International Paper Company: Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
International Paper reported results for the three and nine months ended September 30, 2021. The company operated through Industrial Packaging, Global Cellulose Fibers and Printing Papers. On October 1, 2021, it completed the tax-free spin-off of Printing Papers and related businesses into Sylvamo Corporation, retaining a 19.9% interest intended for monetization within one year. Historical Printing Papers results will be presented as discontinued operations beginning in the fourth quarter of 2021.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $5.714 billion | $5.123 billion | $16.693 billion | $15.341 billion |
| Net earnings attributable to IP | $864 million | $204 million | $1.645 billion | $329 million |
| Diluted EPS | $2.20 | $0.52 | $4.16 | $0.83 |
| Net margin | 15.1% | 4.0% | 9.9% | 2.1% |
| Business segment operating profit | $631 million | $473 million | $1.570 billion | $1.413 billion |
| Adjusted operating earnings | $532 million | $280 million | Not clearly provided | Not clearly provided |
| Adjusted operating EPS | $1.35 | $0.71 | Not clearly provided | Not clearly provided |
| Cash provided by operations | Not separately provided | Not separately provided | $1.923 billion | $2.274 billion |
| Free cash flow | Not separately provided | Not separately provided | $1.575 billion | $1.617 billion |
Q3 operating profit margin was approximately 11.0%, compared with 9.2% in the prior-year quarter. Revenue increased 11.5% year over year in the quarter and 8.8% for the first nine months. Nine-month operating cash flow declined 15%, while free cash flow declined 3%.
Segment Performance
| Segment | Q3 2021 Sales | Year-over-Year Sales Change | Q3 2021 Operating Profit | Year-over-Year Profit Change |
|---|---|---|---|---|
| Industrial Packaging | $4.087 billion | +8% | $429 million | -9% |
| Global Cellulose Fibers | $729 million | +29% | $96 million | Improved from $(59) million |
| Printing Papers | $846 million | +14% | $106 million | +68% |
Management cited stronger pricing and mix, solid demand and lower maintenance downtime as major benefits. These were partly offset by substantially higher fiber, energy, freight, labor and other operating costs, as well as transportation and port congestion that constrained volumes.
Balance Sheet, Debt and Liquidity
- Cash and temporary investments were $2.122 billion at September 30, 2021, compared with $595 million at December 31, 2020. Restricted cash was $1.499 billion, primarily related to Sylvamo debt proceeds.
- Total cash, temporary investments and restricted cash were $3.621 billion at quarter-end.
- Current and long-term International Paper debt totaled approximately $8.474 billion, excluding nonrecourse variable-interest-entity liabilities. The filing reports approximately $8.5 billion of debt at fair value of $10.2 billion.
- Long-term nonrecourse financial liabilities of variable interest entities were $2.098 billion. The related 2015 financing structures matured in August 2021, generating approximately $630 million of cash representing International Paper’s equity in the entities and creating an expected $72 million fourth-quarter tax liability.
- The company had no borrowings under its $1.5 billion committed bank facility, up to $550 million receivables securitization program or $1.0 billion commercial paper program.
- International Paper was in compliance with its debt covenants. The covenants require minimum defined net worth of $9 billion and a total debt-to-capital ratio below 60%.
- Capital expenditures were $348 million for the first nine months. Full-year 2021 capital spending was expected to be approximately $600 million.
- The company paid $602 million of dividends and repurchased $425 million of stock during the first nine months. On October 12, 2021, the board authorized an additional $2 billion of repurchases and reduced the quarterly dividend from $0.5125 to $0.4625 per share beginning in the fourth quarter.
Material Changes Versus Prior Comparable Period
- Q3 net earnings attributable to International Paper increased to $864 million from $204 million, primarily due to higher pricing and mix, improved equity earnings, lower interest expense, lower maintenance costs and favorable special items.
- Q3 earnings included a $350 million after-tax gain on the sale of the Kwidzyn, Poland mill, a $65 million after-tax gain on the sale of the La Mirada distribution center and other unusual items. These gains materially benefited GAAP earnings.
- Equity earnings increased substantially, driven principally by International Paper’s 50% interest in Ilim, which contributed $95 million in Q3 2021 versus a $33 million loss in Q3 2020.
- Industrial Packaging sales increased, but operating profit declined because higher fiber, energy, transportation, labor and other costs more than offset pricing gains.
- Global Cellulose Fibers returned to profitability, reflecting improved pricing and mix and lower downtime, although port congestion and input costs remained significant constraints.
- The company’s pension position improved materially. Pension assets were $545 million at September 30, 2021 versus $5 million at year-end 2020, including the effect of plan remeasurement and the transfer of assets and liabilities to the Sylvamo pension plan.
Guidance, Outlook, Risks and Unusual Items
- For Q4, management expected Industrial Packaging pricing and mix, volumes and operations to improve moderately, but anticipated higher fiber and energy costs and continued supply-chain pressure.
- Global Cellulose Fibers pricing and mix were expected to remain stable, while volumes could decline modestly because of port congestion. Maintenance, wood fiber, energy and other input costs were expected to increase.
- Equity earnings from Ilim were expected to decrease modestly in Q4; Ilim pricing and margins were also expected to decline from Q3 levels.
- COVID-19 continued to create uncertainty relating to demand, labor availability, inflation, transportation, supply shortages, government restrictions and potential new variants. Most facilities remained operational.
- Environmental remediation liabilities totaled approximately $187 million. Additional losses could arise in the Kalamazoo River matter and other environmental proceedings.
- Brazilian tax authorities have assessed approximately $107 million of tax plus $351 million of interest, penalties and fees relating to goodwill amortization. International Paper stated that it intends to defend the matter; the tax matters agreement allocates specified amounts between International Paper and Sylvamo, and the potential fourth-quarter liability had not yet been quantified.
- Asbestos-related liabilities were $112 million net of estimated insurance recoveries. The company stated that additional material losses were not considered probable, although excess losses remained reasonably possible.
- The company expects to incur additional restructuring charges under its “Building a Better IP” initiative, which could be material, but the plans had not been finalized.
Most Important Facts for Investors to Verify
- Recast fourth-quarter and future financial statements showing Printing Papers as discontinued operations and the resulting post-spin-off revenue, earnings and cash-flow profile.
- Use of proceeds from the Sylvamo transaction, including the approximately $1.4 billion cash distribution and monetization of International Paper’s retained 19.9% Sylvamo interest.
- The sustainability of reported earnings after excluding the Kwidzyn sale gain, other special items and favorable pension income.
- Whether pricing gains can offset continued inflation in fiber, energy, freight, labor and other operating costs.
- The financial impact and final allocation of the Brazilian tax contingency and the $72 million tax liability associated with the terminated variable-interest-entity structure.
- Progress on debt reduction, share repurchases, the reduced dividend and the company’s post-spin-off leverage and liquidity.
- Exposure to COVID-19, transportation bottlenecks, port congestion, labor shortages, environmental matters and other litigation contingencies.