International Paper Company — Q2 2013 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, 2013. The company operates in Industrial Packaging, Printing Papers, Consumer Packaging and Distribution, with a 50% equity interest in Ilim Holding in Russia. Results include Temple-Inland operations acquired in February 2012 and the 2013 acquisitions or formations of Olmuksan in Turkey and Orsa IP in Brazil.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Net sales | $7.335 billion | $7.077 billion | $14.425 billion | $13.732 billion |
| Earnings from continuing operations attributable to IP | $235 million | $118 million | $527 million | $301 million |
| Net earnings attributable to IP | $259 million | $134 million | $577 million | $322 million |
| Diluted EPS from continuing operations | $0.52 | $0.27 | $1.18 | $0.68 |
| Diluted net EPS | $0.57 | $0.31 | $1.29 | $0.73 |
| Industry segment operating profit | $601 million | $426 million | $1.107 billion | $888 million |
| Cash provided by operations | Not separately provided | Not separately provided | $1.279 billion total; $1.239 billion continuing operations | $1.375 billion total; $1.411 billion continuing operations |
Q2 net earnings attributable to International Paper increased to $259 million from $134 million, while diluted net EPS rose to $0.57 from $0.31. Approximate Q2 net earnings margin was 3.5%, continuing-operations margin was 3.2%, and industry segment operating-profit margin was 8.2%. Six-month net earnings margin was approximately 4.0%.
Free cash flow, a non-GAAP measure, was $752 million for the first six months, compared with $619 million in the prior-year period. Capital spending was $488 million, versus $705 million in the prior-year period. Management expects approximately $1.4 billion of full-year 2013 capital spending.
At June 30, 2013, cash and temporary investments were $1.205 billion. Current assets were $9.268 billion versus current liabilities of $5.677 billion. Notes payable and current maturities of long-term debt were $1.068 billion, long-term debt was $9.057 billion, and nonrecourse financial liabilities of special purpose entities were $2.040 billion. The company reported approximately $10.1 billion of debt at fair value of approximately $11.5 billion.
Contractually committed credit agreements totaled $2.5 billion, including a $1.5 billion bank facility expiring in August 2016 and up to $1.0 billion of receivables-based commercial paper financing. The company stated that existing cash, operating cash flow and credit facilities should meet 2013 capital expenditures, debt service, working capital and dividend requirements.
Material Changes Versus Comparable Periods
- Q2 net sales increased 4% year over year, primarily reflecting higher price realizations and increased volumes.
- Industry segment operating profit increased 41% year over year to $601 million. Industrial Packaging operating profit rose to $474 million from $260 million, supported by pricing, seasonal volumes and fewer market-related outages.
- Printing Papers operating profit declined to $76 million from $104 million, mainly because of higher maintenance outages, weaker North American pricing and a $28 million bad-debt reserve.
- Consumer Packaging operating profit declined to $51 million from $57 million; pricing and competitive pressures weighed on results despite higher sales.
- Distribution reported approximately break-even operating profit, compared with $5 million in Q2 2012, including $17 million of xpedx reorganization costs.
- Equity losses from Ilim increased to $34 million from $25 million, principally because of foreign-exchange losses on U.S.-dollar debt and start-up and ramp-up costs.
- Continuing-operations cash flow declined to $1.239 billion from $1.411 billion because working capital used $394 million, compared with providing $47 million in the prior-year period.
- Net pension expense increased to $279 million for the first six months from $170 million, primarily due to a lower discount rate and higher amortization of actuarial losses.
- The quarterly common dividend increased to $0.30 per share from $0.2625; six-month dividends were $0.60 per share versus $0.525.
Guidance, Outlook, Risks and Unusual Items
Management expected Q3 2013 seasonally lower North American Industrial Packaging volumes, partly because of one fewer shipping day, but anticipated higher price realization and substantially lower planned maintenance costs. Consumer Packaging trends were expected to improve, while European packaging remained pressured by economic uncertainty. Brazil paper volumes were expected to increase seasonally. Management also expected higher wood and energy costs in several businesses and lower Ilim foreign-exchange losses because the Q2 adjustment was not expected to recur.
Notable unusual items included a $28 million bad-debt reserve for a large envelope customer that filed for bankruptcy, Q2 restructuring and other charges recorded as a $4 million pretax gain, $13 million of bargain-purchase gain related to the Turkish acquisition, Temple-Inland integration costs, and substantial pension expense excluded from management’s non-GAAP Operating Earnings measure.
After June 30, the company repaid approximately $98 million of debt and elected to redeem a $300 million, 7.40% note on August 20, 2013; estimated early-extinguishment costs were approximately $17 million. The Temple-Inland Building Products division was sold on July 19, 2013 for $710 million in cash, subject to closing adjustments.
Environmental remediation liabilities were estimated at approximately $96 million. Significant matters included the Kalamazoo River, San Jacinto River and Bogalusa environmental proceedings, antitrust litigation involving containerboard and gypsum board, and a Brazilian tax matter with potential exposure of approximately $29 million. The company stated that several matters were too preliminary to estimate and that no material change had occurred in previously disclosed risk factors.
Unrecognized tax benefits were $867 million at June 30, 2013. Management estimated that approximately $750 million could be reduced during the following 12 months, with approximately $680 million expected to benefit the effective tax rate, subject to settlements and statute expirations.
Most Important Facts for Investors to Verify
- Whether pricing gains in Industrial Packaging offset expected seasonal volume declines, higher fiber costs and European market pressure.
- The sustainability of free cash flow after approximately $1.4 billion of planned 2013 capital spending, dividends, pension contributions and debt repayments.
- Debt maturities, including $733 million due in 2014 and $1.908 billion due in 2018, and the effect of the planned $300 million note redemption.
- The final purchase-price allocations for Olmuksan and Orsa IP, which remained preliminary at June 30, 2013.
- The resolution and timing of the estimated $750 million reduction in unrecognized tax benefits.
- The financial impact of pension obligations, potential additional 2013 contributions and continued elevated non-operating pension expense.
- Exposure from environmental, antitrust, tax and other litigation matters that the filing states cannot yet be reasonably estimated.
- The performance and foreign-exchange exposure of the Ilim joint venture, including ongoing project ramp-up costs.