International Paper Company — Form 10-Q Summary
Business context and reporting period
International Paper filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The company operates through Industrial Packaging, Printing Papers and Consumer Packaging, and holds a 50% equity interest in Ilim Holding S.A. in Russia.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $5.266 billion | $5.691 billion | $15.698 billion | $16.922 billion |
| Net earnings attributable to International Paper | $312 million | $220 million | $686 million | $760 million |
| Diluted EPS | $0.75 | $0.53 | $1.65 | $1.80 |
| Cash provided by operations | Not separately provided | Not separately provided | $1.566 billion | $1.590 billion |
| Free cash flow | Not separately provided | Not separately provided | $1.413 billion | $1.342 billion |
- Approximate net margin was 5.9% in Q3 2016 and 4.4% for the first nine months, compared with approximately 3.9% and 4.5%, respectively, in the comparable periods.
- Business segment operating profit was $613 million in Q3 2016 and $1.738 billion for the first nine months, versus $579 million and $1.878 billion in the prior-year periods.
- Adjusted operating earnings, a non-GAAP measure, were $380 million, or $0.91 per diluted share, in Q3 2016, compared with $407 million, or $0.97 per share, in Q3 2015.
- Cash and temporary investments were $2.562 billion at September 30, 2016, up from $1.050 billion at December 31, 2015.
- Total debt, including current maturities, was approximately $10.9 billion at September 30, 2016; long-term debt was $10.823 billion and current debt was $78 million. The company also reported $6.282 billion of nonrecourse financial liabilities of special purpose entities.
- Credit facilities totaled $2.1 billion, including a $1.5 billion committed bank credit agreement expiring in August 2019. The company had no borrowings under its commercial paper program or receivables securitization facility at quarter-end.
- Capital expenditures were $903 million through nine months, and full-year 2016 spending was expected to be approximately $1.3 billion.
- Cash dividends were $0.44 per common share in Q3 and $1.32 per share for the first nine months, compared with $0.40 and $1.20, respectively, in 2015.
Material changes versus prior comparable periods
- Q3 net sales declined 7.5% year over year, primarily reflecting lower Consumer Packaging sales after the sale of the IP-Sun joint venture and Asia packaging operations, as well as lower pricing and unfavorable mix.
- Q3 earnings attributable to International Paper increased 42% year over year, primarily because the prior-year period included a $186 million pre-tax impairment charge related to the IP-Sun joint venture. Q3 2016 also benefited from higher Ilim equity earnings, lower taxes, lower interest expense and lower pension expense.
- These benefits were partly offset by lower average selling prices and unfavorable mix, higher operating costs and maintenance outage costs.
- Industrial Packaging operating profit fell to $424 million from $553 million, reflecting pricing pressure, unfavorable mix, higher input and operating costs, and higher maintenance downtime.
- Printing Papers operating profit declined to $128 million from $179 million, principally due to lower U.S. pulp profitability and weaker pricing, partly offset by improved operational performance and lower outage costs in other regions.
- Consumer Packaging operating profit improved to $61 million from a $153 million loss, largely because Q3 2015 included the $186 million IP-Sun impairment charge. Excluding special items, current-quarter profit was lower sequentially but higher year over year.
- Operating cash flow was broadly stable year over year, while free cash flow increased by $71 million due primarily to lower capital spending.
- Debt increased materially during the year as the company issued $1.1 billion of 3.00% senior notes due 2027 and $1.2 billion of 4.40% senior notes due 2047, while repaying $266 million of 7.95% notes.
Guidance, outlook, risks and unusual items
- Management expected relatively stable fourth-quarter volumes, seasonal improvement in selected EMEA and Brazil businesses, and favorable pricing from containerboard and box price increases announced in October 2016.
- Fourth-quarter results were expected to face four fewer North American shipping days, higher energy and operating costs, modestly higher maintenance outages, inflationary pressure in EMEA Printing Papers, and approximately $17 million of Hurricane Matthew costs across North American businesses.
- The North American pulp business was expected to remain pressured by an unfavorable mix while Riegelwood qualified and supplied more fluff pulp capacity.
- The company agreed to acquire Weyerhaeuser’s pulp business for approximately $2.2 billion in cash, subject to adjustments and regulatory approvals. Closing was expected in Q4 2016; the filing states that U.S. Department of Justice review was completed without action, but other approvals remained outstanding.
- International Paper completed the acquisition of Holmen Paper’s Madrid newsprint mill for approximately $59 million and plans to convert it to recycled containerboard production with expected capacity of 380,000 metric tonnes.
- Q3 special items included $29 million of pre-tax debt extinguishment costs, a $17 million write-off related to an India packaging evaluation, $8 million of regulatory pre-engineering write-offs, $7 million of Weyerhaeuser transaction costs and $5 million related to the Asia packaging sale.
- Pension expense was $718 million for the first nine months, including a $439 million non-cash settlement charge in Q2 and a $3 million non-cash settlement charge in Q3. The company contributed $750 million to its qualified pension plan during 2016.
- Environmental remediation liabilities were approximately $95 million for CERCLA and state matters, plus approximately $40 million for other remediation costs. Several Kalamazoo River, San Jacinto River and antitrust matters remained unresolved; the company stated that material losses were not probable where estimable.
- The company identified exposure to raw material, energy, transportation, pricing, currency, interest-rate, pension, environmental, litigation, joint-venture and acquisition risks. It reported no material changes to previously disclosed risk factors.
- Management stated that current cash, operating cash flow and available credit facilities were expected to fund 2016 capital expenditures, debt service, working capital and dividends.
Most important facts for investors to verify
- Whether the Weyerhaeuser pulp acquisition closed on expected terms and delivered anticipated synergies.
- The pace and economics of the Riegelwood conversion and the qualification of new fluff pulp capacity.
- Whether announced containerboard and box price increases offset higher input costs and unfavorable mix.
- The sustainability of cash generation after pension contributions, capital expenditures, dividends, debt service and acquisitions.
- Debt maturity and refinancing exposure, particularly the $9.1 billion of contractual maturities due after 2021.
- Potential changes in pension liabilities and future required or discretionary contributions following the 2016 plan remeasurement.
- Resolution and ultimate cost of environmental, antitrust and tax proceedings, including the Kalamazoo River matters.
- The effects of discontinued or divested businesses on year-over-year comparability and the company’s use of non-GAAP adjusted earnings measures.