International Paper Company — Form 10-Q Summary
Business Context and Reporting Period
International Paper filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company operates through Industrial Packaging, Printing Papers and Consumer Packaging, with a 50% equity investment in Ilim Holding S.A. in Russia. Prior-year results reflect the 2014 spinoff of xpedx, which is presented as discontinued operations.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $5.691 billion | $6.051 billion | $16.922 billion | $17.674 billion |
| Net earnings attributable to International Paper | $220 million | $355 million | $760 million | $421 million |
| Diluted EPS | $0.53 | $0.83 | $1.80 | $0.97 |
| Operating profit | $579 million | $781 million | $1.878 billion | $1.480 billion |
| Cash provided by operations | Not separately provided | Not separately provided | $1.590 billion | $1.933 billion |
| Free cash flow | Not separately provided | Not separately provided | $1.342 billion | $1.325 billion |
Q3 revenue declined approximately 6% year over year, while net earnings attributable to the company declined approximately 38%. Approximate net margin was 3.9% in Q3 2015 versus 5.9% in Q3 2014; operating profit margin was approximately 10.2% versus 12.9%. Nine-month revenue declined approximately 4%, while attributable earnings increased approximately 81%, primarily because 2014 included substantial restructuring and special charges.
- Q3 diluted EPS from continuing operations was $0.53, compared with $0.79 in the prior-year quarter and $0.54 in Q2 2015.
- Management’s non-GAAP Operating Earnings per share was $0.97, unchanged from Q2 2015 and up from $0.95 in Q3 2014.
- Q3 segment operating profit was $553 million for Industrial Packaging, $179 million for Printing Papers and a loss of $153 million for Consumer Packaging.
- Ilim equity earnings were a loss of $9 million in Q3, compared with a loss of $70 million in Q3 2014 and earnings of $67 million in Q2 2015.
- Cash and temporary investments were $1.104 billion at September 30, 2015, compared with $1.881 billion at December 31, 2014.
- Long-term debt was $8.887 billion, with notes payable and current maturities of $753 million. The filing reports total debt of approximately $9.6 billion at fair value of approximately $10.4 billion.
- Credit ratings were BBB with a stable outlook from S&P and Baa2 with a stable outlook from Moody’s.
- Capital expenditures were $998 million in the first nine months; full-year 2015 capital spending was expected to be approximately $1.5 billion.
- Dividends paid in the first nine months totaled $503 million, or $1.20 per common share. Share repurchases and restricted-stock tax withholding totaled approximately $505 million.
Material Changes Versus the Prior Comparable Period
- Sales declined across all three reportable segments: Industrial Packaging fell 3% in Q3, Printing Papers fell 13%, and Consumer Packaging fell 8% year over year.
- Industrial Packaging operating profit increased to $553 million from $527 million, supported by lower raw material and freight costs and lower special charges, but pressured by lower pricing, unfavorable mix, lower volumes and higher maintenance outages.
- Printing Papers operating profit increased slightly to $179 million from $177 million. The prior-year quarter included special items related to the Courtland mill, an India legal contingency and a foreign tax amnesty.
- Consumer Packaging operating profit declined to a $153 million loss from $77 million of profit, primarily because of a $186 million impairment charge associated with the planned sale of the IP-Sun coated paperboard joint venture.
- Nine-month operating profit increased to $1.878 billion from $1.480 billion, despite lower revenue, reflecting significantly lower restructuring and other charges than in 2014.
- Operating cash flow decreased by $343 million year over year, principally reflecting lower operating cash generation and higher pension contributions. Free cash flow was broadly stable because the company made a $750 million voluntary pension contribution in 2015 versus $353 million in 2014.
- Accumulated other comprehensive loss increased to $5.358 billion from $4.646 billion, primarily due to unfavorable foreign-currency translation.
Guidance, Outlook, Risks and Unusual Items
- Management expected relatively stable fourth-quarter volumes overall, with lower North American Industrial Packaging volumes due to three fewer shipping days and seasonally lower specialty sales.
- Fourth-quarter pricing was expected to be generally stable, but seasonal mix was expected to be less favorable. Maintenance outage costs and operating costs were expected to increase, and flooding at two South Carolina mills was expected to adversely affect costs and earnings.
- Management expected seasonal volume improvement in Brazil Printing Papers and Ilim, but anticipated lower pulp prices, higher input costs and the absence of favorable foreign-exchange effects recorded in the third quarter.
- The company announced the sale of its 55% interest in IP-Sun for approximately $23 million. The business had $1.095 billion of assets and $943 million of liabilities classified as held for sale at September 30, 2015; the sale was deemed effective October 13, 2015.
- The company restructured its 2006 timber monetization during the quarter. It consolidated approximately $4.84 billion of timber notes and $4.24 billion of related nonrecourse financial liabilities. The nonrecourse loans mature in May 2016, and management expected to extend the financing and timber notes for approximately five years during the fourth quarter.
- The company had $2.0 billion of credit agreements, including a $1.5 billion committed facility expiring in August 2019. Approximately $127 million was available under the receivables securitization program at September 30, 2015. A $300 million borrowing under that program was repaid after quarter-end.
- Debt maturities included $389 million in 2016, $790 million in 2018, $434 million in 2019 and $7.5 billion thereafter.
- Environmental remediation liabilities were approximately $97 million, including a $47 million reserve for the Cass Lake site. The company also disclosed unresolved Kalamazoo River, San Jacinto Superfund and antitrust proceedings; potential losses for several matters could not be estimated because of their preliminary or unresolved status.
- The company contributed $750 million to its qualified pension plan during the first nine months. Pension expense increased to $350 million from $290 million, and the pension benefit obligation was $3.017 billion at September 30, 2015.
- The filing identified exposure to indebtedness, interest rates, raw material, energy and transportation costs, foreign exchange, cyclicality, pension funding, environmental and litigation matters, manufacturing disruptions, joint-venture risks and refinancing requirements.
Most Important Facts for Investors to Verify
- Completion and economic impact of the IP-Sun sale, including final proceeds, deconsolidation effects and any additional obligations.
- Successful extension or refinancing of the timber monetization loans and timber notes before their 2016 maturities.
- Fourth-quarter effects from South Carolina flooding, planned maintenance outages, shipping-day reductions and higher seasonal costs.
- Underlying performance of Industrial Packaging and Printing Papers after excluding special items, pension expense and foreign-exchange effects.
- Liquidity relative to scheduled debt maturities, pension funding requirements, capital expenditures, dividends and share repurchases.
- Progress and potential exposure in the Kalamazoo River, San Jacinto Superfund and containerboard and gypsum antitrust matters.
- The filing text contains inconsistent descriptions of the after-tax impact of the IP-Sun impairment; investors should verify the definitive amount in the filed financial statements and subsequent filings.