International Paper Company — Q1 2020 Form 10-Q Summary
Business context and reporting period
International Paper reported results for the three months ended March 31, 2020. The company operates through Industrial Packaging, Global Cellulose Fibers, and Printing Papers. Its manufacturing and converting facilities generally remained open because forest products and related supply chains were considered essential during the COVID-19 pandemic.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $5.352 billion | $5.643 billion | Down 5.2% |
| Net earnings attributable to IP | $(141) million | $424 million | Down $565 million |
| Diluted EPS | $(0.36) | $1.05 | Declined $1.41 |
| Adjusted operating earnings | $226 million | $447 million | Down 49% |
| Adjusted operating EPS | $0.57 | $1.11 | Down 49% |
| Cash provided by operations | $649 million | $733 million | Down $84 million |
| Free cash flow | $363 million | $440 million | Down $77 million |
| Business segment operating profit | $512 million | $600 million | Down 15% |
GAAP net margin was approximately (2.6%), compared with approximately 7.5% in Q1 2019. The reported loss included $372 million after-tax of special items and a $5 million after-tax benefit from non-operating pension income.
| Segment | Q1 2020 sales | Q1 2020 operating profit | Q1 2019 operating profit |
|---|---|---|---|
| Industrial Packaging | $3.819 billion | $470 million | $421 million |
| Global Cellulose Fibers | $568 million | $(54) million | $35 million |
| Printing Papers | $908 million | $96 million | $144 million |
At March 31, 2020, cash and temporary investments were $1.239 billion, compared with $511 million at December 31, 2019. Total debt was approximately $10.2 billion, excluding $6.3 billion of nonrecourse variable-interest-entity liabilities. Long-term debt was $9.561 billion and current maturities and notes payable were $664 million. The company was in compliance with its debt covenants.
Material changes versus comparable periods
- Sales declined primarily because of lower prices and unfavorable mix, especially in pulp and printing papers. Sales volumes were generally higher in Industrial Packaging and Global Cellulose Fibers but lower in Printing Papers.
- Industrial Packaging operating profit increased 12% year over year, supported by volume growth and lower raw-material and freight costs, partly offset by lower prices, higher operating costs, and mill events.
- Global Cellulose Fibers moved to an operating loss, reflecting materially lower pulp prices and unfavorable foreign currency effects despite higher volumes and lower input costs.
- Printing Papers operating profit declined 33% year over year as demand continued to weaken, with additional COVID-19-related pressure late in the quarter.
- Equity earnings declined by $145 million year over year. Ilim contributed a $35 million loss, including a $51 million after-tax foreign-exchange loss on U.S.-dollar-denominated net debt, compared with $101 million of earnings in Q1 2019.
- The company recorded a $344 million pretax, or $337 million after-tax, charge related to the planned sale of its Brazilian Industrial Packaging business. The charge included a $20 million long-lived-asset write-down and a $324 million cumulative foreign-currency translation adjustment.
- International Paper exchanged part of its Graphic Packaging investment for $250 million of proceeds and recorded a $33 million pretax gain.
- Capital spending was $286 million in Q1 2020. Management reduced expected full-year 2020 capital spending to approximately $600 million, about $350 million below its initial plan.
Guidance, outlook, risks, and unusual items
- Management expected Q2 2020 price and mix to be lower in Industrial Packaging, volume to decline because of weaker economic activity and one fewer shipping day, and recovered-fiber costs to increase.
- Global Cellulose Fibers volume was expected to be broadly stable, with improved price and mix and lower maintenance outage expense, but with a negative impact from the non-repeat of a favorable Q1 inventory adjustment.
- Printing Papers volume was expected to decline significantly because of COVID-19, with higher unabsorbed fixed costs and weaker operating performance.
- The company could not quantify the full 2020 COVID-19 impact. Management identified risks to demand, workforce availability, supply chains, customer and supplier performance, asset values, pension assets, credit ratings, capital-market access, and liquidity.
- On March 25, 2020, the company entered into a $750 million committed 364-day revolving credit facility, supplementing its $1.5 billion five-year facility. It had no borrowings under either facility at March 31.
- The company had $557 million outstanding under its receivables securitization program at March 31. After quarter-end, the program was amended to a committed facility of up to $550 million through April 2022, and the $557 million balance was repaid.
- Share repurchases were indefinitely suspended beginning in April 2020. Management stated that there were no plans to change the dividend policy; Q1 dividends were $202 million, or $0.5125 per share.
- The company had approximately $4.2 billion of third-party variable-interest-entity loans maturing in the fourth quarter of 2020 unless extended. Management believed refinancing or disposition of related installment notes could address the obligation.
- Environmental remediation liabilities were approximately $196 million. Additional losses related to the Kalamazoo River and Harris County matters remained possible, although the company stated that it could not reasonably estimate amounts beyond recorded liabilities.
- A Brazilian tax dispute involved assessments of approximately $115 million of tax and $365 million of interest, penalties, and fees as of March 31, 2020. The company is appealing and believes its tax position is supportable.
Important facts for investors to verify
- Verify the pace and duration of COVID-19 demand declines, particularly in Printing Papers and subsequently in pulp, containerboard, and corrugated packaging.
- Monitor liquidity after the repayment of the receivables securitization balance, capital-spending reductions, suspended buybacks, and potential debt refinancing needs.
- Assess the closing and final proceeds from the Brazilian Industrial Packaging divestiture and whether further impairment or foreign-currency effects arise.
- Reconcile GAAP earnings with adjusted operating earnings and understand the sustainability of segment performance excluding special items.
- Track Ilim’s operating results, foreign-exchange exposure, and the potential effects of any future shareholder deadlock procedures.
- Review environmental, tax, antitrust, and litigation contingencies for potential cash outflows or charges exceeding recorded reserves.