International Paper Company — Q2 2022 Form 10-Q Summary
Business context and reporting period
International Paper reported results for the quarter and six months ended June 30, 2022. The company operates primarily through Industrial Packaging and Global Cellulose Fibers. Historical Printing Papers results and the Kwidzyn mill are presented as discontinued operations following the October 2021 Sylvamo spin-off and August 2021 Kwidzyn sale.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $5.389 billion | $4.770 billion | $10.626 billion | $9.363 billion |
| Net earnings attributable to IP | $511 million | $432 million | $871 million | $781 million |
| Diluted EPS | $1.38 | $1.09 | $2.32 | $1.96 |
| Adjusted operating earnings | $459 million | $325 million | Not clearly provided | Not clearly provided |
| Cash from operations | Not separately provided | Not separately provided | $978 million | $1.278 billion |
| Free cash flow | Not separately provided | Not separately provided | $607 million | $1.056 billion |
Q2 revenue increased 13% year over year. Net earnings increased 18%, while diluted EPS increased 27%, aided by lower average diluted shares of 370.7 million versus 396.8 million. Approximate Q2 net earnings margin was 9.5%, compared with 9.1% in Q2 2021. Adjusted operating earnings margin was approximately 8.5% versus 6.8% in the prior-year quarter.
Business segment operating profit was $585 million in Q2 2022, compared with $390 million in Q2 2021. Industrial Packaging generated $560 million, up from $389 million, and Global Cellulose Fibers generated $25 million, versus $1 million. Six-month segment operating profit was $933 million, compared with $730 million.
- Industrial Packaging sales were $4.491 billion, up 11% year over year; operating profit increased 44% to $560 million.
- Global Cellulose Fibers sales were $788 million, up 16%; operating profit improved to $25 million from $1 million.
- Q2 equity earnings were $93 million, including $95 million from Ilim, compared with $104 million in the prior-year quarter.
- Reported Q2 income tax provision was $96 million, representing a 19% effective tax rate. The filing states that the rate benefited from the tax-free exchange of Sylvamo shares.
Cash, debt and liquidity
- Cash and temporary investments were $826 million at June 30, 2022, down from $1.295 billion at December 31, 2021.
- Current assets were $7.046 billion and current liabilities were $4.352 billion, implying approximate current coverage of 1.6 times.
- Total reported debt was approximately $5.568 billion, consisting of $293 million of current maturities and $5.275 billion of long-term debt. The filing separately reports $4.2 billion of nonrecourse VIE liabilities.
- The company had no borrowings under its $1.5 billion committed bank facility, $500 million receivables securitization program, or $1.0 billion commercial paper program at June 30, 2022.
- Capital spending was $371 million in the first six months, compared with $222 million in the prior-year period. Full-year 2022 capital spending was expected to be approximately $1.0 billion.
- Share repurchases and restricted-stock tax withholdings used $823 million in the first half, including approximately $801 million under the repurchase program. Dividends paid were $344 million.
- The company stated that it was in compliance with its debt covenants and expected current cash, operating cash flow and available facilities to fund operations, capital expenditures, debt service and dividends.
Material changes versus comparable periods
- Q2 earnings benefited from higher realized prices, lower maintenance outage costs, lower corporate costs and lower interest expense versus Q2 2021.
- These benefits were partly offset by lower volumes, higher operating costs, and substantially higher raw material and freight costs. Raw material and freight costs were identified as a $318 million earnings headwind versus Q2 2021.
- Operating cash flow declined 23% in the first half, primarily reflecting working-capital outflows and the absence of certain prior-year divestiture proceeds. Free cash flow declined approximately 42%.
- The company repurchased significantly more stock than in the prior-year period, while debt reductions were substantially lower than in 2021.
- Q2 2022 contained no restructuring charges, compared with $174 million in Q2 2021, primarily related to early debt extinguishment and severance.
- The company exchanged 4.132 million Sylvamo shares for repayment of an approximately $144 million term loan. Its remaining Sylvamo ownership was approximately 10.5%, valued at $151 million at June 30, 2022.
Guidance, outlook, risks and unusual items
Management expected third-quarter price and mix to improve in Industrial Packaging and Global Cellulose Fibers, with lower planned maintenance outage costs. However, input costs were expected to increase, logistics constraints were expected to persist, and favorable Q2 one-time items and the Prattville insurance recovery were not expected to repeat. Global Cellulose Fibers volumes were expected to remain stable but constrained by logistics.
Building a Better IP initiatives generated approximately $65 million of Q2 earnings benefit and $105 million in the first half. Management identified potential full-year 2022 benefit of $225 million.
- The Russia-Ukraine conflict and sanctions create material uncertainty for the 50% Ilim joint venture, including dividend payments, valuation, operations and the potential sale of the investment.
- The company also intended to monetize its remaining Sylvamo stake; timing and proceeds were uncertain, particularly given Russian operations and capital-market conditions.
- The IRS was examining the 2015 timber monetization restructuring. An unfavorable outcome could accelerate cash taxes associated with an $813 million deferred tax liability.
- Environmental remediation liabilities totaled approximately $198 million. The company increased its reserve for the Harris County site to $22 million, and additional losses remain possible.
- The Brazil goodwill tax matter had assessments of approximately $469 million, including tax, interest, penalties and fees, subject to litigation and allocation under the Sylvamo tax matters agreement. The recorded contingent liability was $48 million.
- Asbestos-related liability was $106 million, net of estimated insurance recoveries. The company also disclosed ongoing antitrust, environmental, tax and other litigation risks.
Important facts for investors to verify
- Whether higher selling prices can continue to offset inflation in energy, chemicals, wood, recovered fiber, freight and other inputs.
- The sustainability of operating cash flow and free cash flow as capital spending rises toward the approximately $1.0 billion full-year expectation.
- The timing, valuation and regulatory feasibility of any sale of the Ilim interest and remaining Sylvamo shares.
- The potential cash-tax exposure from the IRS examination and the ultimate outcome of the Brazil goodwill tax matter.
- The extent of additional environmental, litigation or remediation costs beyond recorded reserves.
- Whether Q3 results are affected by the non-repeat of Q2 insurance recoveries and favorable one-time items.
- The company’s ability to maintain investment-grade ratings, covenant compliance and shareholder distributions while managing debt and geopolitical risks.