filings.toolsItem 2. [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](#ib48f9a18843b4853b72b1471a854559994)
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Item 2. [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](#ib48f9a18843b4853b72b1471a854559994)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited 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, 2023 (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. Please see our "Cautionary Statement Regarding Forward-Looking Statements" below.
EXECUTIVE SUMMARY
Net earnings (loss) were $56 million ($0.16 per diluted share) in the first quarter of 2024, compared with $(284) million ($(0.82) per diluted share) in the fourth quarter of 2023 and $172 million ($0.49 per diluted share) in the first quarter of 2023. The Company generated Adjusted operating earnings (a non-GAAP measure defined below) of $61 million ($0.17 per diluted share) in the first quarter of 2024, compared with $142 million ($0.41 per diluted share) in the fourth quarter of 2023 and $185 million ($0.53 per diluted share) in the first quarter of 2023.
In the first quarter of 2024, our teams across International Paper executed well, with intense focus on accelerating our commercial and mill optimization strategies and taking care of our customers. We were encouraged to see positive market momentum as sales price indexes improved across our portfolio in the first quarter of 2024, and we continue to see signs of demand recovery. The first quarter of 2024 represents an earnings trough based on seasonally lower volumes, the majority of negative price flow through from 2023 index movements and higher recovered fiber costs. Our first quarter of 2024 results also included approximately $52 million of impacts associated with a January freeze, impacting both businesses, along with the initial financial impacts of the Ixtac, Mexico box plant fire in our North American Industrial Packaging business. Our teams across International Paper made significant progress executing our strategic initiatives. We realized margin and mix benefits from our Box Go-to-Market strategy in the first quarter of 2024. We also realized benefits in both businesses from the fixed cost reduction efforts in our mill system. Finally, in a move that we believe is a catalyst to create significant value for our shareholders, we announced on April 16, 2024, our intent to acquire DS Smith in an all-stock transaction valued at approximately $9.9 billion.
Comparing our performance in the first quarter of 2024 to the fourth quarter of 2023, price and mix in our North American Industrial Packaging business was higher due to significant benefits from our Box Go-to-Market strategy which was partially offset by the majority of prior sales price index declines from 2023. The February index publication of $40 per ton increase will primarily flow through our sales contracts in the second and third quarters of 2024. Price in our Global Cellulose Fibers business was higher due to prior index movement and mix improved from the GCF optimization strategy driving benefits from more fluff and specialty pulp and less commodity grades. Volume in our North American Industrial Packaging business was lower as the first quarter of 2024 is expected to represent our seasonally lowest shipment quarter of the year, along with some impact from the January freeze. Also, our Go-to-Market strategy is about making choices regarding value over volume in the near term. We believe this will allow us to improve our margins and mix over the longer term, with a focus on maximizing the profitability of our Industrial Packaging business. Volume in our Global Cellulose Fibers business was sequentially flat overall, as higher shipments for absorbent pulp was offset by lower sales of commodity grades, as we continued to focus on strategically aligning our business with the most attractive customers and end markets. Operations and costs were sequentially higher in our North American Industrial Packaging business due to the January freeze and the Ixtac, Mexico fire in March 2024. Additionally, operations and costs were higher due to cost inflation including items such as labor, materials, contracted maintenance services and employee benefit costs. There was also lower fixed cost absorption from seasonally lower volumes. The higher operating costs were partially offset by lower fixed costs following the fourth quarter shutdown of the Orange, Texas mill. Operations and costs in our Global Cellulose Fibers business were higher due to the January freeze. Additionally, costs were higher due to inflation on items such as labor, materials, contracted maintenance services and employee benefit costs, and some timing of spend. The higher operating costs were largely offset by lower fixed costs resulting from the two pulp machine closures at our mills in Riegelwood, North Carolina and Pensacola, Florida. Planned maintenance outages were higher in our Industrial Packaging business while lower in our Global Cellulose Fibers business. Input costs were higher in our Industrial Packaging business, primarily driven by higher recovered fiber costs. Input costs in our Global Cellulose Fibers business were higher, primarily driven by higher energy costs.
Looking ahead to the second quarter 2024, as compared to the first quarter 2024, in our Industrial Packaging business, we expect price and mix to improve earnings from prior index movement in North America, higher export prices to date, as well as continued progress with our Box Go-to-Market strategy. Volume is expected to be seasonally higher in North America, and also benefit from one more shipping day in the second quarter of 2024. Operations and costs are expected to be higher due to proactive maintenance spending beyond our full-scale mill annual maintenance outages. As we anticipate continuous demand recovery, this spending is focused on improving productivity and efficiencies across our mills and box plant network. We will continue to experience additional inflation and higher selling and administration costs by the additional commercial resources needed to support our Box Go-to-Market strategy.
