effect of foreign currency
exchange rate movements
Benefit obligation,
December 31
Change in plan assets:
Fair value of plan assets,
January 1
Actual return on plan
assets
Company contributions
Benefits paid
Settlements
Other
Effect of foreign currency
exchange rate movements
Fair value of plan
assets, December 31
Funded status,
December 31
Amounts recognized in the
consolidated balance sheet:
Non-current asset
$
— $
5 $
— $
Current liability
(27)
(2)
(30)
Non-current liability
(1,705)
(57)
(1,866)
$ (1,732) $
(54) $ (1,896) $
5
(3)
(73)
(71)
Amounts recognized in
accumulated other
comprehensive income
under ASC 715 (pre-tax):
Prior service cost (credit)
$
74 $
(1) $
88 $
(1)
Net actuarial loss
3,140
57
3,893
$ 3,214 $
56 $ 3,981 $
67
66
71
The largest contributor to the actuarial gain affecting the
benefit obligation was the increase in the discount rate
from 3.60% at December 31, 2017 to 4.30% at
December 31, 2018 which improved the funded position.
Mortality rates, retirement rates for hourly employees,
termination rates, disability incidence and the salary
increase assumption were updated to reflect an
experience study completed in 2018 which also
improved the funded position.
The components of the $(767) million and $(10) million
related to U.S. plans and non-U.S. plans, respectively,
in the amounts recognized in OCI during 2018 consisted
of:
In millions
Current year actuarial (gain) loss
Amortization of actuarial loss
Current year prior service cost
Amortization of prior service cost
Settlements
Effect of foreign currency exchange
rate movements
U.S.
Plans
$
8 $
(337)
2
(16)
(424)
—
$
(767) $
Non-
U.S.
Plans
(4)
(2)
—
—
—
(4)
(10)
The portion of the change in the funded status that was
recognized in either net periodic benefit cost or OCI for
the U.S. plans was $(134) million, $(184) million and
$626 million in 2018, 2017 and 2016, respectively. The
portion of the change in funded status for the non-U.S.
plans was $(6) million, $10 million, and $23 million in
2018, 2017 and 2016, respectively.
The accumulated benefit obligation at December 31,
2018 and 2017 was $10.4 billion and $13.2 billion,
respectively, for our U.S. defined benefit plans and $200
million and $230 million, respectively, at December 31,
2018 and 2017 for our non-U.S. defined benefit plans.
The following table summarizes information for pension
plans with an accumulated benefit obligation in excess
of plan assets at December 31, 2018 and 2017:
between the actual and expected return on plan assets
and other assumption changes. These net gains and
losses are recognized prospectively over a period that
approximates the average remaining service period of
active employees expected to receive benefits under
the plans to the extent that they are not offset by gains
in subsequent years.
NET PERIODIC PENSION EXPENSE
Service cost is the actuarial present value of benefits
attributed by the plans’ benefit formula to services
rendered by employees during the year. Interest cost
represents the increase in the projected benefit
obligation, which is a discounted amount, due to the
passage of time. The expected return on plan assets
reflects the computed amount of current-year earnings
from the investment of plan assets using an estimated
long-term rate of return.
Net periodic pension expense
for qualified and
nonqualified U.S. and non-U.S. defined benefit plans
comprised the following:
2018
2017
2016
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
In millions
Service cost
$ 153 $
5 $ 160 $
4 $ 158 $
Interest cost
467
8
536
9
580
4
9
Expected return
on plan assets
Actuarial loss /
(gain)
Amortization of
prior service cost
Curtailment
loss / (gain) (a)
Settlement loss
Special
termination
benefits (a)
Net periodic
pension
expense
(765)
(11)
(774)
(11)
(815)
(10)
337
2
339
2
400
16
—
424
—
—
28
23
— 383
—
—
1
41
—
445
1
—
—
—
—
—
22
—
—
—
$ 632 $
4 $ 717 $
5 $ 809 $
4
2018
2017
statement of operations.
(a) Recorded in Discontinued operations in the consolidated
In millions
Projected benefit
obligation
Accumulated benefit
obligation
Fair value of plan assets
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
$ 10,467 $ 187 $ 13,264 $
215
10,440
8,735
175
128
13,161
11,368
200
139
ASC 715, “Compensation – Retirement Benefits”
provides for delayed recognition of actuarial gains and
losses, including amounts arising from changes in the
estimated projected plan benefit obligation due to
changes in the assumed discount rate, differences
The components of net periodic pension expense other
than the Service cost component are included in Non-
operating pension expense
the Consolidated
Statement of Operations.
in
The decrease in 2018 pension expense primarily
reflects lower interest cost on a lower 2018 projected
benefit obligation along with the current year absence
of a curtailment loss and special termination benefits
associated with North American Consumer Packaging
transaction, partially offset by a higher settlement loss
in the current year associated with the October 2018
annuity purchase transaction.
72
On September 25, 2018, the Company entered into an
agreement with The Prudential Insurance Company of
America to purchase a group annuity contract and
transfer approximately $1.6 billion of International
Paper's U.S. qualified pension plan projected benefit
obligations, subject to customary closing conditions.
The transaction closed on October 2, 2018 and was
funded with pension plan assets. Under the transaction,
at the end of 2018, Prudential assumed responsibility
for pension benefits and annuity administration for
approximately 23,000 retirees or their beneficiaries
receiving less than $1,000 in monthly benefit payments
from the plan. Settlement accounting rules required a
remeasurement of the qualified plan as of October 2,
2018 and the Company recognized a non-cash pension
settlement charge of $424 million before tax in the fourth
quarter of 2018.
On September 26, 2017, the Company entered into an
agreement with The Prudential Insurance Company of
America to purchase a group annuity contract and
transfer approximately $1.3 billion of International
Paper's U.S. qualified pension plan projected benefit
obligations, subject to customary closing conditions.
The transaction closed on October 3, 2017 and was
funded with pension plan assets. Under the transaction,
at the end of 2017, Prudential assumed responsibility
for pension benefits and annuity administration for
approximately 45,000 retirees or their beneficiaries
receiving less than $450 in monthly benefit payments
from the plan. Settlement accounting rules required a
remeasurement of the qualified plan as of October 3,
2017 and the Company recognized a non-cash pension
settlement charge of $376 million before tax in the fourth
quarter of 2017. In addition, large payments from the
required a
non-qualified pension plan also
remeasurement as of October 2, 2017 and a non-cash
settlement charge of $7 million was also recognized in
the fourth quarter of 2017.
in
the
first quarter of 2016
In
International Paper
announced a voluntary, limited-time opportunity for
the
former employees who are participants
Retirement Plan of International Paper Company (the
Pension Plan) to request early payment of their entire
Pension Plan benefit in the form of a single lump sum
payment. The amount of total payments under this
program was approximately $1.2 billion, and were made
from Plan trust assets on June 30, 2016. Based on the
level of payments made, settlement accounting rules
applied and resulted in a plan remeasurement as of the
June 30, 2016 payment date. As a result of settlement
accounting, the Company recognized a pro-rata portion
of
loss, after
remeasurement, resulting in a $439 million non-cash
charge to the Company's earnings in the second quarter
of 2016. Additional payments of $8 million and $9 million
were made during the third and fourth quarters,
respectively, due to mandatory cash payouts and a small
the Pension Plan was
lump sum payout, and
subsequently remeasured at September 30, 2016 and
December 31, 2016. As a result of settlement
accounting,
recognized non-cash
settlement charges of $3 million in both the third and
fourth quarters of 2016.
the unamortized net actuarial
the Company
ASSUMPTIONS
accounting
International Paper evaluates its actuarial assumptions
annually as of December 31 (the measurement date)
and considers changes in these long-term factors based
upon market conditions and the requirements for
pensions. These
employers’
assumptions are used to calculate benefit obligations
as of December 31 of the current year and pension
expense to be recorded in the following year (i.e., the
discount rate used to determine the benefit obligation
as of December 31, 2018 is also the discount rate used
to determine net pension expense for the 2019 year).
for
Major actuarial assumptions used in determining the benefit obligations and net periodic pension cost for our defined
benefit plans are presented in the following table:
Actuarial assumptions used to determine benefit obligations as of December 31:
Discount rate
Rate of compensation increase
Actuarial assumptions used to determine net periodic pension cost for years ended
December 31:
Discount rate (a)
Expected long-term rate of return on plan assets
Rate of compensation increase
2018
2017
2016
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
4.30% 3.97% 3.60% 3.59% 4.10% 3.88%
2.25% 4.05% 3.75% 4.06% 3.75% 4.20%
3.80% 3.59% 4.03% 3.88% 4.05% 4.72%
7.50% 6.52% 7.50% 6.73% 7.75% 6.55%
3.38% 4.06% 3.75% 4.20% 3.75% 4.03%
(a) Represents the weighted average rate for the U.S. qualified plans in 2018, 2017 and 2016 due to the remeasurements.
73
The expected long-term rate of return on plan assets is
based on projected rates of return for current and
planned asset classes in the plan’s investment portfolio.
Projected rates of return are developed through an
asset/liability study in which projected returns for each
of the plan’s asset classes are determined after
analyzing historical experience and future expectations
of returns and volatility of the various asset classes.
Based on the target asset allocation for each asset class,
the overall expected rate of return for the portfolio is
developed considering the effects of active portfolio
management and expenses paid from plan assets. The
discount rate assumption was determined from a
universe of high quality corporate bonds. A settlement
portfolio is selected and matched to the present value
of the plan’s projected benefit payments. To calculate
pension expense for 2019, the Company will use an
expected long-term rate of return on plan assets of
7.25% for the Retirement Plan of International Paper, a
discount rate of 4.30% and an assumed rate of
compensation
increase of 2.25%. The Company
estimates that it will record net pension expense of
approximately $103 million for its U.S. defined benefit
plans in 2019, compared to expense of $632 million in
2018. The 2018 expense includes $424 million of
settlement accounting charges. Excluding
these
settlement charges, the estimated decrease in net
pension expense in 2019 is primarily due to lower
amortization of actuarial losses and lower service cost
partially offset by lower asset returns due to the annuity
purchase and a decrease in the expected long-term
return on asset assumption from 7.50% in 2018 to 7.25%
in 2019.
