filings.toolsItem 2. [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](#ia6b7680e4c6f499a8797fdf688d23ce091)
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Item 2. [MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](#ia6b7680e4c6f499a8797fdf688d23ce091)
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 $498 million ($1.41 per diluted share) in the second quarter of 2024, compared with $56 million ($0.16 per diluted share) in the first quarter of 2024 and $235 million ($0.68 per diluted share) in the second quarter of 2023. The Company generated Adjusted operating earnings (a non-GAAP measure defined below) of $193 million ($0.55 per diluted share) in the second quarter of 2024, compared with $61 million ($0.17 per diluted share) in the first quarter of 2024 and $204 million ($0.59 per diluted share) in the second quarter of 2023.
International Paper delivered improved earnings in the second quarter of 2024 on higher sales prices across the portfolio along with higher volumes on improved box demand. We were encouraged to see stable to moderately improved industry demand across various customer markets we serve. Even with the stable demand environment positively impacting volumes, our Industrial Packaging volumes performance came in below expectations and continued to lag the overall packaging market. We realized some additional benefits from our Box Go-to-Market strategy, but we believe that the second quarter performance also reflects the lagging residual effect of under investing in certain areas where, as a result, there have been ongoing reliability and capacity issues. Over the past year, we have been investing more in our box system and we are seeing improvement in key metrics such as customer on-time delivery and machine productivity. Fixing these issues continues to be a particular focus in future periods but in the near term, specifically the third quarter 2024, earnings are expected to be negatively impacted by this reset along with higher maintenance outage expense and seasonally lower sales volumes. In order to accelerate improvement, we are deploying an 80/20 strategic approach. We intend to make the changes needed to focus our portfolio, become excellent with our customers and optimize our costs to deliver profitable growth. In North America, our investments will center on providing customers with the most reliable and innovative packaging solutions.
Comparing our performance in the second quarter of 2024 to the first quarter of 2024, price and mix in our Industrial Packaging business was higher due to the realization of benefits from prior index movements. We believe that the improved price and mix also reflects the benefits from our Box Go-to-Market Strategy along with higher export pricing and mix. Price and mix in our Global Cellulose Fibers business was higher due to prior index movement and the GCF optimization strategy driving benefits from higher absorbent pulp mix, and a reduction in commodity grades. Volume in our Industrial Packaging business was higher in the second quarter on a stable to improving demand trend. However, our Box Go-to-Market Strategy is about making choices that are expected to adversely impact our volume in the near term but are intended to allow us to improve our margins and mix over the long term. Although we expect to trail the industry for the next few quarters in unit volume growth, we expect the volume impacts to be temporary, as we continue to transition toward our target mix of customers and invest in the business to maximize profitability. Volume in our Global Cellulose Fibers business was sequentially flat overall, as improved demand 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 Industrial Packaging business due to the impacts of inflation, seasonally higher selling and administration costs and higher spending to improve reliability. Operations and costs in our Global Cellulose Fibers business were lower due in large part to lower fixed costs resulting from the closure of the pulp machine at our Riegelwood, North Carolina mill. Planned maintenance outages were marginally higher in our Industrial Packaging business while lower in our Global Cellulose Fibers business. Input costs were flat in our Industrial Packaging business as lower energy costs offset higher recovered fiber costs. Input costs in our Global Cellulose Fibers business were slightly higher, primarily driven by higher chemical and wood costs partially offset by lower energy costs.
Looking ahead to the third quarter of 2024, as compared to the second quarter of 2024, in our Industrial Packaging business, we expect price and mix to improve earnings from prior index movements in North America and higher export prices to date. We also expect incremental benefit from continued progress with our Box Go-to-Market strategy. Volume is expected to be lower in North America on one less shipping day versus the second quarter of 2024 along with seasonally lower daily demand.
Operations and costs are expected to be higher on increased reliability spending, labor and benefits costs during the summer months, timing of maintenance spend, and higher unabsorbed fixed costs. Maintenance outage expense is expected to be higher in the third quarter of 2024 while input costs are also expected to be higher on increased energy costs. In our Global Cellulose Fibers business, we expect price and mix to increase earnings on prior index movements. Volume is expected to be lower on seasonally lower demand. Operations and costs are expected to be higher due to higher distribution costs, timing of maintenance spend, as well as higher unabsorbed fixed costs. Maintenance outage expense is expected to be lower while input costs are expected to be stable relative to the second quarter of 2024.
