International Paper Company: Q2 2017 Form 10-Q Summary
Business context and reporting period
International Paper is a global producer of industrial packaging, cellulose fibers, printing papers and consumer packaging. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared primarily with the corresponding 2016 periods. Results include the Weyerhaeuser pulp business acquired in December 2016, which is reported in the new Global Cellulose Fibers segment.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $5.772 billion | $5.322 billion | $11.283 billion | $10.432 billion |
| Net earnings attributable to International Paper | $80 million | $40 million | $289 million | $374 million |
| Diluted EPS | $0.19 | $0.10 | $0.69 | $0.90 |
| Cash provided by operations | Not separately provided | Not separately provided | $1.278 billion | $1.225 billion |
| Free cash flow | Not separately provided | Not separately provided | $614 million | $838 million |
Q2 net margin was approximately 1.4%, compared with approximately 0.8% in Q2 2016. Six-month net margin was approximately 2.6%, compared with approximately 3.6% in the prior-year period. Adjusted Operating Earnings, a non-GAAP measure, were $270 million, or $0.65 per diluted share, versus $379 million, or $0.92 per share, in Q2 2016 and $249 million, or $0.60 per share, in Q1 2017.
- Business segment operating profit was $129 million, compared with $627 million in Q2 2016 and $428 million in Q1 2017.
- Q2 segment sales were $3.706 billion in Industrial Packaging, $612 million in Global Cellulose Fibers, $1.017 billion in Printing Papers and $474 million in Consumer Packaging.
- Ilim equity earnings were $21 million in Q2, compared with $46 million in Q2 2016 and $50 million in Q1 2017.
- Capital expenditures were $664 million in the first six months, and full-year 2017 capital spending was expected to be approximately $1.5 billion.
- Cash dividends paid were $382 million in the first six months; the dividend was $0.4625 per share in Q2 and $0.9250 per share for the first half.
Balance sheet, debt and liquidity
- Cash and temporary investments were $1.041 billion at June 30, 2017, compared with $1.033 billion at December 31, 2016.
- Total debt was approximately $11.2 billion, including $824 million of notes payable and current maturities and $10.392 billion of long-term debt. Debt fair value was approximately $12.4 billion.
- Commercial paper borrowings outstanding were $240 million under a $750 million program. Total credit agreements were $2.1 billion, including a $1.5 billion committed facility expiring in December 2021 and up to $600 million under a receivables securitization program.
- Long-term credit ratings were BBB with a stable outlook from S&P and Baa2 with a stable outlook from Moody’s.
- Debt maturities totaled $279 million in 2017, $538 million in 2018, $424 million in 2019, $160 million in 2020, $633 million in 2021, $920 million in 2022 and $8.25 billion thereafter.
Material changes versus the prior comparable period
- Sales increased 8.5% in Q2 and 8.2% for the first six months, primarily reflecting the acquired pulp business, higher price realizations and volume benefits.
- Reported Q2 earnings increased $40 million year over year, but adjusted operating earnings declined $109 million because of higher raw material and freight costs, operating costs, maintenance outages and lower Ilim earnings.
- Industrial Packaging operating profit fell to $50 million from $458 million, principally because of the $354 million Kleen Products antitrust settlement charge. Excluding special items, profit was $407 million versus $486 million.
- Global Cellulose Fibers operating profit improved to $7 million from a $21 million loss, supported by the Weyerhaeuser acquisition, higher prices and improved operations.
- Printing Papers operating profit declined to $86 million from $117 million, while Consumer Packaging declined to a $14 million loss from $73 million of profit.
- Cash from operations increased to $1.278 billion from $1.225 billion, but free cash flow declined to $614 million from $838 million, primarily because the 2016 comparison included a $250 million pension contribution adjustment.
- The company’s pension benefit obligation was $3.357 billion at June 30, 2017, compared with $3.400 billion at year-end 2016.
Guidance, outlook, risks and unusual items
- Management expected Q3 benefits from recent Industrial Packaging price increases, additional containerboard export price realization, Consumer Packaging price increases, lower maintenance outage costs and improved Industrial Packaging operations.
- Expected offsets included lower seasonal volumes, lower softwood pulp prices, higher OCC and energy costs, seasonally lower Ilim volumes and lower Ilim softwood pulp prices.
- The company planned a $1.25 billion voluntary pension contribution by September 15, 2017, funded with a planned $1.0 billion senior unsecured notes issuance, cash and other borrowings. It subsequently borrowed approximately $350 million under the commercial paper program to help fund the Kleen settlement payment.
- The $354 million Kleen Products antitrust settlement was recorded as a Q2 special item and paid into a settlement fund on August 1, 2017. Final court approval was scheduled for October 17, 2017.
- A $9 million impairment was recorded for the foodservice business in China, which was subject to an announced sale for approximately $7 million. The transaction was expected to close in Q3, subject to conditions and governmental approvals.
- A jury awarded approximately $125 million in the Signature Industrial Services litigation; the company stated that the verdict was subject to post-trial proceedings and appeal and expected any eventual loss to be immaterial.
- Environmental remediation liabilities were estimated at approximately $131 million. Several CERCLA, personal injury, antitrust and tax matters remained unresolved; for matters that could not be reasonably estimated, the company stated that outcomes were premature to assess.
- Management identified risks from indebtedness, interest rates, raw material and energy costs, product demand and pricing, foreign exchange, pension funding, environmental regulation, litigation, manufacturing disruptions, joint ventures and execution of the Weyerhaeuser acquisition synergies.
- The company planned to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method. Contract reviews indicated possible acceleration of revenue for certain products without alternative future use, although the materiality remained under evaluation.
Most important facts for investors to verify
- Whether the Kleen Products settlement receives final court approval and whether any additional litigation exposure remains.
- Completion and funding of the $1.25 billion pension contribution and the resulting effect on leverage, interest expense and liquidity.
- Actual realization of Weyerhaeuser pulp acquisition synergies and the sustainability of Global Cellulose Fibers improvement.
- Progress on Industrial Packaging and Consumer Packaging price increases relative to OCC, energy, freight and other input costs.
- Execution of the Tangier acquisition and the planned China foodservice divestiture.
- Potential financial effects of environmental, antitrust, Signature Industrial Services and Brazilian tax proceedings.
- The eventual impact of revenue recognition adoption and the company’s continuing pension funding requirements.