UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange

 

Retirement Benefits

The Company adopted the FASB issuedprovision of ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost."Cost" on January 1, 2018. Under this new guidance, employers will present the service costs component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will beis eligible for capitalization in assets. Employers will present the other components separately from the line items(s) that includes the service cost and outside of any subtotal of operating income. In addition, disclosure of the line(s) used to present the other components of net periodic benefit cost will beare required if the components are not presented separately in the income statement. This guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is currently evaluating the provisions of this guidance; however, we expect the adoption of ASU 2017-07 to result in a change in our adjusted operating profit, which will be offset by a corresponding change in non-operating pension expense to reflectfollowing table details the impact of presenting the amortization of the prior service cost component of net periodic pension expense outside of operating income. We expect to adopt the provisionsretrospective adoption of this guidancestandard on January 1, 2018 using2017 first quarter amounts reported in the accompanying condensed consolidated statement of operations and on full-year amounts for 2017, 2016 and 2015 reported in in the Company's 2017 Form 10-K. The retrospective method and do not anticipate a material change to our 2017 adjusted operating profit or non-operating pension expense when they are recast to reflect the standard. We also do not expect ASU 2017-07 to have a materialadoption had no impact on our consolidated statements of financial position or cash flows.

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." Under the new guidance, an entity must first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If this threshold is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. This guidance iswas effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company is currently evaluatingadopted the provisions of this guidance.

Income Taxes

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

Stock Compensation

In March 2016,May 2017, the FASB issued ASU 2016-09, Compensation2017-09, "Compensation - Stock Compensation (Topic 718): "ImprovementsScope of Modification Accounting." This guidance clarifies when changes to Employee Share-Based Payment Accounting."the terms or conditions of a share-based payment award must be accounted for as modifications. Under this new guidance, all excess tax benefits and tax deficienciesentities will be recognized inapply the income statement as they occur and will therefore impactmodification accounting guidance if the Company's effective tax rate.value, vesting conditions or classification of the award changes. This guidance replaces current guidance which requires tax benefits that exceed compensation costs (windfalls) to be recognized in equity. The new guidance will also change the cash flow presentation of excess tax benefits, classifying them as operating inflows rather than financing activities as they are currently classified. In addition, the new guidance will allow companies to provide net settlement of stock-based compensation to cover tax withholding as long as the net settlement doesn't exceed the maximum individual statutory tax rate in the employee's tax jurisdiction. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. This ASU iswas effective for annual reporting periods beginning after December 15, 2016,2017, and interim periods withwithin those years. The Company adopted the provisions of this ASU in the first quarter of 2017 10-Qguidance on January 1, 2018, with no material impact on the consolidated financial statements.

Leases

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

Revenue Recognition

On January 1, 2018, the FASB issued ASU 2014-09,Company adopted the new revenue recognition standard ASC 606, "Revenue from Contracts With Customers," (new revenue standard) and all related amendments, using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of Retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

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

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

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

Due to the recurring nature of our sales of these customized goods, or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU was effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years and permits the use of either the retrospective or cumulative effect transition method; however, in August 2015, the FASB issued ASU 2015-14 which defers the effective date by one year making the guidance effective for annual reporting periods beginning after December 15, 2017. The FASB has continued to clarify this guidance in various updates during 2015 and 2016, all of which, have the same effective date as the original guidance.

A geographic disaggregation of revenues across our company segmentation in the following table provides information to adoptassist in evaluating the newnature, timing and uncertainty of revenue guidance effective January 1, 2018 usingand cash flows and how they may be impacted by economic factors.

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

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 expectbundle prices; however, we do negotiate with customers on pricing and rebates for the same products based on a variety of factors (e.g. level of contractual volume, geographical location, etc.). Management has concluded that the prices negotiated with each individual customer are representative of the stand-alone selling price of the product.

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

A summary of the changes in equity for the three months ended March 31, 20172018 and 20162017 is provided below:

The following table presents changes in AOCIaccumulated other comprehensive income (AOCI) for the three-month periodthree-months ended March 31, 2016:2018 and 2017:

Basic earnings per common share are computed by dividing earnings by the weighted average number of common shares outstanding. Diluted earnings per common share are computed assuming that all potentially dilutive securities were converted into common shares. There are no adjustments required to be made to net income for purposes of computing basic and diluted EPS. A reconciliation of the amounts included in the computation of basic earnings (loss) per common share, and diluted earnings (loss) per common share is as follows: 

On December 1, 2016,June 30, 2017, the Company finalized the purchase of Weyerhaeuser Company's pulp business for 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.