We continue to make progress towards our announced acquisition of DS Smith with the expectation that the transaction will close in the fourth 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 8 - Acquisitions 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 the required disclosure documents related to the Business Combination will be published, and the related meetings held, in late summer/early autumn.
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 net special items, as described in greater detail below, 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 these non-GAAP measures to focus on ongoing operations and believes that such non-GAAP measures are useful to investors in assessing the operational performance of the Company and enabling investors to perform meaningful comparisons of past and present consolidated operating results from continuing operations. The Company believes that using these non-GAAP measures, along with the most direct comparable GAAP measures, provides for a more complete analysis of the Company's results of operations.
Non-operating pension expense (income) represents amortization of prior service cost, amortization of actuarial gains/losses, expected return on assets and interest cost. The Company excludes these amounts from our Adjusted Operating Earnings as the Company does not believe these items reflect ongoing operations. These particular pension cost elements are not directly attributable to current employee service. The Company includes service cost in our non-GAAP measure as it is directly attributable to employee service, and the corresponding employees’ other compensation elements, in connection with ongoing operations.
The following is a reconciliation of Net earnings (loss) to Adjusted operating earnings (loss) on a total basis. Additional detail is provided below regarding the net special items expense (income) referenced in the charts below.
| Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||
| In millions | 2024 | 2023 | 2024 | ||||||||||||||
| Net earnings (loss) | $ | 498 | $ | 235 | $ | 56 | |||||||||||
| Less - Discontinued operations (gain) loss | — | (13) | — | ||||||||||||||
| Earnings (loss) from continuing operations | 498 | 222 | 56 | ||||||||||||||
| Add back - Non-operating pension expense (income) | (10) | 12 | (12) | ||||||||||||||
| Add back - Net special items expense (income) | 49 | (6) | 18 | ||||||||||||||
| Income taxes - Non-operating pension and special items (a) | (344) | (24) | (1) | ||||||||||||||
| Adjusted operating earnings (loss) | $ | 193 | $ | 204 | $ | 61 |
(a) Special items for the three months ended June 30, 2024 include a tax benefit of $338 million related to internal legal entity restructuring. This amount also includes tax expense of $2 million on the non-operating pension income and a tax benefit of $8 million associated with special items. Special items for the three months ended June 30, 2023 include a tax benefit of $23 million related to the settlement of tax audits. This amount also includes a tax benefit of $3 million on the non-operating pension expense and tax expense of $2 million associated with special items. Special items for the three months ended March 31, 2024 includes tax expense of $3 million on the non-operating pension income and a tax benefit of $4 million associated with special items.
Effects of Net Special Items Expense (Income)
Details of net special items expense (income) included in continuing operations for the three months ended are as follows:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | ||||||||||||||||||||||||||||||||||||
| In millions | Before Tax | After Tax | Before Tax | After Tax | Before Tax | After Tax | ||||||||||||||||||||||||||||||||
| Business Segments | ||||||||||||||||||||||||||||||||||||||
| Net (gain) loss on miscellaneous land sales | $ | (5) | $ | (4) | (a) | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||
| Severance and other closure costs | — | — | — | — | 8 | 6 | (g) | |||||||||||||||||||||||||||||||
| Business Segments Total | (5) | (4) | — | — | 8 | 6 | ||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||
| Environmental remediation adjustment | 25 | 19 | (b) | — | — | — | — | |||||||||||||||||||||||||||||||
| DS Smith combination costs | 17 | 17 | (c) | — | — | 5 | 4 | (c) | ||||||||||||||||||||||||||||||
| Strategic advisory fees | 12 | 9 | (c) | — | — | — | — | |||||||||||||||||||||||||||||||
