International Paper Company — Q1 2011 Form 10-Q Summary
Business context and reporting period
International Paper filed an unaudited Form 10-Q for the quarter ended March 31, 2011. The company operates in Industrial Packaging, Printing Papers, Consumer Packaging and Distribution, with a 50% equity investment in Ilim Holding S.A. Results for Ilim are reported one quarter in arrears. Beginning in 2011, Forest Products was no longer reported as a separate segment because its remaining results were immaterial.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $6.387 billion | $5.807 billion | +10% |
| Earnings from continuing operations attributable to International Paper | $293 million | $(162) million | Turned profitable |
| Net earnings attributable to International Paper | $342 million | $(162) million | Turned profitable |
| Diluted EPS | $0.78 | $(0.38) | Improved $1.16 |
| Cash provided by operations | $514 million | $159 million | +223% |
| Free cash flow | $419 million | $39 million | +1,000% approximately |
| Operating profit by segment | $585 million | $20 million | + $565 million |
Net earnings attributable to International Paper represented an approximately 5.4% net margin, compared with a loss margin in the prior-year quarter. Segment operating profit represented approximately 9.2% of sales. Management reported diluted EPS before special items of $0.74, compared with $0.04 in Q1 2010; this is a non-GAAP measure.
- Segment sales were $2.555 billion for Industrial Packaging, $1.530 billion for Printing Papers, $905 million for Consumer Packaging and $1.640 billion for Distribution.
- Segment operating profit was $279 million for Industrial Packaging, $201 million for Printing Papers, $100 million for Consumer Packaging and $5 million for Distribution.
- Cash and temporary investments were $2.049 billion at March 31, 2011, compared with $2.073 billion at December 31, 2010.
- Total debt reported on the balance sheet was approximately $8.531 billion, consisting of $375 million of current notes payable and current maturities and $8.156 billion of long-term debt. Certain debt obligations remain subject to offset accounting but are still legal obligations.
- Contractually committed credit agreements totaled $2.5 billion, including a $1.5 billion bank facility expiring in November 2012 and up to $1.0 billion of receivables-backed commercial paper financing.
- Capital spending was $181 million. Management expected full-year 2011 capital spending of approximately $1.2 billion to $1.3 billion.
- The quarterly dividend was $0.1875 per share during Q1; the company announced an increase to $0.2625 per share beginning in Q2 2011.
Material changes versus comparable periods
- Sales increased primarily because of higher average selling prices, with additional contributions from sales volumes and product mix.
- Results benefited from lower mill outage costs, lower operating costs, lower corporate costs and $47 million of improved Ilim equity earnings. These benefits were partly offset by higher raw-material and freight costs and higher income-tax expense.
- Industrial Packaging operating profit increased to $279 million from $41 million, Printing Papers improved to $201 million from a $78 million loss, and Consumer Packaging increased to $100 million from $28 million. Distribution declined to $5 million from $21 million.
- Special items were substantially lower than in Q1 2010. Q1 2011 included $45 million of restructuring and other charges, including $32 million of early debt-extinguishment costs, compared with $215 million in Q1 2010, including $204 million related to the Franklin, Virginia mill closure.
- Q1 2011 also included an $8 million impairment charge for the Inverurie, Scotland mill, $49 million of after-tax discontinued-operation income, and a $7 million after-tax bargain-purchase gain recorded in equity earnings.
- Debt reductions totaled approximately $129 million, with $32 million of related pre-tax early-extinguishment costs. Net debt reduction through financing activities was approximately $103 million.
- Working capital used $227 million of cash, primarily reflecting a $365 million increase in accounts and notes receivable during the quarter.
Guidance, outlook, commentary and risks
Management expected Q2 2011 demand to improve seasonally, particularly for corrugated boxes, with broad-based but slight pricing improvement. Expected benefits were to be offset by continuing input-cost inflation and approximately $74 million of higher maintenance-outage costs. Management expected higher Ilim earnings in Q2.
- Full-year capital spending guidance was approximately $1.2 billion to $1.3 billion.
- The company expected to meet 2011 capital expenditures, debt service, working-capital and dividend needs through cash balances, operating cash flow and existing credit facilities.
- International Paper agreed to acquire approximately 53.5% of Andhra Pradesh Paper Mills Limited for about $257 million, plus a $62 million non-compete payment, and planned a tender offer for up to an additional 21.5% for approximately $104 million. The transaction remained subject to regulatory approval and was expected to close in the second half of 2011.
- The company placed approximately $105 million in escrow in connection with the Indian tender offer.
- The company expected no required domestic qualified-pension contribution in 2011, although discretionary contributions remained possible.
- The Ilim shareholder agreement could require International Paper, under specified deadlock circumstances, to purchase its partners’ 50% interest for an estimated $650 million to $700 million. The parties stated they had no current intention to initiate the deadlock procedures.
- The company continued evaluating whether it might repay some or all previously claimed alternative-fuel-mixture tax credits, with interest. The filing does not provide a clear estimate of any potential repayment.
- Risks include input-cost inflation, energy and transportation costs, product demand and pricing cyclicality, foreign-exchange movements, credit ratings and interest rates, pension funding, tax-law changes, environmental obligations, facility disruptions, litigation and joint-venture risks.
- Containerboard antitrust lawsuits sought class certification, damages and related costs. The company considered the allegations meritless, but stated that the matters were preliminary and their financial impact could not be determined with certainty.
- Environmental remediation at a Minnesota site could cost materially more than the $24 million reserve if the most expensive cleanup alternative is approved.
- On May 6, 2011, after the quarter end, the company announced a temporary shutdown of its Vicksburg, Mississippi containerboard mill because of anticipated flooding and transportation disruption.
Most important facts for investors to verify
- Reconcile GAAP diluted EPS of $0.78 with management’s $0.74 EPS before special items and assess the sustainability of earnings excluding unusual items.
- Evaluate whether price increases can offset rising wood, energy, chemicals, recycled fiber and freight costs.
- Confirm the timing, regulatory approvals, financing and final ownership percentage for the Andhra Pradesh Paper Mills acquisition.
- Review debt maturities, including $5.941 billion due after 2016, and the availability and covenants of the $2.5 billion committed liquidity facilities.
- Assess the effect of the $0.2625 quarterly dividend and planned capital spending on debt reduction and liquidity.
- Monitor the Ilim investment, its one-quarter reporting lag, dividend distributions and the potential $650 million to $700 million partner buyout obligation.
- Track the alternative-fuel tax-credit position, environmental remediation exposure and containerboard antitrust litigation.
- Consider the effect of planned maintenance outages and the Vicksburg shutdown on Q2 production, sales volumes and cash flow.