The Pension Plan maintains a strategic asset allocation
policy that designates target allocations by asset class.
Investments are diversified across classes and within
each class to minimize the risk of large losses.
Derivatives, including swaps, forward and futures
contracts, may be used as asset class substitutes or for
hedging or other risk management purposes. Periodic
reviews are made of investment policy objectives and
investment manager performance. For non-U.S. plans,
assets consist principally of common stock and fixed
income securities.
International Paper’s U.S. pension allocations by type
of fund at December 31, 2018 and 2017 and target
allocations were as follows:
Asset Class
2018
2017
Equity accounts
Fixed income accounts
Real estate accounts
Other
Total
32%
51%
11%
6%
100%
49%
36%
10%
5%
100%
Target
Allocations
32% - 43%
44% - 56%
5% - 11%
3% - 8%
The fair values of International Paper’s pension plan
assets at December 31, 2018 and 2017 by asset class
are shown below. Hedge funds disclosed in the following
table are allocated equally between equity and fixed
income accounts for target allocation purposes.
Fair Value Measurement at December 31, 2018
Quoted
Prices
in
Active
Markets
For
Identical
Assets
(Level 1)
Total
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
For non-U.S. pension plans, assumptions reflect
economic assumptions applicable to each country.
Asset Class
In millions
The following illustrates the effect on pension expense
for 2019 of a 25 basis point decrease in the above
assumptions:
In millions
Expense/(Income):
2019
Discount rate
Expected long-term rate of return on plan assets
$
27
22
PLAN ASSETS
International Paper’s Board of Directors has appointed
a Fiduciary Review Committee that is responsible for
fiduciary oversight of the U.S. Pension Plan, approving
investment policy and reviewing the management and
control of plan assets. Pension Plan assets are invested
to maximize returns within prudent levels of risk.
— $
9
1,434
2,262
—
(736)
—
—
—
—
—
—
—
13
98
—
Equities – domestic
$
685 $
685 $
Equities – international
Corporate bonds
Government securities
Mortgage backed securities
Other fixed income
Derivatives
Cash and cash equivalents
Other investments:
Equities - domestic
Equities - international
Corporate bonds
Other fixed income
Hedge funds
Private equity
Real estate funds
1,141
—
—
—
—
—
294
1,150
1,434
2,262
—
(723)
98
294
515
433
59
180
886
518
944
Total Investments
$ 8,735 $
2,120 $
2,969 $
111
74
Fair Value Measurement at December 31, 2017
Quoted
Prices in
Active
Markets
For
Identical
Assets
(Level 1)
Total
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Asset Class
In millions
Equities – domestic
$ 1,291 $
1,291 $
— $
Equities – international
Corporate bonds
Government securities
Mortgage backed securities
Other fixed income
Derivatives
Cash and cash equivalents
Other investments:
Equities - domestic
Equities - international
Corporate bonds
Other fixed income
Hedge funds
Private equity
Real estate funds
Total Investments
2,119
—
—
—
—
—
397
13
1,177
2,778
—
(814)
(8)
—
2,132
1,177
2,778
1
(802)
8
397
708
866
66
232
927
481
1,106
—
—
—
—
1
12
16
—
$11,368 $
3,807 $
3,146 $
29
In accordance with accounting standards, the following
investments are measured at NAV and are not classified
in the fair value hierarchy. Some of the investments have
redemption
restrictions, and notice
requirements which are further explained below.
limitations,
Other Investments at December 31, 2018
Investment
Fair Value
Unfunded
Commitments
Redemption
Frequency
Remediation
Notice Period
In millions
Equities –
domestic
Equities –
international
Corporate
bonds
Other fixed
income
Hedge funds
Private equity
Real estate
funds
$
515 $
— Daily to monthly
1-5 days
433
59
180
886
518
944
— Daily to monthly
1-5 days
— Daily to monthly
1-5 days
— Daily to monthly
1-5 days
— Daily to annually
1 - 100 days
(a)
None
Quarterly
45 - 60 days
310
109
419
Total
$
3,535 $
(a) A private equity fund investment ("partnership interest") is
contractually locked up for the life of the private equity fund by
the partnership agreement. Limited partners do not have the
option to redeem partnership interests.
75
Other Investments at December 31, 2017
Investment
Fair Value
Unfunded
Commitments
Redemption
Frequency
Remediation
Notice Period
In millions
Equities -
domestic
Equities -
international
Corporate
bonds
Other fixed
income
Hedge funds
Private equity
Real estate
funds
$
708 $
— Daily to monthly
1-5 days
866
66
232
927
481
1,106
— Daily to monthly
1-5 days
— Daily to monthly
1-5 days
— Daily to monthly
1-5 days
— Daily to annually
1 - 100 days
(a)
None
Quarterly
45 - 60 days
262
121
383
Total
$
4,386 $
(a) A private equity fund investment ("partnership interest") is
contractually locked up for the life of the private equity fund by
the partnership agreement. Limited partners do not have the
option to redeem partnership interests.
Equity securities consist primarily of publicly traded U.S.
companies and international companies. Publicly traded
equities are valued at the closing prices reported in the
active market in which the individual securities are
traded.
Fixed income consists of government securities,
mortgage-backed securities, corporate bonds, common
collective funds and other fixed income investments.
Government securities are valued by third-party pricing
sources. Mortgage-backed security holdings consist
primarily of agency-rated holdings. The fair value
estimates for mortgage securities are calculated by
third-party pricing sources chosen by the custodian’s
price matrix. Corporate bonds are valued using either
the yields currently available on comparable securities
of issuers with similar credit ratings or using a discounted
cash flows approach that utilizes observable inputs,
such as current yields of similar instruments, but
includes adjustments for certain risks that may not be
observable, such as credit and liquidity risks. Common
collective funds are valued at the net asset value per
share multiplied by the number of shares held as of the
measurement date. Other fixed income investments of
$(723) million and $(802) million at December 31, 2018
and 2017, respectively, primarily include reverse
repurchase agreement obligations in which we have
sold a security and have an agreement to repurchase
the same or substantially the same security at a later
date for a price specified in the agreement.
futures,
investments such as
Derivative
forward
contracts, options and swaps are used to help manage
risks. Derivatives are generally employed as an asset
class substitutes (such as when employed in a portable
alpha
asset/liability
mismatches, or bona fide hedging or other appropriate
risk management purposes. Derivative instruments are
generally valued by the investment managers or in
certain instances by third-party pricing sources.
for managing
strategy),
(commingled, multi-manager
Hedge funds are investment structures for managing
private, loosely-regulated investment pools that can
pursue a diverse array of investment strategies with a
wide range of different securities and derivative
instruments. These investments are made through
funds-of-funds
fund
structures) and through direct investments in individual
hedge funds. Hedge funds are primarily valued by each
fund’s
the
valuation of the underlying securities and instruments
and primarily by applying a market or income valuation
methodology as appropriate depending on the specific
type of security or instrument held. Funds-of-funds are
valued based upon the net asset values of the underlying
investments in hedge funds.
third-party administrator based upon
Private equity consists of interests in partnerships that
invest in U.S. and non-U.S. debt and equity securities.
Partnership interests are valued using the most recent
general partner statement of fair value, updated for any
subsequent partnership interest cash flows.
Real estate funds include commercial properties, land
and timberland, and generally includes, but is not limited
to, retail, office,
industrial, multifamily and hotel
properties. Real estate fund values are primarily
reported by the fund manager and are based on
valuation of the underlying investments which include
inputs such as cost, discounted cash flows, independent
appraisals and market based comparable data.
The following is a reconciliation of the assets that are classified using significant unobservable inputs (Level 3) at
December 31, 2018.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
In millions
Beginning balance at December 31, 2016
Actual return on plan assets:
Relating to assets still held at the reporting date
Relating to assets sold during the period
Purchases, sales and settlements
Transfers in and/or out of Level 3
Ending balance at December 31, 2017
Actual return on plan assets:
Relating to assets still held at the reporting date
Relating to assets sold during the period
Purchases, sales and settlements
Transfers in and/or out of Level 3
Ending balance at December 31, 2018
FUNDING AND CASH FLOWS
The Company’s funding policy for the Pension Plan 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 plans, tax deductibility, cash
flow generated by the Company, and other factors. The
Company continually reassesses the amount and
timing of any discretionary contributions. Contributions
to the qualified plan totaling $1.25 billion and $750
million were made by the Company in 2017 and 2016,
respectively. No voluntary contributions were made in
2018. Generally, International Paper’s non-U.S. pension
plans are funded using the projected benefit as a target,
except in certain countries where funding of benefit
plans is not required.
Mortgage
backed
securities
Other
fixed
income Derivatives
Total
$
1 $
11 $
(71) $
(59)
—
—
—
—
1
—
—
—
94
(23)
16
—
$
1 $
12 $
16 $
—
—
(1)
—
1
—
—
—
75
(19)
26
—
95
(23)
16
—
29
76
(19)
25
—
$
— $
13 $
98 $
111
At December 31, 2018, projected future pension benefit
payments, excluding any termination benefits, were as
follows:
In millions
2019
2020
2021
2022
2023
2024-2028
OTHER U.S. PLANS
$
562
571
585
597
611
3,191
International Paper sponsors the International Paper
Company Salaried Savings Plan and the International
Paper Company Hourly Savings Plan, both of which are
tax-qualified defined contribution 401(k) savings plans.