Full-scale mill annual maintenance outage expense is expected to increase in the second quarter of 2024 including costs associated with the Riverdale mill outage, a portion of which will be recovered during 2024 through our existing paper supply arrangement with Sylvamo. Input costs are expected to be stable based on higher costs for recovered fiber offset by lower energy costs. In our Global Cellulose Fibers business, we expect price and mix to increase earnings based on prior index movements. Volume is expected to remain flat as we reduce our exposure to commodity grades and grow with absorbent pulp. Operations and costs are expected to be lower due to lower fixed costs resulting from the pulp machine closures in our Riegelwood and Pensacola mills, the non-repeat of the January freeze, and timing of spending. Maintenance outage expense is expected to be lower coming off the first quarter of 2024 which included an outage at the Georgetown mill, a portion of the costs of which are expected to be recovered throughout the remainder of the year as part of the existing paper supply arrangement with Sylvamo. Input costs are expected to be stable relative to the first quarter of 2024.
As previously disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission, on April 16, 2024, the Company issued an announcement, pursuant to Rule 2.7 of the United Kingdom City Code on Takeovers and Mergers, disclosing the terms of a recommended offer by the Company to acquire the entire issued and to be issued share capital of DS Smith Plc ("DS Smith"), a public limited company incorporated in England and Wales, in an all-stock transaction (the “Business Combination”). For more information on the announcement, please see Note 19 - Subsequent Event and our public filings with the SEC. The Company expects to effect the Business Combination by way of scheme of arrangement under the laws of England and Wales, such that the issuance of Company shares is not expected to require registration under the U.S. Securities Act of 1933, as amended. In connection with the proposed share issuance, the Company expects to file a proxy statement on Schedule 14A with the SEC.
Adjusted Operating Earnings and Adjusted Operating Earnings Per Share are non-GAAP measures defined as net earnings (loss) (a GAAP measure) excluding discontinued operations, net special items and non-operating pension expense (income). Net earnings (loss) and Diluted earnings (loss) per share 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 (net special items) from net earnings (loss) 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 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 consolidated operating results from continuing operations. 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 Net earnings (loss) to Adjusted operating earnings (loss) on a total and per share basis. Additional detail is provided later in this Form 10-Q regarding the net special items expense (income) referenced in the charts below.
| Three Months Ended March 31, | Three Months Ended December 31, | ||||||||||||||||
| In millions | 2024 | 2023 | 2023 | ||||||||||||||
| Net earnings (loss) | $ | 56 | $ | 172 | $ | (284) | |||||||||||
| Less - Discontinued operations (gain) loss | — | — | — | ||||||||||||||
| Earnings (loss) from continuing operations | 56 | 172 | (284) | ||||||||||||||
| Add back - Non-operating pension expense (income) | (12) | 15 | 14 | ||||||||||||||
| Add back - Net special items expense (income) (a) | 18 | 3 | 546 | ||||||||||||||
| Income taxes - Non-operating pension and special items | (1) | (5) | (134) | ||||||||||||||
| Adjusted operating earnings (loss) | $ | 61 | $ | 185 | $ | 142 |
(a) See page 29 for details of Net special items expense (income).
| Three Months Ended March 31, | Three Months Ended December 31, | ||||||||||||||||
| 2024 | 2023 | 2023 | |||||||||||||||
| Diluted earnings (loss) per share | $ | 0.16 | $ | 0.49 | $ | (0.82) | |||||||||||
| Less - Discontinued operations (gain) loss per share | — | — | — | ||||||||||||||
| Diluted earnings (loss) per share from continuing operations | 0.16 | 0.49 | (0.82) | ||||||||||||||
| Add back - Non-operating pension expense (income) per share | (0.04) | 0.04 | 0.04 | ||||||||||||||
| Add back - Net special items expense (income) per share | 0.05 | 0.01 | 1.58 | ||||||||||||||
| Income taxes per share - Non-operating pension and special items | — | (0.01) | (0.39) | ||||||||||||||
| Adjusted operating earnings (loss) per share | $ | 0.17 | $ | 0.53 | $ | 0.41 |
Cash provided by operations, including discontinued operations, totaled $395 million and $345 million for the first three months of 2024 and 2023, respectively. The Company generated free cash flow of $144 million and $4 million in the first three months of 2024 and 2023, respectively. Free cash flow is a non-GAAP measure, which equals cash provided by operations subject to the adjustments set forth in the reconciliation table below, 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.
The following is a reconciliation of cash provided by operations to free cash flow:
| Three Months Ended March 31, | |||||||||||
| In millions | 2024 | 2023 | |||||||||
| Cash provided by operations | $ | 395 | $ | 345 | |||||||
| Adjustments: | |||||||||||
| Cash invested in capital projects | (251) | (341) | |||||||||
| Free Cash Flow | $ | 144 | $ | 4 |
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 first quarter of 2024, International Paper reported net sales of $4.6 billion, compared with $4.6 billion in the fourth quarter of 2023 and $5.0 billion in the first quarter of 2023.
