International Paper Company — Form 10-Q Summary
Business context and reporting period
International Paper reported for the quarter and six months ended June 30, 2012. The company operated through Industrial Packaging, Printing Papers, Consumer Packaging and Distribution, with a 50% equity interest in Ilim Holding S.A. The February 13, 2012 acquisition of Temple-Inland materially affected the period’s results, debt, assets and operating volumes.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $7.077 billion, versus $6.648 billion in 2011 | $13.732 billion, versus $13.035 billion in 2011 |
| Net earnings attributable to International Paper | $134 million, or $0.31 diluted EPS, versus $219 million and $0.51 | $322 million, or $0.73 diluted EPS, versus $573 million and $1.32 |
| Continuing operations attributable to International Paper | $118 million, or $0.27 diluted EPS | $301 million, or $0.68 diluted EPS |
| Operating profit | $426 million, versus $483 million | $888 million, versus $1.068 billion |
| Cash provided by operations | Not separately provided | $1.411 billion, versus $1.162 billion |
| Free cash flow | Not separately provided | $619 million, versus $838 million |
Second-quarter net sales increased approximately 6%, primarily reflecting Temple-Inland. Net earnings attributable to International Paper declined approximately 39%, and diluted EPS declined approximately 39%. The reported second-quarter net margin was approximately 1.9%, compared with approximately 3.3% in the prior-year quarter. Management reported second-quarter diluted EPS before special items of $0.46, compared with $0.79 in the prior-year quarter and $0.57 in the first quarter of 2012.
- Second-quarter segment sales were $3.450 billion for Industrial Packaging, $1.510 billion for Printing Papers, $780 million for Consumer Packaging and $1.500 billion for Distribution.
- Second-quarter segment operating profit was $260 million for Industrial Packaging, $104 million for Printing Papers, $57 million for Consumer Packaging and $5 million for Distribution.
- Cash and temporary investments were $1.228 billion at June 30, 2012, down from $3.994 billion at December 31, 2011.
- Total debt was approximately $11.3 billion, including $10.478 billion of long-term debt and $838 million of current debt and maturities. Nonrecourse financial liabilities of special-purpose entities totaled $2.140 billion.
- Contractually committed credit agreements totaled $2.75 billion, including a $1.5 billion bank facility expiring in August 2016 and receivables securitization facilities expiring in 2013. The company reported BBB and Baa3 long-term credit ratings, each with a stable outlook.
- The quarterly common dividend was $0.2625 per share; six-month dividends paid were $229 million.
Material changes versus comparable periods
- Temple-Inland contributed sales and earnings from the acquisition date and generated reported synergies. Second-quarter integration costs were $35 million before tax; six-month integration costs were $78 million before tax.
- Industrial Packaging sales increased 28% year over year in the quarter, but operating profit declined to $260 million from $269 million after special items, including a $62 million impairment, $35 million of integration costs and $9 million of divestiture costs.
- Printing Papers operating profit declined to $104 million from $243 million. Consumer Packaging improved from a $33 million loss to $57 million of profit, largely because the prior-year period included a $129 million Shorewood impairment; however, 2012 results included weaker demand and Shorewood sale-related charges.
- Ilim equity earnings fell to a $25 million loss from $51 million of earnings in the prior-year quarter. The decline included a $41 million after-tax foreign-exchange loss on U.S. dollar-denominated debt, compared with a $30 million gain in the first quarter and a $9 million gain in the prior-year quarter.
- Second-quarter downtime was approximately 390,000 tons, including approximately 161,000 tons of market-related downtime, versus approximately 295,000 tons in the prior-year quarter. Management estimated that higher outage costs reduced earnings by approximately $0.15 per share versus the first quarter.
- Operating cash flow increased, but free cash flow declined because capital spending rose to $705 million from $410 million and the company made a $44 million pension contribution. Full-year 2012 capital spending was expected to be approximately $1.5 billion.
Guidance, outlook, risks and unusual items
- Management expected third-quarter earnings to benefit from lower outage costs and the absence of Ilim’s significant second-quarter foreign-exchange loss. Demand and pricing were expected to be generally stable, with benefits from a containerboard and box price increase expected primarily in the fourth quarter.
- Natural gas prices were expected to increase while fiber costs decreased, broadly offsetting each other. Management also expected seasonally lower box volumes, higher paper volumes in some markets and continued weak economic conditions in parts of Europe.
- Special items reduced second-quarter results by approximately $85 million after tax. These included $21 million of restructuring and other charges before tax, $71 million of net gains, losses and impairments of businesses before tax, and acquisition-related integration costs.
- The company completed the required July 2, 2012 divestiture of three containerboard mills with approximately 970,000 tons of aggregate capacity, satisfying the Department of Justice Final Judgment related to Temple-Inland.
- Temple-Inland Building Products was classified as held for sale, with $608 million of assets and $58 million of liabilities at June 30, 2012. The three divested mills had $470 million of assets classified as held for sale at quarter-end.
- Management estimated approximately $93 million of probable environmental liabilities. Additional matters, including the Kalamazoo River and San Jacinto River proceedings and litigation related to the Bogalusa incident, remained too preliminary to estimate reliably.
- A proposed settlement of the Temple-Inland Guaranty Financial Group litigation would require an $80 million payment, for which a purchase-accounting reserve was established, subject to conditions including FDIC approval.
- Approximately $981 million of unrecognized tax benefits and $98 million of related interest and penalties were recorded at June 30, 2012. Management estimated that approximately $75 million could be resolved within the next 12 months.
- The company expected to replace letters of credit supporting certain monetized timber notes after bank credit-rating downgrades. Failure to replace qualifying letters of credit could create financing and liquidity pressure.
- The company stated that it expected to fund 2012 capital expenditures, debt service, working capital and dividends through cash balances, operating cash flow and existing credit facilities, supplemented as necessary by debt or capital markets.
Most important facts for investors to verify
- Whether Temple-Inland integration synergies offset acquisition-related costs and higher interest expense as anticipated.
- The sustainability of operating performance after unusually high second-quarter maintenance outages and the start-up of the Franklin fluff pulp mill.
- The effect of Ilim’s currency exposure, Russian market conditions and potential future equity losses.
- Debt reduction progress, refinancing needs, credit ratings and available liquidity after the Temple-Inland acquisition.
- Final purchase-price allocations for Temple-Inland and APPM, including the valuation of goodwill, intangible assets and nonrecourse liabilities.
- Resolution and potential costs of environmental, antitrust, tax, Bogalusa and Guaranty Financial Group contingencies.
- Whether the company’s $1.5 billion capital-spending expectation and projected free cash flow support dividends and planned debt reduction.