76
The components of postretirement benefit expense in
2018, 2017 and 2016 were as follows:
In millions
2018
2017
2016
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
Service cost
$
1 $ — $
1 $ — $
1 $ —
Interest cost
Actuarial loss
Amortization of
prior service
credits
Net
postretirement
expense
8
9
2
2
11
8
2
3
11
5
3
2
(2)
(3)
(3)
(4)
(4)
(4)
$
16 $
1 $
17 $
1 $
13 $
1
International Paper evaluates its actuarial assumptions
annually as of December 31 (the measurement date)
and considers changes in these long-term factors
based upon market conditions and the requirements of
employers’ accounting for postretirement benefits other
than pensions. The discount rate assumption was
determined based on a hypothetical settlement portfolio
selected from a universe of high quality corporate
bonds.
The discount rates used to determine net U.S. and non-
U.S. postretirement benefit cost for the years ended
December 31, 2018, 2017 and 2016 were as follows:
2018
2017
2016
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
Discount rate
3.50% 9.38% 4.00% 10.53% 4.20% 12.23%
The weighted average assumptions used to determine
the benefit obligation at December 31, 2018 and 2017
were as follows:
2018
2017
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
Discount rate
4.20% 9.10% 3.50% 9.38%
Health care cost trend rate
assumed for next year
Rate that the cost trend rate
gradually declines to
Year that the rate reaches
the rate it is assumed to
remain
7.00% 10.04% 6.50% 10.27%
5.00% 4.93% 5.00% 5.15%
2026
2030
2022
2028
Substantially all U.S. salaried and certain hourly
employees are eligible to participate and may make
elective deferrals to such plans to save for retirement.
International Paper makes matching contributions to
participant accounts on a specified percentage of
employee deferrals as determined by the provisions of
each plan. For eligible employees hired after June 30,
2004, the Company makes Retirement Savings Account
contributions equal to a percentage of an eligible
employee’s pay. Beginning in 2019, as a result of the
freeze for salaried employees under the Pension Plan,
all salaried employees will be eligible for the contribution
to the Retirement Savings Account.
The Company also sponsors the International Paper
Company Deferred Compensation Savings Plan, which
is an unfunded nonqualified defined contribution plan.
This plan permits eligible employees to continue to make
deferrals and receive company matching contributions
(and Retirement Savings Account contributions) when
their contributions to the International Paper Salaried
Savings Plan are stopped due to limitations under U.S.
tax law. Participant deferrals and company contributions
are not invested in a separate trust, but are paid directly
from International Paper’s general assets at the time
benefits become due and payable.
contributions
totaled
Company
approximately $125 million, $117 million and $106
million for the plan years ending in 2018, 2017 and 2016,
respectively.
the plans
to
NOTE 19 POSTRETIREMENT BENEFITS
U.S. POSTRETIREMENT BENEFITS
International Paper provides certain retiree health care
and life insurance benefits covering certain U.S.
salaried and hourly employees. These employees are
generally eligible for benefits upon retirement and
completion of a specified number of years of creditable
service. International Paper does not fund these
benefits prior to payment and has the right to modify or
terminate certain of these plans in the future.
In addition to the U.S. plan, certain Brazilian and
Moroccan employees are eligible for retiree health care
and life insurance benefits.
77
The plans are only funded in an amount equal to
benefits paid. The following table presents the changes
in benefit obligation and plan assets for 2018 and 2017:
The components of the ($41) million and $4 million
change in the amounts recognized in OCI during 2018
for U.S. and non-U.S. plans, respectively, consisted of:
In millions
U.S.
Plans
Non-
U.S.
Plans
Current year actuarial (gain) loss
$ (34) $
Amortization of actuarial (loss) gain
Current year prior service cost
Amortization of prior service credit
Currency impact
(9)
—
2
—
$ (41) $
2
(2)
—
3
1
4
The portion of the change in the funded status that was
recognized in either net periodic benefit cost or OCI for
the U.S. plans was $(25) million, $25 million and $42
million in 2018, 2017 and 2016, respectively. The
portion of the change in funded status for the non-U.S.
plans was $5 million, $3 million, and $(25) million in
2018, 2017 and 2016, respectively.
At December 31, 2018, estimated
future
postretirement benefit payments, net of participant
contributions and estimated future Medicare Part D
subsidy receipts, were as follows:
total
In millions
Benefit
Payments
Subsidy
Receipts
Benefit
Payments
2019
2020
2021
2022
2023
2024 – 2028
U.S.
Plans
U.S.
Plans
$
24 $
1 $
Non-
U.S.
Plans
23
21
20
19
77
1
1
1
1
5
1
1
1
1
1
7
NOTE 20 INCENTIVE PLANS
International Paper currently has an
Incentive
Compensation Plan (ICP) which, upon the approval by
the Company’s shareholders in May 2009, replaced the
Company’s Long-Term Incentive Compensation Plan
(LTICP). The ICP authorizes 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,
In millions
2018
2017
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
Change in projected benefit
obligation:
Benefit obligation, January 1
$ 270 $
25 $ 280 $
Service cost
Interest cost
Participants’ contributions
Actuarial (gain) loss
Plan amendments
Benefits paid
Less: Federal subsidy
Currency Impact
Benefit obligation,
December 31
Change in plan assets:
Fair value of plan assets,
January 1
Company contributions
Participants’ contributions
Benefits paid
Fair value of plan assets,
December 31
1
8
5
(34)
—
(38)
1
—
—
2
—
2
—
(1)
—
(4)
1
11
5
14
—
(42)
1
—
23
—
2
—
2
—
(2)
—
—
$ 213 $
24 $ 270 $
25
$ — $ — $ — $ —
33
5
1
—
37
5
(38)
(1)
(42)
2
—
(2)
$ — $ — $ — $ —
Funded status, December 31
$ (213) $ (24) $ (270) $ (25)
Amounts recognized in the
consolidated balance sheet
under ASC 715:
Current liability
$ (23) $
(1) $ (28) $
(1)
Non-current liability
(190)
(23)
(242)
(24)
$ (213) $ (24) $ (270) $ (25)
Amounts recognized in
accumulated other
comprehensive income under
ASC 715 (pre-tax):
Net actuarial loss (gain)
Prior service credit
$
$
31 $
15 $ 74 $
19
(4)
(22)
(6)
(30)
27 $
(7) $ 68 $ (11)
The non-current portion of the liability is included with
the postemployment liability in the accompanying
consolidated balance sheet under Postretirement and
postemployment benefit obligation.
78
stock appreciation rights, other stock-based awards,
and cash-based awards at the discretion of the
and Compensation
Management Development
Committee of the Board of Directors (the Committee)
that administers the ICP. Additionally, restricted stock,
which may be deferred into RSU’s, may be awarded
under a Restricted Stock and Deferred Compensation
Plan for Non-Employee Directors.
PERFORMANCE SHARE PLAN
Invested Capital
Under the Performance Share Plan (PSP), contingent
awards of International Paper common stock are
granted by the Committee. The PSP awards are earned
over a three-year period. PSP awards are earned based
on the achievement of defined performance rankings of
Return on
(ROIC) and Total
Shareholder Return (TSR) compared to ROIC and TSR
peer groups of companies. The 2016-2018 and
2017-2019 Awards are weighted 75% for ROIC and 25%
for TSR for all participants except for officers for whom
the awards are weighted 50% for ROIC and 50% for
TSR. The 2018-2020 Award is weighted 50% ROIC and
50% TSR for all participants. The ROIC component of
the PSP awards is valued at the closing stock price on
the day prior to the grant date. As the ROIC component
contains a performance condition, compensation
expense, net of estimated forfeitures, is recorded over
the requisite service period based on the most probable
number of awards expected
to vest. The TSR
component of the PSP awards is valued using a Monte
Carlo simulation as the TSR component contains a
market condition. The Monte Carlo simulation estimates
the fair value of the TSR component based on the
expected term of the award, a risk-free rate, expected
dividends, and the expected volatility for the Company
and its competitors. The expected term is estimated
based on the vesting period of the awards, the risk-free
rate is based on the yield on U.S. Treasury securities
matching the vesting period, and the volatility is based
on the Company’s historical volatility over the expected
term. PSP grants are made in performance-based
restricted stock units.
The following table sets forth the assumptions used to
determine compensation cost for the market condition
component of the PSP plan:
The following summarizes PSP activity for the three
years ending December 31, 2018:
Outstanding at December 31, 2015
Granted
Shares issued
Forfeited
Outstanding at December 31, 2016
Granted
Shares issued
Forfeited
Outstanding at December 31, 2017
Granted
Shares issued
Forfeited
Weighted
Average
Grant Date
Fair Value
$38.69
37.26
43.82
43.61
35.89
51.78
51.00
45.96
36.17
62.97
53.67
56.57
Share/
Units
5,857,733
2,617,982
(2,316,085)
(209,500)
5,950,130
2,163,912
(1,876,134)
(438,024)
5,799,884
1,751,235
(1,588,642)
(196,000)
Outstanding at December 31, 2018
5,766,477
$38.79
RESTRICTED STOCK AWARD PROGRAMS
The service-based Restricted Stock Award program
(RSA), designed for recruitment, retention and special
recognition purposes, provides for awards of restricted
stock to key employees.
The following summarizes the activity of the RSA
program for the three years ending December 31, 2018:
Outstanding at December 31, 2015
Granted
Shares issued
Forfeited
Outstanding at December 31, 2016
Granted
Shares issued
Forfeited
Outstanding at December 31, 2017
Granted
Shares issued
Forfeited
Outstanding at December 31, 2018
Weighted
Average
Grant Date
Fair Value
$48.24
42.81
47.14
39.36
45.34
57.24
47.90
53.53
48.63
51.43
48.44
—
$50.17
Shares
120,368
117,881
(59,418)
(9,500)
169,331
63,319
(59,650)
(6,700)
166,300
66,100
(100,289)
—
132,111
Expected volatility
Risk-free interest rate
Twelve Months Ended
December 31, 2018
22.75%-22.99%
1.31%-1.98%
At December 31, 2018, 2017 and 2016 a total of 11.9
million, 13.2 million and 14.3 million shares,
respectively, were available for grant under the ICP.