| Legal reserve adjustments | — | — | — | — | 10 | 7 | (h) | |||||||||||||||||||||||||||||||
| Net (gain) loss on miscellaneous land sales | — | — | — | — | 5 | 4 | (a) | |||||||||||||||||||||||||||||||
| Corporate Total | 54 | 45 | — | — | 20 | 15 | ||||||||||||||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||||||||||||||||||||
| Interest related to settlement of tax audits | — | — | (6) | (4) | (e) | (10) | (7) | (e) | ||||||||||||||||||||||||||||||
| Interest Total | — | — | (6) | (4) | (10) | (7) | ||||||||||||||||||||||||||||||||
| Tax expense (benefit) | ||||||||||||||||||||||||||||||||||||||
| Tax benefit related to internal legal entity restructuring | — | (338) | (d) | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax benefit related to settlement of tax audits | — | — | — | (23) | (f) | — | — | |||||||||||||||||||||||||||||||
| Tax Total | — | (338) | — | (23) | — | — | ||||||||||||||||||||||||||||||||
| Total Net Special Items | $ | 49 | $ | (297) | $ | (6) | $ | (27) | $ | 18 | $ | 14 |
| (a) | (Gains) losses recognized in connection with miscellaneous land sales that the Company does not believe is reflective of the Company's underlying operations recorded in net (gains) losses on sale of fixed assets. | ||||
| (b) | Environmental remediation adjustment associated with the remediation work at a waste pit site at a mill acquired but never operated by the Company and last utilized by the predecessor owner of the mill recorded in cost of products sold. | ||||
| (c) | Transaction related costs not reflective of the Company's underlying operations recorded in selling and administrative expenses. | ||||
| (d) | Tax benefit resulting from internal legal entity restructuring completed during the three months ended June 30, 2024 recorded in income tax provision (benefit). | ||||
| (e) | Interest income on tax overpayments in prior years associated with the settlement of certain tax audits recorded in interest expense, net. | ||||
| (f) | Tax benefit resulting from tax overpayments in prior years, associated with the settlement of certain audits recorded in income tax provision (benefit). | ||||
| (g) | Severance and closure costs associated with the Company's previously disclosed permanent closure of our containerboard mill in Orange, Texas and the permanent shutdown of pulp machines at our Riegelwood, North Carolina and Pensacola, Florida mills primarily recorded in restructuring and other charges, net. | ||||
| (h) | Legal reserve adjustment associated with a previously discontinued business recorded in cost of products sold. |
The following is a reconciliation of Net earnings (loss) to Adjusted operating earnings (loss) on a per share basis:
| Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | 2024 | |||||||||||||||
| Diluted earnings (loss) per share | $ | 1.41 | $ | 0.68 | $ | 0.16 | |||||||||||
| Less - Discontinued operations (gain) loss per share | — | (0.04) | — | ||||||||||||||
| Diluted earnings (loss) per share from continuing operations | 1.41 | 0.64 | 0.16 | ||||||||||||||
| Add back - Non-operating pension expense (income) per share | (0.02) | 0.03 | (0.04) | ||||||||||||||
| Add back - Net special items expense (income) per share | 0.14 | (0.02) | 0.05 | ||||||||||||||
| Income taxes per share - Non-operating pension and special items | (0.98) | (0.06) | — | ||||||||||||||
| Adjusted operating earnings (loss) per share | $ | 0.55 | $ | 0.59 | $ | 0.17 |
Cash provided by operations, including discontinued operations, totaled $760 million and $873 million for the first six months of 2024 and 2023, respectively. The Company generated free cash flow of $311 million and $265 million in the first six months
of 2024 and 2023, respectively. Free cash flow is a non-GAAP measure, which equals cash provided by operations less cash invested in capital projects, and the most directly comparable GAAP measure is cash provided by (used for) 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:
| Six Months Ended June 30, | |||||||||||
| In millions | 2024 | 2023 | |||||||||
| Cash provided by operations | $ | 760 | $ | 873 | |||||||
| Adjustments: | |||||||||||
| Cash invested in capital projects | (449) | (608) | |||||||||
| Free Cash Flow | $ | 311 | $ | 265 |
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. Investors are cautioned not to place undue reliance on any non-GAAP financial measures used in this Form 10-Q.
