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IP > SEC Filings for IP > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for INTERNATIONAL PAPER CO /NEW/

Form 10-Q for INTERNATIONAL PAPER CO /NEW/


6-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY
International Paper generated Operating Earnings per share attributable to International Paper common shareholders of $0.95 in the second quarter of 2014, compared with 2014 first-quarter earnings of $0.61 and 2013 second-quarter earnings of $0.64. Diluted earnings (loss) per share attributable to International Paper common shareholders were $0.37 in the second quarter of 2014, compared with $(0.21) in the first quarter of 2014 and $0.57 in the second quarter of 2013.
We delivered strong earnings performance in the 2014 second quarter driven by volume growth, particularly in our North American Industrial Packaging business, as well as solid operating performance in our other key businesses. We successfully rebounded from the 2014 first quarter severe weather events that impacted our North American businesses but still faced relatively high input costs during the 2014 second quarter. We successfully grew our margins during the 2014 second quarter through continued realization of previously announced price increases and lower operating costs. We successfully executed on our planned maintenance outages in what was the peak maintenance outage quarter. The 2014 second quarter also reflects solid operational performance from the Ilim joint venture which continues to benefit from the ramp up of the two capital projects. During the 2014 second quarter, we completed a bond issue and related tender offer which enabled us to address outstanding debt due in 2018 and 2019 as well as shift from higher cost to lower cost debt.
The 2014 second quarter reflected sequential improvements in volumes, operations and input costs associated with the non-repeat of the significant adverse weather events that impacted much of the US in the 2014 first quarter. Beyond the benefit from the non-repeat of the adverse weather conditions, our North American Industrial Packaging business had higher volumes associated with seasonal demand increases. Prices averaged higher than the previous quarter particularly in our North American businesses, driven by the continued realization of previously announced price increases. While input costs remain relatively high, our North American Industrial Packaging and Printing Papers and Pulp businesses experienced lower input costs versus the 2014 first quarter, particularly lower energy costs. Maintenance outages were higher than the 2014 first quarter with significant outages in our North American Industrial Packaging, Printing Papers and Pulp and European Printing Papers businesses. Finally, for our Ilim joint venture, the benefit associated with continued improvements in operational performance was offset by lower pulp prices in China. Ilim's 2014 second quarter results also benefited from favorable foreign currency movements associated with Ilim's US dollar denominated debt. Looking ahead to the 2014 third quarter, we expect relatively stable volumes across much of our business. Pricing is expected to remain stable with some improvements in our North American Pulp and Consumer Packaging businesses. Input costs are expected to remain elevated with potential increases in wood, energy and chemical costs impacting our North American Industrial Packaging and Printing Papers and Pulp businesses. We also expect increased energy and fiber costs to impact our Brazil Printing Papers business. Maintenance outage costs will decrease in the 2014 third quarter coming off of the peak maintenance outage quarter. For Ilim, the 2014 third quarter will not benefit from the repeat of the favorable foreign currency movement associated with the Ilim's dollar denominated debt. Additionally, outage costs at Ilim will be higher in the 2014 third quarter. Finally, the 2014 third quarter will not include the results of our xpedx business following the completion of the spin-off transaction on July 1, 2014. The spin-off of xpedx will impact our 2014 third quarter earnings both from the business not being included in our results as well as from unabsorbed transitional costs which are expected to be reduced over time.
Operating Earnings is a non-GAAP measure. Diluted earnings (loss) per share attributable to International Paper Company common shareholders is the most direct comparable GAAP measure. The Company calculates Operating Earnings by excluding the after-tax effect of items considered by management to be unusual from the earnings reported under GAAP, non-operating pension expense, and discontinued operations. 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 the most direct comparable GAAP measure, provides for a more complete analysis of the results of operations. The following are reconciliations of Operating Earnings per share attributable to International Paper Company common shareholders to diluted earnings (loss) per share attributable to


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International Paper Company common shareholders.

