INTERNATIONAL PAPER CO quarterly report, Q1 FY2015

International Paper Company — Q1 2015 Form 10-Q Summary

Business context and reporting period

International Paper filed this unaudited Form 10-Q for the three months ended March 31, 2015. The company operates through Industrial Packaging, Printing Papers and Consumer Packaging, with a 50% equity interest in Ilim Holding S.A. in Russia. Prior-year results were adjusted to present the xpedx distribution business as discontinued operations following its July 2014 spinoff and combination with Unisource Worldwide to form Veritiv Corporation.

Financial performance and key metrics

Metric	Q1 2015	Q1 2014	Change
Net sales	$5.517 billion	$5.724 billion	Down 4%
Operating profit	$623 million	$60 million	Up $563 million
Earnings from continuing operations attributable to IP	$313 million	$(88) million	Improved $401 million
Net earnings attributable to IP	$313 million	$(95) million	Improved $408 million
Diluted EPS	$0.74	$(0.21)	Improved $0.95
Cash provided by operations	$638 million	$471 million	Up $167 million
Free cash flow	$319 million	$252 million	Up $67 million

Operating profit margin was approximately 11.3% in Q1 2015 versus approximately 1.0% in Q1 2014. Net earnings margin attributable to International Paper was approximately 5.7% versus negative 1.7% in the prior-year quarter. The comparison benefited materially from the absence of the $499 million pretax restructuring and other charge recorded in Q1 2014, principally related to the Courtland mill shutdown.

• Segment operating profit was $468 million for Industrial Packaging, $109 million for Printing Papers and $46 million for Consumer Packaging.
• Equity earnings from Ilim were $39 million versus a $31 million loss in Q1 2014, primarily reflecting substantially lower foreign-exchange losses on Ilim’s U.S.-dollar-denominated debt.
• Cash and temporary investments were $1.576 billion at March 31, 2015, compared with $1.881 billion at December 31, 2014.
• Total debt presented on the balance sheet included $664 million of notes payable and current maturities and $8.461 billion of long-term debt. The company reported approximately $9.1 billion of debt at fair value and $2.052 billion of nonrecourse financial liabilities of special purpose entities.
• Credit facilities totaled $2.0 billion, including a $1.5 billion committed facility expiring in August 2019 and up to $500 million of receivables-backed commercial-paper financing. No borrowings were outstanding under these facilities at quarter-end.
• Capital spending was $319 million. Full-year 2015 capital spending was expected to be approximately $1.5 billion.
• The company paid $169 million of common dividends, or $0.40 per share, and repurchased or withheld shares totaling $141 million, including $59 million under the share repurchase program.

Material changes versus comparable periods

• Sales declined 4% year over year, reflecting lower volumes, pricing and mix, including adverse currency effects on export sales.
• Results improved sharply because Q1 2015 had no special items, while Q1 2014 included $499 million of pretax restructuring charges and $321 million of after-tax special items, including the Courtland shutdown.
• Operating results benefited from lower raw material, freight and energy costs, lower mill outage costs and lower Courtland-related costs. These benefits were partly offset by lower sales prices and volumes, higher operating costs, higher non-operating pension expense and higher taxes.
• U.S. pension expense increased to $122 million from $90 million, driven by a lower discount rate, updated mortality assumptions and higher amortization of actuarial losses. The company made no qualified pension contribution in Q1 2015 versus $58 million in Q1 2014.
• Accumulated other comprehensive loss increased to $5.042 billion from $4.646 billion at year-end, primarily because of a $484 million after-tax foreign-currency translation loss.
• Industrial Packaging operating profit increased to $468 million from $453 million, while Printing Papers improved from a $410 million loss to $109 million of profit and Consumer Packaging improved from $17 million to $46 million.

Guidance, outlook, risks and unusual items

Management expected Q2 2015 volumes to improve in North American Industrial Packaging and Brazilian Printing Papers, with generally stable pricing and input costs. Planned maintenance outage costs were expected to be higher in Q2, which management identified as the heaviest outage quarter of the year. Ilim operating performance was expected to remain solid, although higher maintenance costs and cost inflation could offset benefits.

• The company announced a $135 million investment to convert the Riegelwood, North Carolina mill to increase fluff and softwood pulp capacity by approximately 400,000 tons by mid-2016, while reducing coated paperboard capacity by 350,000 tons.
• Full-year required qualified pension contributions were expected to be $63 million, with expected 2015 payments of $62 million for U.S. nonqualified plans.
• Debt maturities totaled approximately $513 million in 2015, $518 million in 2016, $54 million in 2017, $1.3 billion in 2018, $602 million in 2019, $11 million in 2020 and $6.2 billion thereafter.
• Environmental remediation liabilities were estimated at approximately $96 million, plus approximately $45 million of other remediation liabilities. The Cass Lake matter could require materially higher costs if a more expensive remedy is selected.
• Material legal matters included the Kalamazoo River environmental litigation, Harris County environmental cases and containerboard antitrust litigation. The company stated that outcomes and potential losses could not be reasonably estimated for several proceedings.
• The federal containerboard antitrust court certified a direct-purchaser class in March 2015; the company intended to pursue appeal or reconsideration.
• Gypsum antitrust cases were settled or proposed for settlement for immaterial amounts, subject to court approval and, for Canadian cases, execution of definitive agreements.
• Key operating risks include indebtedness and interest rates, raw-material and energy costs, product demand and pricing, foreign exchange, economic and political conditions, pension funding, environmental compliance, litigation, manufacturing disruptions, joint-venture performance and execution of strategic initiatives.

Important facts for investors to verify

• Reconcile GAAP diluted EPS of $0.74 with management’s non-GAAP operating EPS of $0.84, including the $0.10 per-share non-operating pension charge.
• Assess the sustainability of earnings excluding the unusually large Q1 2014 Courtland restructuring charge and the effect of Ilim foreign-exchange volatility.
• Review liquidity against near-term debt maturities, planned $1.5 billion of 2015 capital spending, dividends and pension obligations.
• Monitor the impact of currency movements, especially on export pricing and Ilim’s U.S.-dollar-denominated debt.
• Evaluate the Riegelwood conversion, associated capacity reductions, capital requirements and expected 2016 production timing.
• Follow environmental, antitrust and other litigation developments because several potential losses were not estimable at the filing date.
• Confirm the status and final terms of the Carolina Coated Bristols brand sale completed April 30, 2015, after quarter-end.