Net earnings (loss) totaled $56 million, or $0.16 per diluted share, in the first quarter of 2024. This compared with $(284) million, or $(0.82) per diluted share, in the fourth quarter of 2023 and $172 million, or $0.49 per diluted share, in the first quarter of 2023.
Compared with the fourth quarter of 2023, earnings from continuing operations benefited from higher average sales prices and a favorable mix ($47 million), lower tax expense ($4 million) and lower non-operating pension expense ($20 million). These benefits were offset by lower sales volumes ($29 million), higher operating costs ($43 million), higher raw material and freight costs ($23 million), higher mill maintenance outage costs ($11 million), higher corporate and other costs ($22 million) and higher net interest expense ($3 million). Equity earnings, net of taxes, were $1 million lower in the first quarter of 2024 than in the fourth quarter of 2023. Net special items in the first quarter of 2024 were a charge of $14 million compared with a charge of $415 million in the fourth quarter of 2023.
Compared with the first quarter of 2023, the first quarter of 2024 benefited from lower operating costs ($15 million), lower raw material and freight costs ($48 million), lower mill maintenance outage costs ($74 million), lower net interest expense ($2 million) and lower non-operating pension expense ($20 million). These benefits were offset by lower average sales prices and an unfavorable mix ($240 million), lower sales volumes ($4 million), higher corporate and other costs ($11 million) and higher tax expense ($7 million). Equity earnings, net of taxes, were $1 million lower in the first quarter of 2024 compared with the first quarter of 2023. Net special items in the first quarter of 2024 were a charge of $14 million compared with a charge of $2 million in the first quarter of 2023.
The Company currently operates in two segments: Industrial Packaging and Global Cellulose Fibers. On September 18, 2023, the Company completed the sale of its Ilim equity investment and, as a result, all historical results of the Ilim investment are presented as Discontinued Operations, net of taxes and our equity investment is no longer a separate reportable industry segment.
Total business segment operating profit (loss) is a non-GAAP measure and the most directly comparable GAAP measure is net earnings from continuing operations. Total business segment operating profit (losses) are defined as earnings (loss) from continuing operations before income taxes and equity earnings, but including the impact of less than wholly owned subsidiaries, and excluding interest expense, net, corporate expenses, net, corporate net special items, business net special items and non-operating pension expense. In addition, business segment operating profit (loss), at a segment level, 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 - "Segment Reporting". Business segment operating profits (losses) 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.
The following table presents a reconciliation of Net earnings (loss) from continuing operations to its total business segment operating profit (loss):
| Three Months Ended | |||||||||||||||||
| March 31, | December 31, | ||||||||||||||||
| In millions | 2024 | 2023 | 2023 | ||||||||||||||
| Net Earnings (Loss) from Continuing Operations | $ | 56 | $ | 172 | $ | (284) | |||||||||||
| Add back (deduct): | |||||||||||||||||
| Income tax provision (benefit) | 27 | 48 | (61) | ||||||||||||||
| Equity (earnings) loss, net of taxes | 2 | 1 | 19 | ||||||||||||||
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 85 | 221 | (326) | ||||||||||||||
| Interest expense, net | 46 | 62 | 52 | ||||||||||||||
| Less than wholly owned subsidiaries included in operations | (2) | — | (2) | ||||||||||||||
| Corporate expenses, net | 24 | 8 | (9) | ||||||||||||||
| Corporate net special items | 20 | — | (1) | ||||||||||||||
| Business net special items | 8 | — | 529 | ||||||||||||||
| Non-operating pension expense (income) | (12) | 15 | 14 | ||||||||||||||
| Adjusted Operating Profit | $ | 169 | $ | 306 | $ | 257 | |||||||||||
| Business Segment Operating Profit (Loss): | |||||||||||||||||
| Industrial Packaging | $ | 216 | $ | 322 | $ | 315 | |||||||||||
| Global Cellulose Fibers | (47) | (16) | (58) | ||||||||||||||
| Total Business Segment Operating Profit (Loss) | $ | 169 | $ | 306 | $ | 257 |
Total Business Segment Operating Profit (Loss)
Total business segment operating profits (losses) were $169 million in the first quarter of 2024, compared with $257 million in the fourth quarter of 2023 and $306 million in the first quarter of 2023.
Compared with the fourth quarter of 2023, business segment operating profits benefited from higher average sales prices and a favorable mix ($71 million). These benefits were offset by lower sales volumes ($44 million), higher operating costs ($65 million), higher raw material and freight costs ($34 million) and higher mill outage costs ($16 million).
Compared with the first quarter of 2023, operating profits in the current quarter benefited from lower operating costs ($19 million), lower raw material and freight costs ($61 million) and lower mill outage costs ($95 million). These benefits were offset by lower average sales prices and an unfavorable mix ($307 million) and lower sales volumes ($5 million).
