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| IP > SEC Filings for IP > Form 10-Q on 7-Nov-2012 | All Recent SEC Filings |
7-Nov-2012
Quarterly Report
EXECUTIVE SUMMARY
International Paper generated diluted earnings per share attributable to
International Paper common shareholders before special items of $0.75 in the
third quarter of 2012, compared with 2012 second quarter earnings of $0.46 and
2011 third quarter earnings of $0.81. Diluted earnings per share attributable to
International Paper common shareholders were $0.54 in the third quarter of 2012,
compared with $0.31 in the second quarter of 2012 and $1.08 in the third quarter
of 2011.
We delivered strong results in the 2012 third quarter, despite continued global
economic headwinds and the absence of three containerboard mills divested as
required for regulatory approval for the Temple-Inland acquisition. We also
generated excellent cash from operations, reduced balance sheet debt by $800
million, and increased our dividend 14%. Within our North America Industrial
Packaging business, we implemented a $50 per ton containerboard price increase
and achieved our original run rate target of $300 million in Temple-Inland
synergies, fifteen months ahead of our original plan. While maintenance outages
were lower in the third quarter across our mill businesses, seasonally softer
box demand and continued slow overall growth in our North American packaging
businesses resulted in higher sequential market-related downtime in the quarter
as we matched our production to our customer's demand. On the strategic project
front, our Franklin mill continued its accelerated successful production ramp-up
and qualification process for fluff pulp, and the Sun joint venture in China
started up their new coated paperboard machine late in the quarter. Subsequent
to the end of the third quarter, we also announced our entrance into the
Brazilian corrugated packaging market with an agreement to purchase 75% of a
newly-formed joint venture containing Grupo Orsa's industrial packaging assets,
including three mills and four box plants.
The primary headwind we faced during the 2012 third quarter, besides the
expected loss of operating profit associated with the divested mills, was
volume, which was down compared to the 2012 second quarter largely due to
seasonally lower box sales, continued overall slow growth across our North
American packaging businesses and weaker Asian demand. Unfavorable LIFO
inventory valuation adjustments and purchase accounting true-ups impacted
operating costs during the quarter, but were more than offset by favorable
operations, incremental Temple-Inland synergies and improved results after
Franklin's startup. Finally, the quarter was favorably impacted by an increase
in equity earnings from our Ilim joint venture in Russia, mainly due to a
positive foreign currency adjustment.
Looking ahead to the fourth quarter, we expect seasonally stronger volume in our
EMEA box business and our Brazilian papers business to offset normal seasonal
declines in packaging in North America. Box price realizations associated with
the pass through of the North American containerboard increase and mix
improvement from higher domestic sales in Brazil are expected to more than
offset negative North American papers mix due to price leakage and higher
volumes in export markets. Operations are expected to be relatively stable
quarter over quarter. As to input costs, we expect higher wood, recycled fiber
and energy costs, and we are moving from our lightest maintenance outage quarter
to a more average quarter, so our expenses will increase as we move to a
normalized level. Fourth-quarter earnings will also be impacted due to business
interruptions at our box plants and distribution centers throughout the
Northeast caused by Hurricane Sandy. Finally, the contribution from our Ilim
joint venture is expected to decrease as we are not expecting another large
positive currency adjustment like that experienced in the third quarter.
Earnings per share attributable to International Paper shareholders before
special items is a non-GAAP measure. Diluted earnings (loss) per share
attributable to International Paper shareholders is the most direct comparable
GAAP measure. The Company calculates earnings per share before special items by
excluding the after-tax effect of items considered by management to be unusual
from the earnings reported under GAAP. Management uses this measure to focus on
on-going operations, and believes that it is useful to investors because it
enables them to perform meaningful comparisons of past and present operating
results. The Company believes that using this information, along with diluted
earnings (loss) per share, provides for a more complete analysis of the results
of operations by quarter. The following is a reconciliation of earnings per
share attributable to International Paper shareholders before special items to
diluted earnings (loss) per share attributable to International Paper
shareholders.
Three Months Ended Three Months Ended
September 30, June 30,
2012 2011 2012
Earnings Per Share Before Special Items $ 0.75 $ 0.81 $ 0.46
Restructuring and other charges (0.13 ) (0.07 ) (0.08 )
Net gains (losses) on sales and impairments
of businesses (0.11 ) 0.34 (0.11 )
Earnings Per Common Share from Continuing
Operations 0.51 1.08 0.27
Discontinued operations 0.03 - 0.04
Diluted Earnings (Loss) Per Common Share as
Reported $ 0.54 $ 1.08 $ 0.31
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In the first quarter of 2012, we eliminated the one-quarter lag in reporting our
share of equity earnings from the Ilim joint venture in Russia. Prior year
results have been adjusted to reflect the amounts that would have been reported
had the one-quarter lag not existed.