The following summarizes our results of continuing operations for second quarter of 2024 compared with the first quarter of 2024 and the second quarter of 2023:
| Three Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||
| In millions | 2024 | 2023 | 2024 | ||||||||||||||
| Net sales | $ | 4,734 | $ | 4,682 | $ | 4,619 | |||||||||||
| Cost of products sold | 3,360 | 3,360 | 3,424 | ||||||||||||||
| Selling and administrative expenses | 453 | 336 | 358 | ||||||||||||||
| Depreciation and amortization | 261 | 244 | 278 | ||||||||||||||
| Distribution expenses | 379 | 376 | 391 | ||||||||||||||
| Taxes other than payroll and income taxes | 35 | 40 | 41 | ||||||||||||||
| Restructuring and other charges, net | — | — | 3 | ||||||||||||||
| Net (gains) losses on sale of fixed assets | (5) | — | 5 | ||||||||||||||
| Interest expense, net | 55 | 59 | 46 | ||||||||||||||
| Non-operating pension expense (income) | (10) | 12 | (12) | ||||||||||||||
| Earnings from continuing operations before income taxes and equity earnings (loss) | 206 | 255 | 85 | ||||||||||||||
| Income tax provision (benefit) | (293) | 33 | 27 | ||||||||||||||
| Equity earnings (loss), net of taxes | (1) | — | (2) | ||||||||||||||
| Earnings (loss) from continuing operations | $ | 498 | $ | 222 | $ | 56 |
Three Months Ended June 30, 2024 Compared to the Three Months Ended March 31, 2024 and the Three Months Ended June 30, 2023
Refer to the Effects of Net Special Items Expense (Income) section on page 25 for details of net special items expense (income) discussed below.
Net sales
Net sales in the second quarter of 2024 increased by $115 million or 2% compared to the first quarter of 2024 and increased $52 million or 1% compared with the second quarter of 2023. The increase compared to the first quarter of 2024 was driven by higher sales prices and increased volume. The increase compared to the second quarter of 2023 was due to higher volumes. Additional details on net sales are provided in the Business Segment Operating Results section below.
Cost of products sold
Compared to the first quarter of 2024, cost of products sold in the second quarter of 2024 decreased by $64 million or 2%. Net special items charges of $25 million and $10 million in the second quarter of 2024 and the first quarter of 2024, respectively, are included in cost of products sold. The decrease was primarily driven by lower fuel and utility expense and lower inventory and other adjustments of $166 million, partially offset by increased raw material and maintenance expense of $87 million.
Cost of products sold was flat in the second quarter of 2024 compared to the second quarter of 2023. There were no special items charges included in cost of products sold in the second quarter of 2023. While the overall change in cost of products sold was flat, there were decreases in packaging, fuel and utility expense and other adjustments of $60 million, partially offset by increases in raw material and maintenance expense of $35 million.
Selling and administrative expenses
Compared to the first quarter of 2024, selling and administrative expenses in the second quarter of 2024 increased by $95 million or 27%. Net special items charges of $29 million and $5 million in the second quarter of 2024 and the first quarter of 2024, respectively, are included in selling and administrative expenses. The increase in the second quarter of 2024 compared to the first quarter of 2024 was primarily driven by higher employee benefit costs including annual incentive plan compensation.
Compared to the second quarter of 2023, selling and administrative expenses in the second quarter of 2024 increased by $117 million or 35%. There were no special items included in selling and administrative expense in the second quarter of 2023. The increase in the second quarter of 2024 compared to the second quarter of 2023 was primarily driven by higher employee benefit costs including annual incentive plan compensation.
Depreciation and amortization
Compared to the first quarter of 2024, depreciation and amortization in the second quarter of 2024 decreased by $17 million or 6%. The decrease in the second quarter of 2024 compared to the first quarter of 2024 was primarily driven by depreciation related to the write-down of fixed assets for the Ixtac, Mexico box plant fire in the first quarter of 2024.
Compared to the second quarter of 2023, depreciation and amortization in the second quarter of 2024 increased by $17 million or 7%, primarily driven by depreciation recognized on the units of production method at mills with higher production.
Distribution expenses
Compared to the first quarter of 2024, distribution expenses in the second quarter of 2024 decreased by $12 million or 3%, primarily driven by lower freight expense.