79
Stock-based compensation expense and related
income tax benefits were as follows:
In millions
2018
2017
2016
Total stock-based compensation
expense (included in selling and
administrative expense)
$
135 $
147 $
124
Income tax benefits related to stock-
based compensation
16
45
34
At December 31, 2018, $104 million of compensation
cost, net of estimated forfeitures, related to unvested
restricted performance shares, executive continuity
awards and restricted stock attributable to future
performance had not yet been recognized. This amount
will be recognized in expense over a weighted-average
period of 1.7 years.
NOTE 21 FINANCIAL INFORMATION BY BUSINESS
SEGMENT AND GEOGRAPHIC AREA
International Paper’s business segments, Industrial
Packaging, Global Cellulose Fibers and Printing Papers,
are consistent with the internal structure used to manage
these businesses. See the Description of Business
Segments in Part II. Item 7. Management's Discussion
and Analysis of Financial Condition and Results of
Operations for a description of the types of products and
services from which each reportable segment derives its
revenues. All segments are differentiated on a common
product, common customer basis consistent with the
business segmentation generally used in the Forest
Products industry.
Business segment operating profits 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 interest expense, net, corporate
items, net, corporate special items, net, and non-
operating pension expense.
External sales by major product is determined by
aggregating sales from each segment based on similar
products or services. External sales are defined as those
that are made to parties outside International Paper’s
consolidated group, whereas sales by segment in the
Net Sales table are determined using a management
approach and include intersegment sales.
INFORMATION BY BUSINESS SEGMENT
Net Sales
In millions
Industrial Packaging
Global Cellulose Fibers
Printing Papers
Corporate and Intersegment
Sales (a)
2018
$ 15,900
2,819
4,375
2017
$ 15,077
2,551
4,157
2016
$ 14,226
1,092
4,058
212
(42)
119
Net Sales
$ 23,306
$ 21,743
$ 19,495
Operating Profit
In millions
2018
2017
2016
Industrial Packaging
$
2,093
$
1,547
$
1,741
Global Cellulose Fibers
Printing Papers
Business Segment Operating
Profit
251
533
65
457
(179)
540
2,877
2,069
2,102
Earnings (loss) from
continuing operations before
income taxes and equity
earnings
Interest expense, net
Noncontrolling interests /
equity earnings adjustment (b)
Corporate items, net (a)
Corporate special items, net
(a)
Non-operating pension
expense
1,781
536
(10)
67
9
494
848
572
(2)
91
76
484
795
520
1
121
55
610
$
2,877
$
2,069
$
2,102
Restructuring and Other Charges
In millions
2018
2017
2016
Industrial Packaging
$
Global Cellulose Fibers
Printing Papers
Corporate (c)
47
—
3
(21)
$
— $
—
—
67
Restructuring and Other
Charges
$
29
$
67
$
7
—
—
47
54
80
Assets
In millions
Industrial Packaging
Global Cellulose Fibers
Printing Papers
Corporate and other (d)
Assets
Capital Spending
2018
$ 15,859
3,880
3,905
9,932
$ 33,576
2017
$ 15,354
3,913
4,054
10,582
$ 33,903
INFORMATION BY GEOGRAPHIC AREA
Net Sales (j)
In millions
2018
2017
2016
United States (k)
$ 17,609
$ 16,247
$ 14,363
EMEA
Pacific Rim and Asia
Americas, other than U.S.
3,321
605
1,771
3,129
625
1,742
2,852
699
1,581
Net Sales
$ 23,306
$ 21,743
$ 19,495
In millions
2018
2017
2016
Long-Lived Assets (l)
Industrial Packaging
$
1,061
$
Global Cellulose Fibers
Printing Papers
Subtotal
Corporate and other (e)
183
303
1,547
25
$
836
188
235
1,259
21
832
174
215
1,221
20
Capital Spending
$
1,572
$
1,280
$
1,241
In millions
United States
EMEA
Pacific Rim and Asia
Americas, other than U.S.
Long-Lived Assets
2018
$ 10,586
1,315
201
1,367
$ 13,469
2017
$ 10,545
1,302
236
1,630
$ 13,713
Depreciation, Amortization and Cost of Timber
Harvested (f)(g)
In millions
2018
2017
2016
Industrial Packaging
$
Global Cellulose Fibers
Printing Papers
Corporate (h)
Depreciation and
Amortization
$
803
262
258
5
$
815
264
254
10
760
110
242
12
$
1,328
$
1,343
$
1,124
External Sales By Major Product
In millions
Industrial Packaging
Global Cellulose Fibers
Printing Papers
Other (i)
Net Sales
2018
$ 15,828
2,810
4,359
309
$ 23,306
2017
$ 14,946
2,524
4,142
131
$ 21,743
2016
$ 14,142
1,090
4,062
201
$ 19,495
(a)
Includes sales of $0 million in 2018, $15 million in 2017 and $42
million in 2016, operating profits (losses) of $0 million in 2018,
$0 million in 2017 and $(2) million in 2016, and corporate special
items expense of $0 million in 2018, $9 million in 2017 and $9
million in 2016, from previously divested businesses.
(c)
interests and equity earnings
(b) Operating profits for industry segments include each segment’s
percentage share of the profits of subsidiaries included in that
segment that are less than wholly-owned. The pre-tax
noncontrolling
these
subsidiaries is added here to present consolidated earnings from
continuing operations before income taxes and equity earnings.
Includes corporate expenses and expenses of $0 million in 2018,
$9 million in 2017 and $9 million in 2016, from previously
divested businesses.
Includes corporate assets, assets of businesses held for sale
and assets of previously divested businesses.
Includes corporate assets and assets of previously divested
businesses of $0 million in 2018, $0 million in 2017 and $1 million
in 2016.
(e)
(d)
for
(f) Excludes accelerated depreciation related to the closure and/or
repurposing of mills in 2016.
(g) Prior years recast to reflect current methodology for allocation
of Corporate depreciation and amortization to the business
segments. There is no change to segment operating profit.
Includes $0 million in 2018, $1 million in 2017 and $2 million in
2016, from previously divested businesses.
Includes $0 million in 2018, $15 million in 2017, and $42 million
in 2016, from previously divested businesses.
(h)
(i)
(j) Net sales are attributed to countries based on the location of
the seller.
(k) Export sales to unaffiliated customers were $3.1 billion in 2018,
$2.9 billion in 2017 and $1.8 billion in 2016.
(l) Long-Lived Assets includes Forestlands and Plants, Properties
and Equipment, net.
81
INTERIM FINANCIAL RESULTS (UNAUDITED)
In millions, except per share amounts
and stock prices
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
2018
Net sales
Earnings (loss) from continuing
operations before income taxes and
equity earnings
Gain (loss) from discontinued
operations
Net earnings (loss) attributable to
International Paper Company
Basic earnings (loss) per share
attributable to International Paper
Company common shareholders:
Earnings (loss) from continuing
operations
Gain (loss) from discontinued
operations
Net earnings (loss)
Diluted earnings (loss) per share
attributable to International Paper
Company common shareholders:
Earnings (loss) from continuing
operations
Gain (loss) from discontinued
operations
Net earnings (loss)
$ 5,621
$ 5,833
$ 5,901
$ 5,951
$ 23,306
356 (a)
490 (a)
553 (a)
382 (a)
1,781 (a)
368 (b)
(23) (b)
— (b)
— (b)
345 (b)
729 (a-c)
405 (a-c)
562 (a-c)
316 (a-c)
2,012 (a-c)
$
0.87
$
1.03
$
1.38
$
0.79
$
4.07
0.89
1.76
0.86
0.88
1.74
(0.05)
0.98
1.02
(0.05)
0.97
—
1.38
1.37
—
1.37
—
0.79
0.78
—
0.78
0.84
4.91
4.02
0.83
4.85
Dividends per share of common stock
0.4750
0.4750
0.4750
0.5000
1.9250
2017
Net sales
Earnings (loss) from continuing
operations before income taxes and
equity earnings
Gain (loss) from discontinued operations
Net earnings (loss) attributable to
International Paper Company
Basic earnings (loss) per share
attributable to International Paper
Company common shareholders:
Earnings (loss) from continuing
operations
Gain (loss) from discontinued operations
Net earnings (loss)
Diluted earnings (loss) per share
attributable to International Paper
Company common shareholders:
Earnings (loss) from continuing
operations
Gain (loss) from discontinued operations
Net earnings (loss)
$ 5,132
$ 5,383
$ 5,517
$ 5,711
$ 21,743
217 (d)
17 (e)
(23) (d)
(4) (e)
457 (d)
29 (e)
197 (d)
(8) (e)
848 (d)
34 (e)
209 (d-f)
80 (d-f)
395 (d-f)
1,460 (d-f)
2,144 (d-f)
$
0.47
0.04
0.51
0.46
0.04
0.50
$
0.20
$
(0.01)
0.19
0.20
(0.01)
0.19
0.89
0.07
0.96
0.88
0.07
0.95
$
3.56
$
(0.02)
3.54
3.52
(0.02)
3.50
5.11
0.08
5.19
5.05
0.08
5.13
Dividends per share of common stock
0.4625
0.4625
0.4625
0.4750
1.8625
Note: International Paper's common shares (symbol: IP) are listed on
the New York Stock Exchange.
Note: Since basic and diluted earnings per share are computed
independently for each period and category, full year per share amounts
may not equal the sum of the four quarters.
