International Paper Company — Form 10-Q Summary
Business context and reporting period
International Paper filed its quarterly report for the period ended September 30, 2023. The company operates through Industrial Packaging and Global Cellulose Fibers. Results include the third quarter and first nine months of 2023, compared with the corresponding 2022 periods. The former Ilim investment is presented as discontinued operations and was sold on September 18, 2023.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $4.613 billion | $5.402 billion | $14.315 billion | $16.028 billion |
| Net earnings | $165 million | $951 million | $572 million | $1.822 billion |
| Net earnings margin | 3.6% | 17.6% | 4.0% | 11.4% |
| Continuing-operations earnings | $192 million | $887 million | $586 million | $1.570 billion |
| Diluted EPS | $0.47 | $2.64 | $1.64 | $4.92 |
| Adjusted operating earnings | $224 million | $300 million | The filing text does not provide a clear nine-month value | The filing text does not provide a clear nine-month value |
| Business segment operating profit | $352 million | $464 million | $992 million | $1.397 billion |
- Industrial Packaging generated third-quarter sales of $3.787 billion and operating profit of $325 million, compared with $4.385 billion and $369 million, respectively, in the prior-year quarter.
- Global Cellulose Fibers generated third-quarter sales of $725 million and operating profit of $27 million, compared with $887 million and $95 million, respectively, in the prior-year quarter.
- Operating cash flow for the first nine months was $1.341 billion, versus $1.413 billion in 2022. Capital spending was $836 million, versus $609 million, resulting in reported free cash flow of $505 million, versus $804 million.
- Cash and temporary investments increased to $1.149 billion at September 30, 2023, from $804 million at December 31, 2022.
- Total debt was approximately $5.7 billion, including $120 million of current maturities and $5.549 billion of long-term debt. The company had no borrowings under its $1.4 billion committed credit facility, $500 million receivables securitization program, or $1.0 billion commercial paper program at quarter-end.
- The company was in compliance with its debt covenants. Its credit facilities totaled $1.9 billion, and the committed bank facility maturity was extended to June 2028.
- Full-year 2023 capital spending is expected to be approximately $1.1 billion to $1.2 billion, or 110% to 120% of depreciation and amortization.
Material changes versus comparable periods
- Third-quarter sales declined 15% year over year, while net earnings declined 83%. The comparison was affected by a $604 million one-time tax benefit in the third quarter of 2022, a $93 million early debt-extinguishment charge in 2022, and other 2022 special items.
- Adjusted operating earnings declined from $300 million to $224 million year over year but increased from $204 million in the second quarter of 2023.
- Third-quarter segment operating profit decreased 24% year over year but increased 5% sequentially. Lower prices and unfavorable mix, lower volumes, and higher operating costs more than offset lower raw-material and freight costs.
- Net interest expense decreased to $58 million from $123 million in the prior-year quarter, primarily because the 2022 period included interest associated with the timber monetization tax settlement.
- The company completed the sale of its Ilim and Ilim Group interests for total cash proceeds of $508 million, incurred $36 million of transaction fees, and no longer has investments in Russia. The transaction generated a $59 million third-quarter impairment charge and contributed a $27 million loss from discontinued operations.
- Share repurchases and restricted-stock tax withholdings totaled $218 million during the first nine months, compared with $1.093 billion in the prior-year period. Approximately $2.96 billion remained authorized for repurchases at September 30, 2023.
- The company paid $482 million of common dividends during the first nine months, or $1.3875 per share.
Guidance, outlook, risks and unusual items
- Management reported modest demand recovery but continued pressure from macroeconomic conditions affecting prices, volumes, and operating costs. Building a Better IP initiatives exceeded the company’s full-year 2023 target as of the third quarter.
- For the fourth quarter, Industrial Packaging is expected to have higher volumes but lower price and mix, higher operating costs, lower maintenance outage expense, and higher recovered-fiber costs. Global Cellulose Fibers is expected to have lower price and mix, higher maintenance and operating costs, and a shift toward higher fluff-pulp volumes and lower commodity-grade shipments.
- On October 18, 2023, the company announced the planned closure of its Orange, Texas containerboard mill and the shutdown of two pulp machines at its Riegelwood, North Carolina and Pensacola, Florida mills. Expected fourth-quarter charges total approximately $595 million of noncash asset write-offs and accelerated depreciation and $69 million of cash severance and shutdown costs.
- Environmental remediation liabilities totaled approximately $261 million. The company increased its Versailles Pond reserve by approximately $29 million in the third quarter and reported a Kalamazoo River reserve of $33 million and a Harris County reserve of $85 million.
- The company remains exposed to the Brazil goodwill tax matter associated with Sylvamo Brazil. Assessed amounts were approximately $120 million of tax and $418 million of interest, penalties, and fees at September 30, 2023; the recorded liability was $48 million under the tax matters agreement.
- Other risks include cyclical demand and pricing, inflation and raw-material costs, energy and transportation availability, interest rates and leverage, environmental and litigation contingencies, pension costs, geopolitical conditions, climate and severe weather, cybersecurity, and risks associated with the Sylvamo spin-off and related agreements.
- Management stated that current cash, operating cash flow, and available credit facilities are expected to fund capital expenditures, debt service, working capital, dividends, and potential share or debt repurchases for the next 12 months and the foreseeable future.
Investor verification items
- Verify the impact of the announced mill and pulp-machine closures, including the approximately $664 million of expected aggregate charges and any effects on future capacity, volumes, and cash flow.
- Assess whether demand recovery offsets continued price, mix, and macroeconomic pressure in Industrial Packaging and Global Cellulose Fibers.
- Reconcile GAAP earnings with adjusted operating earnings and identify the recurring versus nonrecurring effects of discontinued operations, environmental charges, pension expense, tax items, and other special items.
- Monitor leverage, debt maturities, floating-rate exposure, credit ratings, covenant headroom, and the company’s ability to maintain liquidity while funding elevated capital expenditures.
- Review environmental reserves and the Brazil goodwill tax matter for potential losses above recorded liabilities.
- Evaluate the sustainability of dividends and authorized share repurchases against free cash flow after capital spending and restructuring-related cash costs.