Sales Volumes by Product (a)
Sales volumes of major products for the three months ended March 31, 2024 and 2023 were as follows:
| Three Months Ended March 31, | ||||||||||||||
| In thousands of short tons (except as noted) | 2024 | 2023 | ||||||||||||
| Industrial Packaging | ||||||||||||||
| Corrugated Packaging (b) | 2,232 | 2,381 | ||||||||||||
| Containerboard | 739 | 544 | ||||||||||||
| Recycling | 575 | 560 | ||||||||||||
| Saturated Kraft | 47 | 34 | ||||||||||||
| Gypsum/Release Kraft | 58 | 60 | ||||||||||||
| EMEA Packaging (b) | 340 | 335 | ||||||||||||
| Industrial Packaging | 3,991 | 3,914 | ||||||||||||
| Global Cellulose Fibers (in thousands of metric tons) (c) | 729 | 688 |
(a)Sales volumes include third party and intersegment 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 September 18, 2023, pursuant to a previously announced agreement, the Company completed the sale of its 50% equity interest in Ilim S.A. ("Ilim"), which was a joint venture that operated a pulp and paper business in Russia and has subsidiaries including Ilim Group, to its joint venture partners for $484 million in cash. The Company also completed the sale of all of its Ilim Group shares (constituting a 2.39% stake) for $24 million, and divested other non-material residual interests associated with Ilim, to its joint venture partners. Following the completed sales, the Company no longer has an interest in Ilim or any of its subsidiaries. Additionally, we incurred transaction fees of $36 million in connection with the sale of our investment. This transaction is discussed further in Note 10 - Equity Method Investments of Item 1. Financial Statements.
Discontinued operations includes the equity earnings of the prior Ilim joint venture. Discontinued operations also includes special items charges of $43 million (before and after taxes) for the three months ended March 31, 2023.
Income Taxes
An income tax provision of $27 million was recorded for the first quarter of 2024 and the reported effective income tax rate was 32%. The reported effective income tax rate for the first quarter of 2024 was higher than the fourth quarter of 2023 primarily due to reduced tax benefits for equity-based compensation. Excluding a benefit of $4 million related to the tax effects of net special items and an expense of $3 million related to the tax effects of non-operating pension expense, the operational effective income tax rate was 31% for the first quarter of 2024. The operational effective tax rate for the first quarter of 2024 was lower than the fourth quarter of 2023 primarily due to an increased deferred tax valuation allowance in the fourth quarter.
An income tax benefit of $61 million was recorded for the fourth quarter of 2023 and the reported effective income tax rate was 19%. Excluding a benefit of $131 million related to the tax effects of net special items and benefit of $3 million related to the tax effects of non-operating pension expense, the operational effective income tax rate was 34% for the fourth quarter of 2023.
An income tax provision of $48 million was recorded for the first quarter of 2023 and the reported effective income tax rate was 22%. Excluding a benefit of $1 million related to the tax effects of net special items and benefit of $4 million related to the tax effects of non-operating pension expense, the operational effective income tax rate was 22% for the first quarter of 2023.
The operational income tax provision and operational effective tax rate are non-GAAP financial measures and are calculated by adjusting the income tax provision from continuing operations and rate to exclude the tax effect of net special items and non-operating pension expense (income). The most directly comparable GAAP measure is the reported income tax provision and effective income tax rate. Management believes that this presentation provides useful information to investors by providing a meaningful comparison of the income tax rate between past and present periods.
The following is a reconciliation of the net income tax provision (benefit) to the operational income tax provision and rate:
| Three Months Ended | |||||||||||
| March 31, | December 31, | ||||||||||
| In millions | 2024 | 2023 | 2023 | ||||||||
| Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | $ | 85 | $ | 221 | $ | (326) | |||||
| Pre-tax special items | 18 | 3 | 528 | ||||||||
| Non-operating pension (income) expense | (12) | 15 | 14 | ||||||||
| Adjusted Operating Earnings (Loss) from Continuing Operations Before Income Taxes and Equity Earnings | $ | 91 | $ | 239 | $ | 216 | |||||
| Income tax provision (benefit) | $ | 27 | $ | 48 | $ | (61) | |||||
| Income tax effect - non-operating pension (income) expense and pre-tax special items | 1 | 5 | 134 | ||||||||
| Operational Tax Provision | $ | 28 | $ | 53 | $ | 73 | |||||
| Operational Effective Tax Rate | 31 | % | 22 | % | 34 | % |
Interest Expense
Net interest expense was $46 million in the first quarter of 2024, compared with $52 million in the fourth quarter of 2023 and $62 million in the first quarter of 2023. The first quarter of 2024 includes $10 million of interest income on prior years tax overpayments related to the settlement of tax audits. The first quarter of 2023 includes $3 million of interest expense related to the settlement of the timber monetization restructuring tax matter.
