filings.toolsItem 2. [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](#i04da70ab3b4d4cc794e56c49bd0e3ac897)
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Item 2. [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](#i04da70ab3b4d4cc794e56c49bd0e3ac897)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included in "Financial Statements and Supplementary Data" of this Quarterly Report on Form 10-Q (this "Form 10-Q") and the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (our "Annual Report"). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and in our Annual Report, particularly under "Risk Factors" and "Forward-Looking Statements" of this Form 10-Q and our Annual Report.
EXECUTIVE SUMMARY
Net earnings (loss) attributable to the Company's common shareholders were $511 million ($1.38 per diluted share) in the second quarter of 2022, compared with $360 million ($0.95 per diluted share) in the first quarter of 2022 and $432 million ($1.09 per diluted share) in the second quarter of 2021. The Company generated Adjusted operating earnings attributable to its common shareholders (a non-GAAP measure defined below) of $459 million ($1.24 per diluted share) in the second quarter of 2022, compared with $288 million ($0.76 per diluted share) in the first quarter of 2022 and $325 million ($0.82 per diluted share) in the second quarter of 2021.
During the second quarter 2022, we delivered strong revenue and earnings growth through continued strong price realization and solid operating performance, overcoming higher than expected input costs. Our mills and converting system performed well as we managed through continued logistics constraints which negatively impacted operating costs. We successfully executed our second highest maintenance outage quarter of 2022 and have completed approximately 65% of full-year planned maintenance outages in the first half of 2022. Demand for our products in the second quarter was impacted by a shift in consumer spending from goods to services, while the retail channel managed through elevated inventory levels. Additionally, our businesses continued to manage through a challenging supply chain and labor environment. We continued to make progress on our Building a Better IP initiatives, generating approximately $65 million of earnings benefit in the second quarter for a total of $105 million through the first half of the year. We expect these initiatives to significantly lower our cost structure and accelerate profitable growth with the potential to generate $225 million of full-year 2022 benefit. With respect to capital allocation, in the second quarter we returned $565 million to shareholders through dividends of $170 million and approximately $395 million of share repurchases. In the first half of 2022, we have returned $1.1 billion to shareowners, highlighting the opportunities that our strong balance sheet and cash generation provides to the Company. Finally, the Company continues to actively explore strategic options with respect to our Ilim joint venture, including a sale of our 50% interest.
Comparing our performance in the second quarter 2022 to the first quarter 2022, price and mix significantly improved, driven by realization of our prior price increase in our North American Industrial Packaging business, as well as price realization from prior increases in our Global Cellulose Fibers business. Volumes were relatively flat in our North American Industrial Packaging business, while on-going shipping constraints continued to impact our Global Cellulose Fibers business. Operations and costs improved sequentially for both business segments as our mills and converting system performed well. Operations and costs also benefited from an insurance recovery associated with the Prattville mill along with favorable one-time items, due in large part to lower benefit costs. Maintenance outages were sequentially lower in both business segments coming off of the highest maintenance outage quarter of 2022. Input costs were sequentially unfavorable in both business segments driven by higher energy, chemicals and distribution costs. Elevated diesel fuel and natural gas costs were primary drivers of the increased inputs costs which continue to be a significant headwind across our business segments.
Looking ahead to the third quarter 2022, as compared to the second quarter 2022, in our Industrial Packaging business, we expect higher price and mix on the continued flow-through of previous price increases in North America. Volume is expected to improve on one more shipping day. Operations and costs are expected to be higher on the non-repeat of the Prattville insurance recovery as well as the non-repeat of the favorable one-time items. Maintenance outage expense is expected to be lower coming off of the second highest outage quarter of 2022. Input costs are expected to be higher. In our Global Cellulose Fibers business, we expect price and mix to improve on price realization of prior period increases. Volume is expected to remain stable as the solid demand environment is offset by continued logistics challenges. Operations and costs are expected to be higher on the non-repeat of favorable one-time items. Maintenance outage expenses are expected to decrease while input costs are expected to be higher.
The Russia-Ukraine conflict, including current and future sanctions, actions by the Russian government, and associated domestic and global economic and geopolitical conditions, have affected and could materially and adversely affect our Ilim joint venture and could otherwise adversely affect our business, financial condition, results of operations and cash flows. We are unable to predict the full impact Russia’s ongoing invasion of Ukraine, sanctions that have been imposed to date or that may in the future be imposed, geopolitical instability and the possibility of broadened military conflict may have on us or our
Ilim joint venture, including whether our Ilim joint venture may be able to continue to pay dividends to us. We continue to actively explore strategic options with respect to the Ilim joint venture, including a sale of our 50% equity interest in Ilim. In addition, we have disclosed our intent to monetize our remaining equity stake in Sylvamo (which has certain operations in Russia, and announced in March 2022 that it began the suspension of operations in Russia and that it was continuing to assess various options for its operations in that country). While we may sell our equity interests in the Ilim joint venture and Sylvamo, we cannot be certain if and when this may occur, or the impact that possible disruptions in the capital markets, or conditions associated with the Russia-Ukraine conflict, could have on the value of and our ability to sell our equity interests in the Ilim joint venture and/or Sylvamo and the timing of any such sales.
