International Paper Company — Q1 2014 Form 10-Q Summary
Business context and reporting period
International Paper reported results for the three months ended March 31, 2014. Its principal segments were Industrial Packaging, Printing Papers, Consumer Packaging and Distribution, with a 50% equity interest in Ilim Holding in Russia. Results were affected by severe U.S. weather, planned maintenance outages, the Courtland, Alabama mill shutdown and ongoing restructuring activities.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $7.014 billion | $7.090 billion |
| Operating profit | $65 million | $506 million |
| Loss from continuing operations attributable to International Paper | $93 million | Earnings of $292 million |
| Net loss attributable to International Paper | $95 million | Earnings of $318 million |
| Diluted EPS | $(0.21) | $0.71 |
| Operating EPS, non-GAAP | $0.61 | $0.65 |
| Cash provided by continuing operations | $473 million | $516 million |
| Free cash flow, non-GAAP | $254 million | $300 million |
| Capital expenditures | $277 million | $216 million |
| Cash and temporary investments at March 31 | $1.341 billion | $934 million at March 31, 2013 |
Operating margin based on reported operating profit was approximately 0.9% in Q1 2014, versus approximately 7.1% in Q1 2013. The comparison was materially distorted by restructuring and other charges. Net sales decreased approximately 1% year over year.
- Restructuring and other charges were $517 million pretax and $315 million after tax, including $495 million pretax, or $302 million after tax, related to the Courtland mill shutdown.
- The Courtland charge included approximately $430 million of accelerated depreciation, $30 million of site closure costs, $15 million of severance and $20 million of other non-cash charges.
- Segment operating profit was $453 million in Industrial Packaging, a loss of $410 million in Printing Papers, $17 million in Consumer Packaging and $5 million in Distribution.
- Equity losses from Ilim were $31 million, including a $45 million after-tax foreign-exchange loss on U.S.-dollar-denominated debt.
- Total debt was approximately $9.4 billion at March 31, 2014, consisting primarily of $8.867 billion of long-term debt and $561 million of current maturities and notes payable. The filing reports fair value of debt of approximately $10.7 billion.
- Credit ratings were BBB with a stable outlook from S&P and Baa3 with a stable outlook from Moody’s.
- Available credit agreements totaled approximately $2.0 billion, including a $1.5 billion committed bank facility expiring in August 2016 and up to $500 million of receivables-based financing.
- The quarterly common dividend was increased to $0.35 per share from $0.30 per share in the prior-year quarter. The company repurchased $311 million of shares under its repurchase program during the quarter.
Material changes versus comparable periods
- Reported earnings deteriorated sharply because of the Courtland shutdown charge and higher special items. Net special items were a $331 million after-tax loss in Q1 2014 versus a $51 million gain in Q1 2013.
- Operating profit declined to $65 million from $506 million, although management reported higher pricing, lower corporate costs, lower net interest expense and lower non-operating pension expense as offsets.
- Industrial Packaging operating profit increased to $453 million from $355 million, supported by pricing and mix, despite weather-related disruption and higher input costs.
- Printing Papers shifted to a $410 million operating loss from $149 million of profit, primarily because of the Courtland shutdown and weaker volumes in North American printing papers.
- Consumer Packaging operating profit increased to $17 million from $7 million, while Distribution improved to $5 million from a $5 million loss.
- Operating cash flow from continuing operations declined $43 million year over year, while capital spending increased $61 million. Free cash flow declined to $254 million from $300 million.
- Cash declined by $461 million during the quarter, reflecting capital spending, share repurchases, dividends and net debt reductions.
Guidance, outlook, commentary and risks
Management expected second-quarter results to benefit from the absence of severe first-quarter weather, higher seasonal volumes, further realization of announced price increases and lower Courtland closure costs. These benefits were expected to be partly offset by heavier planned maintenance outages, pressure on pulp prices, higher European wood costs and economic weakness in Russia.
- Full-year 2014 capital spending was expected to be approximately $1.4 billion, or about 95% of depreciation and amortization for current businesses.
- Management expected to fund capital expenditures, debt service, working capital and dividends through cash balances, operating cash flow and existing credit facilities as needed.
- The xpedx distribution business was expected to combine with Unisource in a Reverse Morris Trust transaction. International Paper expected to receive SpinCo shares and a special payment of $400 million, subject to adjustments, plus a possible earn-out.
- On April 8, 2014, after quarter-end, the company acquired the remaining 25% of Orsa IP for approximately $135 million in cash. The transaction was expected to eliminate the $168 million redeemable noncontrolling interest recorded at March 31 and increase paid-in capital by the net difference.
- Pension funding remained a cash consideration. The company contributed $58 million during the quarter, contributed an additional $205 million in April and expected to make another $180 million of required contributions before year-end.
- Environmental remediation liabilities were estimated at approximately $98 million. Significant unresolved matters included the Kalamazoo River, San Jacinto River and certain antitrust proceedings; several matters were too preliminary to estimate a probable loss.
- Key risks included leverage and interest rates, commodity, energy and transportation costs, cyclical demand and pricing, foreign exchange, pension funding, environmental and litigation exposure, manufacturing disruptions, joint-venture risks and execution of the xpedx transaction.
Most important facts for investors to verify
- Whether the severe-weather effects, Courtland shutdown costs and maintenance outages were temporary or indicate continuing operational pressure.
- The remaining cash and debt impact of the Orsa IP purchase, pension contributions, share repurchases and the planned xpedx transaction.
- The timing, amount and accounting treatment of the expected $400 million SpinCo payment and any earn-out.
- Progress and financial consequences of the Courtland closure, including remaining accelerated depreciation and site-related obligations.
- Exposure to Ilim’s foreign-currency debt, Russian economic conditions and future pulp pricing.
- Potential outcomes and reserves for environmental, antitrust, tax and other litigation matters.
- Whether the company can maintain investment-grade ratings while funding approximately $1.4 billion of capital expenditures and continuing dividends and repurchases.