Effects of Net Special Items Expense (Income) and Non-Operating Pension Expense
Details of net special items expense (income) and non-operating pension expense (income) for the three months ended are as follows:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| March 31, | December 31, | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2023 | ||||||||||||||||||||||||||||||||||||
| In millions | Before Tax | After Tax | Before Tax | After Tax | Before Tax | After Tax | ||||||||||||||||||||||||||||||||
| Business Segments | ||||||||||||||||||||||||||||||||||||||
| Accelerated depreciation | $ | 5 | $ | 4 | (a) | $ | — | $ | — | $ | 422 | $ | 317 | (a) | ||||||||||||||||||||||||
| Severance and other costs | 3 | 2 | (b) | — | — | 118 | 89 | (b) | ||||||||||||||||||||||||||||||
| Building a Better IP | — | — | — | — | (11) | (8) | (c) | |||||||||||||||||||||||||||||||
| Business Segments Total | 8 | 6 | — | — | 529 | 398 | ||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||
| Legal reserve adjustments | 10 | 7 | — | — | — | — | ||||||||||||||||||||||||||||||||
| DS Smith combination costs | 5 | 4 | — | — | — | — | ||||||||||||||||||||||||||||||||
| Net loss on miscellaneous land sales | 5 | 4 | — | — | — | — | ||||||||||||||||||||||||||||||||
| Equity method investment impairment | — | — | — | — | 18 | 14 | ||||||||||||||||||||||||||||||||
| Environmental remediation reserve adjustment | — | — | — | — | 7 | 5 | ||||||||||||||||||||||||||||||||
| Building a Better IP | — | — | — | — | (8) | (6) | ||||||||||||||||||||||||||||||||
| Corporate Total | 20 | 15 | — | — | 17 | 13 | ||||||||||||||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||||||||||||||||||||
| Interest related to settlement of tax audits | (10) | (7) | — | — | — | — | ||||||||||||||||||||||||||||||||
| Interest related to timber monetization settlement | — | — | 3 | 2 | — | — | ||||||||||||||||||||||||||||||||
| Interest Total | (10) | (7) | 3 | 2 | — | — | ||||||||||||||||||||||||||||||||
| Total net special items expense (income) | 18 | 14 | 3 | 2 | 546 | 411 | ||||||||||||||||||||||||||||||||
| Non-operating pension expense (income) | (12) | (9) | 15 | 11 | 14 | 11 | ||||||||||||||||||||||||||||||||
| Total net special items and non-operating pension expense (income) | $ | 6 | $ | 5 | $ | 18 | $ | 13 | $ | 560 | $ | 422 |
| (a) | Includes $1 million (before and after taxes) and $347 million ($261 million after taxes) for the three months ended March 31, 2024 and December 31, 2023, respectively, recorded in the Industrial Package business segment and $4 million ($3 million after taxes) and $75 million ($56 million after taxes) for the three months ended March 31, 2024 and December 31, 2023, respectively, recorded in the Global Cellulose Fibers business segment. | ||||
| (b) | Includes $3 million ($2 million after taxes) and $81 million ($61 million after taxes) for the three months ended March 31, 2024 and December 31, 2023, respectively, recorded in the Industrial Packaging business segment and $37 million ($28 million after taxes) for the three months ended December 31, 2023 recorded in the Global Cellulose Fibers business segment. | ||||
| (c) | Includes $8 million ($6 million after taxes) recorded in the Industrial Packaging business segment and $3 million ($2 million after taxes) recorded in the Global Cellulose Fibers business segment. |
Net special items expense (income) include the following tax expenses (benefits):
| Three Months Ended | ||||||||||||||||||||
| March 31, | December 31, | |||||||||||||||||||
| In millions | 2024 | 2023 | 2023 | |||||||||||||||||
| Tax related to legal entity restructuring | $ | — | $ | — | $ | 4 | ||||||||||||||
| Total | $ | — | $ | — | $ | 4 |
BUSINESS SEGMENT OPERATING RESULTS
The following tables present net sales and business segment operating profit (loss) at a segment level, which is the Company's measure of segment profitability. As previously noted, business segment operating profit (loss), at a segment level, 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 - "Segment Reporting". For additional information regarding business segment operating profit (loss) at a segment level as well as total business segment operating profit (loss), a non-GAAP financial measure, see above under “Results of Operations” of this Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-Q.