Adjusted operating earnings and Adjusted operating earnings per share are non-GAAP measures and are defined as net earnings (loss) attributable to International Paper (a GAAP measure) excluding discontinued operations, net special items and non-operating pension expense (income). Net earnings (loss) and Diluted earnings (loss) per share attributable to common shareholders are the most directly comparable GAAP measures. The Company calculates Adjusted operating earnings by excluding the after-tax effect of discontinued operations, non-operating pension expense (income) and items considered by management to be unusual or otherwise not reflective of on-going operations (net special items) from net earnings (loss) attributable to shareholders reported under GAAP. Adjusted operating earnings per share is calculated by dividing Adjusted operating earnings by diluted average shares of common stock outstanding. Management uses these measures to focus on on-going operations, and believes that these measures are useful to investors because such measures enable investors to perform meaningful comparisons of past and present consolidated operating results. The Company believes that using this information, along with the most directly comparable GAAP measures, provide for a more complete analysis of the results of operations.
The following are reconciliations of Net earnings (loss) attributable to shareholders to Adjusted operating earnings (loss) attributable to common shareholders on a total and per share basis. Additional detail is provided later in this Form 10-Q regarding the net special items referenced in the charts below.
| Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||
| In millions | 2022 | 2021 | 2022 | ||||||||||||||
| Net earnings (loss) attributable to shareholders | $ | 511 | $ | 432 | $ | 360 | |||||||||||
| Less - Discontinued operations (gain) loss | — | $ | (124) | $ | — | ||||||||||||
| Earnings (loss) from continuing operations attributable to shareholders | 511 | 308 | 360 | ||||||||||||||
| Add back - Non-operating pension expense (income) | (47) | (51) | (49) | ||||||||||||||
| Add back - Net special items expense (income) | 18 | 69 | (46) | ||||||||||||||
| Income tax effect - Non-operating pension and net special items expense | (23) | (1) | 23 | ||||||||||||||
| Adjusted operating earnings (loss) attributable to shareholders | $ | 459 | $ | 325 | $ | 288 |
| Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||
| In millions | 2022 | 2021 | 2022 | ||||||||||||||
| Diluted earnings (loss) per share attributable to shareholders | $ | 1.38 | $ | 1.09 | $ | 0.95 | |||||||||||
| Less - Discontinued operations (gain) loss per share | — | (0.31) | — | ||||||||||||||
| Diluted earnings (loss) per share from continuing operations attributable to shareholders | 1.38 | 0.78 | 0.95 | ||||||||||||||
| Add back - Non-operating pension expense (income) per share | (0.13) | (0.13) | (0.13) | ||||||||||||||
| Add back - Net special items expense (income) per share | 0.05 | 0.17 | (0.12) | ||||||||||||||
| Income tax effect per share - Non-operating pension and net special items expense | (0.06) | — | 0.06 | ||||||||||||||
| Adjusted operating earnings (loss) per share attributable to shareholders | $ | 1.24 | $ | 0.82 | $ | 0.76 |
Cash provided by operations totaled $978 million and $1.3 billion for the first six months of 2022 and 2021, respectively. The Company generated free cash flow of approximately $607 million and $1.1 billion in the first six months of 2022 and 2021, respectively. Free cash flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operations. Management utilizes this measure in connection with managing our business and believes that free cash flow is useful to investors as a liquidity measure because it measures the amount of cash generated that is available, after reinvesting in the business, to maintain a strong balance sheet, pay dividends, repurchase stock, service debt and make investments for future growth. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. By adjusting for certain items that are not indicative of the Company's ongoing performance, we believe that free cash flow also enables investors to perform meaningful comparisons between past and present periods.
The following is a reconciliation of cash provided by operations to free cash flow:
| Six Months Ended June 30, | |||||||||||
| In millions | 2022 | 2021 | |||||||||
| Cash provided by operations | $ | 978 | $ | 1,278 | |||||||
| Adjustments: | |||||||||||
| Cash invested in capital projects, net of insurance recoveries | (371) | (222) | |||||||||
| Free Cash Flow | $ | 607 | $ | 1,056 |
The non-GAAP financial measures presented in this Form 10-Q as referenced above have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results calculated in accordance with GAAP. In addition, because not all companies utilize identical calculations, the Company's presentation of non-GAAP measures in this Form 10-Q may not be comparable to similarly titled measures disclosed by other companies, including companies in the same industry as the Company.
For the second quarter of 2022, International Paper reported net sales of $5.4 billion, compared with $5.2 billion in the first quarter of 2022 and $4.8 billion in the second quarter of 2021.
Net earnings (loss) attributable to International Paper totaled $511 million, or $1.38 per diluted share, in the second quarter of 2022. This compared with $360 million, or $0.95 per diluted share, in the first quarter of 2022 and $432 million, or $1.09 per diluted share, in the second quarter of 2021.
Compared with the first quarter of 2022, earnings benefited from higher average sales prices net of an unfavorable mix ($151 million), lower operating costs ($45 million), lower mill maintenance outage costs ($61 million) and lower tax expense ($11 million). These benefits were offset by lower sales volumes ($9 million), higher raw material and freight costs ($74 million), higher corporate and other items ($10 million), higher net interest expense ($4 million) and higher non-operating pension expense ($2 million). Equity earnings, net of taxes, relating to International Paper’s investments in Ilim and other investments were flat compared with the first quarter of 2022. Net special items in the second quarter of 2022 were a gain of $17 million compared with a gain of $35 million in the first quarter of 2022.
