International Paper Company — 2014 Q2 Form 10-Q Summary
Business context and reporting period
International Paper filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company operates through Industrial Packaging, Printing Papers, Consumer Packaging and Distribution, and holds a 50% equity interest in Ilim Holding S.A. in Russia. The Distribution segment consisted of xpedx, which was spun off on July 1, 2014 and merged with Unisource Worldwide to form Veritiv Corporation.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $7.213 billion | $7.335 billion | $14.227 billion | $14.425 billion |
| Operating profit | $651 million | $601 million | $716 million | $1.107 billion |
| Net earnings attributable to IP | $161 million | $259 million | $66 million | $577 million |
| Continuing-operations diluted EPS | $0.38 | $0.52 | $0.16 | $1.18 |
| Diluted EPS including discontinued operations | $0.37 | $0.57 | $0.15 | $1.29 |
| Cash provided by operations | — | — | $1.000 billion | $1.279 billion |
| Free cash flow | — | — | $634 million | $752 million |
Q2 operating profit margin was approximately 9.0%, compared with 8.2% in the prior-year quarter. Net earnings attributable to International Paper represented approximately 2.2% of sales, compared with 3.5% in Q2 2013. Six-month operating profit margin was approximately 5.0%, compared with 7.7% in the prior-year period.
- Cash and temporary investments were $1.293 billion at June 30, 2014, down from $1.802 billion at December 31, 2013.
- Total current liabilities were $5.393 billion and long-term debt was $8.997 billion. Including current maturities, reported debt was approximately $9.949 billion; its estimated fair value was $11.2 billion.
- Shareholders’ equity was $7.522 billion, down from $8.105 billion at year-end 2013, primarily reflecting share repurchases, dividends and other equity activity.
- Capital spending was $634 million in the first six months, and full-year 2014 capital spending was expected to be approximately $1.4 billion.
- Common dividends paid were $302 million in the first six months, or $0.70 per share, versus $266 million, or $0.60 per share, in the prior-year period.
Material changes versus comparable periods
- Q2 sales declined 2% year over year, while operating profit increased 8%. Higher price realizations and the absence of a prior-year bad-debt provision were partly offset by lower volumes, higher operating and input costs, and greater maintenance costs.
- Q2 net earnings attributable to International Paper declined $98 million year over year, primarily because of $208 million of after-tax special-item losses, including $160 million of debt-extinguishment costs, versus $2 million of special-item losses in Q2 2013.
- Compared with Q1 2014, Q2 earnings improved substantially: diluted EPS increased from a loss of $0.21 to $0.37, and operating profit increased from $65 million to $651 million. The improvement reflected recovery from severe first-quarter weather, higher volumes and lower operating costs, partly offset by maintenance outages and higher interest expense.
- Printing Papers operating profit was $69 million in Q2, compared with a $410 million loss in Q1, but remained below the $76 million earned in Q2 2013. The 2014 results include Courtland mill shutdown costs of $49 million in Q2 and $495 million in Q1.
- Industrial Packaging operating profit rose to $537 million from $474 million year over year. Consumer Packaging profit declined to $33 million from $51 million, while Distribution improved to $12 million from breakeven.
- Equity earnings from Ilim were $43 million, compared with a $34 million loss in Q2 2013, benefiting from operational improvements and a $29 million after-tax foreign-exchange gain on U.S.-dollar debt.
Debt, liquidity and capital allocation
- In June, the company issued $800 million of 3.65% senior notes due 2024 and $800 million of 4.80% senior notes due 2044. Proceeds were used to repay approximately $957 million of higher-cost notes carrying rates of 7.95% to 9.38%.
- The refinancing generated $262 million of pretax early debt-extinguishment costs, including $257 million of cash premiums.
- Debt maturities were listed as $486 million in 2014, $520 million in 2015, $476 million in 2016, $283 million in 2017, $1.3 billion in 2018, $483 million in 2019 and $6.4 billion thereafter.
- At June 30, the company had $2.0 billion of credit agreements, including a $1.5 billion committed facility and up to $500 million of receivables-based financing. On August 5, 2014, the committed facility was replaced with a new $1.5 billion five-year facility expiring in August 2019.
- Credit ratings were BBB with a stable outlook from S&P and Baa2 with a stable outlook from Moody’s.
- The company repurchased $685 million of common stock during the first six months, including $607 million under its repurchase program. As of June 30, it had repurchased 23.3 million shares for approximately $1.07 billion.
Guidance, outlook, risks and unusual items
- Management expected generally stable third-quarter volumes and pricing, with some improvement in North American pulp and Consumer Packaging. Input costs were expected to remain elevated, particularly for wood, energy and chemicals.
- Maintenance outage costs were expected to decline in several businesses after the peak outage quarter, although Ilim was expected to incur higher outage costs and lose the benefit of the Q2 foreign-exchange gain.
- The third quarter would not include xpedx results following the July 1 spin-off and could include transitional costs that are expected to decline over time.
- The Courtland, Alabama mill shutdown generated approximately $544 million of segment charges during the first six months, including accelerated depreciation. Total restructuring and other charges were $841 million pretax in the first six months.
- Environmental remediation liabilities were estimated at approximately $98 million. Significant unresolved matters included the Kalamazoo River Superfund litigation, Harris County/San Jacinto River matters, antitrust claims involving containerboard and gypsum board, and a Brazilian tax dispute with potential exposure of approximately $27 million.
- The company identified risks from indebtedness and interest rates, raw-material, energy and transportation costs, cyclicality and pricing pressure, foreign exchange, pension funding, environmental and litigation exposure, manufacturing disruptions, joint ventures, and execution of acquisitions, divestitures and restructurings.
- The company stated that current cash, operating cash flow and available credit facilities should be sufficient for 2014 capital expenditures, debt service, working capital and dividends. Results for the first six months may not indicate full-year performance.
Most important facts for investors to verify
- Separate recurring operating performance from the substantial Courtland shutdown, debt-refinancing and xpedx-related special items.
- Assess whether the improvement from Q1 is sustainable after the weather recovery, peak maintenance outages and Ilim’s nonrecurring foreign-exchange benefit.
- Review leverage, debt maturities and compliance with the new credit agreement’s minimum net worth and maximum debt-to-capital covenants.
- Evaluate the cash-flow effect of higher capital spending, pension contributions, dividends and share repurchases.
- Monitor the July 1 xpedx/Veritiv separation, transitional costs and the effect of removing Distribution revenue and earnings from future periods.
- Track environmental, antitrust, tax and other litigation exposures for developments that could exceed recorded reserves.