International Paper Company — Form 10-Q Summary
Business Context and Reporting Period
International Paper reported for the quarter and nine months ended September 30, 2013. The company operates in Industrial Packaging, Printing Papers, Consumer Packaging and Distribution, and holds a 50% interest in Ilim Holding S.A. Results include Temple-Inland operations, acquired in February 2012, and the 2013 acquisitions or formations of Olmuksan International Paper in Turkey and Orsa International Paper Embalagens in Brazil.
Financial Performance and Liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $7.406 billion | $7.026 billion | $21.831 billion | $20.758 billion |
| Earnings from continuing operations attributable to IP | $392 million | $223 million | $919 million | $524 million |
| Net earnings attributable to IP | $382 million | $237 million | $959 million | $559 million |
| Diluted EPS | $0.85 | $0.54 | $2.14 | $1.27 |
| Cash provided by operations | Not separately provided | Not separately provided | $1.991 billion | $2.254 billion |
| Free cash flow | Not separately provided | Not separately provided | $1.206 billion | $1.186 billion |
Q3 earnings from continuing operations before taxes and equity earnings were $411 million, implying a pre-tax margin of approximately 5.6% of sales. Total industry segment operating profit was $678 million, or approximately 9.2% of sales, compared with $539 million in the prior-year quarter. Net earnings attributable to the company represented approximately 5.2% of sales.
- Industrial Packaging operating profit was $499 million versus $255 million; sales increased 13% to $3.755 billion.
- Printing Papers operating profit was $93 million versus $202 million; sales declined 2% to $1.555 billion, including a $51 million Courtland mill shutdown charge.
- Consumer Packaging operating profit was $73 million versus $67 million; sales increased 16% to $885 million.
- Distribution operating profit was $13 million versus $15 million; sales declined 6% to $1.445 billion.
At September 30, 2013, cash and temporary investments were $1.946 billion, compared with $1.302 billion at December 31, 2012. Total current assets were $9.475 billion and current liabilities were $5.395 billion. Debt consisted of $783 million of notes payable and current maturities and $8.900 billion of long-term debt, or approximately $9.7 billion including current maturities. The company also reported $2.042 billion of nonrecourse financial liabilities related to special purpose entities.
Nine-month capital spending was $759 million, compared with $1.001 billion in 2012. Management expected full-year 2013 capital spending of approximately $1.3 billion. The company reduced debt by a net $425 million during the first nine months, paid $400 million of common dividends, and announced a $1.5 billion share repurchase program. Approximately $19 million had been spent under the program by September 30.
Committed credit agreements totaled $2.5 billion, including a $1.5 billion bank facility expiring in August 2016 and up to $1.0 billion of receivables-based commercial paper financing. No borrowings were outstanding under the receivables securitization facility at quarter-end. Credit ratings were BBB with a stable outlook from S&P and Baa3 with a stable outlook from Moody’s.
Material Changes Versus Comparable Periods
- Q3 sales increased 5%, while net earnings attributable to International Paper increased 61% and diluted EPS increased from $0.54 to $0.85.
- Management attributed the earnings improvement primarily to higher selling prices, higher volumes, lower interest expense and lower tax expense. These benefits were partly offset by unfavorable product mix, higher operating, raw material, freight and maintenance costs, and higher non-operating pension expense.
- Operating earnings per share, a non-GAAP measure, increased to $1.05 from $0.81. The quarter included a $30 million tax benefit related to the adjustment of the tax basis of certain fixed assets.
- Nine-month operating cash flow declined to $1.991 billion from $2.254 billion, principally because working capital used $594 million versus providing $168 million in the prior-year period. Free cash flow remained broadly stable at $1.206 billion versus $1.186 billion.
- Pension expense increased to $413 million from $256 million for the first nine months, primarily because of a lower discount rate and higher amortization of actuarial losses.
- The company sold the Temple-Inland Building Products division for approximately $733 million and sold its 50% interest in Del-Tin Fiber for $20 million in assumed liabilities and cash. These businesses were classified as discontinued operations.
Guidance, Outlook, Risks and Unusual Items
For the fourth quarter, management expected seasonal volume increases in Brazilian and European Industrial Packaging, offset by lower North American Industrial Packaging volumes due to seasonality and two fewer shipping days. Printing Papers volumes were expected to decline because of the Courtland restructuring. Management expected continued benefit from prior price increases, additional price increases in North American Printing Papers, somewhat lower wood-cost pressure than in Q3, and slightly higher planned maintenance costs. The $30 million Q3 tax benefit was not expected to recur.
The Courtland, Alabama mill closure was expected to generate approximately $550 million of pre-tax noncash asset write-offs and accelerated depreciation and approximately $125 million of cash severance and other shutdown costs in 2013 and 2014. Q3 restructuring and other charges totaled $76 million before tax, including $51 million for Courtland, $15 million of early debt extinguishment costs, and $17 million related to xpedx restructuring and transaction costs, partly offset by a $9 million gain on the Bellevue box plant sale.
Key risks include cyclicality and pricing pressure in paper, packaging and distribution markets; higher costs or limited availability of wood, recycled fiber, energy and transportation; foreign exchange and global economic conditions; leverage and interest rates; pension funding requirements; environmental remediation; litigation; manufacturing disruptions; joint-venture risks; and execution risk from acquisitions, divestitures and restructurings.
- Environmental remediation liabilities were estimated at approximately $95 million. The Cass Lake reserve was $52 million, and additional recorded remediation liabilities were approximately $43 million.
- The company was found liable as an owner in a CERCLA matter involving the Kalamazoo River, but the separate allocation of costs had not yet been determined.
- Containerboard and gypsum-board antitrust litigation remained unresolved; management could not estimate reasonably possible losses and did not believe a material loss was probable.
- A Brazilian tax dispute carried potential exposure of approximately $29 million.
- Unrecognized tax benefits were $838 million at September 30, 2013; the company estimated that approximately $720 million could be reduced over the following 12 months, with approximately $650 million expected to benefit the effective tax rate.
- The preliminary purchase price allocations for Olmuksan and Orsa IP remained subject to change and were expected to be finalized in the fourth quarter of 2013.
Investor Verification Checklist
- Reconcile GAAP diluted EPS of $0.85 with non-GAAP operating EPS of $1.05, including pension expense, special items, discontinued operations and the nonrecurring tax benefit.
- Assess the sustainability of Industrial Packaging price realization against recycled fiber, wood, energy and freight costs.
- Verify the expected timing and total cash and noncash costs of the Courtland mill closure and related capacity reductions.
- Review approximately $9.7 billion of debt, the 2013–2018 maturity schedule, and the company’s ability to maintain investment-grade ratings.
- Monitor working-capital cash usage, pension funding, tax settlements and the potential reduction of unrecognized tax benefits.
- Follow environmental, antitrust, Brazilian tax and other litigation matters for changes in liability estimates.
- Evaluate the impact of the new Turkish and Brazilian operations and the pending finalization of their acquisition accounting.