Compared with the second quarter of 2021, the second quarter of 2022 reflects higher average sales prices net of an unfavorable mix ($493 million), lower mill maintenance outage costs ($45 million), lower corporate and other costs ($8 million) and lower net interest expense ($10 million). These benefits were offset by lower sales volumes ($36 million), higher operating costs ($22 million), higher raw material and freight costs ($318 million), higher tax expense ($35 million) and higher non-operating pension expense ($3 million). Equity earnings, net of taxes, relating to International Paper’s investments in Ilim and other investments were $11 million lower in the second quarter of 2022 than in the second quarter of 2021. Net special items in the second quarter of 2022 were a gain of $17 million compared with a loss of $55 million in the second quarter of 2021.
Business segment operating profits are used by International Paper's management to measure the earnings performance of its businesses. 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. International Paper believes that using this information, along with net earnings, provides a more complete analysis of the results of operations by quarter. Business segment operating profits are defined as earnings (loss) from continuing operations before income taxes and equity earnings, but including the impact of noncontrolling interests, and excluding interest expense, net, corporate expenses, net, corporate net special items, business net special items and non-operating pension expense. Business segment operating profits is a measure reported to our management for purposes of making decisions about allocating resources to our business segments and assessing the performance of our business segments and is presented in our financial statement footnotes in accordance with ASC 280.
The Company currently operates in two segments: Industrial Packaging and Global Cellulose Fibers.
The following table presents a reconciliation of Net earnings (loss) attributable to International Paper Company to its Total business segment operating profit:
| Three Months Ended | |||||||||||||||||
| June 30, | March 31, | ||||||||||||||||
| In millions | 2022 | 2021 | 2022 | ||||||||||||||
| Net Earnings (Loss) from Continuing Operations Attributable to International Paper Company | $ | 511 | $ | 308 | $ | 360 | |||||||||||
| Add back (deduct): | |||||||||||||||||
| Income tax provision (benefit) | 96 | 46 | 95 | ||||||||||||||
| Equity (earnings) loss, net of taxes | (93) | (104) | (93) | ||||||||||||||
| Noncontrolling interests, net of taxes | — | 2 | — | ||||||||||||||
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 514 | 252 | 362 | ||||||||||||||
| Interest expense, net | 74 | 86 | 69 | ||||||||||||||
| Noncontrolling interests included in operations | (1) | (1) | — | ||||||||||||||
| Corporate expenses, net | 27 | 36 | 12 | ||||||||||||||
| Corporate net special items | 18 | 77 | (46) | ||||||||||||||
| Business net special items | — | (9) | — | ||||||||||||||
| Non-operating pension expense (income) | (47) | (51) | (49) | ||||||||||||||
| Adjusted Operating Profit | $ | 585 | $ | 390 | $ | 348 | |||||||||||
| Business Segment Operating Profit (Loss): | |||||||||||||||||
| Industrial Packaging | $ | 560 | $ | 389 | $ | 397 | |||||||||||
| Global Cellulose Fibers | 25 | 1 | (49) | ||||||||||||||
| Total Business Segment Operating Profit | $ | 585 | $ | 390 | $ | 348 |
Business Segment Operating Profit
Total business segment operating profits were $585 million in the second quarter of 2022, $348 million in the first quarter of 2022 and $390 million in the second quarter of 2021.
Compared with the first quarter of 2022, operating profits benefited from higher average sales prices net of an unfavorable mix ($206 million), lower operating costs ($62 million) and lower mill outage costs ($84 million). These benefits were offset by lower sales volumes ($13 million) and higher raw material and freight costs ($102 million).
Compared with the second quarter of 2021, operating profits in the current quarter benefited from higher average sales prices net of an unfavorable mix ($597 million) and lower mill outage costs ($54 million). These benefits were offset by lower sales volumes ($44 million), higher operating costs ($27 million) and higher raw material and freight costs ($385 million).
Sales Volumes by Product (a)
Sales volumes of major products for the three months and six months ended June 30, 2022 and 2021 were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| In thousands of short tons (except as noted) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Industrial Packaging | |||||||||||||||||||||||
| Corrugated Packaging (b) | 2,619 | 2,733 | 5,237 | 5,417 | |||||||||||||||||||
| Containerboard | 707 | 699 | 1,419 | 1,408 | |||||||||||||||||||
| Recycling | 535 | 568 | 1,099 | 1,126 | |||||||||||||||||||
| Saturated Kraft | 51 | 50 | 95 | 95 | |||||||||||||||||||
| Gypsum/Release Kraft | 64 | 68 | 118 | 123 | |||||||||||||||||||
| EMEA Packaging (b) | 354 | 410 | 722 | 845 | |||||||||||||||||||
| Industrial Packaging | 4,330 | 4,528 | 8,690 | 9,014 | |||||||||||||||||||
| Global Cellulose Fibers (in thousands of metric tons) (c) | 720 | 743 | 1,432 | 1,498 |
(a)Sales volumes include third party and inter-segment sales and exclude sales of equity investees.
(b)Volumes for corrugated box sales reflect consumed tons sold (CTS). Board sales for these businesses reflect invoiced tons.
(c)Includes North American volumes and internal sales to mills.
