International Paper Company — Q1 2023 Form 10-Q Summary
Business context and reporting period
International Paper reported for the three months ended March 31, 2023. The company operates primarily through Industrial Packaging and Global Cellulose Fibers. The filing presents the Ilim joint venture as discontinued operations following the announced agreement to sell the investment.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $5.020 billion | $5.237 billion | Down 4% |
| Income from continuing operations | $172 million | $267 million | Down 36% |
| Net earnings | $172 million | $360 million | Down 52% |
| Diluted EPS | $0.49 | $0.95 | Down $0.46 |
| Adjusted operating earnings | $185 million | $195 million | Down 5% |
| Adjusted operating EPS | $0.53 | $0.51 | Up $0.02 |
| Cash provided by operations | $345 million | $588 million | Down 41% |
| Capital spending | $341 million | $185 million | Up 84% |
| Free cash flow | $4 million | $403 million | Down $399 million |
Reported net margin was approximately 3.4%, compared with approximately 6.9% in the prior-year quarter. Continuing-operations income before taxes was $221 million, with a 22% reported effective tax rate.
- Industrial Packaging sales were $4.083 billion and segment operating profit was $322 million, versus $4.406 billion and $397 million, respectively, in Q1 2022.
- Global Cellulose Fibers sales were $811 million and segment operating loss was $16 million, versus $710 million and a $49 million loss, respectively.
- Cash and temporary investments were $636 million; including restricted cash, total cash for cash-flow purposes was $708 million.
- Current debt and current maturities were $367 million, and long-term debt was $5.471 billion. The filing reports approximately $5.8 billion of debt at fair value, excluding nonrecourse variable-interest-entity liabilities.
- The company had $2.0 billion of credit facilities and no borrowings under the committed bank facility or receivables securitization program. It also had no commercial paper outstanding.
- Total equity was $8.389 billion at March 31, 2023, compared with $8.497 billion at December 31, 2022.
- The company paid $162 million of common dividends and repurchased $157 million of stock under its repurchase program during the quarter.
Material changes versus comparable periods
- Sales declined primarily because of lower volumes, customer inventory destocking and weaker demand, partly offset by higher average sales prices and lower raw-material and freight costs.
- Operating costs increased by $275 million year over year, while lower raw-material and freight costs provided an $87 million benefit. Higher operating costs more than offset the benefit from pricing and input costs.
- Business segment operating profit declined to $306 million from $348 million. Lower volumes and higher operating costs outweighed higher pricing, lower input costs and lower maintenance outage costs.
- Operating cash flow fell $243 million, and free cash flow declined substantially as capital spending increased and the company made a $193 million final IRS payment related to the timber monetization restructuring settlement.
- The company issued a $600 million term loan due in 2028 after repaying $410 million of commercial paper. It also issued approximately $72 million of environmental development bonds to refinance bonds maturing April 1, 2023.
- Non-operating pension expense was $15 million, compared with $49 million of pension income in Q1 2022, reducing year-over-year earnings by $48 million.
- Q1 2023 included no discontinued-operations earnings in the consolidated income statement. Q1 2022 included $93 million of discontinued-operations earnings related to Ilim.
Guidance, outlook, commentary and unusual items
Management expects customer and supply-chain destocking to continue through the second quarter, with an improved demand environment in the second half of 2023. For Q2, management expects seasonally higher volumes but lower pricing and mix in both major businesses, lower maintenance outage costs, and lower energy, freight and fiber costs. The company expects full-year 2023 capital spending of approximately $1.0 billion to $1.2 billion.
Management reported $65 million of year-over-year incremental earnings benefit from its “Building a Better IP” initiatives. It also stated that the mill system performed well despite Q1 being the company’s highest planned maintenance-outage quarter of 2023.
- The company recorded a $43 million impairment of its Ilim and Ilim Group investments. The remaining investment balance of $90 million was classified as held for sale.
- International Paper agreed to sell its Ilim interest for $484 million and received an indication of interest for its approximately 2.39% Ilim Group stake for $24 million. Completion remained subject to Russian regulatory approvals.
- The Ilim transaction and the Russia-Ukraine conflict create uncertainty regarding timing, proceeds, sanctions, government actions and the ultimate value of the investment.
- Aggregate environmental remediation liabilities were approximately $240 million, including reserves of $95 million for the Harris County site and $37 million for the Kalamazoo River Superfund site.
- The company recorded $107 million of net asbestos-related liabilities. It also retained exposure under the Sylvamo tax matters agreement related to Brazilian goodwill tax assessments totaling approximately $486 million, although the recorded contingent liability was $48 million.
- Management expects no required pension contributions over the next 12 months and believes current cash, operating cash flow and available credit facilities should support capital expenditures, debt service, dividends and working-capital needs.
- Key risks include economic weakness, customer destocking, pricing and volume pressure, inflation, interest rates, raw-material and energy costs, supply-chain disruptions, geopolitical developments, environmental liabilities, litigation, pension obligations and credit-market conditions.
Most important facts for investors to verify
- Whether the Ilim and Ilim Group sales close, when regulatory approvals are received, and the cash proceeds ultimately realized.
- Whether destocking ends as management expects and whether demand improves in the second half of 2023.
- Q2 pricing, volumes, operating costs and maintenance-outage performance in Industrial Packaging and Global Cellulose Fibers.
- Capital spending trajectory relative to the $1.0 billion–$1.2 billion full-year expectation and the effect on free cash flow.
- Debt maturities, interest costs and compliance with the minimum net-worth and debt-to-capital covenants.
- Potential changes in environmental, asbestos, Brazilian tax and other litigation liabilities beyond recorded reserves.
- The sustainability of dividends and share repurchases given the sharp year-over-year reduction in free cash flow.