International Paper Company — Form 10-Q Summary
Business context and reporting period
International Paper manufactures and sells fiber-based packaging, pulp and paper products through Industrial Packaging, Global Cellulose Fibers and Printing Papers. The filing covers the quarter and six months ended June 30, 2018, with comparisons to the periods ended June 30, 2017. Results are unaudited.
The company also reported equity-method interests in Ilim Holding S.A. and Graphic Packaging International, LLC. On January 1, 2018, International Paper transferred its North American Consumer Packaging business to Graphic Packaging in exchange for a 20.5% ownership interest; the transferred business is presented as discontinued operations.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Net sales | $5,833 million | $5,383 million | $11,454 million | $10,515 million |
| Earnings from continuing operations attributable to International Paper | $428 million | $84 million | $789 million | $276 million |
| Net earnings attributable to International Paper | $405 million | $80 million | $1,134 million | $289 million |
| Diluted EPS | $0.97 | $0.19 | $2.71 | $0.69 |
| Cash provided by operations | Not separately provided | Not separately provided | $1,464 million | $1,278 million |
| Free cash flow | Not separately provided | Not separately provided | $535 million | $614 million |
Net earnings margin was approximately 7.0% in the second quarter and 9.9% for the first six months. Continuing-operations earnings margin was approximately 7.3% and 6.9%, respectively. These calculated margins are based on reported net sales.
- Second-quarter business segment operating profit was $697 million, compared with $157 million in the prior-year quarter. Segment contributions were Industrial Packaging $537 million, Global Cellulose Fibers $66 million and Printing Papers $94 million.
- Second-quarter adjusted operating earnings attributable to shareholders, a non-GAAP measure, were $498 million, or $1.19 per diluted share, compared with $274 million, or $0.66 per diluted share, in the prior-year quarter.
- Cash and temporary investments were $1,073 million at June 30, 2018, compared with $1,018 million at December 31, 2017.
- Total debt was approximately $11.5 billion, including $10.805 billion of long-term debt and $684 million of current maturities and notes payable. The company had $545 million outstanding under its commercial paper program at a weighted-average interest rate of 2.34%.
- Credit agreements totaled $2.1 billion, including a $1.5 billion committed bank facility expiring in December 2021. No borrowings were outstanding under the bank facility or receivables securitization program.
- Capital expenditures were $929 million in the first six months, compared with $664 million in the prior-year period. Full-year 2018 capital spending was expected to be approximately $1.5 billion.
- Cash dividends paid were $393 million in the first six months. The quarterly dividend was $0.475 per common share, up from $0.4625 in the prior-year quarter.
Material changes versus comparable periods
- Second-quarter sales increased 8% year over year, driven by higher prices and favorable volume trends. Six-month sales increased 9%.
- Second-quarter continuing-operations earnings increased substantially from $84 million to $428 million. The prior-year period included a $354 million pre-tax Kleen Products antitrust litigation settlement.
- Adjusted operating earnings increased from $274 million to $498 million year over year, reflecting higher sales prices and volumes and stronger equity earnings, partly offset by higher operating costs and maintenance expenses.
- Industrial Packaging operating profit increased to $537 million from $64 million, benefiting from price realization and volume growth. EMEA Industrial Packaging remained unprofitable, with a second-quarter operating loss of $43 million before a $26 million restructuring charge.
- Global Cellulose Fibers operating profit increased to $66 million from $7 million, supported by higher pulp prices, lower maintenance outage costs and improved operating performance.
- Printing Papers operating profit increased to $94 million from $86 million, although six-month operating profit declined to $158 million from $186 million.
- Operating cash flow increased 15% year over year, but free cash flow declined because capital spending increased significantly.
- The company repurchased approximately $300 million of common stock during the second quarter and $331 million during the first six months. Approximately $2.4 billion had been spent under the $3.0 billion repurchase authorization as of June 30, 2018.
- The company adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by $73 million. The filing states that the adoption had no material expected impact on operations or cash flows.
Guidance, outlook, commentary and unusual items
- Management expected third-quarter benefits from recently implemented price increases across all three businesses, seasonally stronger mix in Global Cellulose Fibers and Printing Papers, and substantially lower maintenance outage costs.
- Expected third-quarter pressures included higher Industrial Packaging operating costs associated with the Madrid mill start-up, rising input and transportation costs, one fewer shipping day in North American Industrial Packaging, and continued trade-policy uncertainty.
- Management expected Global Cellulose Fibers volumes to increase, with higher prices and lower maintenance costs, while Ilim volumes were expected to be slightly lower and affected by planned maintenance outages.
- Second-quarter special items included $26 million of EMEA Packaging optimization charges, $9 million for abandoned property removal and $12 million of costs related to the Smurfit Kappa acquisition proposal. Total pre-tax special items were $47 million; non-operating pension expense was $36 million.
- The company withdrew its proposal to acquire Smurfit Kappa on June 5, 2018. Under Irish takeover rules, it was generally prohibited from making another offer or taking certain related actions through June 5, 2019, subject to exceptions.
- The company continued to account provisionally for certain effects of the 2017 Tax Cuts and Jobs Act. It had recorded a provisional $1.22 billion net tax benefit in 2017 and expected to complete the accounting by December 2018.
- Environmental remediation liabilities were approximately $125 million. At the Kalamazoo River site, a court allocated International Paper 15% of approximately $50 million of past costs, plus interest; the company appealed. At the Harris County, Texas site, additional losses were considered probable and potentially material, but could not yet be estimated.
- The company faced antitrust lawsuits involving containerboard pricing and other litigation. The filing states that losses could not be estimated for certain preliminary matters. A separate Texas contract judgment of approximately $137 million was under appeal, with management expecting any eventual loss to be immaterial.
- The company froze participation and credited service for certain salaried pension plans effective January 1, 2019; benefits accrued through December 31, 2018 were unaffected.
Most important facts for investors to verify
- Whether price increases continue to offset higher wood, chemical, energy, freight and transportation costs.
- The execution and financial impact of the Madrid mill conversion and broader EMEA Packaging optimization.
- Whether the planned approximately $1.5 billion of 2018 capital expenditures reduce free cash flow and affect leverage or shareholder distributions.
- The timing and amount of debt maturities, including approximately $9.0 billion due after 2023, and continued access to commercial paper and committed credit facilities.
- Final accounting for the Tax Cuts and Jobs Act, including potential changes to deferred taxes, transition tax and GILTI treatment.
- Developments in the Kalamazoo River, Harris County and other environmental matters, including potential unaccrued material losses.
- The sustainability of earnings from Ilim and Graphic Packaging, including foreign-exchange effects and the basis differences in the equity-method investments.
- The effect of the North American Consumer Packaging divestiture on future revenue, earnings mix and cash flows.