International Paper Company — Form 10-Q Summary
Business Context and Reporting Period
International Paper filed its unaudited Form 10-Q for the three months ended March 31, 2018. Its principal segments were Industrial Packaging, Global Cellulose Fibers and Printing Papers. The company also held equity interests in Ilim Holding S.A. and Graphic Packaging International, LLC.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $5.621 billion | $5.132 billion | +10% |
| Earnings from continuing operations | $362 million | $192 million | +$170 million |
| Net earnings attributable to International Paper | $729 million | $209 million | +$520 million |
| Diluted EPS | $1.74 | $0.50 | +$1.24 |
| Diluted EPS from continuing operations | $0.86 | $0.46 | +$0.40 |
| Adjusted operating earnings | $395 million | $232 million | +$163 million |
| Adjusted operating EPS | $0.94 | $0.56 | +$0.38 |
| Cash provided by operations | $663 million | $633 million | +$30 million |
| Free cash flow | $174 million | $259 million | -$85 million |
Net margin was approximately 13.0%, while continuing-operations earnings represented approximately 6.4% of sales. Adjusted operating earnings represented approximately 7.0% of sales. Business segment operating profit was $512 million, compared with $414 million in the prior-year quarter.
- Industrial Packaging sales were $3.827 billion and operating profit was $437 million, compared with $3.577 billion and $384 million, respectively.
- Global Cellulose Fibers sales were $677 million and operating profit was $11 million, compared with $564 million and a $70 million operating loss, respectively.
- Printing Papers sales were $1.053 billion and operating profit was $64 million, compared with $995 million and $100 million, respectively.
- Ilim equity earnings increased to $92 million from $50 million; Ilim paid International Paper a $116 million dividend.
Balance Sheet, Debt and Liquidity
- Cash and temporary investments were $1.141 billion at March 31, 2018, up from $1.018 billion at December 31, 2017.
- Total debt was approximately $11.346 billion, including $10.759 billion of long-term debt and $587 million of current maturities and notes payable. The company also reported $6.293 billion of nonrecourse financial liabilities related to special purpose entities.
- Commercial paper borrowings were $375 million under a $750 million program, at a weighted-average interest rate of 2.33%.
- The company had $2.1 billion of credit agreements, including a $1.5 billion committed facility expiring in December 2021. No borrowings were outstanding under the bank facility or receivables securitization program.
- Capital expenditures were $489 million in the quarter. Full-year 2018 capital spending was expected to be approximately $1.5 billion.
- Cash dividends paid were $197 million, or $0.4750 per common share. The company repurchased stock and paid restricted-stock tax withholding of $31 million.
Material Changes Versus Comparable Period
- Revenue increased 10%, primarily from higher realized prices and favorable demand across the portfolio. Higher prices contributed approximately $198 million to continuing-operations earnings, partly offset by unfavorable mix.
- Continuing-operations earnings rose to $361 million attributable to International Paper shareholders from $192 million. Benefits included higher pricing, increased Ilim earnings, lower interest expense, lower taxes and lower non-operating pension expense.
- These gains were partly offset by higher operating, raw-material, freight and mill-maintenance costs. Planned maintenance outage costs were approximately $44 million higher than in Q1 2017.
- Free cash flow declined because capital spending increased to $489 million from $374 million, despite higher operating cash flow.
- The company completed the transfer of its North American Consumer Packaging business to Graphic Packaging on January 1, 2018, receiving a 20.5% equity interest. It recorded a $516 million pretax gain, or $385 million after tax, producing $368 million of discontinued-operations earnings in Q1 2018.
- International Paper adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by $73 million. The standard increased reported Q1 sales by $22 million and net earnings by $5 million versus amounts calculated without adoption.
- A $22 million pretax restructuring charge was recorded, primarily for severance of 221 employees related to EMEA Packaging optimization.
Guidance, Outlook, Commentary and Risks
Management expected Q2 2018 benefits from prior price increases and improved mix, seasonally higher volumes in North American Industrial Packaging and Printing Papers, and lower operating disruption costs as severe Q1 weather conditions did not repeat. Approximately 75% of annual maintenance outages were expected to be completed by the end of Q2. The Madrid mill was expected to start up during Q2, producing approximately 400,000 metric tons of lightweight recycled containerboard annually.
- Input costs remained a concern, although management expected lower recovered-fiber costs and generally stable or lower costs in several businesses.
- Q1 performance was affected by severe weather, rail and truck capacity constraints, unplanned outages, and operational incidents at the Kwidzyn mill in Poland.
- Management proposed acquiring Smurfit Kappa for approximately €9.5 billion under a revised proposal, but Smurfit Kappa rejected the proposal and no agreement had been reached.
- The company continued evaluating the final accounting effects of the 2017 Tax Cuts and Jobs Act. It had recorded a provisional $1.22 billion net tax benefit in 2017; the accounting remained incomplete and could change by December 2018.
- Environmental remediation liabilities were estimated at approximately $131 million. The Harris County, Texas matter could result in material additional losses, although the amount could not be estimated. The Kalamazoo River matter resulted in a court allocation of 15% of approximately $50 million of past costs, plus interest; future costs remained uncertain.
- Antitrust litigation involving containerboard pricing and a contract dispute involving a $137 million judgment were being appealed or defended. The company stated that outcomes could not be estimated in several matters and that the contract judgment was expected to result in an immaterial loss.
- Principal ongoing risks included indebtedness and interest rates, commodity, energy and freight costs, product demand and pricing, foreign exchange, pensions, taxes, environmental obligations, litigation, manufacturing disruptions, joint ventures and strategic transactions.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $368 million discontinued-operations gain related to the Graphic Packaging transaction.
- Reconcile GAAP earnings with adjusted operating earnings and confirm the treatment of the $40 million pretax special items and $4 million non-operating pension expense.
- Monitor whether pricing gains offset maintenance, freight, labor, energy, wood, chemical and recycled-fiber cost inflation.
- Assess the effect of the $1.5 billion 2018 capital-spending plan on free cash flow, leverage and dividend coverage.
- Track the provisional Tax Cuts and Jobs Act accounting, including potential changes to deferred taxes, transition tax and GILTI treatment.
- Evaluate environmental, antitrust and contract contingencies, particularly Harris County, Kalamazoo River and the appealed Signature judgment.
- Confirm the status and financing implications of any potential Smurfit Kappa transaction.