Industrial Packaging
| Total Industrial Packaging | 2024 | 2023 | |||||||||||||||||||||
| In millions | 1st Quarter | 1st Quarter | 4th Quarter | ||||||||||||||||||||
| Sales | $ | 3,808 | $ | 4,083 | $ | 3,842 | |||||||||||||||||
| Operating Profit (Loss) | $ | 216 | $ | 322 | $ | 315 |
Industrial Packaging net sales for the first quarter of 2024 were 1% lower compared with the fourth quarter of 2023 and 7% lower compared with the first quarter of 2023. Operating profit was 31% lower in the first quarter of 2024 compared with the fourth quarter of 2023 and 33% lower compared with the first quarter of 2023.
| North American Industrial Packaging | 2024 | 2023 | |||||||||||||||||||||
| In millions | 1st Quarter | 1st Quarter | 4th Quarter | ||||||||||||||||||||
| Sales (a) | $ | 3,486 | $ | 3,724 | $ | 3,528 | |||||||||||||||||
| Operating Profit (Loss) | $ | 192 | $ | 302 | $ | 287 | |||||||||||||||||
(a)Includes intra-segment sales of $26 million, $32 million and $26 million for the three months ended March 31, 2024 and 2023 and December 31, 2023, respectively.
North American Industrial Packaging average sales margins in the first quarter of 2024 were higher compared to the fourth quarter of 2023 driven by higher average sales prices for corrugated boxes reflecting the benefits of our Box Go-to-Market strategy. Average sales margins for containerboard were also higher, reflecting higher sales prices and a favorable geographic mix. Sales volumes were lower due to seasonality and our Box Go-to-Market strategy. Total maintenance and economic downtime was about 84,000 short tons lower in the first quarter of 2024 compared with the fourth quarter of 2023, due to lower economic downtime. Economic downtime was favorably impacted by the mill strategic actions taken in the fourth quarter 2023. Operating costs were higher driven by inflation on goods and services and the impact of the January 2024 winter freeze and the Ixtac, Mexico fire. Planned maintenance downtime costs were higher in the first quarter of 2024 compared with the fourth quarter of 2023. Input costs were higher, primarily for recovered fiber.
Compared with the first quarter of 2023, sales volumes in the first quarter of 2024 were lower for corrugated boxes reflecting the impact of our Box Go-to-Market strategy. Sales volumes for export containerboard were higher. Total maintenance and economic downtime was about 366,000 short tons lower in the first quarter of 2024, due to lower economic and maintenance downtime. Economic downtime was favorably impacted by the mill strategic actions taken in the fourth quarter of 2023. Average sales prices for boxes and containerboard were lower reflecting index movements, partially offset by the benefits of our commercial initiatives. Operating costs increased, driven by inflation on goods and services and increased maintenance spending in our box system. Operating costs were also impacted by the January 2024 winter freeze and Ixtac, Mexico fire. Planned maintenance downtime costs were lower in the first quarter of 2024 compared with the first quarter of 2023. Input costs were lower driven by lower energy, wood and other raw material costs partially offset by higher recovered fiber costs.
Entering the second quarter of 2024, sales volumes are expected to be seasonally higher compared to the first quarter of 2024. There is one additional shipping day in the second quarter of 2024. Average sales margins are expected to be higher. Operating costs are expected to be higher. Planned maintenance downtime costs are expected to be lower in the second quarter of 2024 compared with the first quarter of 2024. Input costs are expected to be higher driven by recovered fiber and energy.
| EMEA Industrial Packaging | 2024 | 2023 | ||||||||||||||||||
| In millions | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||
| Sales | $ | 348 | $ | 391 | $ | 340 | ||||||||||||||
| Operating Profit (Loss) | $ | 24 | $ | 20 | $ | 28 |
EMEA Industrial Packaging sales volumes for corrugated boxes in the first quarter of 2024 were flat compared with the fourth quarter of 2023. Average sales margins for corrugated boxes were lower, reflecting lower sales prices partially offset by a favorable product mix. Average sales margins for containerboard were also lower. Operating costs were lower driven by strong cost management. Planned maintenance downtime costs were lower in first quarter of 2024 compared with the fourth quarter of 2023. Input costs were stable. Earnings were also impacted by the non-repeat of an energy subsidy and other favorable one-time items in the fourth quarter of 2023.
Compared with the first quarter of 2023, sales volumes in the first quarter of 2024 were flat. Higher average sales margins for corrugated boxes were more than offset by lower margins for containerboard. Operating costs were lower, driven by good cost management. There were no planned maintenance outages in either the first quarter of 2024 or the first quarter of 2023. Input costs were lower primarily for energy and chemicals.
Looking ahead to the second quarter of 2024, sales volumes for corrugated boxes are expected to be seasonally lower. Average sales margins are expected to be higher. Operating and input costs are expected to be higher. Planned maintenance downtime costs are expected to be higher in the second quarter of 2024.
Global Cellulose Fibers
| Total Global Cellulose Fibers | 2024 | 2023 | ||||||||||||||||||
| In millions | 1st Quarter | 1st Quarter | 4th Quarter | |||||||||||||||||
| Sales | $ | 704 | $ | 811 | $ | 656 | ||||||||||||||
| Operating Profit (Loss) | $ | (47) | $ | (16) | $ | (58) |
Global Cellulose Fibers net sales in the first quarter of 2024 were 7% higher compared with the fourth quarter of 2023 and 13% lower than in the first quarter of 2023. Operating loss was $11 million lower in the first quarter of 2024 compared with the fourth quarter of 2023 and was $31 million higher compared with the first quarter of 2023.
