International Paper Company — Q2 2019 Form 10-Q Summary
Business Context and Reporting Period
International Paper is a global producer of industrial packaging, cellulose fibers and printing papers. This report covers the quarter and six months ended June 30, 2019, compared primarily with the corresponding 2018 periods. Results are unaudited and interim results may not indicate full-year performance.
Financial Performance and Key Metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $5.667 billion | $5.833 billion | $11.310 billion | $11.454 billion |
| Earnings from continuing operations | $286 million | $430 million | $712 million | $792 million |
| Net earnings attributable to IP | $292 million | $405 million | $716 million | $1.134 billion |
| Diluted EPS | $0.73 | $0.97 | $1.78 | $2.71 |
| Cash from operations | Approximately $1.1 billion | Not separately provided | $1.800 billion | $1.464 billion |
| Free cash flow | $732 million | Not separately provided | $1.172 billion | $535 million |
Reported Q2 net margin was approximately 5.2%, versus approximately 6.9% in Q2 2018. Six-month net margin was approximately 6.3%, versus approximately 9.9% in the prior-year period; the comparison is affected by a $345 million after-tax gain from discontinued operations recorded in the first half of 2018.
- Adjusted operating earnings: $460 million, or $1.15 per diluted share, compared with $498 million, or $1.19 per share, in Q2 2018 and $447 million, or $1.11 per share, in Q1 2019.
- Segment operating profit: $472 million in Q2, down from $697 million in Q2 2018. Industrial Packaging contributed $507 million, Global Cellulose Fibers had a $2 million loss, and Printing Papers had a $33 million loss after special items.
- Balance sheet: Cash and temporary investments were $787 million at June 30, 2019, compared with $589 million at December 31, 2018. Total assets were $34.347 billion and total equity was $7.499 billion.
- Debt and liquidity: Current debt and long-term debt totaled approximately $10.726 billion, excluding $6.302 billion of nonrecourse VIE financial liabilities. Commercial paper borrowings were $535 million at a weighted-average rate of 2.64%. The company had $2.1 billion of credit agreements, including a $1.5 billion committed facility, with no borrowings under the credit facility or receivables securitization program.
- Capital allocation: Six-month capital spending was $628 million, dividends were $398 million and repurchases, including restricted-stock tax withholdings, were $460 million. Approximately $810 million was returned to shareholders during the first half.
Material Changes Versus Prior Comparable Period
- Q2 sales declined 3% year over year, primarily because of lower volumes in Industrial Packaging and Global Cellulose Fibers. Printing Papers sales increased 3%.
- Q2 earnings declined despite higher average sales prices, lower corporate costs, lower interest expense and lower non-operating pension expense. Offsetting factors included lower volumes, higher operating and raw-material costs, and higher maintenance outage costs.
- Industrial Packaging operating profit declined 6% to $507 million; Global Cellulose Fibers fell from $66 million to a $2 million loss; Printing Papers declined from $94 million to a $33 million loss on the India impairment.
- Special items were a $158 million pre-tax expense in Q2 2019, compared with $47 million in Q2 2018. The principal item was a $145 million pre-tax, $143 million after-tax impairment related to the planned sale of the Indian APPM business.
- Operating cash flow increased 23% for the first six months, while capital spending decreased 32%, producing substantially higher free cash flow than in the prior-year period.
- The company adopted the new lease standard on January 1, 2019, recognizing $408 million of operating right-of-use assets and $412 million of operating lease liabilities at June 30. Management reported no material effect on earnings or cash flows.
Guidance, Outlook, Risks and Unusual Items
Management expects Q3 2019 to have lower price and mix, improved seasonal volumes and export shipments, lower input costs and significantly lower maintenance outages. Industrial Packaging is expected to benefit from stronger seasonal North American demand but face lower prices and higher seasonal labor costs. Global Cellulose Fibers is expected to face continued pulp-price, trade and inventory pressure. Printing Papers is expected to benefit from seasonal volume improvement but experience export and mix pressure.
- Full-year 2019 capital spending was expected to be approximately $1.4 billion, including approximately $400 million of strategic investments.
- The company expects current cash, operating cash flow and available credit facilities to fund capital expenditures, debt service, working capital and dividends for the remainder of 2019.
- International Paper agreed to sell its controlling interest in APPM in India. Closing was expected by year-end, subject to customary conditions and governmental approvals. The disposal group was classified as held for sale.
- The company acquired packaging businesses in Portugal and France for approximately $83 million. Purchase accounting remained preliminary.
- Environmental remediation liabilities totaled approximately $132 million. Significant uncertainties remain regarding the Kalamazoo River and Harris County matters, including potentially material future costs.
- A Brazilian tax dispute involves assessments of approximately $146 million in tax plus $377 million in interest and penalties as of June 30, 2019. The company is appealing and believes its position will be sustained.
- A Texas contract judgment of approximately $137 million remains on appeal; management expects any eventual loss to be immaterial.
- Key operating risks include cyclical demand, global economic and trade conditions, pulp and recovered-fiber prices, energy and transportation costs, foreign exchange, interest rates, debt levels, environmental obligations, litigation, pension funding and execution of acquisitions and divestitures.
Most Important Facts for Investors to Verify
- Whether weaker global demand, trade uncertainty and elevated pulp inventories continue to pressure pricing and volumes.
- Whether Q3’s expected reduction in maintenance outages and input costs offsets lower price and mix.
- The timing and final proceeds from the APPM sale and whether additional impairment or foreign-currency losses arise before closing.
- The sustainability of strong operating cash flow and free cash flow, particularly given planned capital spending of approximately $1.4 billion.
- Debt maturities, refinancing needs and the effect of commercial paper borrowings on liquidity and credit ratings.
- Potential exposure from the Brazilian tax assessments, environmental remediation matters and other unresolved litigation.
- The effect of equity earnings and cash dividends from the Ilim and Graphic Packaging investments on reported earnings and liquidity.