RESULTS OF OPERATIONS
For the third quarter of 2012, International Paper Company reported net sales of
$7.0 billion, compared with $7.1 billion in the second quarter of 2012 and $6.6
billion in the third quarter of 2011. The results of operations of Temple-Inland
are included since the acquisition in February 2012.
Net earnings attributable to International Paper totaled $237 million, or $0.54
per share, in the 2012 third quarter. This compared with $468 million, or $1.08
per share, in the third quarter of 2011 and $134 million, or $0.31 per share, in
the second quarter of 2012.
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Earnings from continuing operations attributable to International Paper Company
were $223 million in the third quarter of 2012 compared with $468 million in the
third quarter of 2011 and $118 million in the second quarter of 2012. Compared
with the third quarter of 2011, earnings in the 2012 third quarter benefited
from higher sales volumes ($26 million), lower mill outage costs ($19 million),
lower raw material and freight costs ($43 million), and Temple-Inland synergies
($52 million). These benefits were offset by lower average sales price
realizations ($66 million), the net impact of a more favorable mix of products
sold and higher operating costs ($78 million), higher corporate and other costs
($24 million), higher interest expense ($23
million) and higher tax expense ($2 million). Equity earnings, net of taxes,
relating to International Paper's investment in Ilim Holding S.A. were $31
million higher in the 2012 third quarter than in the 2011 third quarter. Net
special items were a loss of $107 million in the 2012 third quarter, compared
with a gain of $116 million in the 2011 third quarter.
Compared with the second quarter of 2012, earnings benefited from higher average
sales price realizations ($4 million), lower mill outage costs ($96 million),
lower raw material and freight costs ($5 million), lower interest expense ($6
million), and lower tax expense ($5 million). These benefits were offset by
lower sales volumes ($21 million), the net impact of a less favorable mix of
products sold and lower operating costs ($2 million), the impact of the
divestiture of three containerboard mills ($22 million), and higher corporate
and other costs ($2 million). Equity earnings, net of taxes, for Ilim Holding,
S.A. increased by $58 million versus the 2012 second quarter. Net special items
were a loss of $107 million in the 2012 third quarter, compared with a loss of
$85 million in the 2012 second quarter.
To measure the performance of the Company's business segments from period to
period without variations caused by special or unusual items, International
Paper's management focuses on industry segment operating profit. This is defined
as earnings from continuing operations before taxes, equity earnings and
noncontrolling interests net of taxes, excluding interest expense, corporate
charges and corporate special items which may include restructuring charges and
(gains) losses on sales and impairments of businesses.
The following table presents a reconciliation of net earnings attributable to
International Paper Company to its operating profit:
Three Months Ended
September 30, June 30,
In millions 2012 2011 2012
Earnings (Loss) From Continuing Operations
Attributable to International Paper Company $ 223 $ 468 $ 118
Add back (deduct):
Income tax provision (benefit) 130 (84 ) 57
Equity (earnings) loss, net of taxes (34 ) - 26
Noncontrolling interests, net of taxes 1 (3 ) 3
Earnings (Loss) From Continuing Operations
Before Income Taxes and Equity Earnings 320 381 204
Interest expense, net 163 130 172
Noncontrolling interests / equity earnings
included in operations - 1 (4 )
Corporate items 41 34 45
Special items:
Restructuring and other charges 15 25 9
$ 539 $ 571 $ 426
Industry Segment Operating Profit:
Industrial Packaging $ 255 $ 293 $ 260
Printing Papers 202 239 104
Consumer Packaging 67 30 57
Distribution 15 9 5
Total Industry Segment Operating Profit $ 539 $ 571 $ 426
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Industry Segment Operating Profit
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Total industry segment operating profits of $539 million in the 2012 third
quarter were lower than the $571 million in the 2011 third quarter, but higher
than the $426 million in the 2012 second quarter. Compared with the third
quarter of 2011, operating profits in the current quarter benefited from higher
sales volumes ($37 million), lower mill outage costs ($27 million), lower raw
material and freight costs ($61 million), and Temple-Inland synergies ($75
million). These benefits were offset by lower average sales price realizations
($95 million), the net impact of a more favorable mix of products sold and
higher operating costs ($112 million) and lower corporate and other items ($28
million). Special items were a loss of $95 million in the 2012 third quarter,
compared with a loss of $98 million in the 2011 third quarter.
Compared with the second quarter of 2012, operating profits benefited from
higher average sales price realizations ($6 million), lower mill outage costs
($141 million), and lower raw material and freight costs ($7 million). These
benefits were offset by lower sales volumes ($32 million), the net impact of a
more favorable product mix and higher operating costs ($4 million), the impact
of the divestiture of three containerboard mills ($33 million), and higher other
costs ($4 million). Special items were a loss of $95 million in the 2012 third
quarter, compared with a special item loss of $127 million in the 2012 second
quarter.