Sales volumes in the first quarter of 2024, compared with the fourth quarter of 2023, were higher, reflecting higher fluff volumes partially offset by lower commodity volumes. Total maintenance and economic downtime was about 126,000 short tons lower in the first quarter of 2024 compared with the fourth quarter of 2023 driven by both economic and maintenance downtime. Economic downtime was favorably impacted by the mill strategic actions taken in the second half of 2023. Average sales margins were higher, driven by higher average sales prices and a favorable product mix. Operating costs were higher. Planned maintenance downtime costs in the first quarter of 2024 were lower compared with the fourth quarter of 2023. Input costs were higher, primarily for energy.
Compared with the first quarter of 2023, sales volumes in the first quarter of 2024 were higher, reflecting higher fluff volumes partially offset by lower commodity volumes. Total maintenance and economic downtime was about 144,000 short tons lower in the first quarter of 2024, due to both economic and maintenance downtime. Economic downtime was favorably impacted by the mill strategic actions taken in the second half of 2023. Average sales margins were lower reflecting lower average sales prices partially offset by a favorable product mix. Operating costs were lower driven by lower distribution costs. Planned maintenance downtime costs in the first quarter of 2024 were lower compared with the first quarter of 2023. Input costs were lower primarily for chemicals, wood and energy.
Entering the second quarter of 2024, sales volumes are expected to be stable. Average sales margins are expected to be higher. Planned maintenance downtime costs in the second quarter of 2024 are expected to be lower compared with the first quarter of 2024. Operating costs are expected to be lower. Input costs are expected to be higher, primarily for energy and chemicals.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $395 million for the first three months of 2024 compared with $345 million for the comparable 2023 three-month period. Cash provided by working capital components (accounts receivable, contract assets and inventory less accounts payable and accrued liabilities, interest payable and other) totaled $32 million for the three months ended March 31, 2024 compared with cash used by working capital components of $132 million for the three months ended March 31, 2023. The increase in cash provided by operations in the first three months of 2024 compared to the comparable 2023 three-month period was primarily due to the impact of the timing of mill outage spending on accounts payable and the related pull down of inventory balances, partially offset by lower accounts receivable collections driven by lower sales.
Investments in capital projects totaled $251 million in the first three months of 2024, compared to $341 million in the first three months of 2023. Full-year 2024 capital spending is currently expected to be approximately $800 million to $1.0 billion, or 76% to 95% of depreciation and amortization.
Financing activities for the first three months of 2024 included a $3 million net decrease in debt versus a $257 million net increase in debt during the comparable 2023 three-month period.
See Note 15 - Debt of Item 1. Financial Statements for a discussion of various debt-related actions taken by the Company during the three months ended March 31, 2024.
There were no early debt reductions for the three months ended March 31, 2024 and 2023, respectively.
At March 31, 2024, contractual obligations for future payments of debt maturities (including finance lease liabilities disclosed in Note 9 - Leases and excluding the timber monetization structure disclosed in Note 14 - Variable Interest Entities) by calendar year were as follows: $138 million in 2024; $189 million in 2025; $142 million in 2026; $332 million in 2027; $670 million in 2028 and $4.1 billion thereafter.
Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At March 31, 2024, 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 March 31, 2024, International Paper’s credit agreements totaled $1.9 billion, which is comprised of the $1.4 billion contractually committed bank credit agreement and up to $500 million under the receivables securitization program. In June 2023, the Company amended and restated its credit agreement to, among other things (i) reduce the size of the contractually committed bank facility from $1.5 billion to $1.4 billion, (ii) extend the maturity date from June 2026 to June 2028, and (iii) replace the LIBOR-based rate with a SOFR-based rate. Management believes that the Company's 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 March 31, 2024, the Company had no borrowings outstanding under the $1.4 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 15 - 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 March 31, 2024, 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 $1.4 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 $1.4 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 March 31, 2024, the Company had no outstanding borrowings under the program.
During the first quarter of 2024, the Company had debt reductions of $3 million related to decreases in the amount of capital leases.
International Paper expects to meet projected capital expenditures, service existing debt, meet working capital and dividend payments 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. 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, and subject to prevailing market conditions, our liquidity requirements, applicable securities laws requirements, and other factors. 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 three months of 2024, International Paper used 1.9 million shares of treasury stock for various incentive plans. International Paper also acquired 0.6 million shares of treasury stock, including restricted stock tax withholdings during the first three months of 2024. Repurchases of common stock and payments of restricted stock withholding taxes totaled $22 million during this period. Our current share repurchase program approved by our Board of Directors ("Board") on October 11, 2022, which does not have an expiration date, has approximately $2.96 billion aggregate amount of shares of common stock remaining authorized for purchase as of March 31, 2024.