Discontinued Operations
On October 1, 2021, the Company completed the previously announced spin-off of its Printing Papers business along with certain mixed-use coated paperboard and pulp businesses in North America, France and Russia into a standalone, publicly-traded company, Sylvamo. On August 6, 2021, the Company completed the sale of its Kwidzyn, Poland mill which included the pulp and paper mill in Kwidzyn and supporting functions. As a result of the Sylvamo spin-off and sale of Kwidzyn, the Company no longer has a Printing Papers business segment, and all historical results have been adjusted to reflect the Kwidzyn and the Printing Papers business and other businesses conveyed to Sylvamo as discontinued operations. See Note 9 - Divestitures and Impairments of Item 1. Financial Statements for further discussion.
Discontinued operations include the operating earnings of the businesses noted above. Discontinued operations also includes after-tax net special items income of $27 million and $7 million for the three months and six months ended June 30, 2021, respectively.
Details of these charges were as follows:
| Three Months Ended | Six Months | ||||||||||||||||||||||
| June 30, | June 30. | ||||||||||||||||||||||
| 2021 | 2021 | ||||||||||||||||||||||
| In millions | Before Tax | After Tax | Before Tax | After Tax | |||||||||||||||||||
| Printing Papers spin-off | $ | 24 | $ | 20 | $ | 49 | $ | 40 | |||||||||||||||
| Foreign value-added tax credit (including interest) | (70) | (47) | (70) | (47) | |||||||||||||||||||
| Total | $ | (46) | $ | (27) | $ | (21) | $ | (7) |
Income Taxes
An income tax provision of $96 million was recorded for the second quarter of 2022 and the reported effective income tax rate was 19%. Excluding benefit of $35 million related to the tax effects of net special items and expense of $12 million related to the tax effects of non-operating pension expense, the effective income tax rate was 25% for the quarter. The effective tax rate for the second quarter of 2022 was lower due to the tax-free exchange of a portion of the Company’s shares of Sylvamo Corporation.
An income tax provision of $95 million was recorded for the first quarter of 2022 and the reported effective income tax rate was 26%. Excluding expense of $11 million related to the tax effects of net special items and expense of $12 million related to the tax effects of non-operating pension expense, the effective income tax rate was 27% for the quarter. The higher operational effective tax rate in the first quarter of 2022 was primarily due to reduced tax benefits for equity-based compensation.
An income tax provision of $46 million was recorded for the second quarter of 2021 and the reported effective income tax rate was 18%. Excluding benefit of $14 million related to the tax effects of net special items and expense of $13 million related to the tax effects of non-operating pension expense, the effective income tax rate was 17% for the quarter. The tax rate in the second quarter of 2021 was lower primarily due to a discrete period tax benefit of $15 million related to the adjustment of the tax depreciation method for certain of the Company’s fixed assets. This adjustment was partially offset by the tax rate differential associated with a foreign value-added tax credit accrual.
Interest Expense
Net interest expense was $74 million in the second quarter of 2022, compared with $69 million in the first quarter of 2022 and $86 million in the second quarter of 2021.
Effects of Net Special Items and Non-Operating Pension Expense
Details of net special items and non-operating pension expense (income) for the three months ended are as follows:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | ||||||||||||||||||||||||||||||||||||
| In millions | Before Tax | After Tax | Before Tax | After Tax | Before Tax | After Tax | ||||||||||||||||||||||||||||||||
| Business Segments | ||||||||||||||||||||||||||||||||||||||
| EMEA Packaging impairment - Turkey | $ | — | $ | — | $ | (8) | $ | (2) | (a) | $ | — | $ | — | |||||||||||||||||||||||||
| Business Segments Total | — | — | (8) | (2) | — | — | ||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||
| Environmental remediation reserve adjustment | 15 | 11 | 5 | 3 | — | — | ||||||||||||||||||||||||||||||||
| Sylvamo investment | (3) | (2) | — | — | (46) | (35) | ||||||||||||||||||||||||||||||||
| Debt extinguishment costs | — | — | 170 | 128 | — | — | ||||||||||||||||||||||||||||||||
| Building a Better IP | — | — | 4 | 3 | — | — | ||||||||||||||||||||||||||||||||
| Real estate - office impairment | — | — | 21 | 16 | — | — | ||||||||||||||||||||||||||||||||
| Gain on sale of equity investment in Graphic Packaging | — | — | (130) | (98) | — | — | ||||||||||||||||||||||||||||||||
| Other | 6 | 5 | 7 | 5 | — | — | ||||||||||||||||||||||||||||||||
| Corporate Total | 18 | 14 | 77 | 57 | (46) | (35) | ||||||||||||||||||||||||||||||||
| Total net special items | 18 | 14 | 69 | 55 | (46) | (35) | ||||||||||||||||||||||||||||||||
| Non-operating pension expense (income) | (47) | (35) | (51) | (38) | (49) | (37) | ||||||||||||||||||||||||||||||||
| Total net special items and non-operating pension expense (income) | $ | (29) | $ | (21) | $ | 18 | $ | 17 | $ | (95) | $ | (72) |
(a) Recorded in the Industrial Packaging segment.
