International Paper Company — 2015 Q2 Form 10-Q Summary
Business context and reporting period
International Paper reported results for the quarter and six months ended June 30, 2015. The company operates through Industrial Packaging, Printing Papers, and Consumer Packaging, and accounts for its 50% Ilim joint venture in Russia under the equity method. Prior-period results exclude the xpedx distribution business, which was spun off on July 1, 2014 and is presented as discontinued operations.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $5.714 billion | $5.899 billion | $11.231 billion | $11.623 billion |
| Net earnings attributable to International Paper | $227 million | $161 million | $540 million | $66 million |
| Diluted EPS | $0.54 | $0.37 | $1.28 | $0.15 |
| Operating profit | $676 million | $639 million | $1.299 billion | $699 million |
| Cash provided by operations | Not separately provided | Not separately provided | $753 million | $1.000 billion |
- Q2 net margin was approximately 4.0%, compared with approximately 2.7% in Q2 2014. Six-month net margin was approximately 4.8%, compared with approximately 0.6% in the prior-year period.
- Segment operating profit margins were approximately 11.8% for Q2 and 11.6% for the first six months.
- Equity earnings from Ilim were $67 million in Q2 and $106 million for the first six months, compared with $43 million and $12 million, respectively, in the prior-year periods.
- Q2 dividend was $0.40 per share; first-half dividends totaled $0.80 per share, up from $0.70 in the prior-year period.
- Cash and temporary investments were $1.590 billion at June 30, 2015, down from $1.881 billion at December 31, 2014.
- Debt included $909 million of current maturities and $9.017 billion of long-term debt. The filing states that total debt had a fair value of approximately $10.8 billion and a carrying amount of approximately $9.9 billion.
- Credit facilities totaled $2.0 billion, including a $1.5 billion committed facility expiring in August 2019 and up to $500 million of receivables-based financing. No borrowings were outstanding under these facilities at June 30, 2015.
- Capital expenditures were $673 million in the first six months. Full-year 2015 capital spending was expected to be approximately $1.5 billion.
- Management-defined free cash flow was $830 million, consisting of operating cash flow of $753 million, less capital spending of $673 million, plus the $750 million voluntary pension contribution.
Material changes versus comparable periods
- Q2 sales declined 3% year over year, primarily reflecting foreign-exchange translation, lower volumes, and weaker pricing and mix. Six-month sales declined 3%.
- Q2 net earnings attributable to International Paper increased 41% year over year, while diluted EPS increased from $0.37 to $0.54. The improvement reflected lower raw-material and freight costs, lower interest expense, lower Courtland mill closure costs, lower non-operating pension expense, and higher Ilim earnings.
- Q2 operating profit increased 6% year over year and 9% sequentially. Industrial Packaging profit was $528 million, Printing Papers was $101 million, and Consumer Packaging was $47 million.
- Printing Papers operating profit improved substantially versus the prior year because Q2 2014 included Courtland mill shutdown costs; however, 2015 results remained pressured by lower pricing, foreign exchange, and weak international demand.
- Restructuring and other charges were $194 million before tax in Q2 2015, compared with $307 million in Q2 2014. The 2015 amount primarily comprised $207 million of early debt extinguishment costs, partly offset by a $14 million net gain related to the Carolina Coated Bristols brand sale and Riegelwood mill conversion.
- Operating cash flow declined to $753 million from $1.0 billion, mainly because of the $750 million pension contribution and lower earnings adjusted for non-cash items. Capital spending increased from $634 million to $673 million.
- Share repurchases and restricted-stock tax withholding totaled $353 million in the first six months, including $271 million under the repurchase program. Approximately 36.2 million shares had been repurchased for approximately $1.7 billion through June 30, 2015.
- The company issued $2.0 billion of senior unsecured notes in May 2015, used approximately $1.0 billion to repay higher-cost debt, paid $211 million of related cash premiums, and contributed $750 million to its pension plan.
Guidance, outlook, commentary, and risks
- Management expected Q3 2015 volumes to increase in North American and Brazilian Printing Papers, remain generally flat in North American Industrial Packaging, and improve at Ilim. Pricing was expected to be broadly stable, with increases in EMEA Printing Papers offset by pressure in EMEA Industrial Packaging.
- Q3 input costs were expected to become a headwind from higher energy, recycled fiber, and rail costs, while maintenance outage costs were expected to decline from the Q2 peak.
- Asia Industrial Packaging and Asia Consumer Packaging continued to face soft demand, overcapacity, intense competition, and pricing pressure.
- The company planned to invest $135 million to convert its Riegelwood mill to pulp production, adding approximately 400,000 tons of fluff pulp capacity by mid-2016 while reducing coated paperboard capacity by 350,000 tons.
- Pension expense increased because of a lower discount rate, updated mortality assumptions, and higher amortization of actuarial losses. The company also disclosed a $3.039 billion pension benefit obligation at June 30, 2015.
- Debt maturities were $443 million in 2015, $533 million in 2016, $54 million in 2017, $811 million in 2018, $359 million in 2019, $13 million in 2020, and approximately $7.7 billion thereafter. The Timber Notes structure has approximately $4.8 billion of notes maturing in August 2016 and a related deferred tax liability of approximately $1.4 billion.
- Environmental remediation liabilities were approximately $96 million, including a $48 million reserve for the Cass Lake site. Material outcomes remain uncertain for the Kalamazoo River, San Jacinto River, and other environmental proceedings.
- Containerboard antitrust litigation remains pending, including a class-certification appeal and related lawsuits. The company also faces gypsum-related litigation, with certain settlements described as immaterial or subject to court approval.
- Other principal risks include leverage and interest rates, raw-material and energy costs, product demand and pricing, foreign currency, pension funding, environmental compliance, litigation, manufacturing disruptions, joint-venture risks, and execution of acquisitions, divestitures, and restructurings.
Important facts for investors to verify
- Reconcile the non-GAAP operating earnings and free-cash-flow measures to GAAP results and assess the effect of the $194 million restructuring charge on reported earnings.
- Review debt maturities, refinancing requirements, credit ratings, and the August 2016 maturity of the Timber Notes structure.
- Assess whether the $750 million pension contribution and continuing pension expense reduce future cash-flow flexibility.
- Monitor pricing, volumes, foreign-exchange effects, and input costs, particularly in Printing Papers and Asian operations.
- Track execution, capital requirements, and capacity effects of the Riegelwood conversion.
- Review developments in environmental, antitrust, and other litigation, for which the filing states that potential losses may be difficult to estimate.