Compared to the second quarter of 2023, distribution expenses in the second quarter of 2024 increased by $3 million or 1%, primarily driven by higher warehousing and freight expense.
Taxes other than payroll and income taxes
Compared to the first quarter of 2024, taxes other than payroll and income taxes in the second quarter of 2024 decreased by $6 million or 15%, primarily driven by lower real estate and sales and use tax expense.
Compared to the second quarter of 2023, taxes other than payroll and income taxes in the second quarter of 2024 decreased by $5 million or 13%, primarily driven by lower real estate tax expense.
Interest expense, net
Compared to the first quarter of 2024, interest expense, net in the second quarter of 2024 increased by $9 million or 20%. Net special items income of $10 million is included in interest expense, net in the first quarter of 2024.
Compared to the second quarter of 2023, interest expense, net in the second quarter of 2024 decreased by $4 million or 7%. Net special items income of $6 million is included in interest expense, net in the second quarter of 2023. The decrease in the second quarter of 2024 compared to the second quarter of 2023 was primarily driven by higher interest income in the second quarter of 2024.
Income tax provision (benefit)
Refer to Income Taxes section on page 30 for discussion on income tax provision (benefit) and income tax rates.
Earnings (loss) from continuing operations
Earnings (loss) from continuing operations totaled $498 million, or $1.41 per diluted share, in the second quarter of 2024. This compared with $56 million, or $0.16 per diluted share, in the first quarter of 2024 and $222 million, or $0.64 per diluted share, in the second quarter of 2023.
Compared with the first quarter of 2024, earnings from continuing operations benefited from higher average sales prices and a favorable mix ($78 million), higher sales volumes ($20 million), lower raw material and freight costs ($1 million), lower mill maintenance outage costs ($11 million), lower corporate and other costs ($1 million) and lower tax expense ($26 million). These benefits were offset by higher operating costs ($5 million), higher net interest expense ($1 million) and higher non-operating pension expense ($1 million). Equity earnings, net of taxes, were $1 million higher in the second quarter of 2024 than in the first quarter of 2024. Net special items in the second quarter of 2024 were a gain of $297 million compared with a charge of $14 million in the first quarter of 2024.
Compared with the second quarter of 2023, the second quarter of 2024 benefited from higher sales volumes ($16 million), lower operating costs ($4 million), lower mill maintenance outage costs ($16 million), lower net interest expense ($8 million), lower tax expense ($3 million) and lower non-operating pension expense ($17 million). These benefits were offset by lower average sales prices net of a favorable mix ($38 million), higher raw material and freight costs ($8 million) and higher corporate and other costs ($11 million). Equity earnings, net of taxes, were $1 million lower in the second quarter of 2024 compared with the second quarter of 2023. Net special items in the second quarter of 2024 were a gain of $297 million compared with a gain of $27 million in the second quarter of 2023.
Sales Volumes by Product (a)
Sales volumes of major products for the three months and six months ended June 30, 2024 and 2023 were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| In thousands of short tons (except as noted) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Industrial Packaging | |||||||||||||||||||||||
| Corrugated Packaging (b) | 2,255 | 2,393 | 4,487 | 4,774 | |||||||||||||||||||
| Containerboard | 791 | 600 | 1,530 | 1,144 | |||||||||||||||||||
| Recycling | 552 | 528 | 1,127 | 1,088 | |||||||||||||||||||
| Saturated Kraft | 49 | 44 | 96 | 78 | |||||||||||||||||||
| Gypsum/Release Kraft | 67 | 61 | 125 | 121 | |||||||||||||||||||
| EMEA Packaging (b) | 323 | 317 | 663 | 652 | |||||||||||||||||||
| Industrial Packaging | 4,037 | 3,943 | 8,028 | 7,857 | |||||||||||||||||||
| Global Cellulose Fibers (in thousands of metric tons) (c) | 684 | 625 | 1,413 | 1,313 |
(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
Discontinued operations includes the equity earnings of the prior Ilim joint venture. Discontinued operations also includes special items charges of $33 million and $43 million (before and after taxes) for the three months ended June 30, 2023 and March 31, 2023, respectively. The Company completed the sale of the Ilim joint venture in the third quarter of 2023 - this transaction is discussed further in Note 11 - Equity Method Investments of Item 1. Financial Statements.