82
Footnotes to Interim Financial Results
(d) Includes the following pre-tax charges (gains):
(a)
Includes the following pre-tax charges (gains):
2017
In millions
Q1
Q2
Q3
Q4
Smurfit-Kappa acquisition
proposal costs
$ — $ 12
$ — $ —
2018
Legal settlement
Litigation settlement
recovery
Environmental
remediation reserve
adjustment
EMEA Packaging
optimization
Abandoned property
removal
Riverdale mill conversion
costs
Brazil Packaging
impairment
Debt extinguishment costs
Gain on sale of investment
in Liaison Technologies
Non-operating pension
expense
9
—
—
22
9
—
—
—
—
4
—
(5)
—
(1)
8
4
—
10
(31)
—
—
—
26
9
—
—
—
9
—
6
5
— 122
—
—
—
—
36
25
429
Total
$ 44
$ 83
$167
$414
(b) Includes the following pre-tax charges (gains):
2018
In millions
Q1
Q2
Q3
Q4
North American
Consumer Packaging
transaction costs
North American
Consumer Packaging
gain on transfer
$
23
$
2
$ — $ —
(516)
28
—
—
Total
$ (493) $ 30
$ — $ —
(c) Includes the following tax expenses (benefits):
In millions
Q1
Q2
Q3
Q4
Gain on sale of investment
in ArborGen
Costs associated with the
pulp business acquired in
2016
Amortization of
Weyerhaeuser inventory
fair value step-up
Holmen bargain purchase
gain
Abandoned property
removal
Asia Foodservice sale
Brazil Packaging wood
supply accelerated
amortization
Debt extinguishment costs
Interest income on income
tax refund claims
Other items
Non-operating pension
expense
Total
$ — $ (14) $ — $ —
4
5
6
18
14
(6)
2
—
—
5
—
—
—
—
—
9
—
—
(4)
(2)
—
—
7
—
—
10
—
—
—
—
—
6
—
—
—
83
(1)
—
31
34
33
386
$ 45
$ 387
$ 56
$ 492
Kleen Products settlement
— 354
(e) Includes the operating earnings of the North American Consumer
Packaging business for the full year. Also includes the following
pre-tax charges (gains):
2017
In millions
Q1
Q2
Q3
Q4
North American Consumer
Packaging transaction costs
Non-operating pension
expense
Total
$ — $ — $ — $ 17
—
—
—
45
$ — $ — $ — $ 62
(f) Includes the following tax expenses (benefits):
2018
In millions
Q1
Q2
Q3
Q4
2017
In millions
Q1
Q2
Q3
Q4
State income tax
legislative changes
Tax benefit of Tax Cuts
and Jobs Act
International investment
restructuring
Foreign tax audits
Tax impact of other
special items
Tax impact of non-
operating pension
expense
Total
$ — $
9
$ — $ —
—
—
—
—
—
—
(36)
—
—
(9)
(13)
(46)
—
19
25
3
(1)
(9)
(6)
(107)
$(10) $ (13) $ (88) $ (60)
International legal entity
restructuring
Income tax refund claims
Cash pension contribution
International tax law change
Tax benefit of Tax Cuts and
Jobs Act
Tax impact of other special
items
Tax impact of non-operating
pension expense
Total
83
$ 15
$ — $ 19
$ —
—
—
—
—
(85) —
—
—
38
—
—
(28)
—
9
— (1,222)
(8)
(137)
(8)
(41)
(12)
(13)
(13)
(148)
$ (5) $(197) $ (2) $(1,430)
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2018, an evaluation was carried out
under the supervision and with the participation of the
including our principal
Company’s management,
executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures
and internal control over financial reporting. Based upon
this evaluation, our principal executive officer and
principal financial officer have concluded that the
Company’s disclosure controls and procedures and
internal control over financial reporting were effective as
of December 31, 2018.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
reporting during
There have been no changes in our internal control over
the quarter ended
financial
December 31, 2018, that have materially affected, or
are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
Information concerning our directors
is hereby
incorporated by reference to our definitive proxy
statement that will be filed with the Securities and
Exchange Commission (SEC) within 120 days of the
close of our fiscal year. The Audit and Finance
Committee of the Board of Directors has at least one
member who is a financial expert, as that term is defined
in Item 401(d)(5) of Regulation S-K. Further information
concerning the composition of the Audit and Finance
Committee and our audit committee financial experts
is hereby incorporated by reference to our definitive
proxy statement that will be filed with the SEC within
120 days of the close of our fiscal year. Information with
respect to our executive officers is set forth on pages 4
and 5 in Part I of this Form 10-K under the caption,
“Executive Officers of the Registrant.”
Executive officers of International Paper are elected to
hold office until the next annual meeting of the Board
of Directors
the annual meeting of
shareholders and, until the election of successors,
subject to removal by the Board.
following
84
The Company’s Code of Business Ethics (Code) is
applicable to all employees of the Company, including
the chief executive officer and senior financial officers,
as well as the Board of Directors. We disclose any
amendments to our Code and any waivers from a
provision of our Code granted to our directors, chief
executive officer and senior financial officers on our
website within four business days following such
amendment or waiver. To date, no waivers of the Code
have been granted.
in print
We make available free of charge on our website at
www.internationalpaper.com, and
to any
shareholder who requests
them, our Corporate
Governance Principles, our Code of Business Ethics
and the Charters of our Audit and Finance Committee,
Management Development and Compensation
Committee, Governance Committee and Public Policy
and Environment Committee. Requests for copies may
be directed to the corporate secretary at our corporate
headquarters.
respect
Information with
to compliance with
Section 16(a) of the Exchange Act and our corporate
governance is hereby incorporated by reference to our
definitive proxy statement that will be filed with the SEC
within 120 days of the close of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the compensation of
executives and directors of the Company is hereby
incorporated by reference to our definitive proxy
statement that will be filed with the SEC within 120 days
of the close of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
A description of the security ownership of certain
beneficial owners and management and equity
compensation plan information is hereby incorporated
by reference to our definitive proxy statement that will
be filed with the SEC within 120 days of the close of our
fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
A description of certain relationships and related
transactions is hereby incorporated by reference to our
definitive proxy statement that will be filed with the SEC
within 120 days of the close of our fiscal year.
Supplemental Indenture (including the form
of Notes), dated as of June 4, 2008, between
International Paper Company and The Bank
of New York, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K dated June 4,
2008).
Supplemental Indenture (including the form
of Notes), dated as of May 11, 2009,
between International Paper Company and
The Bank of New York Mellon, as trustee
(incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-
K dated May 11, 2009).
Supplemental Indenture (including the form
of Notes), dated as of August 10, 2009,
between International Paper Company and
The Bank of New York Mellon, as trustee
(incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-
K dated August 10, 2009).
Supplemental Indenture (including the form
of Notes), dated as of December 7, 2009,
between International Paper Company and
The Bank of New York Mellon Trust
Company, N.A., as trustee (incorporated by
reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated
December 7, 2009).
Supplemental Indenture (including the form
of Notes), dated as of November 16, 2011,
between the Company and The Bank of New
York Mellon Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-
K dated November 16, 2011).
Supplemental Indenture (including the form
of Notes), dated as of June 10, 2014,
between the Company and The Bank of New
York Mellon Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-
K dated June 10, 2014).
Supplemental Indenture (including the form
of Notes), dated as of May 26, 2015,
between the Company and The Bank of New
York Mellon Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-
K dated May 26, 2015).
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
Information with respect to fees paid to, and services
rendered by, our
registered public
independent
accounting firm, and our policies and procedures for pre-
approving those services, is hereby incorporated by
reference to our definitive proxy statement that will be
filed with the SEC within 120 days of the close of our
fiscal year.
PART IV.
(4.2)
(4.3)
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(4.4)
(4.5)
(4.6)
(4.7)
(4.8)
(1) Financial Statements – See Item 8. Financial
Statements and Supplementary Data.
the consolidated
(2) Financial Statement Schedules – The following
additional financial data should be read in
conjunction with
financial
statements in Item 8. Financial Statements and
Supplementary Data. Schedules not included
with this additional financial data have been
omitted because they are not applicable, or the
required information is shown in the consolidated
financial statements or the notes thereto.
Additional Financial Data
2018, 2017 and 2016
(2.1)
(3.1)
(3.2)
(4.1)
Transaction Agreement, dated October 23,
2017, by and among the Company, Graphic
Packaging Holding Company, Gazelle
Newco LLC and Graphic Packaging
International,
by
reference to Exhibit 2.1 to the Company’s
Current Report on Form 8-K filed October
24, 2017).
(incorporated
Inc.
Restated Certificate of
Incorporation
Company
Paper
of International
(incorporated by reference to Exhibit 3.1 to
the Company’s Current Report on Form 8-
K dated May 13, 2013).
By-laws of International Paper Company, as
amended
through February 9, 2016
(incorporated by reference to Exhibit 3.1 to
the Company’s Current Report on Form 8-
K dated February 8, 2016).
Indenture, dated as of April 12, 1999,
between International Paper and The Bank
of New York, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K dated June 29,
2000).
85
(10.8)
(10.9)
(10.10)
(10.11)
(10.12)
(10.13)
(10.14)
(10.15)
(4.9)
(4.10)
(4.11)
(10.1)
(10.2)
(10.3)
(10.4)
(10.5)
(10.6)
(10.7)
Supplemental Indenture (including the form
of Notes), dated as of August 11, 2016,
between the Company and The Bank of New
York Mellon Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-
K dated August 11, 2016).
Supplemental Indenture (including the form
of Notes), dated as of August 9, 2017,
between the Company and The Bank of New
York Mellon Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-
K dated August 9, 2017).
with
accordance
Item 601
In
(b) (4) (iii) (A) of Regulation S-K, certain
instruments respecting long-term debt of the
Company have been omitted but will be
furnished to the Commission upon request.
Amended and Restated 2009 Incentive
Compensation Plan (ICP) (incorporated by
reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated February
10, 2014). +
and
Deferred
Restricted
Stock
Compensation Plan
for Non-Employee
Directors, Amended and Restated as of May
10, 2010 (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended
June 30, 2010). +
Form of Restricted Stock Award Agreement
(incorporated by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-
K for the fiscal year ended December 31,
2017). * +
Form of Restricted Stock Unit Award
Agreement (cash settled) (incorporated by
reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal
year ended December 31, 2017). +
Form of Restricted Stock Unit Award
Agreement (stock settled) (incorporated by
reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the fiscal
year ended December 31, 2017). +
Form of Performance Share Plan award
certificate (incorporated by reference to
Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 2017). +
Pension Restoration Plan
for Salaried
Employees (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended
March 31, 2009). +
86
Unfunded Supplemental Retirement Plan
for Senior Managers, as amended and
restated effective January 1, 2008
(incorporated by reference to Exhibit 10.21
the Company’s Annual Report on
to
Form 10-K
fiscal year ended
December 31, 2007). +
the
for
Unfunded
Amendment No. 1 to the International Paper
Company
Supplemental
Retirement Plan for Senior Managers,
effective October 13, 2008 (incorporated by
reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K dated October
17, 2008). +
Unfunded
Amendment No. 2 to the International Paper
Company
Supplemental
Retirement Plan for Senior Managers,
effective October 14, 2008 (incorporated by
reference to Exhibit 10.5 to the Company’s
Current Report on Form 8-K dated October
17, 2008). +
Unfunded
Amendment No. 3 to the International Paper
Company
Supplemental
Retirement Plan for Senior Managers,
effective December 8, 2008 (incorporated
the
by reference
Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2008).