                                                   Three Months Ended          Three Months Ended
                                                        June 30,                    March 31,
                                                  2014             2013               2014
Operating Earnings (Loss) Per Share
Attributable to Shareholders                 $      0.95       $     0.64     $            0.61
Non-operating pension per share                    (0.09 )          (0.11 )               (0.06 )
Special items per share                            (0.48 )          (0.01 )               (0.76 )
Diluted Earnings (Loss) Per Share from
Continuing Operations                               0.38             0.52                 (0.21 )
Discontinued operations per share                  (0.01 )           0.05                     -
Diluted Earnings (Loss) Per Share
Attributable to Shareholders                 $      0.37       $     0.57     $           (0.21 )

RESULTS OF OPERATIONS
For the second quarter of 2014, International Paper Company reported net sales of $7.2 billion, compared with $7.0 billion in the first quarter of 2014 and $7.3 billion in the second quarter of 2013.
Net earnings attributable to International Paper totaled $161 million, or $0.37 per share, in the 2014 second quarter. This compared with $259 million, or $0.57 per share, in the second quarter of 2013 and a loss of $95 million or $0.21 per share, in the first quarter of 2014.
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Earnings from continuing operations attributable to International Paper Company were $164 million in the second quarter of 2014 compared with earnings of $235 million in the second quarter of 2013 and a loss of $93 million in the first quarter of 2014. Compared with the second quarter of 2013, the 2014 second quarter reflects higher average sales price realizations ($129 million), the absence of a provision for a bad debt related to a large envelope customer that was booked in the second quarter of 2013 ($20 million), lower net interest expense ($2 million), and lower non-operating pension expense ($14 million). These benefits were offset by lower sales volumes ($33 million), higher operating costs ($31 million) including closure and transition costs associated with the Courtland mill closure, higher raw material and freight costs ($27 million), higher other items ($5 million) and higher tax expense ($11 million) reflecting a higher estimated tax rate. Equity earnings, net of taxes, relating to International Paper's investment in Ilim Holding S.A. were $77 million higher in the 2014 second quarter than in the 2013 second quarter. Net special items were a loss of $208 million in the 2014 second quarter including $160 million of debt extinguishment costs, compared with a loss of $2 million in the 2013 second quarter.


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The financial impact associated with the adverse weather that affected the U.S. during the first quarter of 2014 has been included within the corresponding explanations that follow. Compared with the first quarter of 2014, earnings benefited from higher average sales price realizations ($20 million), higher sales volumes ($35 million), lower operating costs ($51 million) including closure and transition costs associated with the Courtland mill closure, lower raw material and freight costs ($13 million), and lower corporate and other items ($9 million). These benefits were offset by higher mill maintenance outage costs ($39 million), higher net interest expense ($15 million), a higher tax expense ($4 million) and higher non-operating pension expense ($10 million). Equity earnings, net of taxes, for Ilim Holding, S.A. increased by $74 million versus the 2014 first quarter. Net special items were a loss of $208 million in the 2014 second quarter compared with a loss of $331 million, including $302 million associated with the Courtland mill shutdown, in the 2014 first 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
                                                          June 30                March 31,
In millions                                         2014            2013           2014
Earnings (Loss) From Continuing Operations
Attributable to International Paper Company     $       164     $      235     $       (93 )
Add back (deduct):
Income tax provision (benefit)                           28             94             (83 )
Equity (earnings) loss, net of taxes                    (41 )           36              33
Noncontrolling interests, net of taxes                   (3 )           (2 )            (4 )
Earnings (Loss) From Continuing Operations
Before Income Taxes and Equity Earnings                 148            363            (147 )
Interest expense, net                                   165            168             142
Noncontrolling interests / equity earnings
included in operations                                   (3 )           (4 )             -
Corporate items                                           -              -               9
Special items                                           280             (9 )            17
Non-operating pension expense                            61             83              44
                                                $       651     $      601     $        65
Industry Segment Operating Profit:
Industrial Packaging                            $       537     $      474     $       453
Printing Papers                                          69             76            (410 )
Consumer Packaging                                       33             51              17
Distribution                                             12              -               5
Total Industry Segment Operating Profit         $       651     $      601     $        65


