Sylvamo Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Sylvamo sells uncoated papers and market pulp through its Europe, Latin America and North America segments. The Russian business is classified as discontinued operations. Comparisons with 2021 require context: Sylvamo completed its spin-off from International Paper on October 1, 2021, and pre-spin-off results reflect combined historical operations and allocated parent costs.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $968 million | $731 million | $2.701 billion | $2.050 billion |
| Income from continuing operations | $109 million | $59 million | $248 million | $198 million |
| Continuing diluted EPS | $2.44 | $1.34 | $5.58 | $4.50 |
| Net income (loss), including discontinued operations | $57 million | $92 million | $24 million | $269 million |
| Adjusted EBITDA and margin (non-GAAP) | $216 million; 22.3% | $131 million; 17.9% | $551 million; 20.4% | $322 million; 15.7% |
| Cash from continuing operating activities | $146 million | $137 million | $276 million | $292 million |
| Free cash flow (non-GAAP) | $114 million | $117 million | $185 million | $245 million |
Q3 business segment operating profit, a non-GAAP measure, was $175 million, up from $95 million: Europe $19 million (versus a $1 million loss), Latin America $58 million (versus $44 million), and North America $98 million (versus $52 million). Management reported that higher selling prices and favorable product mix generally more than offset higher input and operating costs.
At September 30, cash and temporary investments were $163 million. Current assets were $1.409 billion and current liabilities $1.029 billion, including assets and liabilities held for sale. Long-term debt was $1.200 billion, with $29 million of current maturities and notes payable. The $450 million revolving credit facility had no borrowings; a newly established $120 million receivables financing program also had no borrowings. Sylvamo reported compliance with its debt covenants at quarter-end.
Material changes and unusual items
- Q3 sales rose by $237 million year over year, primarily due to higher average selling prices. Cost of products sold increased $131 million, mainly from higher input and operating costs; selling and administrative expenses rose $34 million, including transition-service and spin-off costs.
- Continuing-operations earnings increased year over year, while total net income fell because of Russian discontinued-operation losses. Q3 discontinued operations included a $78 million after-tax charge related to eliminating cumulative foreign currency translation losses. Nine-month discontinued operations recorded a $224 million net loss, including a $68 million after-tax fixed-asset impairment and $234 million of after-tax charges for currency translation losses.
- In October 2022, Sylvamo completed the Russian operations sale for $420 million and received approximately $390 million after foreign-exchange costs and transaction fees. The Russia operation had represented about 15% of 2021 net sales and 10% of long-lived assets.
- Nine-month cash from continuing operations declined to $276 million from $292 million, primarily reflecting working-capital use. Working-capital components used $86 million, including $81 million for receivables and $76 million for inventory, partly offset by payables and other items.
- Debt declined during the period. After quarter-end, Sylvamo repaid the remaining Term Loan B balance; management said this achieved its target of less than $1 billion in gross debt. The filing does not give the resulting post-repayment debt balance.
Outlook, risks and contingencies
- For Q4, management expected global uncoated freesheet demand to remain strong, with seasonally weaker volumes in Europe and North America. Favorable selling prices were expected to offset higher costs from foreign exchange impacts in Brazil and increased incentive compensation. Two planned maintenance outages were expected to make Q4 the heaviest outage quarter of the year.
- Sylvamo agreed to acquire Stora Enso’s Nymolla, Sweden, uncoated freesheet mill for approximately €150 million, subject to customary conditions and regulatory approval; closing was expected no later than Q1 2023. The mill has capacity of approximately 500,000 short tons annually.
- After quarter-end, the board approved a quarterly dividend of $0.25 per share, payable in January 2023, an increase from $0.1125 per share. A previously authorized $150 million share repurchase program remained available; no shares were repurchased in Q3.
- The Brazil goodwill-amortization tax dispute involved assessments of approximately $109 million in tax and $346 million in interest, penalties and fees as of September 30, 2022. Under the tax matters agreement, Sylvamo bears 40% of assessments up to $300 million, while International Paper bears amounts above that threshold. The dispute may take years to resolve.
- Potential additional remediation costs at a Brazilian mill’s former wastewater basins could be material, but Sylvamo said it could not estimate the amount pending further studies and regulatory review. The company also described other legal and tax matters, noting that adverse developments could cause material charges in a particular period.
- Other identified risks include inflation and recession, energy, fiber and transportation costs or shortages, geopolitical disruption, acquisition approval and execution, debt obligations, environmental and tax regulation, cybersecurity, and risks associated with operating as a recently separated company. A rights agreement may deter or delay a change in control.
Important facts for investors to verify
- Whether price increases continue to offset inflation in fiber, energy, chemicals, labor and freight, and how planned outages affect Q4 volumes and margins.
- Post-Russia-sale cash deployment, the exact debt balance after the Term Loan B repayment, and compliance with amended debt covenants.
- Resolution and potential Sylvamo exposure in the Brazil tax dispute, including the effects of the November 2022 credit-agreement amendment on restricted payments.
- Regulatory approval, closing timing, purchase price adjustments and expected returns for the Nymolla acquisition.
- Progress and eventual cost of the Brazilian environmental assessment and remediation process.
- Interpretation of reported performance: adjusted EBITDA and free cash flow are non-GAAP measures, and 2021 pre-spin-off results include parent allocations and are not fully representative of standalone costs.