Net special items include the following tax expenses (benefits):
| Three Months Ended | ||||||||||||||||||||
| June 30, | March 31, | |||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | |||||||||||||||||
| Tax benefit related to tax-free exchange of Sylvamo shares | $ | (31) | $ | — | $ | — | ||||||||||||||
| Total | $ | (31) | $ | — | $ | — |
Details of net special items and non-operating pension expense (income) for the six months ended are as follows:
| Six Months Ended | ||||||||||||||||||||||||||
| June 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| In millions | Before Tax | After Tax | Before Tax | After Tax | ||||||||||||||||||||||
| Business Segments | ||||||||||||||||||||||||||
| EMEA Packaging business optimization | $ | — | $ | — | $ | 12 | $ | 10 | (a) | |||||||||||||||||
| EMEA Packaging impairment - Turkey | — | — | (6) | — | (a) | |||||||||||||||||||||
| Business Segments Total | — | — | 6 | 10 | ||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||
| Environmental remediation reserve adjustment | 15 | 11 | 5 | 3 | ||||||||||||||||||||||
| Sylvamo investment | (49) | (37) | — | — | ||||||||||||||||||||||
| Debt extinguishment costs | — | — | 188 | 142 | ||||||||||||||||||||||
| Building a Better IP | — | — | 4 | 3 | ||||||||||||||||||||||
| Real estate - office impairment | — | — | 21 | 16 | ||||||||||||||||||||||
| Gain on sale of equity investment in Graphic Packaging | — | — | (204) | (154) | ||||||||||||||||||||||
| Other | 6 | 5 | 7 | 5 | ||||||||||||||||||||||
| Corporate Total | (28) | (21) | 21 | 15 | ||||||||||||||||||||||
| Total net special items | (28) | (21) | 27 | 25 | ||||||||||||||||||||||
| Non-operating pension expense (income) | (96) | (72) | (103) | (77) | ||||||||||||||||||||||
| Total net special items and non-operating pension expense (income) | $ | (124) | $ | (93) | $ | (76) | $ | (52) |
(a) Recorded in the Industrial Packaging segment.
Net special items include the following tax expenses (benefits):
| Six Months Ended | ||||||||||||||
| June 30, | ||||||||||||||
| In millions | 2022 | 2021 | ||||||||||||
| Tax benefit related to tax-free exchange of Sylvamo shares | $ | (31) | $ | — | ||||||||||
| Total | $ | (31) | $ | — |
BUSINESS SEGMENT OPERATING RESULTS
The following tables present net sales and business segment operating profit (loss) which is the Company's measure of segment profitability.
Industrial Packaging
| Total Industrial Packaging | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||||||||
| Sales | $ | 4,491 | $ | 4,406 | $ | 8,897 | $ | 4,030 | $ | 3,930 | $ | 7,960 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 560 | $ | 397 | $ | 957 | $ | 389 | $ | 421 | $ | 810 |
Industrial Packaging net sales for the second quarter of 2022 were 2% higher compared with the first quarter of 2022 and 11% higher compared with the second quarter of 2021. Operating profit was 41% higher in the second quarter of 2022 compared with the first quarter of 2022 and 44% higher compared with the second quarter of 2021.
| North American Industrial Packaging | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||||||||
| Sales (a) | $ | 4,126 | $ | 4,025 | $ | 8,151 | $ | 3,663 | $ | 3,560 | $ | 7,223 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 550 | $ | 400 | $ | 950 | $ | 377 | $ | 395 | $ | 772 |
(a)Includes intra-segment sales of $48 million and $27 million for the three months ended June 30, 2022 and 2021, respectively; $29 million and $26 million for the three months ended March 31, 2022 and 2021, respectively; and $77 million and $53 million for the six months ended June 30, 2022 and 2021, respectively.
North American Industrial Packaging sales volumes in the second quarter of 2022 were stable compared to the first quarter of 2022 for corrugated boxes reflecting slower demand driven by inflation. Export containerboard volumes increased and domestic containerboard volumes were lower. Total maintenance and economic downtime was about 64,000 short tons lower in the second quarter of 2022 compared with the first quarter of 2022, due to lower maintenance downtime. Average sales margins were higher reflecting higher average sales prices for boxes and export containerboard partially offset by an unfavorable mix in our box system. Operating costs were flat as solid mill and converting performance offset inflation. Planned maintenance downtime costs were $59 million lower in the second quarter of 2022 compared with the first quarter of 2022. Input costs were higher driven by energy, chemicals and freight costs. Earnings benefited from insurance recoveries and one-time items in both the second quarter of 2022 and insurance recoveries in the first quarter of 2022.
Compared with the second quarter of 2021, sales volumes in the second quarter of 2022 were lower for corrugated boxes but increased for export and domestic containerboard. Sales volumes for corrugated boxes were lower reflecting slower demand driven by inflation and a strong second quarter of 2021. Total maintenance and economic downtime was about 143,000 short tons lower in the second quarter of 2022, due to lower maintenance downtime. Export containerboard and box prices were higher reflecting previous price increases. Operating costs increased, driven mainly by inflation. Distribution costs increased. Planned maintenance downtime costs were $60 million lower in the second quarter of 2022 compared with the second quarter of 2021. Input costs were significantly higher driven by energy, recovered fiber, wood, chemicals and freight.