+
to Exhibit 10.20
to
Unfunded
Amendment No. 4 to the International Paper
Company
Supplemental
Retirement Plan for Senior Managers,
effective January 1, 2009 (incorporated by
reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009). +
Unfunded
Amendment No. 5 to the International Paper
Company
Supplemental
Retirement Plan for Senior Managers,
effective October 31, 2009 (incorporated by
reference to Exhibit 10.17 to the Company’s
Annual Report on Form 10-K for the fiscal
year ended December 31, 2009). +
Unfunded
Amendment No. 6 to the International Paper
Company
Supplemental
Retirement Plan for Senior Managers,
effective January 1, 2012 (incorporated by
reference to Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the fiscal
year ended December 31, 2011). +
Form of Non-Competition Agreement,
entered into by certain Company employees
(including named executive officers) who
have received restricted stock (incorporated
by reference
the
Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2008).
+
to Exhibit 10.22
to
(10.24)
(10.25)
(10.26)
(10.27)
(10.28)
(10.29)
(21)
(23.1)
Settlement Agreement dated June 27, 2017,
by and between
International Paper
Company, Temple-Inland Inc., n/k/a Temple-
Inland LLC, TIN Inc., n/k/a TIN LLC, and
Weyerhaeuser Company, and Kleen
Products LLC, R.P.R. Enterprises, Inc.,
Mighty Pac, Inc., Ferraro Foods, Inc.,
Ferraro Foods of North Carolina, LLC, MTM
Packaging Solutions of Texas, LLC, RHE
Hatco, Inc., and Chandler Packaging, Inc.,
the plaintiff class representatives, both
individually and on behalf of the plaintiff
class (incorporated by reference to Exhibit
10.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30,
2017).
Commitment Agreement, dated September
26, 2017, between International Paper
Company and The Prudential Insurance
Company of America, relating
the
Retirement Plan of International Paper
Company (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended
September 30, 2017). †
to
Credit Agreement, dated December 8, 2017,
by and among the Company, Bank of
America, N.A.
and BNP Paribas
(incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-
K filed December 12, 2017).
Commitment Agreement, dated September
25, 2018, between International Paper
Company
Insurance
and Prudential
the
Company of America, relating
Retirement Plan of International Paper
Company (corrected version of previously
filed exhibit). * †
to
Termination Agreement and Release, dated
July 6, 2018, and executed July 23, 2018,
between International Paper Company and
Glenn R. Landau (incorporated by reference
to Exhibit 99.1 to the Company's Current
Report on Form 8-K/A filed on July 27, 2018).
Letter to Glenn R. Landau, dated July 23,
2018 (incorporated by reference to Exhibit
99.2 to the Company's Current Report on
Form 8-K/A filed on July 27, 2018).
Subsidiaries and Joint Ventures.*
Consent of Independent Registered Public
Accounting Firm. *
(10.16)
(10.17)
(10.18)
(10.19)
(10.20)
(10.21)
(10.22)
(10.23)
Form of Non-Solicitation Agreement,
entered into by certain Company employees
(including named executive officers) who
have received restricted stock (incorporated
by
the
Company’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2006). +
to Exhibit 10.5
reference
to
Form of Change-in-Control Agreement - Tier
I, for the Chief Executive Officer and all
"grandfathered" senior vice presidents
elected prior to 2012 (all named executive
- approved September 2013
officers)
(incorporated by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form
10-Q for the quarter ended September 30,
2013). +
Form of Change-in-Control Agreement - Tier
II, for all future senior vice presidents and all
"grandfathered" vice presidents elected
prior
- approved
September 2013 (incorporated by reference
to Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended
September 30, 2013). +
to February 2008
Form of Indemnification Agreement for
Directors (incorporated by reference to
Exhibit 10.13 to the Company’s Annual
Report on Form 10-K for the fiscal year
ended December 31, 2003). +
Board Policy on Severance Agreements
with Senior Executives (incorporated by
reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on October
18, 2005). +
Board Policy on Change of Control
Agreements (incorporated by reference to
Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed on October 18,
2005). +
Time Sharing Agreement, dated October 17,
2014 (and effective November 1, 2014), by
and between Mark S. Sutton and
International Paper Company (incorporated
by
the
Company’s Current Report on Form 8-K
dated October 14, 2014). +
to Exhibit 99.1
reference
to
Five-Year Credit Agreement dated as of
December 12, 2016, among International
Paper Company, JPMorgan Chase Bank,
N.A., individually and as administrative
agent, and certain lenders (incorporated by
reference to Exhibit 99.1 to the Company’s
Current Report on Form 8-K filed June 6,
2017).
87
(23.2)
Consent of Independent Auditors. *
(101.INS)
XBRL Instance Document *
(24)
(31.1)
(31.2)
(32)
(99.1)
the
Power of Attorney (contained on
signature page to the Company’s Annual
Report on Form 10-K for the year ended
December 31, 2018). *
Certification by Mark S. Sutton, Chairman
and Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002. *
Certification by Tim S. Nicholls, Senior Vice
President and Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002. *
Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
Audited Financial Statements for Ilim S.A.
and its subsidiaries as of and for the year
ended December 31, 2018 and 2017. *
(101.SCH)
(101.CAL)
(101.DEF)
(101.LAB)
XBRL Taxonomy Extension Schema *
XBRL Taxonomy Extension Calculation
Linkbase *
XBRL Taxonomy Extension Definition
Linkbase *
XBRL Taxonomy Extension Label
Linkbase *
(101.PRE)
XBRL Extension Presentation Linkbase
*
+ Management contract or compensatory plan or arrangement.
* Filed herewith
† Confidential treatment has been granted for certain information
pursuant to Rule 24b-2 under the Securities Act of 1934, as
amended.
88
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
INTERNATIONAL PAPER COMPANY
By:
/S/ SHARON R. RYAN
Sharon R. Ryan
Senior Vice President, General Counsel
and Corporate Secretary
POWER OF ATTORNEY
February 20, 2019
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Sharon R. Ryan and Matthew Barron as his or her true and lawful attorney-in-fact and agent, acting alone, with full
power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities,
to sign any or all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-
in-fact full power and authority to do and perform each and every act and thing requisite or necessary to be done,
hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/S/ MARK S. SUTTON
Mark S. Sutton
Chairman of the Board & Chief Executive
Officer and Director
February 20, 2019
/S/ DAVID J. BRONCZEK
Director
David J. Bronczek
/S/ WILLIAM J. BURNS
Director
William J. Burns
/S/ CHRISTOPHER M. CONNOR Director
Christopher M. Connor
/S/ AHMET C. DORDUNCU
Director
Ahmet C. Dorduncu
/S/ ILENE S. GORDON
Director
Ilene S. Gordon
89
February 20, 2019
February 20, 2019
February 20, 2019
February 20, 2019
February 20, 2019
/S/ JACQUELINE C. HINMAN
Director
Jacqueline C. Hinman
/s/ CLINTON A. LEWIS, JR.
Director
Clinton A. Lewis, Jr.
