International Paper Company — First-Quarter 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The filing is unaudited and results for the quarter may not be indicative of full-year performance. International Paper operates Industrial Packaging, Global Cellulose Fibers, Printing Papers and Consumer Packaging businesses, with a 50% equity interest in Ilim Holding S.A.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $5.511 billion | $5.110 billion | Up 8% |
| Net earnings attributable to International Paper | $209 million | $334 million | Down $125 million |
| Diluted earnings per share | $0.50 | $0.81 | Down $0.31 |
| Earnings from continuing operations | $209 million | $339 million | Down $130 million |
| Adjusted operating earnings | $249 million | $330 million | Down $81 million |
| Adjusted operating earnings per share | $0.60 | $0.80 | Down $0.20 |
| Cash provided by operations | $633 million | $620 million | Up $13 million |
| Free cash flow | $259 million | $311 million | Down $52 million |
| Capital expenditures | $374 million | $309 million | Up $65 million |
The reported effective tax rate was 34%, compared with 13% in the prior-year quarter. Excluding tax effects of special items and non-operating pension expense, the effective tax rate was 30.5% versus 33% in Q1 2016. Net interest expense increased to $142 million from $123 million.
At March 31, 2017, cash and temporary investments were $998 million, compared with $1.033 billion at December 31, 2016. Total debt was approximately $11.3 billion, including $454 million of current maturities and notes payable and $10.823 billion of long-term debt. The company also reported $6.286 billion of nonrecourse financial liabilities associated with special purpose entities. Long-term credit ratings were BBB with a stable outlook from S&P and Baa2 with a stable outlook from Moody’s.
Management expects approximately $1.5 billion of 2017 capital spending. Credit agreements totaled $2.1 billion, including a $1.5 billion committed facility expiring in December 2021 and up to $600 million of receivables-based uncommitted financing. The commercial paper program had $310 million outstanding against a $750 million capacity.
Material changes versus prior comparable period
- Sales increased primarily from the addition of the Weyerhaeuser pulp business, higher volumes and price increases. Global Cellulose Fibers sales rose to $564 million from $212 million, while Industrial Packaging sales increased to $3.499 billion from $3.411 billion.
- Total business segment operating profit declined to $428 million from $497 million. Higher volumes and lower mill outage costs were more than offset by weaker price and mix, higher operating costs, higher raw material and freight costs, and increased costs associated with the acquired pulp business.
- Industrial Packaging operating profit declined to $365 million from $396 million, and Printing Papers declined to $100 million from $135 million. Consumer Packaging improved to $33 million from $16 million. Global Cellulose Fibers reported a $70 million operating loss versus a $50 million loss.
- Recycled fiber, energy, wood, freight and other input costs were elevated. The company also incurred significant maintenance downtime, including $41 million of planned downtime costs at acquired pulp mills and higher outage costs in several other businesses.
- Q1 2017 included $14 million of pretax inventory fair-value step-up amortization and $4 million of acquisition costs related to the Weyerhaeuser pulp acquisition, partially offset by a $6 million bargain-purchase gain related to the Holmen mill. Q1 2016 included a $37 million impairment and restructuring charge related to the divested Asia Packaging business and other items.
- The company received $127 million of cash dividends from Ilim. Ilim equity earnings declined to $50 million from $62 million, although foreign-exchange gains contributed to the current-quarter result.
- Cash dividends increased to $0.4625 per share from $0.4400. The company repurchased no shares under its public program during the quarter; reported equity purchases of $46 million primarily reflected employee tax withholding.
Outlook, commentary and unusual items
Management characterized Q2 2017 as another transitional quarter. It expected seasonally higher volumes in North American Industrial Packaging and Consumer Packaging, continued benefits from announced price increases, additional pulp integration synergies and lower Pensacola-related costs. However, planned maintenance downtime was expected to be significantly higher, including scheduled outages in Industrial Packaging, Global Cellulose Fibers, Printing Papers and Consumer Packaging. Recycled fiber costs were expected to remain elevated.
The Pensacola mill digester incident occurred in January 2017; management reported that the mill restarted in early April. The filing identifies potential uncertainty regarding related costs and insurance coverage. The company also cited risks from indebtedness and interest rates, raw-material and energy costs, industry cyclicality, foreign exchange, pensions, environmental compliance, litigation, manufacturing disruptions, the Ilim joint venture and realization of Weyerhaeuser acquisition synergies.
Environmental remediation liabilities were estimated at approximately $134 million at March 31, 2017. Significant unresolved matters included Kalamazoo River and San Jacinto River environmental proceedings, containerboard antitrust litigation and a $115 million Brazilian tax assessment. Management stated that material losses were not considered probable in the described environmental and tax matters, but containerboard litigation could potentially result in a material loss and no range could currently be estimated.
Debt maturities include $349 million in 2017, $539 million in 2018, $423 million in 2019, $160 million in 2020, $629 million in 2021, $927 million in 2022 and $8.2 billion thereafter. Management expects current cash, operating cash flow and existing credit facilities to fund 2017 capital expenditures, debt service, working capital and dividends.
The company adopted ASU 2016-09 on stock compensation and ASU 2016-17 on variable interest entities with no material impact. It plans to adopt the new revenue-recognition standard on January 1, 2018 using the full retrospective method and does not expect a material financial statement impact. Disclosure controls were deemed effective, and no material changes in internal control were reported.
Most important facts for investors to verify
- Whether announced price increases offset elevated recycled fiber, energy, freight and maintenance costs in subsequent quarters.
- The pace and realized benefits of Weyerhaeuser pulp-business integration synergies, including the effect of planned downtime and purchase-accounting adjustments.
- The ultimate cost, insurance recovery and operational impact of the Pensacola mill digester incident.
- Liquidity and refinancing capacity relative to approximately $11.3 billion of debt, special-purpose-entity liabilities and substantial maturities after 2022.
- Progress and potential exposure in containerboard antitrust litigation and environmental proceedings, particularly Kalamazoo River and San Jacinto River matters.
- Whether Ilim’s earnings, foreign-exchange exposure and dividend distributions remain supportive of cash flow.
- Actual 2017 capital spending and free cash flow versus management’s approximately $1.5 billion capital-spending expectation.