Entering the third quarter of 2022, sales volumes for corrugated boxes and export containerboard are expected to be stable compared to the second quarter of 2022. Average sales margins are expected to be higher, reflecting previous price increases. Operating costs are expected to be higher. Planned maintenance downtime costs are expected to be $41 million lower in the third quarter of 2022 compared with the second quarter of 2022. Input costs are expected to be higher. Earnings are expected to be impacted by the non-repeat of favorable one-time items in the second quarter of 2022.
| EMEA Industrial Packaging | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||||||||
| Sales | $ | 413 | $ | 410 | $ | 823 | $ | 394 | $ | 396 | $ | 790 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 10 | $ | (3) | $ | 7 | $ | 12 | $ | 26 | $ | 38 |
EMEA Industrial Packaging sales volumes for corrugated boxes in the second quarter of 2022 were lower compared with the first quarter of 2022 reflecting seasonally lower volumes in Morocco. Average sales margins for corrugated boxes were higher reflecting higher average sales prices in the Eurozone. Average sales margins in Morocco were lower driven by higher containerboard costs. Operating costs were lower. There were no planned maintenance outages in either the second quarter of 2022 or the first quarter of 2022. Input costs were stable.
Compared with the second quarter of 2021, sales volumes in the second quarter of 2022 were lower driven by the sale of our EMEA Packaging business in Turkey in the second quarter of 2021. Average sales margins for corrugated boxes were higher driven by higher sales prices. Operating costs were higher mostly due to inflation. There were no planned maintenance outages in either the second quarter of 2022 or the second quarter of 2021. Input costs were significantly higher driven by energy.
Looking ahead to the third quarter of 2022, sales volumes for corrugated boxes are expected to be stable as higher volumes in the Eurozone are offset by seasonally lower volumes in Morocco. Average sales margins are expected to be lower. Operating costs are expected to be flat. There are no planned maintenance outages scheduled for the third quarter of 2022. Input costs are expected to increase.
Global Cellulose Fibers
| Total Global Cellulose Fibers | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||||||||
| Sales | $ | 788 | $ | 710 | $ | 1,498 | $ | 680 | $ | 595 | $ | 1,275 | |||||||||||||||||||||||
| Operating Profit (Loss) | $ | 25 | $ | (49) | $ | (24) | $ | 1 | $ | (81) | $ | (80) |
Global Cellulose Fibers net sales in the second quarter of 2022 were 11% higher compared with the first quarter of 2022 and 16% higher than in the second quarter of 2021. Operating profit in the second quarter of 2022 improved compared to the first
quarter of 2022 and the second quarter of 2021. Earnings were impacted by favorable one-time items in the second quarter of 2022.
Sales volumes in the second quarter of 2022 compared with the first quarter of 2022 were slightly higher despite continuing supply chain challenges. Total maintenance and economic downtime was about 30,000 short tons lower in the second quarter of 2022 compared with the first quarter of 2022 due to maintenance downtime. Average sales margins improved significantly, reflecting higher average sales price for both fluff pulp and market pulp. Operating costs were lower, reflecting improved mill performance and seasonality. Planned maintenance downtime costs in the second quarter of 2022 were $25 million lower compared with the first quarter of 2022. Input costs were higher, primarily for energy and chemicals. Earnings were impacted by favorable one-time items in the second quarter of 2022.
Compared with the second quarter of 2021, sales volumes in the second quarter of 2022 were lower driven by on-going logistics challenges. Total maintenance and economic downtime was about 16,000 short tons lower in the second quarter of 2022, due to maintenance downtime. Average sales prices were higher for both fluff and market pulp. Operating costs were higher due to logistics challenges and inflation. Distribution costs were also higher. Planned maintenance downtime costs in the second quarter of 2022 were $6 million higher compared with the second quarter of 2021. Input costs were higher primarily for wood, chemicals and energy.
Entering the third quarter of 2022, sales volumes are expected to be stable and constrained by continued logistics challenges. Average sales margins are expected to be higher. Planned maintenance downtime costs in the third quarter of 2022 are expected to be $24 million lower compared with the second quarter of 2022. Operating costs are expected to be higher. Input costs are expected to be higher. Earnings are expected to be impacted by the non-repeat of favorable one-time items in the second quarter of 2022.
Equity Earnings, Net of Taxes – Ilim
International Paper accounts for its 50% equity interest in Ilim using the equity method of accounting. Ilim is a separate reportable industry segment with primary operations in Russia. During the first quarter of 2022, the Company announced its intention to explore strategic options, including a sale of its 50% ownership in Ilim. The Company recorded equity earnings, net of taxes, of $95 million in the second quarter of 2022, compared with $93 million in the first quarter of 2022 and $101 million in the second quarter of 2021. In the second quarter of 2022, foreign exchange gains (losses) of $13 million are included in equity earnings, compared with ($15) million in the first quarter of 2022 and ($2) million in the second quarter of 2021. Ilim Group had no US dollar-denominated debt outstanding at June 30, 2022. There is no recourse of Ilim debt to International Paper.
Compared with the first quarter of 2022, sales volumes in the second quarter of 2022 edged higher led by containerboard shipments to China, which were partially offset by lower shipments of containerboard, softwood pulp and hardwood pulp to other export markets. In Russia, shipments overall were moderately lower, as higher containerboard shipments were partially offset by higher softwood pulp and hardwood pulp shipments. Average sales prices for softwood pulp and hardwood pulp increased in all markets. Average sales prices for containerboard were lower in China and other export markets, but were higher in Russia. Costs for wood, fuel and energy increased. Logistical constraints in the second quarter of 2022 drove distribution costs higher. Planned mill maintenance outage costs were also higher in the second quarter of 2022.