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Industry Segment Operating Profit
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Total industry segment operating profits of $651 million in the 2014 second quarter were higher than the $601 million in the 2013 second quarter and the $65 million in the 2014 first quarter. Compared with the second quarter of 2013, operating profits in the current quarter benefited from higher average sales price realizations ($183 million) and the absence of a provision for bad debt related to a large envelope customer that was booked in the second quarter of 2013 ($28 million). These benefits were offset by lower sales volumes ($47 million), higher operating costs ($44 million), higher raw material and freight costs ($38 million) and higher other costs ($7 million). Special items were a loss of $46 million in the 2014 second quarter compared with a loss of $21 million in the 2013 second quarter.
The financial impact associated with the adverse weather that affected the U.S. during the first quarter of 2014 has been included within the corresponding explanations that follow. Compared with the first quarter of 2014, operating profits benefited from higher average sales price realizations ($29 million), higher sales volumes ($51 million), lower operating costs ($76 million) including costs associated with the Courtland mill closure, lower raw material and freight costs ($19 million) and lower other items ($2 million). These benefits were offset by higher mill maintenance outage costs ($57 million). Special items were a loss of $46 million in the 2014 second quarter compared with a loss of $512 million, including $495 million associated with the Courtland mill shutdown, in the 2014 first quarter.
During the 2014 second quarter, International Paper took approximately 290,000 tons of downtime of which approximately 58,000 tons were market-related compared with approximately 225,000 tons of downtime, which included about 1,000 tons that were market-related, in the 2013 second quarter. During the 2014 first quarter, International Paper took approximately 233,000 tons of downtime of which approximately 60,000 tons were market-related. Market-related downtime is taken to balance internal supply with our customer demand, while maintenance downtime is taken periodically during the year.


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Sales Volumes by Product (a)
Sales volumes of major products for the three months and six months ended
June 30, 2014 and 2013 were as follows:
                                        Three Months Ended          Six Months Ended
                                             June 30,                   June 30,
In thousands of short tons                2014           2013         2014         2013
Industrial Packaging
North American Corrugated Packaging     2,633           2,679       5,149         5,228
North American Containerboard             763             861       1,509         1,719
North American Recycling                  709             580       1,313         1,161
North American Saturated Kraft             47              49          94            89
North American Gypsum/Release Kraft        43              36          80            66
North American Bleached Kraft               7              40          14            71
EMEA Industrial Packaging                 341             332         692           671
Asian Box                                 100             101         193           201
Brazilian Packaging (b)                    83              82         162           123
Industrial Packaging                    4,726           4,760       9,206         9,329
Printing Papers
U.S. Uncoated Papers                      474             624         973         1,254
EMEA and Russian Uncoated Papers          385             339         760           668
Brazilian Uncoated Papers                 272             279         543           543
Indian Uncoated Papers                     57              57         115           117
Uncoated Papers                         1,188           1,299       2,391         2,582
Market Pulp (c)                           428             427         841           859
Consumer Packaging
North American Consumer Packaging         382             410         733           779
EMEA Coated Paperboard                     78              90         162           181
Asian Coated Paperboard                   325             338         675           698
Consumer Packaging                        785             838       1,570         1,658

(a) Sales volumes include third party and inter-segment sales and exclude sales of equity investees.
(b) Includes volumes for Brazil Packaging from date of acquisition in mid-January 2013.
(c) Includes North American, European and Brazilian volumes and internal sales to mills.