The following table summarizes the preliminary allocation of the purchase price to theprovisional fair value ofassigned to assets and liabilities acquired as of December 1, 2016.June 30, 2017:

DueAdjustments, if any, to the timing of the completion of the acquisition, the purchase price allocation is preliminary and could be revised as a result of additional information obtained regarding assets acquired and liabilities assumed, and revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to inventory, property, plant and equipment and intangible assets. These changes to the purchase price allocation could be significant. The purchase price allocationamounts will be finalized within the measurement period of up to one year from the acquisition date.

Additionally, the supply contract estimated losses were increased by $3 millionAll historical operating results for North American Consumer Packaging are included in Discontinued operations, net of tax in the first quarter of 2017 based on actual operating results since acquisition. The resulting net $6 million gain was recorded to Net bargain purchase gain on acquisition of business in the accompanyingaccompany consolidated statement of operations.

Total cash provided by (used for) operations related to the IP AsiaNorth American Consumer Packaging business included in the Company's consolidated statement of operations were $41$(23) million and $23 million for the three months ended March 31, 2016.2018 and March 31, 2017 is included in Cash Provided By (Used For) Operations in the consolidated statement of cash flows. Total cash provided by (used for) investing activities related to the North American Consumer Packaging business of $1 million and $(25) million for the three months ended March 31, 2018 and March 31, 2017, is included in Cash Provided By (Used For) Investing Activities in the consolidated statement of cash flows.

Temporary Investments 

Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $727$723 million and $757$661 million at March 31, 20172018 and December 31, 2016,2017, respectively.

The allowance for doubtful accounts was $72$75 million and $70$73 million at March 31, 20172018 and December 31, 2016,2017, respectively.

Inventories 

Depreciation 

Accumulated depreciation was $22.0$20.8 billion and $21.6$20.5 billion at March 31, 20172018 and December 31, 2016.2017. Depreciation expense was $324$306 million and $267$299 million for the three months ended March 31, 20172018 and 2016,2017, respectively.

Interest

Interest payments made during the three months ended March 31, 2018 and 2017 and 2016 were $212$223 million and $136$212 million, respectively.

Amounts related to interest were as follows: 

Goodwill

The following table presents changes in goodwill balances as allocated to each business segment for the three-month periodthree-months ended March 31, 2017:2018: 

 

Other Intangibles

Identifiable intangible assets comprised the following: 

The Company recognized the following amounts as amortization expense related to intangible assets: 

International Paper made income tax payments, net of refunds, of $29$20 million and $6$29 million for the three months ended March 31, 20172018 and 2016,2017, respectively.

International Paper has been named as a potentially responsible party (PRP) in environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Many of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received

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

Remediation costs are recorded in the consolidated financial statements when they become probable and reasonably estimable. International Paper has estimated the probable liability associated with these matters to be approximately $134$131 million ($143 million undiscounted) in the aggregate at March 31, 2017.2018. Other than as described above,below, completion of required remedial actions is not expected to have a material effect on our consolidated financial statements.

hich was concluded in late 2015. A decision has not been rendered and it is unclear to what extentIn March 2018, the Court willissued an Opinion addressing the Company's liability for past costs. The Court fixed the past cost amount at approximately $50 million (plus interest to be determined) and allocated to the Company a 15% share of responsibility for those past costs. The Court did not address responsibility for future remediation costs in thatits decision. We areAs to future remediation costs, the Company remains unable to predict the outcome or estimate our maximum reasonably possible loss.loss with respect to this site. However, we do not believe that any material loss is probable.

The Company isInternational Paper and MIMC/WMI are also defending an additional lawsuit related to the San Jacinto River Superfund Sitesite brought by approximately 400600 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.

before a jury in Beaumont, Texas, in May 2017. On June 1, 2017, the preliminary stage.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 does not believe that a material loss is probable. During the second quarter of 2016, the Company received a favorable first instance judgment vacating the State's assessment.has appealed this judgment. The Company anticipates thathas numerous and strong bases for appeal, and we believe we will prevail on appeal. Because the State will appealappellate proceedings are in a preliminary stage, we are unable to estimate a range of reasonably possible loss, but we expect the judgment.amount of any loss to be immaterial.

General

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

As of March 31, 2017,2018, the fair value of the Timber Notes and Extension Loans is $4.74$4.68 billion and $4.29$4.22 billion, respectively, for the 2015 Financing Entites.Entities. The Timber Notes and Extension Loans are classified as Level 2 within the fair value hierarchy, which is further defined in Note 14 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.