International Paper Company — 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
International Paper reported for the quarter and nine months ended September 30, 2019. The company operates through Industrial Packaging, Global Cellulose Fibers and Printing Papers. Results are unaudited and may not be indicative of full-year performance.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $5.568 billion | $5.901 billion | $16.878 billion | $17.355 billion |
| Net earnings attributable to IP | $344 million | $562 million | $1.060 billion | $1.696 billion |
| Diluted EPS | $0.87 | $1.37 | $2.65 | $4.08 |
| Adjusted operating earnings | $431 million | $641 million | Not clearly provided | Not clearly provided |
| Business segment operating profit | $655 million | $738 million | $1.706 billion | $1.947 billion |
| Cash provided by operations | Not separately provided | Not separately provided | $2.682 billion | $2.405 billion |
| Free cash flow | Not separately provided | Not separately provided | $1.769 billion | $1.119 billion |
Q3 net earnings attributable to International Paper represented an approximate 6.2% net margin, compared with 9.5% in Q3 2018. Nine-month net margin was approximately 6.3%, compared with 9.8% in the prior-year period. Q3 adjusted operating earnings were $1.09 per diluted share versus $1.56 in Q3 2018.
- Q3 segment operating profit: Industrial Packaging $510 million, Global Cellulose Fibers $(3) million and Printing Papers $148 million.
- Cash and temporary investments were $697 million at September 30, 2019, versus $589 million at December 31, 2018.
- Total debt was approximately $10.4 billion, including $9.957 billion of long-term debt and $402 million of current maturities and notes payable. Commercial paper borrowings were $245 million.
- Credit agreements totaled $2.1 billion, including a $1.5 billion committed facility expiring in December 2021. No borrowings were outstanding under the credit facility or receivables securitization program.
- The company paid $595 million in dividends and repurchased shares and paid restricted-stock tax withholding totaling $535 million during the first nine months.
Material Changes Versus Comparable Periods
- Q3 sales declined 5.6% year over year; nine-month sales declined 2.7%.
- Q3 net earnings attributable to International Paper declined 38.8%, while diluted EPS declined 36.5%. Nine-month net earnings declined 37.5%, partly reflecting the $345 million after-tax discontinued-operations gain included in 2018.
- Q3 segment operating profit declined 11.2%, primarily due to lower prices and unfavorable mix, lower volumes and higher operating costs. Lower raw-material, freight and maintenance costs partially offset these pressures.
- Industrial Packaging sales declined 5%, with operating profit before special items down 11% year over year. Global Cellulose Fibers sales declined 13%, and operating profit before special items fell 95% due principally to lower pulp prices and challenging supply-demand conditions. Printing Papers sales declined 3%, while operating profit before special items declined 14%.
- Operating cash flow increased 12% and free cash flow increased 58% year over year, primarily reflecting improved working-capital cash flow and lower capital spending.
- Debt was reduced by approximately $391 million on a net basis during the first nine months, compared with a $107 million net increase in the prior-year period.
- The company adopted the new lease standard on January 1, 2019, recognizing $425 million of operating lease right-of-use assets and $428 million of operating lease liabilities at September 30, 2019. Management reported no material impact on earnings or cash flow.
Guidance, Outlook, Risks and Unusual Items
Management expects fourth-quarter 2019 results to reflect lower price and mix, improved seasonal volume and export shipments, lower input costs and significantly lower maintenance outage costs. However, operations and costs are expected to be pressured by the non-repeat of favorable Q3 items, higher seasonal energy consumption in certain businesses and continued pulp and paper price pressure.
- Full-year 2019 capital spending was expected to be approximately $1.3 billion, including approximately $400 million of strategic investments.
- Q3 included $94 million of pre-tax special items, including the India impairment, Italian antitrust fine, overhead cost-reduction charges, litigation reserves and environmental remediation charges. Q3 also included $9 million of non-operating pension expense.
- For the first nine months, special items totaled $273 million pre-tax, including $151 million related to the India disposal and $32 million for the Italian antitrust fine.
- The company completed its sale of controlling interest in APPM, its India-based paper business, on October 30, 2019, retaining a passive 20% investment. The filing states that a final immaterial adjustment was expected in Q4.
- A Brazilian tax dispute involves assessments of approximately $146 million in tax and $379 million in interest and penalties as of September 30, 2019. The company is appealing and believes its position will be sustained.
- Environmental remediation liabilities were approximately $145 million, with additional material losses reasonably possible in matters including the Kalamazoo River and San Jacinto River Waste Pits sites.
- The company faces ongoing antitrust, contract, environmental and other litigation. A $32 million Italian antitrust fine was recorded in Q3 and is being appealed. The company also disclosed an approximately $137 million judgment in the Signature litigation, which remains on appeal.
- Key operating risks include cyclicality and pricing for packaging, pulp and paper; raw-material, energy and transportation costs; trade and tariff conditions; foreign exchange; facility disruptions; pension funding; environmental obligations; litigation; joint-venture performance; leverage and interest rates.
Most Important Facts for Investors to Verify
- Reconcile reported GAAP earnings and EPS with adjusted operating earnings, including the treatment and tax effects of special items and pension expense.
- Assess whether pulp, paper and containerboard pricing pressures and elevated industry inventories persist into 2020.
- Verify the completion economics of the APPM sale, the value of the retained 20% investment and any final impairment adjustment.
- Review debt maturities, refinancing requirements and the effect of maintaining investment-grade ratings; $8.7 billion of disclosed debt obligations mature thereafter beyond 2023.
- Monitor the Brazilian tax dispute, environmental remediation matters and outstanding litigation for changes in probable or reasonably possible loss estimates.
- Evaluate whether projected lower maintenance costs, seasonal volume recovery and planned capital spending support management’s cash-flow outlook.
- Confirm the impact of the 2019 lease adoption and future expected-credit-loss accounting adoption scheduled for January 1, 2020.