During the 2012 third quarter, International Paper took approximately 399,000
tons of downtime of which approximately 353,000 tons were market-related
compared with approximately 140,000 tons of downtime, which included about
68,000 tons that were market-related, in the 2011 third quarter. During the 2012
second quarter, International Paper took approximately 390,000 tons of downtime
of which approximately 161,000 tons were market-related. Market-related downtime
is taken to balance internal supply with our customer demand to help manage
inventory levels, while maintenance downtime, which makes up the majority of the
difference between total downtime and market-related downtime, is taken
periodically during the year.
Sales Volumes by Product (1)
Sales volumes of major products for the three months and nine months September
30, 2012 and 2011 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
In thousands of short tons 2012 2011 2012 2011
Industrial Packaging
Corrugated Packaging (2) 2,665 1,895 7,922 5,618
Containerboard (2) 823 614 2,400 1,789
Recycling 620 608 1,754 1,860
Saturated Kraft 47 38 130 122
Bleached Kraft 30 27 85 75
European Industrial Packaging 244 244 770 783
Asian Box 108 118 306 337
Industrial Packaging 4,537 3,544 13,367 10,584
Printing Papers
U.S. Uncoated Papers 668 657 1,990 1,975
European and Russian Uncoated Papers 326 289 948 907
Brazilian Uncoated Papers 290 283 859 826
Indian Uncoated Papers (3) 59 - 185 -
Uncoated Papers 1,343 1,229 3,982 3,708
Market Pulp (4) 414 347 1,155 1,052
Consumer Packaging
North American Consumer Packaging 378 388 1,139 1,208
European Coated Paperboard 93 80 278 244
Asian Coated Paperboard 242 257 719 737
Consumer Packaging 713 725 2,136 2,189
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(1) Sales volumes include third party and inter-segment sales and exclude sales of equity investees.
(2) Includes Temple-Inland volumes from date of acquisition in February 2012.
(3) Includes APPM volumes from date of acquisition in October 2011.
(4) Includes internal sales to mills.
Discontinued Operations
2012: Upon the acquisition of Temple-Inland, management committed to a plan to
sell the Temple-Inland Building Products business and is currently marketing the
sale, which is probable of being closed. The operating results of this business
are included in Discontinued operations from the date of acquisition. The assets
of this business, totaling $613 million at September 30, 2012, are included in
Assets of businesses held for sale in current assets in the accompanying
consolidated balance sheet at September 30, 2012. The liabilities of this
business, totaling $63 million at September 30, 2012, are included in
Liabilities of businesses held for sale in the accompanying consolidated balance
sheet at September 30, 2012.
2011: The sale of the Company's Kraft Papers business that closed in January
2007 contained an earnout provision that could require KapStone to make an
additional payment to International Paper in 2012. Based on the results through
the first four years of the earnout period, KapStone concluded that the
threshold would be attained and the full earnout payment would be due to
International Paper in 2012. On January 3, 2011, International Paper signed an
agreement with KapStone to allow KapStone to pay the Company on January 4, 2011,
the discounted amount of $50 million before taxes ($30 million after taxes) that
otherwise would have been owed in full under the agreement in 2012. This amount
has been included in Discontinued operations in the accompanying consolidated
statement of operations.
In the third quarter of 2006, the Company completed the sale of its Brazilian
Coated Papers business and restated its financial statements to reflect this
business as a discontinued operation. Included in the results for this business
in 2005 and 2006 were local country tax contingency reserves for which the
related statute of limitations has now expired. A $15 million tax benefit for
the reversal of these reserves plus associated interest income of $6 million ($4
million after taxes) was recorded during the three months ended March 31, 2011,
and is included in Discontinued operations in the accompanying consolidated
statement of operations.
Income Taxes
The income tax provision was $130 million for the 2012 third quarter. Excluding
a benefit of $3 million related to the tax effects of special items, the
effective income tax rate for continuing operations was 31% for the quarter.
The income tax provision was $57 million for the 2012 second quarter. Excluding
a benefit of $51 million related to the tax effects of special items, the
effective income tax rate for continuing operations was 32% for the quarter.
An income tax benefit of $84 million was recorded for the 2011 third quarter.
Excluding a benefit of $239 million related to the tax effects of special items,
the effective income tax rate for continuing operations was 30% for the quarter.
Interest Expense and Corporate Items
Net interest expense for the 2012 third quarter was $163 million compared with
$172 million in the 2012 second quarter and $130 million in the 2011 third
quarter. The higher net expense compared with prior year is due to interest
expense associated with the Temple-Inland acquisition.
