International Paper Company — Q1 2019 Form 10-Q Summary
Business context and reporting period
International Paper reported results for the three months ended March 31, 2019. The company operates through Industrial Packaging, Global Cellulose Fibers and Printing Papers, with additional equity-method earnings primarily from Ilim and Graphic Packaging International Partners. The interim financial statements are unaudited, and management notes that first-quarter results may not be indicative of full-year performance.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $5.643 billion | $5.621 billion | Up 0.4% |
| Earnings from continuing operations attributable to IP | $424 million | $361 million | Up 17% |
| Net earnings attributable to IP | $424 million | $729 million | Down 42%; prior year included $368 million from discontinued operations |
| Diluted EPS from continuing operations | $1.05 | $0.86 | Up $0.19 |
| Adjusted operating earnings | $447 million | $395 million | Up 13% |
| Adjusted operating EPS | $1.11 | $0.94 | Up $0.17 |
| Cash provided by operations | $733 million | $663 million | Up 11% |
| Capital expenditures | $293 million | $489 million | Down 40% |
| Free cash flow | $440 million | $174 million | Up $266 million |
| Cash and temporary investments | $641 million | $589 million at Dec. 31, 2018 | Up $52 million |
Continuing-operations net margin attributable to International Paper was approximately 7.5% of sales, compared with approximately 6.4% in the prior-year quarter. Adjusted operating earnings represented approximately 7.9% of sales. The filing does not present a consolidated gross margin.
- Business segment operating profit was $579 million, compared with $512 million in Q1 2018. Industrial Packaging contributed $404 million, Global Cellulose Fibers $32 million and Printing Papers $143 million.
- Equity earnings were $114 million, including $101 million from Ilim and $13 million from Graphic Packaging International Partners.
- Interest expense, net, was $133 million, compared with $135 million in Q1 2018.
- The effective income tax rate was 25% for both comparable quarters.
- Total debt was approximately $10.8 billion, including current maturities. Separately, nonrecourse financial liabilities of special purpose entities were $6.3 billion.
- Commercial paper borrowings were $530 million at a weighted-average rate of 2.73%; receivables-securitization borrowings were $100 million at 3.32%. No borrowings were outstanding under the $1.5 billion committed credit facility.
- The company held investment-grade ratings of BBB with a stable outlook from S&P and Baa2 with a stable outlook from Moody’s.
- The quarterly dividend was $0.50 per share. The company returned $381 million to shareholders through $201 million of dividends and $180 million of share repurchases.
Material changes versus comparable periods
- Revenue was broadly stable year over year, while continuing-operations earnings improved because of higher average sales prices, lower mill-maintenance costs and higher equity earnings.
- These benefits were partly offset by lower sales volumes, higher operating costs, higher raw-material and freight costs, higher corporate costs and slightly higher non-operating pension expense.
- Industrial Packaging operating profit declined to $404 million from $437 million, primarily because of lower volumes, higher operating costs and economic downtime. The segment recorded a $16 million multi-employer pension plan exit liability and a $7 million gain on an EMEA packaging box-plant sale.
- Global Cellulose Fibers operating profit increased to $32 million from $11 million, despite weaker demand, lower volumes and increased economic downtime, as prior price increases and lower maintenance costs benefited results.
- Printing Papers operating profit increased to $143 million from $64 million, led by price increases, favorable mix and lower maintenance costs.
- First-quarter 2018 net earnings included a $368 million after-tax gain from the transfer of the North American Consumer Packaging business. That business is now reflected through equity earnings rather than consolidated operations.
- Share repurchases increased materially: $180 million under the repurchase program in Q1 2019 versus $31 million of total repurchases and withholding-related purchases in Q1 2018. Average diluted shares declined to 403.2 million from 418.2 million.
- The company adopted the new lease standard on January 1, 2019, recognizing $415 million of operating-lease right-of-use assets and $418 million of operating-lease liabilities. Management reported no material effect on earnings or cash flows.
- The company adopted ASU 2018-02, increasing opening retained earnings and reducing accumulated other comprehensive loss by $529 million for stranded tax effects.
Guidance, outlook, risks and unusual items
Management expects stronger seasonal demand in the second quarter but also the highest planned maintenance-outage quarter of 2019. Approximately 75% of planned maintenance outages, representing about $400 million, were expected to be completed during the first half of the year. Management expects second-quarter equity earnings from Ilim to decline because of planned maintenance outages.
- North American and European corrugated-packaging demand is expected to improve seasonally, while export containerboard recovery is expected to be gradual because customer destocking continues.
- Global Cellulose Fibers and paper volumes are generally expected to improve seasonally, although pulp pricing and mix remain pressured by slower developing-market growth, tariff uncertainty and regional economic conditions.
- Full-year 2019 capital spending was expected to be approximately $1.4 billion, including approximately $400 million of strategic investments.
- Management stated that current cash, operating cash flow and available credit facilities should support capital expenditures, debt service, working capital and dividends through the remainder of 2019.
- On April 16, 2019, the company agreed to acquire certain DS Smith packaging operations in France and Portugal for approximately €63 million, or about $71 million, subject to customary closing conditions and regulatory approvals.
- Significant contingencies include environmental remediation reserves of approximately $132 million, unresolved environmental matters at the Kalamazoo River and Harris County sites, Brazilian tax assessments totaling approximately $559 million in tax, interest and penalties, and litigation matters whose potential outcomes cannot yet be reliably estimated.
- The company is appealing a Texas judgment of approximately $137 million in the Signature litigation and believes it will prevail; management expects any eventual loss to be immaterial.
- Other key risks include indebtedness and interest rates, cyclicality and pricing of paper and packaging products, raw-material, energy and transportation costs, foreign exchange, tariffs, pension obligations, environmental compliance, manufacturing disruptions, litigation and joint-venture risks.
Most important facts for investors to verify
- Whether second-quarter demand recovery offsets the unusually high planned maintenance-outage schedule and continuing export customer destocking.
- The sustainability of price increases and segment margins amid weaker pulp pricing, higher operating costs and raw-material volatility.
- Progress toward the approximately $1.4 billion 2019 capital-spending plan and its effect on free cash flow, leverage and shareholder returns.
- Refinancing and liquidity needs associated with approximately $790 million of 2019 debt and finance-lease maturities and $8.6 billion of maturities thereafter.
- Developments in the Brazilian tax assessments and environmental matters, particularly Harris County and Kalamazoo River, where additional losses may be material or remain difficult to estimate.
- The financial and regulatory outcome of the proposed DS Smith packaging acquisition.
- Potential changes in the Ilim joint venture: the filing states that the parties have no current intention to invoke deadlock procedures, but International Paper could have an estimated $2.4 billion purchase option for the partner’s 50% interest under certain circumstances.