Compared with the second quarter of 2021, sales volumes in the second quarter of 2022 were lower particularly for shipments to export markets other than China. Shipments to China were higher primarily for containerboard. Shipments in Russia increased for softwood pulp and hardwood pulp, but were offset by a decrease in containerboard shipments. Average sales margins for softwood pulp and hardwood pulp increased reflecting higher average sales prices in all regions. Average sales prices for containerboard increased in Russia, but were lower in China and other export markets.
Looking forward to the third quarter of 2022, sales volumes are expected to decrease due to planned outages. Average sales margins are projected to decrease for hardwood pulp and containerboard. Repair and maintenance costs are projected to be higher. Input costs for chemicals, fuel and energy are expected to be lower.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $978 million for the first six months of 2022, compared with $1.3 billion for the comparable 2021 six-month period.
Investments in capital projects, net of insurance recoveries, totaled $371 million in the first six months of 2022, compared to $222 million in the first six months of 2021. Full-year 2022 capital spending is currently expected to be approximately $1.0 billion, or 91% of depreciation and amortization.
Financing activities for the first six months of 2022 included a $11 million net decrease in debt versus a $910 million net decrease in debt during the comparable 2021 six-month period.
Amounts related to early debt extinguishment during the three and six months ended June 30, 2022 and 2021 were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| In millions | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Early debt reductions (a) | $ | 5 | $ | 790 | $ | 5 | $ | 897 | |||||||||||||||
| Pre-tax early debt extinguishment (gain) loss, net | — | 170 | — | 188 |
(a)Reductions related to notes with interest rates ranging from 4.35% to 4.40% with original maturities from 2047 to 2048 and from 3.00% to 5.15% with original maturities 2027 to 2048 for the three month ended June 30, 2022 and 2021, respectively, and from 4.35% to 4.40% with original maturities from 2047 to 2048 and from 3.00% to 5.15% with original maturities 2027 to 2048 for the six months ended June 30, 2022 and 2021, respectively.
At June 30, 2022, contractual obligations for future payments of debt maturities (including finance lease liabilities disclosed in Note 11 - Leases and excluding the timber monetization structures disclosed in Note 16 - Variable Interest Entities) by calendar year were as follows: $104 million in 2022; $359 million in 2023; $149 million in 2024; $206 million in 2025; $74 million in 2026; and $4.7 billion thereafter.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At June 30, 2022, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively. In addition, the Company held short-term credit ratings of A2 and P2 by S&P and Moody's, respectively, for borrowings under the Company's commercial paper program.
At June 30, 2022, International Paper’s credit agreements totaled $2.0 billion, which is comprised of the $1.5 billion contractually committed bank credit agreement and up to $500 million under the receivables securitization program. Management believes these credit agreements are adequate to cover expected operating cash flow variability during the current economic cycle. The credit agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. At June 30, 2022, the Company had no borrowings outstanding under the $1.5 billion credit agreement or the $500 million receivables securitization program. The Company’s credit agreements are not subject to any restrictive covenants other than the financial covenants as disclosed in Note 17 - Debt, and the borrowings under the receivables securitization program being limited by eligible receivables. The Company was in compliance with all its debt covenants at June 30, 2022 and was well below the thresholds stipulated under the covenants as defined in the credit agreements. Further the financial covenants do not restrict any borrowings under the credit agreements.
In addition to the $2.0 billion capacity under the Company's credit agreements, International Paper has a commercial paper program with a borrowing capacity of $1.0 billion supported by its $1.5 billion credit agreement. Under the terms of the program, individual maturities on borrowings may vary, but not exceed one year from the date of issue. Interest bearing notes may be issued either as fixed or floating rate notes. As of June 30, 2022, the Company had no borrowings outstanding under the program.
International Paper expects to be able to meet projected capital expenditures, service existing debt, meet working capital and dividend requirements and make common stock and/or debt repurchases for the next 12 months and for the foreseeable future thereafter with current cash balances and cash from operations, supplemented as required by its existing credit facilities. The Company will continue to rely on debt and capital markets for the majority of any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure planning objectives. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and maintain appropriate levels of liquidity to meet our needs while managing balance sheet debt and interest expense, and we have repurchased, and may continue to repurchase, our common stock (under our existing share repurchase program) and debt (including in open market purchases) to the extent consistent with this capital structure planning. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors.
During the first six months of 2022, International Paper used 1.5 million shares of treasury stock for various incentive plans. International Paper also acquired 18.1 million shares of treasury stock, including restricted stock tax withholdings. Repurchases of common stock and payments of restricted stock withholding taxes totaled $823 million, including $801 million related to shares repurchased under the Company's repurchase program. Our current share repurchase program approved by our Board of Directors on October 12, 2021, which does not have an expiration date, has approximately $2.12 billion aggregate amount of shares of common stock remaining authorized for purchase as of June 30, 2022.
During the first six months of 2021, International Paper used approximately 1.8 million shares of treasury stock for various incentive plans. International Paper also acquired 4.1 million shares of treasury stock, including restricted stock tax withholding. Repurchases of common stock and payments of restricted stock withholding taxes totaled $213 million, including $186 million related to shares repurchased under the Company's repurchase program.