Income Taxes
The following is a reconciliation of the net income tax provision (benefit) to the operational income tax provision and the reported effective income tax rate to the operational effective income tax rate:
| Three Months Ended | ||||||||||||||||||||
| June 30, | March 31, | |||||||||||||||||||
| In millions (except rates) | 2024 | 2023 | 2024 | |||||||||||||||||
| Provision (Benefit) | Rate | Provision (Benefit) | Rate | Provision (Benefit) | Rate | |||||||||||||||
| Income tax provision (benefit) and reported effective income tax rate | $ | (293) | (142) | % | $ | 33 | 13 | % | $ | 27 | 32 | % | ||||||||
| Income tax effect - non-operating pension (income) expense and pre-tax special items | 344 | 24 | 1 | |||||||||||||||||
| Operational Tax Provision and Operational Effective Tax Rate | $ | 51 | 21 | % | $ | 57 | 22 | % | $ | 28 | 31 | % |
An income tax benefit of $293 million was recorded for the second quarter of 2024 and the reported effective income tax rate was (142)%. The reported effective income tax rate for the second quarter of 2024 was lower than the first quarter of 2024 due to a tax benefit recorded on our internal legal entity restructuring. Excluding a benefit of $346 million related to the tax effects of net special items and an expense of $2 million related to the tax effects of non-operating pension income, the operational effective income tax rate was 21% for the second quarter of 2024. The operational effective income tax rate for the second quarter of 2024 was lower than the first quarter of 2024 primarily due to an increased tax expense on equity-based compensation during the first quarter and tax benefits recorded during the second quarter for higher U.S. foreign tax credits.
An income tax provision of $27 million was recorded for the first quarter of 2024 and the reported effective income tax rate was 32%. Excluding a benefit of $4 million related to the tax effects of net special items and expense of $3 million related to the tax effects of non-operating pension income, the operational effective income tax rate was 31% for the first quarter of 2024.
An income tax provision of $33 million was recorded for the second quarter of 2023 and the reported effective income tax rate was 13%. Excluding a benefit of $21 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 22% for the second quarter of 2023.
The operational income tax provision and operational effective income 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.
BUSINESS SEGMENT OPERATING RESULTS
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 segment.
The following tables present net sales and business segment operating profit (loss), which is the Company's measure of segment profitability. Business segment operating profit (loss) 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), including a description of the manner in which business segment operating profit (loss) is calculated, see Note 19 - Business Segment Information of the Condensed Notes to the Consolidated Financial Statements.
Industrial Packaging
| Total Industrial Packaging | 2024 | 2023 | |||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||
| Sales | $ | 3,931 | $ | 3,808 | $ | 7,739 | $ | 3,884 | $ | 4,083 | $ | 7,967 | |||||||||||||||||
| Business Segment Operating Profit (Loss) | $ | 291 | $ | 216 | $ | 507 | $ | 304 | $ | 322 | $ | 626 |
Industrial Packaging net sales for the second quarter of 2024 were 3% higher compared with the first quarter of 2024 and 1% higher compared with the second quarter of 2023. Business segment operating profit was 35% higher in the second quarter of 2024 compared with the first quarter of 2024 and 4% lower compared with the second quarter of 2023.
| North American Industrial Packaging | 2024 | 2023 | |||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||
| Sales (a) | $ | 3,628 | $ | 3,486 | $ | 7,114 | $ | 3,550 | $ | 3,724 | $ | 7,274 | |||||||||||||||||
| Business Segment Operating Profit (Loss) | $ | 281 | $ | 192 | $ | 473 | $ | 284 | $ | 302 | $ | 586 | |||||||||||||||||
(a)Includes intra-segment sales of $25 million, $17 million for the three months ended June 30, 2024 and 2023, respectively; $26 million and $32 million for the three months ended March 31, 2024 and 2023, respectively; and $51 million and $49 million for the six months ended June 30, 2024 and 2023, respectively.
