International Paper Company — Q1 2021 Form 10-Q Summary
Business context and reporting period
International Paper reported results for the three months ended March 31, 2021. The company operates through Industrial Packaging, Global Cellulose Fibers, and Printing Papers. Most manufacturing and converting facilities remained operational during the COVID-19 pandemic, although demand and supply-chain effects varied by product.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $5.363 billion | $5.352 billion | Up $11 million |
| Net earnings attributable to International Paper | $349 million | $(141) million | Improved $490 million |
| Diluted earnings per share | $0.88 | $(0.36) | Improved $1.24 |
| Adjusted operating earnings | $299 million | $226 million | Up 32% |
| Adjusted operating earnings per share | $0.76 | $0.57 | Up $0.19 |
| Cash provided by operations | $512 million | $649 million | Down $137 million |
| Free cash flow | $423 million | $363 million | Up $60 million |
| Business segment operating profit | $445 million | $512 million | Down $67 million |
Net earnings margin was approximately 6.5% in Q1 2021, compared with a negative margin in Q1 2020. Adjusted operating earnings margin was approximately 5.6%. The reported income tax provision was $99 million, representing a 25% effective tax rate; the adjusted effective tax rate was 24%.
- Industrial Packaging sales were $3.953 billion and operating profit was $447 million, compared with $3.819 billion and $470 million, respectively, in Q1 2020.
- Global Cellulose Fibers sales were $581 million and operating loss was $82 million, compared with sales of $568 million and an operating loss of $54 million.
- Printing Papers sales were $781 million and operating profit was $80 million, compared with sales of $908 million and operating profit of $96 million.
- Cash and temporary investments were $787 million at March 31, 2021, versus $595 million at December 31, 2020.
- Long-term debt was $7.954 billion, and notes payable plus current maturities were $31 million. The company also reported $6.314 billion of nonrecourse financial liabilities related to variable interest entities.
- The company paid $202 million of common-stock dividends and repurchased common stock or paid restricted-stock tax withholdings totaling $155 million.
- Capital spending was $89 million during the quarter. Full-year 2021 capital spending was expected to be approximately $800 million.
Material changes versus comparable periods
- Profitability improved sharply from Q1 2020, primarily because of higher average sales prices and favorable mix, lower interest expense, lower non-operating pension expense, and stronger equity earnings.
- Q1 2020 results included substantial business impairment and other special charges, including charges related to the Brazilian Industrial Packaging business. Q1 2021 included a $74 million pretax gain from sales of portions of the Graphic Packaging investment, partly offset by restructuring, debt extinguishment, and other charges.
- Sales volumes declined overall in Industrial Packaging, Global Cellulose Fibers, and Printing Papers. Printing Papers volumes were particularly affected by pandemic-related demand weakness.
- Raw material, freight, energy, chemical, recovered-fiber, and distribution costs increased. A severe U.S. winter storm reduced pretax earnings by approximately $80 million, including approximately $75 million in North American Industrial Packaging.
- Operating cash flow declined year over year, but lower capital spending resulted in higher free cash flow.
- Equity earnings improved to $49 million from a $31 million loss, primarily reflecting improved results from Ilim and lower foreign-exchange losses. Graphic Packaging ownership was reduced to 7.4% following monetization transactions.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected Q2 2021 price and mix to improve across the businesses, supported by prior price increases. Volumes were expected to be stable to modestly lower, while input costs, transportation costs, and some maintenance expenses were expected to increase.
- Industrial Packaging was expected to benefit from price increases and the absence of winter-storm costs, partially offset by higher recovered-fiber, energy, raw-material, distribution, and maintenance costs.
- Global Cellulose Fibers margins were expected to improve, with stable volumes and lower planned maintenance expense.
- Printing Papers demand was expected to remain pressured but show improved pricing and margins. The company planned to complete the tax-free spin-off of Printing Papers, known as Sylvamo Corporation, in late Q3 2021, subject to approvals and other conditions.
- The company agreed to sell the Kwidzyn, Poland mill for approximately $786 million, subject to adjustments and regulatory approval, with closing expected in the second half of 2021. It also agreed to sell its 90.38% interest in Olmuksan International Paper for approximately $78 million, with completion expected in Q2 2021.
- Timber Notes of approximately $4.8 billion and related extension loans of approximately $4.2 billion were scheduled to mature in August 2021. Management expected the structure to generate approximately $0.6 billion of cash proceeds representing the company’s equity, with an expected $75 million cash tax payment.
- The company had $2.1 billion of credit facilities, no borrowings under those facilities or its $1.0 billion commercial paper program, and remained in compliance with debt covenants. The $750 million supplemental revolving facility expired on March 24, 2021 and was not extended.
- Management expected available cash, operating cash flow, and existing credit facilities to fund capital expenditures, debt service, dividends, and working capital needs for the next 12 months.
- COVID-19 remained a material uncertainty, including potential new variants, vaccination effectiveness and distribution, economic reopening, demand, supply-chain disruption, and capital-market conditions.
- Environmental remediation liabilities were approximately $189 million. The company also reported $114 million of recorded asbestos-related liabilities, net of estimated insurance recoveries.
- Brazilian tax authorities had challenged the deductibility of goodwill amortization, with assessments totaling approximately $105 million of tax plus $338 million of interest, penalties, and fees as of March 31, 2021. The company intended to appeal and believed its position was supportable.
- Management disclosed that additional losses related to environmental, litigation, tax, and other contingencies could be material in a particular reporting period, although it did not expect current loss contingencies to materially affect consolidated financial position or liquidity.
Investor verification points
- Verify execution and final proceeds from the Kwidzyn sale, Olmuksan sale, and the planned Sylvamo spin-off.
- Monitor the August 2021 maturity and settlement of the timber monetization structure, including the expected $0.6 billion cash proceeds and $75 million tax payment.
- Assess whether pricing gains offset ongoing inflation in recovered fiber, energy, chemicals, raw materials, freight, and maintenance costs.
- Review the sustainability of cash generation after dividends, share repurchases, capital spending, debt reductions, and transaction-related payments.
- Track COVID-19 effects on Printing Papers demand, Industrial Packaging supply chains, transportation, and customer activity.
- Review developments in the Brazilian tax dispute, environmental matters, Kalamazoo River and Harris County remediation, and other litigation contingencies.
- Reconcile GAAP earnings with management’s non-GAAP adjusted operating earnings and identify the effect of special items and pension income.