/S/ KATHRYN D. SULLIVAN
Director
Kathryn D. Sullivan
/S/ J. STEVEN WHISLER
Director
J. Steven Whisler
/S/ RAY G. YOUNG
Director
Ray G. Young
February 20, 2019
February 20, 2019
February 20, 2019
February 20, 2019
February 20, 2019
/S/ TIMOTHY S. NICHOLLS
Timothy S. Nicholls
Senior Vice President and Chief Financial
Officer
February 20, 2019
/S/ VINCENT P. BONNOT
Vice President – Finance and Controller
February 20, 2019
Vincent P. Bonnot
90
2018 LISTING OF FACILITIES
(all facilities are owned except noted otherwise)
PRINTING PAPERS
Uncoated Papers
U.S.:
Savannah, Georgia
Cayuga, Indiana
Cedar Rapids, Iowa
Henderson, Kentucky
Selma, Alabama (Riverdale Mill)
Maysville, Kentucky
Ticonderoga, New York
Eastover, South Carolina
Georgetown, South Carolina
Sumter, South Carolina
International:
Bogalusa, Louisiana
Campti, Louisiana
Mansfield, Louisiana
Vicksburg, Mississippi
Valliant, Oklahoma
Springfield, Oregon
Luiz Antônio, São Paulo, Brazil
Orange, Texas
Mogi Guacu, São Paulo, Brazil
APPENDIX I
Tracy, California
Golden, Colorado
Wheat Ridge, Colorado
Putnam, Connecticut
Orlando, Florida
Plant City, Florida
Tampa, Florida leased
Columbus, Georgia
Forest Park, Georgia
Griffin, Georgia
Kennesaw, Georgia leased
Lithonia, Georgia
Savannah, Georgia
Três Lagoas, Mato Grosso do Sul, Brazil
International:
Stone Mountain, Georgia leased
Saillat, France
Kadiam, India
Rajahmundry, India
Kwidzyn, Poland
Svetogorsk, Russia
GLOBAL CELLULOSE FIBERS
Pulp
U.S.:
Cantonment, Florida
Flint River, Georgia
Port Wentworth, Georgia
Columbus, Mississippi
New Bern, North Carolina
Franco da Rocha, São Paulo, Brazil
Tucker, Georgia
Nova Campina, São Paulo, Brazil
Aurora, Illinois (3 locations)
Paulinia, São Paulo, Brazil
Veracruz, Mexico
Kenitra, Morocco
Madrid, Spain
Corrugated Container
U.S.:
Bay Minette, Alabama
Decatur, Alabama
Bedford Park, Illinois (2 locations) 1
leased
Belleville, Illinois
Carol Stream, Illinois
Des Plaines, Illinois
Lincoln, Illinois
Montgomery, Illinois
Northlake, Illinois
Rockford, Illinois
Butler, Indiana
Dothan, Alabama leased
Crawfordsville, Indiana
Huntsville, Alabama
Conway, Arkansas
Fort Wayne, Indiana
Hammond, Indiana
Fort Smith, Arkansas (2 locations)
Indianapolis, Indiana (2 locations)
Riegelwood, North Carolina
Russellville, Arkansas (2 locations)
Saint Anthony, Indiana
Eastover, South Carolina
Georgetown, South Carolina
Franklin, Virginia
Tolleson, Arizona
Yuma, Arizona
Anaheim, California
Tipton, Indiana
Cedar Rapids, Iowa
Waterloo, Iowa
Buena Park, California leased
Garden City, Kansas
International:
Camarillo, California
Kansas City, Kansas
Grande Prairie, Alberta, Canada
Carson, California
Bowling Green, Kentucky
Saillat, France
Gdansk, Poland
Kwidzyn, Poland
Svetogorsk, Russia
Cerritos, California leased
Compton, California
Elk Grove, California
Exeter, California
Lexington, Kentucky
Louisville, Kentucky
Walton, Kentucky
Bogalusa, Louisiana
Gilroy, California (2 locations)
Lafayette, Louisiana
INDUSTRIAL PACKAGING
Los Angeles, California
Containerboard
U.S.:
Pine Hill, Alabama
Prattville, Alabama
Cantonment, Florida
Rome, Georgia
Modesto, California
Ontario, California
Salinas, California
Sanger, California
San Leandro, California leased 3
Santa Fe Springs, California (2
locations)
Shreveport, Louisiana
Springhill, Louisiana
Auburn, Maine
Three Rivers, Michigan
Arden Hills, Minnesota
Austin, Minnesota
Fridley, Minnesota
Stockton, California
Minneapolis, Minnesota leased
A-1
Shakopee, Minnesota
Laurens, South Carolina
White Bear Lake, Minnesota
Lexington, South Carolina
Silao, Mexico
Toluca, Mexico
Houston, Mississippi
Jackson, Mississippi
Ashland City, Tennessee leased
Villa Nicolas Romero, Mexico
Cleveland, Tennessee
Zapopan, Mexico
Magnolia, Mississippi leased
Elizabethton, Tennessee leased
Agadir, Morocco
Olive Branch, Mississippi
Morristown, Tennessee
Casablanca, Morocco
Fenton, Missouri
Kansas City, Missouri
Murfreesboro, Tennessee
Amarillo, Texas
Tangier, Morocco
Almeria, Spain 2
Maryland Heights, Missouri
Carrollton, Texas (2 locations)
Barcelona, Spain
North Kansas City, Missouri leased
Edinburg, Texas
St. Joseph, Missouri
St. Louis, Missouri
Omaha, Nebraska
Barrington, New Jersey
Bellmawr, New Jersey
Milltown, New Jersey
Spotswood, New Jersey
Thorofare, New Jersey
Binghamton, New York
Buffalo, New York
Rochester, New York
Scotia, New York
Utica, New York
Bilbao, Spain
Gandia, Spain
El Paso, Texas
Ft. Worth, Texas leased
Las Palmas, Spain
Grand Prairie, Texas
Hidalgo, Texas
McAllen, Texas
Madrid, Spain
Tenerife, Spain
Adana, Turkey
San Antonio, Texas (2 locations)
Bursa. Turkey
Sealy, Texas
Waxahachie, Texas
Lynchburg, Virginia
Petersburg, Virginia
Richmond, Virginia
Corlu, Turkey
Corum, Turkey
Gebze, Turkey
Izmir, Turkey
Moses Lake, Washington
Olympia, Washington
Recycling
U.S.:
Charlotte, North Carolina (2 locations) 1
leased
Lumberton, North Carolina
Manson, North Carolina
Newton, North Carolina
Yakima, Washington
Fond du Lac, Wisconsin
Manitowoc, Wisconsin
Phoenix, Arizona
Fremont, California
Norwalk, California
West Sacramento, California
Statesville, North Carolina
International:
Itasca, Illinois
Byesville, Ohio
Delaware, Ohio
Eaton, Ohio
Madison, Ohio
Marion, Ohio
Marysville, Ohio leased
Middletown, Ohio
Mt. Vernon, Ohio
Newark, Ohio
Streetsboro, Ohio
Wooster, Ohio
Manaus, Amazonas, Brazil
Des Moines, Iowa
Paulinia, São Paulo, Brazil
Wichita, Kansas
Rio Verde, Goias, Brazil
Roseville, Minnesota
Suzano, São Paulo, Brazil
Omaha, Nebraska
Rancagua, Chile
Arles, France
Charlotte, North Carolina
Beaverton, Oregon
Chalon-sur-Saone, France
Springfield, Oregon leased
Creil, France
Carrollton, Texas
LePuy, France (Espaly Box Plant)
Salt Lake City, Utah
Mortagne, France
Richmond, Virginia
Guadeloupe, French West Indies
Kent, Washington
Oklahoma City, Oklahoma
Beaverton, Oregon (3 locations)
Hillsboro, Oregon
Portland, Oregon
Salem, Oregon leased
Bellusco, Italy
Catania, Italy
Pomezia, Italy
San Felice, Italy
Apodaco (Monterrey), Mexico
leased
Biglerville, Pennsylvania (2 locations)
Ixtaczoquitlan, Mexico
International:
Monterrey, Mexico leased
Xalapa, Veracruz, Mexico leased
Bags
U.S.:
Eighty-four, Pennsylvania
Hazleton, Pennsylvania
Juarez, Mexico leased
Los Mochis, Mexico
Buena Park, California
Kennett Square, Pennsylvania
Puebla, Mexico leased
Lancaster, Pennsylvania
Reynosa, Mexico
Beaverton, Oregon
Grand Prairie, Texas
Mount Carmel, Pennsylvania
San Jose Iturbide, Mexico
Georgetown, South Carolina
Santa Catarina, Mexico
A-2
Coated Paperboard
International:
Kwidzyn, Poland
Svetogorsk, Russia
DISTRIBUTION
IP Asia
International:
Guangzhou, China
Hong Kong, China
Shanghai, China
Japan
Korea
Singapore
Taiwan 1
Thailand 1
Vietnam 1
FOREST RESOURCES
International:
Approximately 329,400 acres
in Brazil
1) Closed July 2018
2) Closed September 2018
3) Closed December 2018
A-3
2018 CAPACITY INFORMATION
APPENDIX II
(in thousands of short tons except as noted)
U.S.
EMEA
Americas,
other
than U.S.
India
Total
Industrial Packaging
Containerboard (a)
Coated Paperboard
Total Industrial Packaging
Global Cellulose Fibers
Dried Pulp (in thousands of metric tons)
Printing Papers
Uncoated Freesheet & Bristols (b)
Newsprint
Total Printing Papers
13,596
—
13,596
91
428
519
366
—
366
2,914
277
535
1,990
1,162
1,135
—
75
—
1,990
1,237
1,135
—
—
—
—
266
—
266
14,053
428
14,481
3,726
4,553
75
4,628
(a) In addition to Containerboard, this also includes saturated kraft, kraft bag, and gypsum.
(b) In addition to Uncoated Freesheet and Bristols, includes bleached multiwall bag and plate.
Forest Resources
We own, manage or have an interest in
approximately 1.4 million acres of forestlands
worldwide. These forestlands and associated
acres are located in the following regions:
Brazil
We have harvesting rights in:
Russia
Total
(M Acres)
329
1,047
1,376
A-4
INTERNATIONAL PAPER LEADERSHIP
As of April 1, 2019
Mark S. Sutton
Chairman of the Board
and Chief Executive Officer
W. Michael Amick, Jr.
Senior Vice President
Paper the Americas and India
Tommy S. Joseph
Senior Vice President
Manufacturing, Technology,
Environment, Health and Safety
and Global Sourcing
Timothy S. Nicholls
Senior Vice President and
Chief Financial Officer
Thomas J. Plath
Senior Vice President
Human Resources and
Global Citizenship
Jean-Michel Ribiéras
Senior Vice President
Industrial Packaging
the Americas
Sharon R. Ryan
Senior Vice President
General Counsel and
Corporate Secretary
John V. Sims
Senior Vice President
and President
International Paper
Europe, Middle East,
Africa and Russia
Catherine I. Slater
Senior Vice President
Global Cellulose Fibers and
IP Asia
Gregory T. Wanta
Senior Vice President
North American Container
Santiago Arbelaez
Vice President
Industrial Packaging
International Paper Brazil
September G. Blain
Vice President
Finance and
Strategic Planning
Industrial Packaging
Paul J. Blanchard
Vice President
Supply Chain
Industrial Packaging
Vincent P. Bonnot
Vice President
Finance, Controller and
Chief Accounting Officer
Eric Chartrain
Vice President and
General Manager
Packaging
Europe, Middle East and
Africa
Thomas A. Cleves
Vice President
Global Citizenship
Kirt Cuevas
Vice President
Environment,
Health and Safety
Rodrigo Davoli
Vice President
Latin America Papers
President
International Paper Brazil
Donald P. Devlin
Vice President and
Chairman of the Board and
Chief Executive Officer
International Paper India
Clay R. Ellis
Vice President
Manufacturing
Global Cellulose Fibers
Roman B. Gallo
Vice President
Manufacturing
North American Papers
Aimee K. Gregg
Vice President and
General Manager
Recycling and Recovered Fiber
James P. Royalty, Jr.
