International Paper Company — 2020 Q3 Form 10-Q Summary
Business context and reporting period
International Paper filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company operates through Industrial Packaging, Global Cellulose Fibers and Printing Papers. Most facilities remained operational during COVID-19, but printing-paper demand was materially impaired, while containerboard, corrugated boxes and pulp demand remained more resilient.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Net sales | $5.123 billion | $5.568 billion | Down 8% |
| Net earnings attributable to International Paper | $204 million | $344 million | Down 41% |
| Diluted EPS | $0.52 | $0.87 | Down $0.35 |
| Adjusted operating earnings | $280 million | $431 million | Down 35% |
| Adjusted operating EPS | $0.71 | $1.09 | Down $0.38 |
| Cash provided by operations | $735 million | $882 million | Down 17% |
| Free cash flow | $616 million | $597 million | Up 3% |
Reported net margin was approximately 4.0% in Q3 2020 versus 6.2% in Q3 2019. Business segment operating profit was $473 million, or approximately 9.2% of sales, versus $701 million, or 12.6%, in the prior-year quarter. The reported effective tax rate was 18%, compared with 30% in Q3 2019.
| Segment | Q3 2020 sales | Q3 2019 sales | Q3 2020 operating profit | Q3 2019 operating profit |
|---|---|---|---|---|
| Industrial Packaging | $3.768 billion | $3.820 billion | $469 million | $535 million |
| Global Cellulose Fibers | $564 million | $624 million | $(59) million | $4 million |
| Printing Papers | $743 million | $1.071 billion | $63 million | $162 million |
For the first nine months, sales were $15.341 billion versus $16.878 billion, net earnings attributable to International Paper were $329 million versus $1.060 billion, and diluted EPS was $0.83 versus $2.65. Operating cash flow was $2.274 billion versus $2.682 billion, while free cash flow was $1.617 billion versus $1.769 billion.
Balance sheet, debt and liquidity
- Cash and temporary investments were $678 million at September 30, 2020, up from $511 million at December 31, 2019.
- Long-term debt was $8.525 billion and current maturities and notes payable were $179 million. The filing states that the fair value of approximately $8.7 billion of company debt was $10.7 billion.
- The company reduced debt by approximately $1.1 billion during the first nine months, including $903 million of early debt reductions in Q3. Debt extinguishment costs were $105 million in Q3 and $131 million year to date.
- Available committed liquidity included a $750 million 364-day revolving facility, a $1.5 billion five-year credit agreement and up to $550 million under the receivables securitization program. No borrowings were outstanding under these facilities at quarter-end. Commercial paper borrowings were $140 million against a $1.0 billion capacity.
- The company was in compliance with its debt covenants. The covenants require minimum defined net worth of $9 billion and a debt-to-capital ratio below 60%.
- Capital spending was $657 million year to date. Full-year 2020 capital spending was expected to be approximately $800 million, about $200 million below the original plan.
- Dividends paid were $605 million year to date. The share-repurchase program was indefinitely suspended in April 2020.
Material changes versus prior comparable periods
- Q3 sales and profitability declined primarily because of lower prices and unfavorable mix, lower volumes, and weaker demand for printing papers. Printing Papers sales fell 31% year over year, and its operating profit fell 61%.
- Global Cellulose Fibers moved from a $4 million operating profit to a $59 million operating loss, reflecting lower pulp prices, customer destocking and higher maintenance outage costs.
- Industrial Packaging remained profitable but operating profit declined 12% year over year because of lower prices and mix, higher operating costs and maintenance expense.
- Compared with Q2 2020, Q3 sales increased 5%, net earnings declined from $266 million to $204 million, and adjusted operating earnings declined from $305 million to $280 million. Higher volume and lower operating and input costs were offset by higher maintenance outage costs, lower prices and weaker equity earnings.
- Year-to-date results included a $347 million pretax impairment charge related to the Brazilian Industrial Packaging business, $131 million of early debt-extinguishment costs, and other special items. The Brazilian business sale closed October 14, 2020, after quarter-end.
- Equity earnings were adversely affected by a $55 million after-tax foreign-exchange loss at the Ilim joint venture in Q3. International Paper recognized a $33 million equity loss from Ilim versus $18 million of earnings in the prior-year quarter.
Guidance, outlook, risks and unusual items
Management did not provide a single quantified full-year earnings forecast. For Q4 2020, management expected stable Industrial Packaging price and mix, modestly lower volume, lower maintenance expense but higher energy and transportation costs; stable Global Cellulose Fibers volume with lower price and mix and higher maintenance expense; and improving Printing Papers volume with stable price and mix but higher seasonal costs. Management expected improved Ilim earnings because the Q3 foreign-exchange loss was not expected to repeat.
- COVID-19 remained the principal operating risk. A resurgence, renewed shutdowns, supply-chain disruption, weaker economic activity or reduced customer demand could materially affect results, liquidity and cash flow.
- The $4.22 billion of third-party loans associated with variable-interest entities matured in November and December 2020. Management was negotiating extensions to August 2021 and stated it could dispose of related installment notes if extensions were not completed.
- Environmental remediation liabilities were approximately $186 million, including reserves of $65 million for the Harris County site. Additional losses could exceed recorded liabilities, particularly for the Kalamazoo River matter.
- Brazilian tax assessments totaled approximately $107 million of tax plus $342 million of interest, penalties and fees as of September 30, 2020. The company is appealing and believes its tax position is supportable.
- Recorded asbestos-related liabilities were $117 million net of estimated insurance recoveries. The company also disclosed various litigation and regulatory matters, including an Italian antitrust fine of approximately $32 million that was recorded in 2019.
- The company expected to meet capital expenditures, debt service, working capital and dividend requirements for the next 12 months using cash from operations, cash balances and available credit facilities, but noted that prolonged economic disruption could restrict access to liquidity.
Most important facts for investors to verify
- Whether the variable-interest-entity loans were successfully extended or otherwise refinanced before their November and December 2020 maturities.
- The final proceeds, working-capital adjustment and accounting impact from the October 2020 sale of Brazilian Industrial Packaging.
- Whether printing-paper, pulp and packaging demand and pricing recovered as projected in Q4 and beyond.
- The sustainability of cash generation and the company’s ability to reduce debt while funding dividends and planned capital expenditures.
- Developments in Brazilian tax litigation, environmental matters, asbestos claims and other contingencies.
- The effect of special items, maintenance costs, foreign-exchange movements and equity-method results on recurring earnings.