International Paper Company: Q1 2022 Form 10-Q Summary
Business context and reporting period
International Paper reported results for the three months ended March 31, 2022. The Company operated through Industrial Packaging and Global Cellulose Fibers following the October 1, 2021 spin-off of its Printing Papers business and related operations to Sylvamo Corporation. Prior-period results were recast to present the spun-off businesses and the Kwidzyn, Poland mill as discontinued operations.
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $5.237 billion | $4.593 billion | 14% increase |
| Net earnings attributable to International Paper | $360 million | $349 million | 3% increase |
| Continuing operations earnings | $360 million | $267 million | 35% increase |
| Diluted EPS | $0.95 | $0.88 | Increase |
| Adjusted operating earnings | $288 million | $198 million | 46% increase |
| Adjusted operating EPS | $0.76 | $0.50 | Increase |
Financial performance and liquidity
- Operating cash flow was $588 million, compared with $512 million in Q1 2021. Free cash flow was approximately $403 million versus $423 million.
- Capital spending was $185 million, compared with $89 million in the prior-year period. Management expected approximately $1.1 billion of full-year 2022 capital spending.
- Cash and temporary investments were $1.031 billion at March 31, 2022, with an additional $88 million of restricted cash.
- Total debt, including current maturities, was approximately $5.665 billion; the Company also reported $2.1 billion of nonrecourse variable-interest-entity liabilities. Debt fair value was approximately $6.3 billion.
- The Company had no borrowings under its $1.5 billion committed bank facility, receivables securitization program, or $1.0 billion commercial paper program. It was in compliance with its debt covenants.
- Interest expense, net, declined to $69 million from $93 million. The reported effective tax rate was 26%; the adjusted effective tax rate was 27%.
- Business segment operating profit was $348 million, compared with $340 million. Industrial Packaging contributed $397 million, while Global Cellulose Fibers reported a $49 million operating loss.
- Industrial Packaging sales increased to $4.406 billion from $3.930 billion, while operating profit declined to $397 million from $421 million. Global Cellulose Fibers sales increased to $710 million from $595 million, and its operating loss improved from $81 million to $49 million.
- Equity earnings, primarily from the Ilim joint venture, increased to $93 million from $49 million. Ilim dividends received were $204 million.
- The Company repurchased approximately 9.4 million shares and spent $428 million on repurchases and restricted-stock tax withholding. Dividends paid were $174 million, or $0.4625 per share.
Material changes versus comparable periods
- Results benefited from higher selling prices and favorable mix, especially from North American Industrial Packaging and Global Cellulose Fibers price increases.
- Higher energy, chemicals, wood, recovered fiber, freight, distribution, inflation, and logistics costs reduced profitability. Maintenance outage costs were materially higher than in Q1 2021.
- Volumes were lower in several businesses because of Omicron-related labor constraints, seasonality, and continuing logistics challenges.
- Q1 2022 included a $35 million after-tax gain from net special items, primarily a $35 million after-tax fair-value gain on the retained Sylvamo investment. Q1 2021 included a $30 million after-tax net special-item gain and $82 million of discontinued-operations earnings.
- There were no restructuring and other charges in Q1 2022, compared with $30 million in Q1 2021, including debt extinguishment and EMEA Packaging severance costs.
- Share count declined, with diluted weighted-average shares falling to 379.2 million from 394.8 million.
Guidance, outlook, commentary, and risks
- For Q2 2022, management expected higher price and mix in both operating segments and lower maintenance outage costs. Industrial Packaging volumes were expected to improve seasonally; Global Cellulose Fibers volumes were expected to be slightly lower because of logistics constraints.
- Input costs, particularly energy, chemicals, distribution, and in some cases wood, were expected to increase. Management expected approximately 70% of planned full-year maintenance outages to be completed by the end of Q2.
- Management reported $40 million of earnings from its “Building a Better IP” cost and growth initiatives during Q1.
- The Company was actively exploring strategic options, including a sale of its 50% interest in Ilim S.A., and intended to monetize its remaining Sylvamo investment. Timing, valuation, and completion of either transaction were uncertain.
- The Russia-Ukraine conflict and related sanctions could materially affect Ilim, dividend receipts, the value or saleability of the Ilim and Sylvamo investments, supply chains, energy costs, capital markets, and liquidity.
- Other key risks included inflation, labor shortages, transportation constraints, commodity prices, economic cyclicality, interest rates, foreign exchange, environmental liabilities, litigation, cybersecurity, pension obligations, and potential changes in tax or regulatory requirements.
- Environmental remediation liabilities were estimated at approximately $182 million, and asbestos-related liabilities were $101 million net of estimated insurance recoveries.
- The Company recorded a $48 million liability related to its obligations under the Sylvamo tax matters agreement concerning Brazilian goodwill tax assessments. Assessed tax, interest, penalties, and fees totaled approximately $537 million as of March 31, 2022, although the matter remained disputed and subject to appeal.
- The Company reported an $813 million remaining deferred tax liability associated with the 2015 timber monetization structure, which was under IRS examination and could result in accelerated cash tax payments if resolved unfavorably.
Most important facts for investors to verify
- Whether price increases can offset continuing energy, chemicals, freight, wood, labor, and logistics inflation.
- The sustainability and timing of cash dividends from Ilim and the impact of the Russia-Ukraine conflict on the joint venture and potential sale process.
- The valuation, monetization timing, and remaining ownership percentage of Sylvamo after the April 2022 share-for-debt transaction.
- Whether planned maintenance outages, supply-chain constraints, and seasonal volume changes affect Q2 and full-year segment profitability.
- Progress toward the approximately $1.1 billion 2022 capital-spending plan and the resulting free-cash-flow outlook.
- Potential cash-tax exposure from the Brazilian tax litigation and the IRS examination of the timber monetization structure.
- Developments in environmental, asbestos, antitrust, and other legal matters that could produce charges above recorded liabilities.
- The reconciliation and comparability of management’s non-GAAP adjusted operating earnings and free-cash-flow measures with GAAP results.