North American Industrial Packaging sales in the second quarter of 2024 were higher compared to the first quarter of 2024 driven by higher average sales prices reflecting prior index movements and the benefits of our Box Go-to-Market strategy, seasonally higher volumes and a favorable geographic mix. Sales also benefited from one additional shipping day in the second quarter of 2024. Total maintenance and economic downtime was about 54,000 short tons higher in the second quarter of 2024 compared with the first quarter of 2024, as lower maintenance downtime was more than offset by higher economic downtime. Operating costs were higher driven by increased costs on goods and services, administrative spend and spending to improve reliability. Planned maintenance downtime costs were lower in the second quarter of 2024 compared with the first quarter of 2024. Input costs were lower, as lower energy and other raw material costs were partially offset by higher recovered fiber.
Compared with the second quarter of 2023, sales in the second quarter of 2024 were higher reflecting the impact of our Box Go-to-Market strategy and lower economic downtime partially offset by an unfavorable geographic mix. Total maintenance and economic downtime was about 436,000 short tons lower in the second 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. Operating costs increased, driven by increased costs on goods and services, administrative spend and spending to improve reliability. Planned maintenance downtime costs were lower in the second quarter of 2024 compared with the second quarter of 2023. Input costs were higher driven by recovered fiber partially offset by lower energy, wood and other raw material costs.
Entering the third quarter of 2024, sales volumes are expected to be seasonally lower compared to the second quarter of 2024. There is one less shipping day in the third quarter of 2024. The lower volumes will be mostly offset by prior index movements and benefits from our Box Go-To-Market strategy. Operating costs are expected to be higher. Planned maintenance downtime costs are expected to be higher in the third quarter of 2024 compared with the second quarter of 2024. Input costs are expected to be higher driven by energy, recovered fiber and chemicals.
| EMEA Industrial Packaging | 2024 | 2023 | ||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | ||||||||||||||||||||
| Sales | $ | 328 | $ | 348 | $ | 676 | $ | 351 | $ | 391 | $ | 742 | ||||||||||||||
| Business Segment Operating Profit (Loss) | $ | 10 | $ | 24 | $ | 34 | $ | 20 | $ | 20 | $ | 40 |
EMEA Industrial Packaging sales in the second quarter of 2024 were seasonally lower compared with the first quarter of 2024. Operating costs were higher driven by higher administrative spend and the impact of a warehouse fire in Morocco. Planned maintenance downtime costs were higher in the second quarter of 2024 compared with the first quarter of 2024. Input costs were higher driven by higher fiber costs partially offset by lower energy costs.
Compared with the second quarter of 2023, sales in the second quarter of 2024 were lower reflecting soft demand in the Eurozone partially offset by a favorable product mix. Operating costs were higher, driven by higher administrative spend and the impact of a warehouse fire in Morocco. Planned maintenance downtime costs were higher in the second quarter of 2024 compared with the second quarter of 2023. Input costs were lower, as higher fiber costs were more than offset by lower energy and chemical costs.
Looking ahead to the third quarter of 2024, sales are expected to be stable. Operating costs are expected to be lower. Input costs are expected to be higher, primarily driven by fiber costs. Planned maintenance downtime costs are expected to be lower in the third quarter of 2024.
Global Cellulose Fibers
| Total Global Cellulose Fibers | 2024 | 2023 | |||||||||||||||||||||||||||
| In millions | 2nd Quarter | 1st Quarter | Six Months | 2nd Quarter | 1st Quarter | Six Months | |||||||||||||||||||||||
| Sales | $ | 717 | $ | 704 | $ | 1,421 | $ | 698 | $ | 811 | $ | 1,509 | |||||||||||||||||
| Business Segment Operating Profit (Loss) | $ | 31 | $ | (47) | $ | (16) | $ | 30 | $ | (16) | $ | 14 |
Global Cellulose Fibers net sales in the second quarter of 2024 were 2% higher compared with the first quarter of 2024 and 3% higher than in the second quarter of 2023. Business Segment operating profit was $78 million higher in the second quarter of 2024 compared with the first quarter of 2024 and was $1 million higher compared with the second quarter of 2023.