Discontinued Operations
On April 1, 2013, the Company finalized the sale of Temple-Inland's 50% interest in Del-Tin Fiber L.L.C. (Del-Tin) to joint venture partner Deltic Timber Corporation (Deltic) for $20 million in assumed liabilities and cash. On July 19, 2013, the Company finalized the sale of its Temple-Inland Building Products division to Georgia-Pacific Building Products, LLC for approximately $726 million in cash.
Income Taxes
An income tax provision of $28 million was recorded for the 2014 second quarter. Excluding a benefit of $118 million related to the tax effects of special items and a benefit of $24 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 32% for the quarter.
An income tax benefit of $83 million was recorded for the 2014 first quarter. Excluding a tax benefit of $198 million related to the tax effects of special items and a benefit of $17 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 31% for the quarter.
An income tax provision of $94 million was recorded for the 2013 second quarter. Excluding a benefit of $10 million related to the tax effects of special items and a benefit of $32 million related to the tax effects of non-operating pension expense, the effective income tax rate for continuing operations was 30% for the quarter.
Interest Expense and Corporate Items
Net interest expense for the 2014 second quarter was $165 million compared with $142 million in the 2014 first quarter and $168 million in the 2013 second quarter.


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Corporate items, net, were $0 million in the 2014 second quarter compared with an expense of $9 million in the 2014 first quarter, and $0 million in the 2013 second quarter.
Restructuring and Other Charges
2014: During the three months ended June 30, 2014, restructuring and other charges totaling $324 million before taxes ($207 million after taxes) were recorded. Details of these charges were as follows:

                                    Three Months Ended
                                       June 30, 2014
                                 Before-Tax      After-Tax
In millions                       Charges         Charges
Courtland mill shutdown (a)     $      49       $      30
Early debt extinguishment costs       262             160
xpedx transaction costs                18              20
Brazil packaging                       (7 )            (5 )
Other                                   2               2
Total                           $     324       $     207

During the three months ended March 31, 2014, restructuring and other charges totaling $517 million before taxes ($315 million after taxes) were recorded. Details of these charges were as follows:

                                    Three Months Ended
                                      March 31, 2014
                                Before-Tax         After-Tax
In millions                       Charges           Charges
Courtland mill shutdown (a) $     495             $       302
xpedx restructuring                 2                       -
xpedx transaction costs            16                      10
Other                               4                       3
Total                       $     517             $       315

(a) During 2013, the Company deferred accelerating depreciation for certain assets as we evaluated possible alternative uses by one of our other businesses. The net book value of these assets at December 31, 2013 was approximately $470 million. During the first quarter of 2014, we completed our evaluation and concluded that there were no alternative uses for these assets. We recognized approximately $430 million and approximately $36 million of accelerated depreciation related to these assets during the first quarter of 2014 and second quarter of 2014, respectively. Other components of the second quarter of 2014 Courtland mill shutdown cost include site closure costs of $7 million, and severance charges of $6 million. Other components of the first quarter of 2014 Courtland mill shutdown cost include site closure costs of $30 million, severance charges of $15 million and $20 million of other non-cash charges. 2013: During the three months ended June 30, 2013, restructuring and other charges totaling a gain of $4 million before taxes ($2 million after taxes) were recorded. Details of these charges were as follows:

                                    Three Months Ended
                                       June 30, 2013
                                 Before-Tax      After-Tax
In millions                       Charges         Charges
Early debt extinguishment costs $       3       $      2
Insurance reimbursements              (30 )          (19 )
xpedx restructuring                    17             10
Other                                   6              5
Total                           $      (4 )     $     (2 )


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During the three months ended March 31, 2013, restructuring and other charges totaling $59 million before taxes ($36 million after taxes) were recorded. Details of these charges were as follows:

                                         Three Months Ended
                                           March 31, 2013
                                      Before-Tax          After-Tax
In millions                            Charges             Charges
Early debt extinguishment costs $        6               $        4
xpedx restructuring                      7                        4
Augusta paper machine shutdown          44                       27
Other                                    2                        1
Total                           $       59               $       36