During the first three months of 2023, International Paper used approximately 1.5 million shares of treasury stock for various incentive plans. International Paper also acquired 4.8 million shares of treasury stock, including restricted stock tax withholding during the first three months of 2023. Repurchases of common stock and payments of restricted stock withholding taxes totaled $177 million, including $157 million related to shares repurchased under the Company's repurchase program during this period.
Cash dividend payments related to common stock totaled $161 million and $162 million for the first three months of 2024 and 2023, respectively. Dividends were $0.4625 per share for the first three months of 2024 and 2023.
Our pension plan is currently fully funded and we do not anticipate any required cash 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. In connection with the 2006 International Paper installment sale of forestlands, we received $4.8 billion of installment notes. These installment notes were used by variable interest entities as collateral for borrowings from third-party lenders. These variable interest entities were restructured in 2015 when the installment notes and third-party loans were extended. 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. This resulted in cash proceeds of approximately $630 million representing our equity in the variable interest entities. Maturity of the installment notes and termination of the monetization structure also resulted in a $72 million tax liability that was paid in the fourth quarter of 2021. On September 2, 2022, the Company and the Internal Revenue Service agreed to settle the previously disclosed timber monetization restructuring tax matter involving the 2015 Financing Entities. Under this agreement, the Company was required to fully resolve the matter and pay $252 million in U.S. federal income taxes. As a result, interest was charged upon closing of the audit. The Company has paid $252 million in U.S. federal income taxes and $58 million in interest expense as a result of the settlement agreement. The Company paid $163 million in U.S. federal income taxes and $30 million in interest during the first quarter of 2023 and fully satisfied the payment terms of the settlement agreement regarding the 2015 Financing Entities timber monetization restructuring tax matter during the second quarter of 2023.
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 may 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 may require management’s judgments. The Company has not made any changes in these critical accounting policies during the first three months of 2024.
CAUTIONARY STATEMENT REGARDING 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, as amended. Forward-looking statements can be identified by the use of forward-looking or conditional words such as “expects,” “anticipates,” “believes,” “estimates,” “could,” “should,” “can,” “forecast,” “intend,” “look,” “may,” “will,” “remain,” “confident,” “commit” and “plan” or similar expressions. These statements are not guarantees of future performance and reflect management’s current views and speak only as to the dates the statements are made and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. All statements, other than statements of historical fact, are forward-looking statements, including, but not limited to, statements regarding anticipated financial results, economic conditions, industry trends, future prospects, and the execution and consummation of corporate transactions or contemplated acquisitions, including our proposed business combination with DS Smith Plc. Factors which could cause actual results to differ include but are not limited to: (i) our ability to consummate and achieve the benefits expected from, and other risks associated with, acquisitions, joint ventures, divestitures, spinoffs, capital investments and other corporate transactions, including, but not limited to, our proposed business combination with DS Smith Plc and our ability to integrate and implement our plans, forecasts, and other expectations with respect to the combined company (ii) uncertainty as to whether or when the business combination may be completed, if at all (iii) risks with respect to climate change and global, regional, and local weather conditions, as well as risks related to our targets and goals with respect to climate change and the emission of greenhouse gases and other environmental, social and governance matters, including our ability to meet such targets and goals; (iv) the level of our indebtedness, risks associated with our variable rate debt, and changes in interest rates (including the impact of current elevated interest rate levels); (v) the impact of global and domestic economic conditions and industry conditions, including with respect to current negative macroeconomic conditions, inflationary pressures and changes in the cost or availability of raw materials, energy sources and transportation sources, supply chain shortages and disruptions, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products, and conditions impacting the credit, capital and
financial markets; (vi) risks arising from conducting business internationally, domestic and global geopolitical conditions, military conflict (including the Russia/Ukraine conflict, the conflict in the Middle East, the possible expansion of such conflicts, and the potential geopolitical and economic consequences associated therewith), 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; (vii) the amount of our future pension funding obligations, and pension and healthcare costs; (viii) the costs of compliance, or the failure to comply with, existing and new environmental (including with respect to climate change and GHG emissions), tax, labor and employment, privacy, anti- bribery and anti-corruption, and other U.S. and non-U.S. governmental laws and regulations; (ix) 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; (x) our ability to realize expected benefits and cost savings associated with restructuring initiatives; (xi) cybersecurity and information technology risks, including as a result of security breaches and cybersecurity incidents; (xii) loss contingencies and pending, threatened or future litigation, including with respect to environmental related matters; (xiii) our exposure to claims under our agreements with Sylvamo Corporation; (xiv) 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 (xv) our ability to attract and retain qualified personnel, particularly in light of current labor market conditions. 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 reports filed with the U.S. Securities and Exchange Commission. 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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