International Paper Company — Q1 2016 Form 10-Q
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2016. International Paper operates through Industrial Packaging, Printing Papers and Consumer Packaging, with a 50% equity interest in Ilim Holding in Russia. Results are unaudited and may not be indicative of full-year performance.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $5.110 billion | $5.517 billion | Down 7% |
| Earnings from continuing operations | $339 million | $311 million | Up 9% |
| Net earnings attributable to International Paper | $334 million | $313 million | Up 7% |
| Diluted EPS | $0.81 | $0.74 | Up $0.07 |
| Operating earnings per share, non-GAAP | $0.80 | $0.84 | Down $0.04 |
| Operating cash flow | $620 million | $638 million | Down 3% |
| Capital spending | $309 million | $319 million | Down 3% |
| Free cash flow, non-GAAP | $311 million | $319 million | Down 3% |
Net earnings margin was approximately 6.5%, compared with 5.7% in the prior-year quarter. Cash and temporary investments were $1.155 billion at March 31, 2016, versus $1.050 billion at December 31, 2015. Total debt was approximately $9.4 billion, including $551 million of notes payable and current maturities and $8.824 billion of long-term debt. Nonrecourse financial liabilities of special purpose entities totaled $6.279 billion.
The company paid $181 million in dividends, or $0.44 per share, and repurchased $100.1 million of common stock under its repurchase program. Credit ratings were BBB with a stable outlook from S&P and Baa2 with a stable outlook from Moody’s. Credit agreements totaled $2.1 billion, including a $1.5 billion committed facility and $385 million of availability under receivables securitization financing.
Material Changes Versus the Prior Comparable Period
- Sales declined $407 million, primarily reflecting lower prices and mix, the absence of divested Asian Consumer Packaging sales, and weaker conditions in certain businesses.
- Continuing-operations earnings increased $28 million despite lower sales. Benefits included higher volumes, $32 million of lower raw-material and freight costs, $9 million of lower net interest expense and $17 million of lower non-operating pension expense.
- These benefits were partly offset by $48 million of unfavorable price and mix, $11 million of higher operating costs and $33 million of higher mill maintenance outage costs.
- Total industry segment operating profit declined to $497 million from $623 million. Industrial Packaging contributed $396 million, Printing Papers $85 million and Consumer Packaging $16 million.
- Equity earnings from Ilim increased to $62 million from $39 million, including an $11 million after-tax foreign-exchange gain compared with an $18 million loss in Q1 2015.
- The company recorded a $37 million impairment charge related to the planned sale of its China and Southeast Asia corrugated packaging business and $9 million of Riegelwood mill conversion costs. Tax benefits related to special items and internal restructurings significantly reduced the reported tax provision.
Guidance, Outlook and Unusual Items
- Management expected seasonally higher North American Industrial Packaging volumes in Q2 2016 and improvement in Brazilian Printing Papers volumes.
- Q2 pricing was expected to be unfavorable in North American Industrial Packaging and North American pulp, while Brazilian Printing Papers pricing was expected to improve as announced increases took effect.
- Maintenance outage costs were expected to remain significant but lower than in Q1, particularly as the Riegelwood conversion was completed in April 2016.
- Full-year 2016 capital spending was expected to be approximately $1.3 billion, roughly equal to depreciation and amortization for the current businesses.
- The company agreed to purchase Holmen Paper’s Madrid newsprint mill for approximately $57 million and planned to convert it to recycled containerboard with expected capacity of 380,000 metric tonnes.
- The planned sale of the China and Southeast Asia corrugated packaging business was expected to provide approximately $155 million, subject to adjustments and governmental approvals, with the buyer assuming approximately $57 million of loans.
- After quarter-end, on May 1, 2016, the company agreed to acquire Weyerhaeuser’s pulp business for $2.2 billion in cash, subject to adjustments and regulatory approval. Management estimated a tax benefit with a net present value of approximately $300 million.
- A voluntary pension lump-sum program was expected to result in approximately $1.2 billion of payments in Q2 2016 and trigger settlement accounting, including recognition of a portion of previously unamortized actuarial losses.
Risks and Contingencies
- Key risks include cyclical demand and pricing, raw-material, energy and freight costs, interest rates, currency movements, debt levels, pension funding, environmental regulation, litigation and manufacturing disruptions.
- Environmental remediation liabilities were estimated at approximately $93 million, including a $47 million reserve for the Cass Lake site.
- Material legal matters included Kalamazoo River and San Jacinto River environmental proceedings, containerboard antitrust litigation and a $92 million Brazil tax assessment. The company stated that material losses were not considered probable in the matters where an estimate was unavailable.
- Completion, financing, regulatory approval and integration of the Weyerhaeuser pulp acquisition may be uncertain, and expected synergies may not be realized.
- The company stated that current cash balances, operating cash flow and available credit facilities should support 2016 capital expenditures, debt service, working capital and dividends.
Investor Verification Priorities
- Verify the closing and final economics of the Asia Packaging divestiture and the Madrid mill acquisition.
- Assess financing, leverage and credit-rating effects of the proposed $2.2 billion Weyerhaeuser pulp acquisition.
- Track Q2 pension settlement accounting and the resulting actuarial-loss charge.
- Compare actual Q2 pricing, volumes, maintenance downtime and Riegelwood conversion performance with management’s outlook.
- Review developments in environmental, antitrust and tax proceedings, particularly the Kalamazoo River matter and Brazil assessment.