Sales were higher driven by higher average sales prices in the second quarter of 2024, compared with the first quarter of 2024. Sales volumes were stable as higher fluff volumes were offset by lower commodity volumes. Total maintenance and economic downtime was about 12,000 short tons lower in the second quarter of 2024 compared with the first quarter of 2024 primarily driven by maintenance downtime. Operating costs were lower, reflecting mill efficiencies from the strategic actions taken in the second half of 2024 and the timing of expenditures. Planned maintenance downtime costs in the second quarter of 2024 were lower compared with the first quarter of 2024. Input costs were stable as lower energy costs were offset by higher chemicals and wood costs.
Compared with the second quarter of 2023, sales in the second quarter of 2024 were higher, reflecting higher fluff volumes partially offset by lower commodity volumes partially offset by lower sales prices. Total maintenance and economic downtime was about 144,000 short tons lower in the second 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 2024. Operating costs were higher. Planned maintenance downtime costs in the second quarter of 2024 were higher compared with the second quarter of 2023. Input costs were lower primarily for chemicals and wood.
Entering the third quarter of 2024, sales are expected to be stable. Planned maintenance downtime costs in the third quarter of 2024 are expected to be lower compared with the second quarter of 2024. Operating costs are expected to be higher. Input costs are expected to be stable.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $760 million for the first six months of 2024 compared with $873 million for the comparable 2023 six-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 $12 million for the six months ended June 30, 2024 compared with cash used by working capital components of $88 million for the six months ended June 30, 2023. The decrease in cash provided by operations in the first six months of 2024 compared to the comparable 2023 six-month period was primarily due to the impact of the timing of mill outage spending and input pricing on accounts payable, partially offset by lower accounts receivable cash receipts due to the timing of sales.
Investments in capital projects totaled $449 million in the first six months of 2024, compared to $608 million in the first six months of 2023. Full-year 2024 capital spending is currently expected to be approximately $800 million to $1.0 billion, or 77% to 96% of depreciation and amortization.
Financing activities for the first six months of 2024 included an $8 million net decrease in debt versus a $236 million net increase in debt during the comparable 2023 six-month period.
See Note 16 - Debt of Item 1. Financial Statements for a discussion of various debt-related actions taken by the Company during the six months ended June 30, 2024.
There were no early debt reductions for the three months ended June 30, 2024 and 2023, respectively.
At June 30, 2024, contractual obligations for future payments of debt maturities (including finance lease liabilities disclosed in Note 10 - Leases and excluding the timber monetization structure disclosed in Note 15 - Variable Interest Entities) by calendar
year were as follows: $132 million in 2024; $191 million in 2025; $143 million in 2026; $333 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 June 30, 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 June 30, 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 June 30, 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 16 - 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, 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 June 30, 2024, the Company had no outstanding borrowings under the commercial paper program.
During the first quarter of 2024, the Company had debt reductions of $3 million related to decreases in the amount of capital leases.
During the second quarter of 2024, the Company had debt reductions of $5 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 six months of 2024, International Paper used 2.0 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 June 30, 2024. During the three months ended June 30, 2024, no shares of common stock were repurchased under our share repurchase program.
During the first sixth months of 2023, International Paper used approximately 1.6 million shares of treasury stock for various incentive plans. International Paper also acquired 5.9 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 $218 million, including $197 million related to shares repurchased under the Company's repurchase program during this period.
Cash dividend payments related to common stock totaled $321 million and $322 million for the first six months of 2024 and 2023, respectively. Dividends were $0.9250 per share for the first six 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 agreed 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. Of this amount, the Company paid $163 million in U.S. federal income taxes and $30 million in interest during the first quarter of 2023, with the Company fully satisfying the remaining 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 six 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) loss contingencies and pending, threatened or future litigation, including with respect to environmental related matters; (v) 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); (vi) 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; (vii) 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; (viii) the amount of our future pension funding obligations, and pension and healthcare costs; (ix) the costs of compliance, or the failure to comply with, existing and new environmental (including with respect to climate change and greenhouse gas emissions), 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) our ability to realize expected benefits and cost savings associated with restructuring initiatives; (xii) cybersecurity and information technology risks, including as a result of security breaches and cybersecurity incidents; (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. 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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