Corporate items, net, of $41 million in the 2012 third quarter were lower than
the $45 million of net expense in the 2012 second quarter, but higher than the
$34 million of net expense in the 2011 third quarter. The decrease compared with
the prior quarter reflects lower supply chain project costs. The increase
compared with the 2011 third quarter reflects higher pension costs partially
offset by lower supply chain project costs.
Special Items
Restructuring and Other Charges
2012: During the three months ended September 30, 2012, restructuring and other
charges totaling $33 million before taxes ($24 million after taxes) were
recorded. Details of these charges were as follows:
Three Months Ended September 30, 2012
Before-Tax After-Tax
In millions Charges Charges
Early debt extinguishment costs $ 13 $ 8
xpedx restructuring 8 4
EMEA packaging restructuring 16 11
Other (4 ) 1
Total $ 33 $ 24
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During the three months ended June 30, 2012, restructuring and other charges totaling $21 million before taxes ($13 million after taxes) were recorded. Details of these charges were as follows:
Three Months Ended June 30, 2012
Before-Tax After-Tax
In millions Charges Charges
Early debt extinguishment costs $ 10 $ 6
xpedx restructuring 10 6
Other 1 1
Total $ 21 $ 13
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During the three months ended March 31, 2012, restructuring and other charges totaling $34 million before taxes ($23 million after taxes) were recorded. Details of these charges were as follows:
Three Months Ended March 31, 2012
Before-Tax After-Tax
In millions Charges Charges
Early debt extinguishment costs $ 16 $ 10
xpedx restructuring 19 14
Other (1 ) (1 )
Total $ 34 $ 23
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2011: During the three months ended September 30, 2011, restructuring and other charges totaling $49 million before taxes ($32 million after taxes) were recorded. Details of these charges were as follows:
Three Months Ended September 30,
2011
Before-Tax After-Tax
In millions Charges Charges
xpedx restructuring $ 18 $ 13
APPM acquisition 16 10
Temple-Inland merger agreement 8 5
Shorewood 6 4
Other 1 -
Total $ 49 $ 32
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During the three months ended June 30, 2011, restructuring and other charges totaling a gain of $10 million before taxes (a gain of $7 million after taxes) were recorded. Details of these charges were as follows:
Three Months Ended June 30, 2011
Before-Tax After-Tax
In millions Charges Charges
xpedx restructuring $ 10 $ 6
Franklin, Virginia mill closure costs (21 ) (13 )
Other 1 -
Total $ (10 ) $ (7 )
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The 2011 second-quarter change in estimate of closure costs related to the
Franklin, Virginia mill is the result of the Company's decision to repurpose a
portion of the mill to produce fluff pulp.
Additionally, a $5 million after-tax charge was recorded for tax adjustments
related to state legislative changes and audit settlements (see Note 10).
During the three months ended March 31, 2011, restructuring and other charges
totaling $45 million before taxes ($28 million after taxes) were recorded.
Details of these charges were as follows:
Three Months Ended March 31, 2011
Before-Tax After-Tax
In millions Charges Charges
Early debt extinguishment costs $ 32 $ 19
xpedx restructuring 7 4
Other 6 5
Total $ 45 $ 28
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Net (Gains) Losses on Sales and Impairments of Businesses
2012: As referenced in Note 6, on July 2, 2012, International Paper finalized
the sales of its Ontario and Oxnard (Hueneme), California containerboard mills
to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee
containerboard mill to Hood Container Corporation. During the three months ended
September 30, 2012, the Company recorded a pre-tax charge of $19 million ($49
million after taxes) for additional costs associated with the divestiture of its
Ontario and Oxnard (Hueneme), California containerboard mills and its New
Johnsonville, Tennessee containerboard mill. Also during the three months ended
September 30, 2012, a gain of $1 million, before and after taxes, was recorded
for other items.
A pre-tax charge of $9 million ($5 million after taxes) was recorded during the
three months ended June 30, 2012 for costs associated with the divestiture of
these three containerboard mills. Also, in anticipation of the divestiture of
the Hueneme mill in Oxnard, California, a pre-tax charge of $62 million ($38
million after taxes) was recorded during the three months ended June 30, 2012 to
adjust the long-lived assets of the mill to their fair value.
During the three months ended June 30, 2012, the Company recorded a pre-tax
charge of $6 million ($4 million after taxes) to adjust the previously estimated
loss on the sale of the Company's Shorewood business. Also during the three
months ended June 30, 2012, charges of $1 million, before and after taxes, were
recorded for other items.
During the three months ended March 31, 2012, the Company recorded a pre-tax
gain of $7 million ($6 million after taxes) to adjust the previously estimated
loss on the sale of the Company's Shorewood business. The sale of the Shorewood
non-U.S. business was completed in January 2012.
All of the charges discussed above are included in Net (gains) losses on sales
. . .
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