Other
On July 1, 2014, International Paper announced the completion of the previously announced spinoff of its distribution solutions business, xpedx, and xpedx's merger with Unisource Worldwide, Inc., with the combined companies now operating as Veritiv Corporation (Veritiv).
The spinoff was accomplished by the contribution of the xpedx business to Veritiv and the distribution of 8,160,000 shares of Veritiv common stock on a pro-rata basis to International Paper shareholders. International Paper received a payment of approximately $400 million, subject to adjustments, financed with new debt in Veritiv's capital structure. Immediately following the distribution, UWW Holdings, Inc., the parent company of Unisource Worldwide, Inc., merged with and into Veritiv, with the parent company of UWW Holdings, Inc. receiving 7,840,000 unregistered shares of Veritiv common stock as merger consideration.

BUSINESS SEGMENT OPERATING RESULTS
The following presents business segment discussions for the second quarter of
2014.
Industrial Packaging
                                                    2014                                                 2013
In millions                    2nd Quarter       1st Quarter       Six Months       2nd Quarter       1st Quarter       Six Months
Sales                        $       3,800     $       3,693     $      7,493     $       3,780     $       3,560     $      7,340
Operating Profit                       537               453              990               474               355              829

Industrial Packaging net sales for the second quarter of 2014 were 3% higher than in the first quarter of 2014 and 1% higher than in the second quarter of 2013. Operating profits in the second quarter of 2014 included charges of $2 million for integration costs associated with the Temple-Inland acquisition, a gain of $7 million related to our Brazil Packaging business and net charges of $2 million for other items. Operating profits in the first quarter of 2014 included charges of $12 million for integration costs associated with the Temple-Inland acquisition and net charges of $2 million for other items. Operating profits in the second quarter of 2013 included charges of $14 million for integration costs associated with the Temple-Inland acquisition, a gain of $13 million related to a bargain purchase adjustment on the acquisition of a majority share of our operations in Turkey, and net charges of $2 million for other items. Excluding these items, operating profits in the second quarter of 2014 were 14% higher than in the first quarter of 2014 and 12% higher than in the second quarter of 2013.
North American Industrial Packaging net sales were $3.2 billion in the second quarter of 2014 compared with $3.1 billion in the first quarter of 2014 and $3.2 billion in the second quarter of 2013. Operating profits were $521 million ($523 million excluding Temple-Inland integration costs) in the second quarter of 2014 compared with $449 million ($460 million excluding Temple-Inland integration costs and a gain on the sale of a closed box plant facility) in the first quarter of 2014 and $454 million ($468 million excluding Temple-Inland acquisition costs) in the second quarter of 2013.
Sales volumes in the second quarter of 2014 were higher than in the first quarter of 2014 despite having the same number of shipping days for boxes, partially reflecting the recovery from the impact of adverse weather conditions during the first quarter of 2014. Containerboard sales volumes were higher for both domestic and export shipments. Total maintenance and market-related downtime were about flat quarter-over-quarter. Average sales prices were flat for both boxes and containerboard. Input costs decreased for energy, wood and recycled fiber. Planned maintenance downtime costs were $22 million higher in the 2014 second quarter with outages at eight mills compared with the 2014 first quarter which had outages at six mills. Manufacturing operating costs were lower largely due to the absence of the costs associated with the extreme cold weather that occurred in the first quarter of 2014.


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Compared with the second quarter of 2013, sales volumes in the second quarter of 2014 decreased due to one less shipping day for boxes. Total maintenance and market-related downtime was 79,000 tons higher in the second quarter of 2014 of which market-related downtime was 56,000 tons higher. Average sales price realizations were significantly higher due to sales price increases for boxes and domestic containerboard that were implemented in 2013. Input costs for wood and energy increased, partially offset by lower costs for starch and recycled fiber. Planned maintenance downtime costs were $19 million higher in the second quarter of 2014 compared with the second quarter of 2013.
Entering the third quarter of 2014, sales volumes are expected to be stable . . .

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