INTERNATIONAL PAPER CO quarterly report, Q1 FY2013

International Paper Company: Q1 2013 Form 10-Q Summary

Business context and reporting period

International Paper filed its unaudited Form 10-Q for the three months ended March 31, 2013. The company operates in Industrial Packaging, Printing Papers, Consumer Packaging and Distribution, with a 50% equity investment in Ilim. Results include the Temple-Inland operations for the full comparable period, while Olmuksan and Orsa International Paper were consolidated beginning in January 2013.

Key financial metrics

Metric	Q1 2013	Q1 2012
Net sales	$7.090 billion	$6.655 billion
Earnings from continuing operations attributable to IP	$292 million	$183 million
Net earnings attributable to IP	$318 million	$188 million
Diluted EPS	$0.71	$0.43
Operating profit	$506 million	$462 million
Cash provided by continuing operations	$516 million	$633 million
Free cash flow	$300 million	$357 million
Capital spending	$216 million	$285 million
Cash and temporary investments at period end	$934 million	$1.288 billion at March 31, 2012

Net sales increased 7% year over year. Net earnings attributable to International Paper increased 69%, and diluted EPS increased 65%. Continuing-operations earnings attributable to the company were $292 million, or approximately 4.1% of sales; net earnings attributable to the company were approximately 4.5% of sales. Operating profit was approximately 7.1% of sales.

At March 31, 2013, total debt was approximately $10.2 billion, including $727 million of notes payable and current maturities and $9.495 billion of long-term debt. The company also reported $2.038 billion of nonrecourse financial liabilities of special purpose entities. Long-term credit ratings were BBB with a stable outlook from S&P and Baa3 with a stable outlook from Moody’s.

Committed credit agreements totaled $2.5 billion, including a $1.5 billion bank facility and up to $1.0 billion of receivables-based financing, of which $825 million was available at quarter end. The company had $60 million outstanding under the receivables securitization facility.

Material changes versus the prior comparable period

Industrial Packaging operating profit rose to $355 million from $215 million, supported by higher price realizations, Temple-Inland synergies and additional acquired operations.
Printing Papers operating profit increased modestly to $149 million from $146 million.
Consumer Packaging operating profit fell to $7 million from $103 million, primarily because of a $44 million charge for permanently shutting down a paper machine at the Augusta, Georgia mill.
Distribution operating profit declined to a $5 million loss from a $2 million loss, reflecting seasonally lower volumes, competitive conditions and $7 million of xpedx restructuring costs.
Equity earnings from Ilim declined to an $11 million loss from $40 million of earnings, mainly because of an unfavorable foreign-exchange impact on Ilim’s U.S.-dollar-denominated debt.
Cash from continuing operations declined $117 million, principally because working capital used $281 million compared with $66 million in the prior-year quarter.
Free cash flow declined $57 million despite lower capital spending, primarily because of lower operating cash flow.
The quarterly common dividend increased to $0.3000 per share from $0.2625.

Guidance, outlook and management commentary

Management reported solid first-quarter results despite seasonally slow demand, higher input costs and adverse foreign-exchange effects at Ilim. It cited a $55-per-ton benefit from the prior North American containerboard price increase and stated that Temple-Inland synergy savings exceeded the $400 million target run rate.

Second-quarter packaging volumes are expected to improve seasonally in North America and Brazil. Containerboard price increases are expected to provide additional benefit, although higher mandated containerboard purchase prices will offset part of that benefit.
Western European volumes are expected to remain weak, while Asian volumes are expected to remain broadly flat amid macroeconomic uncertainty and excess capacity.
Input costs were expected to be generally stable, with risks from Russian wood costs and North American recycled fiber.
Planned maintenance outage costs were expected to increase materially in the second quarter, which management identified as the peak outage quarter.
The tax rate was expected to normalize in the second quarter after significant first-quarter benefits, including approximately $35 million related to the American Taxpayer Relief Act and $91 million from an IRS audit settlement.
Full-year 2013 capital spending was expected to be approximately $1.4 billion.
The company expected to meet 2013 capital expenditures, debt service, working capital and dividend needs through cash balances, operating cash flow and existing credit facilities.

Acquisitions, divestitures and unusual items

International Paper acquired an additional 43.7% of Olmuksan for $56 million, bringing ownership to 87.4%; the transaction generated a $17 million foreign-currency translation loss and a $19 million bargain-purchase gain.
The company formed Orsa International Paper in Brazil, owning 75%, with an investment of approximately $470 million. The venture includes three containerboard mills and four box plants.
Restructuring and other charges totaled $59 million before tax, including $44 million for the Augusta shutdown, $7 million for xpedx restructuring and $6 million of early debt-extinguishment costs.
Discontinued Temple-Inland Building Products assets of $775 million were classified as held for sale. The sale agreement with Georgia-Pacific was adjusted to $710 million after excluding International Paper’s Del-Tin interest.
On April 22, 2013, the company disclosed non-binding discussions to combine xpedx with Unisource through a proposed Reverse Morris Trust transaction. No definitive agreement had been reached.

Risks and contingencies

Key operating risks include cyclicality, weak demand, product pricing, raw-material, energy and transportation costs, foreign-exchange movements, excess capacity and manufacturing disruptions.
Pension expense increased to $140 million from $83 million, primarily because of a lower discount rate and higher amortization of actuarial losses. The company expected at least $30 million of pension contributions in 2013, subject to reassessment.
Environmental remediation liabilities were estimated at approximately $90 million. Significant matters included Cass Lake, the Kalamazoo River Superfund site and San Jacinto River litigation, for which outcomes or loss ranges were not yet estimable.
Antitrust litigation involving containerboard and gypsum board remained in preliminary or discovery stages; the company disputed the allegations and could not estimate potential losses.
A Brazilian tax dispute involved a potential loss of approximately $32 million. The company also reported $873 million of unrecognized tax benefits and estimated that approximately $750 million could be reduced within the next 12 months, subject to settlements and statute expirations.
Under the Ilim shareholders’ agreement, the company could potentially be required to purchase its partner’s 50% interest for an estimated $250 million to $300 million, although the parties stated they had no current intention to initiate the process.

Most important facts for investors to verify

Whether containerboard pricing and Temple-Inland synergies can offset weaker volumes, input-cost inflation and higher planned outage costs.
The sustainability of first-quarter earnings given the $116 million tax benefit from special items, the IRS settlement benefit and other unusual items.
Progress and final purchase-price allocations for Olmuksan and Orsa IP.
Debt maturities, refinancing needs and liquidity relative to the company’s investment-grade ratings.
Execution and terms of any definitive xpedx-Unisource transaction.
Developments in environmental, antitrust, tax and other litigation matters that the filing states cannot yet be quantified.