International Paper Company: Q2 2021 Form 10-Q Summary
Business Context and Reporting Period
International Paper filed its quarterly report for the three and six months ended June 30, 2021. The company operates through Industrial Packaging, Global Cellulose Fibers and Printing Papers. Results were affected by recovering demand, higher prices, supply-chain and transportation constraints, elevated input costs, planned maintenance outages and ongoing COVID-19 uncertainty.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net sales | $5.616 billion | $4.866 billion | $10.979 billion | $10.218 billion |
| Net earnings attributable to IP | $432 million | $266 million | $781 million | $125 million |
| Diluted EPS | $1.09 | $0.67 | $1.96 | $0.32 |
| Business segment operating profit | $494 million | $428 million | $939 million | $940 million |
| Cash provided by operations | Not separately provided | Not separately provided | $1.278 billion | $1.539 billion |
| Free cash flow | Not separately provided | Not separately provided | $1.056 billion | $1.001 billion |
Q2 net earnings attributable to International Paper increased 62% year over year, while sales increased 15%. The reported net margin was approximately 7.7%, compared with approximately 5.5% in Q2 2020. Adjusted operating earnings were $421 million, or $1.06 per diluted share, compared with $305 million, or $0.77 per diluted share, in Q2 2020.
Segment sales and operating profit were $4.056 billion and $408 million for Industrial Packaging, $671 million and $10 million for Global Cellulose Fibers, and $846 million and $76 million for Printing Papers. Industrial Packaging profit declined despite higher sales, while Global Cellulose Fibers and Printing Papers improved year over year.
At June 30, 2021, cash and temporary investments were $706 million. Reported long-term debt was $7.073 billion and notes payable and current maturities were $116 million. The balance sheet also included $6.316 billion of nonrecourse financial liabilities of variable interest entities. The company had $2.1 billion of credit facilities and a $1.0 billion commercial paper program, with no borrowings outstanding under those facilities or the commercial paper program. Debt fair value was approximately $9.1 billion.
Material Changes Versus Prior Comparable Period
- Sales increased $750 million in Q2 and $761 million for the first six months, primarily from higher prices, favorable mix, improved volumes and recovery in Printing Papers demand.
- Net earnings attributable to International Paper increased $166 million in Q2 and $656 million for the first six months. The prior-year period included substantial business impairment and other special charges.
- Business segment operating profit increased $66 million in Q2 but was essentially flat for the six-month period. Price and mix benefits were offset by higher operating, raw material, freight and maintenance costs.
- Operating cash flow declined $261 million for the first six months, mainly reflecting working-capital changes, particularly higher receivables, despite higher earnings. Capital spending declined to $222 million from $538 million, increasing free cash flow to $1.056 billion from $1.001 billion.
- The company reduced debt by approximately $910 million net during the first six months, including $897 million of early debt reductions and $188 million of debt tender premiums. Q2 included approximately $790 million of early debt reductions and a $170 million pre-tax extinguishment charge.
- International Paper monetized its remaining Graphic Packaging International Partners investment for approximately $402 million in Q2 and no longer held an ownership interest at June 30, 2021.
- The company completed the sale of its Turkish Olmuksan business and acquired two box plants in Spain for approximately $83 million.
Guidance, Outlook, Risks and Unusual Items
Management expected Q3 2021 price and mix to improve across the businesses, with stable-to-higher volumes, lower planned maintenance expense and continued pressure from recovered fiber, wood, chemicals, energy, freight and port congestion. The company expected full-year 2021 capital spending of approximately $800 million, or 61% of depreciation and amortization.
International Paper planned to complete the tax-free spin-off of its Printing Papers business, Sylvamo Corporation, on October 1, 2021, subject to regulatory approvals and other conditions. International Paper expected to retain up to 19.9% of Sylvamo initially, with an intent to monetize that investment.
Unusual Q2 items included a $170 million pre-tax early debt extinguishment charge, $28 million of pre-tax spin-off and transformation costs, a $130 million pre-tax gain on the sale of the Graphic Packaging investment, and a $70 million Brazilian value-added tax benefit. Restructuring and other charges totaled $174 million in Q2, including the debt extinguishment charge and severance.
The $4.8 billion timber monetization installment notes and $4.2 billion related third-party loans were scheduled to mature in August 2021. Management expected approximately $600 million of cash proceeds representing its equity in the structures and a $75 million cash tax payment in Q4 2021.
Key risks include COVID-19 resurgence and variants, supply-chain and transportation disruptions, raw-material and energy inflation, cyclicality and pricing pressure, interest rates and leverage, foreign exchange, environmental remediation, tax litigation in Brazil, asbestos and other litigation, joint-venture risks, and execution, regulatory approval and tax qualification of the Printing Papers spin-off. Environmental remediation liabilities were estimated at approximately $185 million, and recorded asbestos-related liabilities were $112 million. Brazilian tax assessments related to goodwill deductions totaled approximately $492 million, including tax, interest, penalties and fees, although management believes its position is supportable.
Important Facts for Investors to Verify
- Whether price increases offset continued inflation in recovered fiber, wood, chemicals, energy, freight and other operating costs.
- The timing, regulatory approvals, financing arrangements, tax treatment and final terms of the Sylvamo spin-off.
- The August 2021 settlement of the timber monetization structures and the expected $600 million cash proceeds and $75 million tax payment.
- Debt reduction progress, refinancing needs, covenant compliance and the company’s ability to maintain investment-grade ratings.
- Whether working-capital pressure, especially receivables growth, affects operating cash flow.
- Potential additional exposure from Brazilian tax litigation, environmental matters, asbestos claims and other contingencies.
- The effect of port congestion, low containerboard inventories and planned maintenance outages on Q3 volumes and margins.