Vice President
Corporate Development and
Disruptive Technologies
John F. Grover
Vice President
Enterprise Converting
Optimization
North American Container
Guillermo Gutierrez
Vice President
Investor Relations
William T. Hamic
Vice President and
General Manager
Containerboard and Recycling
Errol A. Harris
Vice President and Treasurer
Russell V. Harris
Vice President
Manufacturing
Containerboard
Peter G. Heist
Vice President
North Area
North American Container
Robert M. Hunkeler
Vice President
Trust Investments
Chris J. Keuleman
Vice President
Global Government Relations
David A. Liebetreu
Vice President
Global Sourcing
Allison B. Magness
Vice President
South Area
North American Container
Brian N.G. McDonald
Vice President
Strategic Planning
Bathsheba T. Sams
Vice President
Human Resources
Industrial Packaging
the Americas
Fred A. Towler
Vice President
Human Resources,
Talent Management and
Global Mobility and
Chief Diversity Officer
Keith R. Townsend
Vice President and President
International Paper Russia
Marc Van Lieshout
Vice President
Corporate Audit
Kent L. Walker
Vice President
Product Development,
Innovation and
Customer Technical Service
Global Cellulose Fibers
Robert W. Wenker
Vice President and
Chief Information Officer
Hunter Whiteley
Vice President
Manufacturing
Enterprise Initiatives
Patrick Wilczynski
Vice President
Technology and
Strategic Initiatives
Ron P. Wise
Vice President
Commercial and
National Accounts
North American Container
ILIM GROUP
SENIOR LEADERSHIP
Ksenia Sosnina
Chief Executive Officer
Mark M. Azzarello
Vice President
Human Resources, Global
Compensation and Benefits
Gary M. Gavin
Vice President
West Area
North American Container
Brett A. Mosley
Vice President
Manufacturing
Containerboard
Marcio Bertoldo
Vice President
Manufacturing
Latin America
Hans M. Bjorkman
Vice President and
General Manager
European Papers
Greg C. Gibson
Vice President and
General Manager
North American Papers
Holly Goughnour
Vice President
Tax
Mark P. Nellessen
Vice President
Financial Planning and Analysis
Chris R. Read
Vice President
Manufacturing
Europe, Middle East, Africa
and Russia
A-1
BOARD OF DIRECTORS
As of April 1, 2019
Mark S. Sutton
Chairman of the Board and Chief Executive Officer
International Paper Company
William J. Burns
President
The Carnegie Endowment for International Peace
Christopher M. Connor
Retired Executive Chairman
The Sherwin-Williams Company
Ahmet C. Dorduncu
Chief Executive Officer
Akkök Group
Ilene S. Gordon
Presiding Director
Retired Executive Chairman
Ingredion Incorporated
Anders Gustafsson
Chief Executive Officer
Zebra Technologies Corporation
Jacqueline C. Hinman
Former Chairman, President & Chief Executive Officer
CH2M HILL Companies, Ltd.
Clinton A. Lewis, Jr.
Executive Vice President & Group President
International Operations, Commercial Development,
Global Genetics and Aquatic Health
Zoetis Inc.
Kathryn D. Sullivan
Senior Fellow
Potomac Institute for Policy Studies and
Ambassador-at-Large
Smithsonian National Air & Space Museum
J. Steven Whisler
Retired Chairman and Chief Executive Officer
Phelps Dodge Corporation
Ray G. Young
Executive Vice President and Chief Financial Officer
Archer Daniels Midland Company
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
International Paper Company
6400 Poplar Avenue Memphis, TN 38197
(901) 419-9000
ANNUAL MEETING
The next annual meeting of shareholders will be held at
International Paper’s corporate headquarters in Memphis, TN,
at 11:00 a.m. CDT on Monday, May 13, 2019.
TRANSFER AGENT AND REGISTRAR
Computershare, our transfer agent, maintains the records
of our registered shareholders and can help with a variety of
shareholder related services at no charge including:
• Change of name or address
• Consolidation of accounts
• Duplicate mailings
• Dividend reinvestment enrollment
• Lost stock certificates
• Transfer of stock to another person
• Additional administrative services
Telephone:
(800) 678-8715 (U.S.)
(201) 680-6578 (International)
MAILING ADDRESSES
Shareholder correspondence should be mailed to:
Computershare Investor Services
P.O. Box 505000
Louisville, KY 40233-5000
USA
Overnight mail delivery:
Computershare Investor Services
462 South 4th Street, Suite 1600
Louisville, KY 40202
USA
SHAREHOLDER WEBSITE
www.computershare.com/investor
Shareholder online inquiries
https://www-us.computershare.com/investor/Contact
STOCK EXCHANGE LISTINGS
Common shares (symbol: IP) are listed on the New York
Stock Exchange.
DIRECT PURCHASE PLAN
Under our plan, you may invest all or a portion of your dividends,
and you may purchase up to $20,000 of additional shares
each year. International Paper pays most of the brokerage
commissions and fees. You may also deposit your certificates
with the transfer agent for safekeeping. For a copy of the plan
prospectus, call or write to Computershare.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
100 Peabody Place, Suite 800
Memphis, TN 38103
REPORTS AND PUBLICATIONS
This Annual Performance Summary is being delivered
to our shareholders to comply with the annual report
delivery requirements of the New York Stock Exchange
and Rule 14a-3 under the Securities Exchange Act. All
information required by those applicable rules is contained
in this Annual Performance Summary, including certain
information contained in the Form 10-K included herein,
which has previously been filed with the Securities and
Exchange Commission. Copies of this Annual Performance
Summary (including the 10-K), SEC filings and other
publications may be obtained free of charge by visiting our
website, http://www.internationalpaper.com, by calling
(800)332-8146, or by writing to our investor relations
department at the corporate headquarters address
listed above.
INVESTOR RELATIONS
Investors desiring further information about International Paper
should contact the investor relations department at corporate
headquarters, (901) 419-9000.
A-2
International Paper has a long relationship with Sanderson Farms, one of the largest poultry producers in the United States. By partnering with our customer to develop innovative packaging solutions, Sanderson Farms is able to serve millions of consumers. Sanderson Farms supplies chicken to grocery stores across the country with our ClimaShield® packaging — About the cover…At International Paper, creating value for the future is all about people: employees, customers, suppliers, community members, shareowners and all other stakeholders. That’s why we’re highlighting a few of these people in our suite of 2018 reports. This cover features an employee, a tree farmer, a child in one of our communities and Dusty Braddock, who works for our customer, Sanderson Farms. Learn more about Dusty below, and about all our stakeholders at InternationalPaper.com/reports. corrugated boxes with an environmentally-friendly moisture barrier. Our team members regularly visit Dusty and his team at Sanderson Farms to ensure we exceed expectations and continue working together toward recyclable packaging solutions.Dusty BraddockCorporate Purchasing, Sanderson FarmsLearn more at InternationalPaper.com/reports25,000Customers in 150 Countries$23 BillionTotal Revenue in 2018More than 52,000 Global EmployeesLEFT TO RIGHTGlobal HeadquartersRegional HeadquartersBoard of DirectorsRay G. Young Executive Vice President and Chief Financial Officer Archer Daniels Midland CompanyClinton A. Lewis, Jr. Executive Vice President and Group President International Operations, Commercial Development, Global Genetics and Aquatic Health Zoetis Inc.William J. Burns President The Carnegie Endowment for International PeaceIlene S. Gordon Presiding Director Retired Executive Chairman Ingredion IncorporatedJ. Steven Whisler Retired Chairman and Chief Executive Officer Phelps Dodge CorporationAhmet C. Dorduncu Chief Executive Officer Akkök GroupJay L. Johnson Retired Chairman and Chief Executive Officer General Dynamics Corporation (Retired December 31, 2018)International Paper Company 6400 Poplar Avenue Memphis, TN 38197 United States of AmericaInternational Paper Asia 8F, Building A Xuhui Vanke Center 55 Ding An Road Shanghai, 200235, ChinaInternational Paper Brazil Avenida Engenheiro Luís Carlos Berrini, 105 - 16 andar, São Paulo, SP, BrazilInternational Paper Europe, Middle East and Africa (EMEA) Chaussée de la Hulpe 166 1170 Brussels, BelgiumInternational Paper India Krishe Sapphire Building 8th Floor Hitech City Main Road, Madhapur Hyderabad 500 081, IndiaInternational Paper Russia Kropotkina Street 1, Litera I Saint Petersburg, 197101, RussiaMark S. Sutton Chairman and Chief Executive Officer International Paper CompanyChristopher M. Connor Retired Executive Chairman The Sherwin-Williams CompanyJacqueline C. Hinman Former Chairman, President and Chief Executive Officer CH2M HILL Companies, Ltd.David J. Bronczek Retired President and Chief Operating Officer FedEx Corporation (Retired February 28, 2019)Not Pictured:Anders Gustafsson Chief Executive Officer Zebra Technologies Corporation (Effective March 1, 2019)Kathryn D. Sullivan Senior Fellow Potomac Institute for Policy Studies and Ambassador-at-Large Smithsonian National Air and Space Museum InternationalPaper.com
©2019 International Paper Company. All rights reserved. Accent, Ballet, by George, Chamex, ClimaShield, Elegance, Hammermill, International Paper logo, PRO-DESIGN, REY and SvetoCopy are registered trademarks of International Paper Company or its affiliates. POL is a trademark of International Paper Company or its affiliates.“World’s Most Ethical Companies” and “Ethisphere” names and marks are registered trademarks of Ethisphere LLC. “FORTUNE and The World’s Most Admired Companies are registered trademarks of Time Inc. and are used under license.” From FORTUNE Magazine, February 1, 2019. ©2019 Time Inc. used under license. FORTUNE and Time Inc. are not affiliated with, and do not endorse products or services of, International Paper Company. All product names, logos and brands are property of their respective owners.Annual Performance Summary printed on Accent® Opaque Cover Smooth 100lb. and Text Smooth 100lb. 10-K printed on Accent® Opaque Text Smooth 50lb.