Cash dividend payments related to common stock totaled $344 million and $403 million for the first six months of 2022 and 2021, respectively. Dividends were $0.9250 per share and $1.0250 per share for the first six months in 2022 and 2021, respectively.
Our pension plan is currently sufficiently funded and we do not anticipate any required contributions for the next 12 months.
Variable Interest Entities
Information concerning variable interest entities is set forth in Note 15 in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. In connection with the 2006 International Paper installment sale of forestlands, we received $4.8 billion of installment notes. The restructured variable interest entities held installment notes of $4.8 billion and third-party loans of $4.2 billion which both matured in August 2021. We settled the third-party loans at their maturity with the proceeds from the installment notes. As of June 30, 2022, the Company's remaining deferred tax liability associated with the 2015 Financing Entities was $813 million. The nature and timing of the income tax due related to these transactions is currently under review by the Internal Revenue Service (IRS). During the second quarter of 2022, the Company entered into a voluntary mediation program with the IRS which could accelerate the resolution of this matter. The ultimate outcome of the IRS’s examination remains uncertain; however, an unfavorable resolution in such current examination, future administrative procedures, or future tax litigation could result in material, accelerated cash tax payments as a result of all or a portion of deferred tax liability becoming payable.
Ilim S.A. Shareholders’ Agreement
In October 2007, in connection with the formation of the Ilim joint venture, International Paper entered into a shareholders' agreement with an initial 15-year term expiring in October 2022 that automatically renews for successive five-year terms, unless terminated by either party. We continue to actively explore strategic options with respect to the Ilim joint venture, including a sale of our 50% equity interest in Ilim. While we may sell our equity interests in the Ilim joint venture in the future, we cannot be certain if and when this may occur, or the impact that possible disruptions in the capital markets, or conditions associated with the Russia-Ukraine conflict, could have on the value of and our ability to sell our equity interests in the Ilim joint venture and the timing of any such sales.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.
Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include accounting for contingencies, impairment or disposal of long-lived assets, goodwill and other intangible assets, pensions and income taxes.
The Company has included in its Annual Report a discussion of these critical accounting policies, which are important to the portrayal of the Company’s financial condition and results of operations and require management’s judgments. The Company has not made any changes in these critical accounting policies during the first six months of 2022.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q that are not historical in nature may be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “believes,” “estimates” and similar expressions identify forward-looking statements. These statements are not guarantees of future performance and reflect management’s current views and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include but are not limited to: (i) risks with respect to climate change and global, regional, and local weather conditions, as well as risks related to our ability to meet targets and goals with respect to climate change and the emission of
GHGs and other environmental, social and governance matters; (ii) the impact of the conflict involving Russia and Ukraine, including in connection with related escalated sanctions imposed by the United States, the European Union, G7 and other countries and possible actions by the Russian government, and the impact of such developments on domestic and global economic and geopolitical conditions in general and on us and our Ilim joint venture, which could be materially and adversely affected by such developments, and our inability to predict the full impact of the Russian invasion of Ukraine, current or future sanctions, geopolitical instability and the possibility of broadened military conflict on our Ilim joint venture and on our receipt of dividends from our Ilim joint venture; (iii) the possible impact of these developments involving Ukraine and Russia and potential negative capital markets conditions on the value of and our ability to sell all or a portion of our equity stake in Sylvamo Corporation and the timing of any such sales; (iv) the impact of and developments related to the ongoing COVID-19 pandemic; (v) the level of our indebtedness and changes in interest rates; (vi) the impact of global and domestic economic conditions and industry conditions, including with respect to commercial activity, inflationary pressures and changes in the cost or availability of raw materials, energy sources and transportation sources, supply chain shortages and disruptions, the availability of labor, particularly in light of current labor market conditions which are exceptionally tight, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products, and conditions impacting the credit, capital and financial markets; (vii) domestic and global geopolitical conditions, changes in currency exchange rates, trade protectionist policies, downgrades in our credit ratings, and/or the credit ratings of banks issuing certain letters of credit, issued by recognized credit rating organizations; (viii) the amount of our future pension funding obligations, and pension and healthcare costs; (ix) unanticipated expenditures or other adverse developments related to compliance with existing and new environmental, tax, labor and employment, privacy, anti-bribery and anti-corruption, and other U.S. and non-U.S. governmental laws and regulations; (x) any material disruption at any of our manufacturing facilities or other adverse impact on our operations due to severe weather, natural disasters, climate change or other causes; (xi) risks inherent in conducting business through joint ventures; (xii) our ability to achieve the benefits expected from, and other risks associated with, acquisitions, joint ventures, divestitures, spinoffs and other corporate transactions, (xiii) cybersecurity and information technology risks; (xiv) loss contingencies and pending, threatened or future litigation, including with respect to environmental related matters; (xv) our exposure to claims under our agreements with Sylvamo Corporation; (xvi) our failure to realize the anticipated benefits of the spin-off of Sylvamo Corporation and the qualification of such spin-off as a tax-free transaction for U.S. federal income tax purposes; and (xvii) our ability to attract and retain qualified personnel. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements can be found in our press releases and SEC filings. In addition, other risks and uncertainties not presently known to the Company or that we currently believe to be immaterial could affect the accuracy of any forward-looking statements. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
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