PaperAge Magazine

International Paper Reports Fourth Quarter and Full Year 2016 Earnings

Mark Sutton "While we experienced margin pressure in 2016, we enter the new year with an improving economic climate and several catalysts which we expect to improve profitability across International Paper." – Mark Sutton, Chairman and CEO, International Paper.

Feb. 2, 2017 - International Paper (NYSE: IP) today reported full-year 2016 net earnings attributable to International Paper of $904 million ($2.18 per share) compared with net earnings of $938 million ($2.23 per share) for full-year 2015. In the fourth quarter of 2016, the Company reported net earnings of $218 million ($0.53 per share) compared with $178 million ($0.43 per share) in the fourth quarter of 2015. Net earnings in all periods include the impact of special items, if any, non-operating pension expense and discontinued operations.

* Adjusted operating earnings (Non-GAAP) is defined as net earnings from continuing operations attributable to International Paper Company (GAAP) excluding special items and non-operating pension expense. Non-operating pension expense for the full year 2016 included a pre-tax charge of $439 million ($270 million after taxes or $0.65 per share) for a settlement accounting charge associated with payments under the previously announced term-vested lump sum buyout.

Full-year 2016 adjusted operating earnings were $1.4 billion ($3.35 per share) compared with $1.5 billion ($3.65 per share) in 2015. Adjusted operating earnings in the fourth quarter of 2016 totaled $303 million ($0.73 per share) compared with $361 million ($0.87 per share) in the fourth quarter of 2015.

Annual net sales totaled $21.1 billion in 2016 compared with $22.4 billion in 2015. The year-over-year revenue decline was primarily due to the sale of the IP-Sun joint venture and the Asian Corrugated Packaging business, as well as the sale of the Carolina® Coated Bristols business. Quarterly net sales were $5.4 billion in the fourth quarter of 2016 compared with $5.4 billion in the fourth quarter of 2015.

Full-year 2016 business segment operating profits were $2.2 billion compared with $2.4 billion in 2015. Business segment operating profits in the fourth quarter of 2016 were $464 million, compared with $483 million in the fourth quarter of 2015.

Cash provided by operations was $2.5 billion for the full-year 2016 and $912 million in the fourth quarter of 2016. Free cash flow (non-GAAP) was $1.9 billion for the full-year 2016 and $467 million in the fourth quarter of 2016.

"I'm pleased with another year of strong cash generation and returns solidly above the cost of capital," said Mark Sutton, Chairman and Chief Executive Officer. "While we experienced margin pressure in 2016, we enter the new year with an improving economic climate and several catalysts which we expect to improve profitability across International Paper. We are focused on serving our customers, strong operations and margin improvement, along with integrating the newly acquired pulp business and driving synergies. We remain confident in our ability to create shareholder value through thoughtful capital allocation with a near-term focus on debt reduction."

SEGMENT INFORMATION

The performance of the Company's business segments is measured quarter to quarter without variations caused by special items, as management focuses on business segment operating profits excluding those items. The combination of IP's legacy pulp business with the acquired pulp business in 2016, will now be called Global Cellulose Fibers and reported as a separate business segment (previously reported in Printing Papers). Prior periods have been restated to reflect this change. Fourth quarter 2016 business segment operating profits and business trends compared with the prior quarter are as follows:

Industrial Packaging operating profits in the fourth quarter of 2016 were $372 million ($379 million excluding special items) compared with $424 million ($429 million excluding special items) in the third quarter of 2016. In North America, improved sales price realization was more than offset by slightly lower box shipments due to fewer shipping days, higher input costs and higher operating costs, including an inventory valuation adjustment. Operating profits in EMEA improved, due to seasonally higher sales volumes.

Global Cellulose Fibers operating profits in the fourth quarter of 2016 were a loss of $70 million (a loss of $32 million excluding special items) compared with a loss of $39 million (a loss of $32 million excluding special items) in the third quarter of 2016. The legacy IP business was negatively impacted by lower sales prices and an unfavorable mix, partially offset by lower planned maintenance outage costs. The segment reflects the operating profits for one month from the newly acquired pulp business.

Printing Papers operating profits were $121 million in the fourth quarter of 2016 versus $167 million in the third quarter of 2016. Earnings in North America were impacted by higher maintenance outage costs, seasonally higher operating costs and an unfavorable product mix. In Brazil, seasonally stronger sales volumes were partially offset by higher operating costs. Operating profits in EMEA were lower due to higher planned maintenance outage expenses, as well as higher input costs.

Consumer Packaging operating profits were $41 million in the fourth quarter of 2016 compared with $61 million in the third quarter of 2016. The earnings decrease in North America was primarily due to seasonally lower volume, seasonally higher operating costs and higher planned maintenance outage expenses.

International Paper recorded Ilim joint venture equity earnings of $45 million in the fourth quarter of 2016 compared with $46 million in the third quarter of 2016. The Company recognized a non-cash after-tax foreign exchange gain of $6 million in the fourth quarter of 2016 ($0.01 per share), compared with a gain of $3 million in the third quarter of 2016 ($0.01 per share).

CORPORATE EXPENSES

Net corporate expenses, excluding non-operating pension expense, were $11 million for the fourth quarter of 2016, compared with $11 million in the third quarter of 2016.

EFFECTIVE TAX RATE

The reported effective tax rate for the fourth quarter of 2016 was 38.6% compared to a 2016 third quarter effective tax rate of 28.7%. Excluding special items and non-operating pension expense, the effective tax rate for the fourth quarter of 2016 was 29.0%, compared with an effective tax rate of 30.5% in the third quarter of 2016. The lower rate of 29.0% in the fourth quarter was due to the inclusion of a decrease in the Company's valuation allowance for state income taxes.

EFFECTS OF SPECIAL ITEMS

Special items in the fourth quarter of 2016 included a pre-tax charge of $7 million ($6 million after taxes) for Restructuring and other charges for costs associated with the closure of a mill in Turkey. Special items also included a pre-tax charge of $19 million ($14 million after taxes) for costs associated with the newly acquired pulp business, a pre-tax charge of $19 million ($11 million after taxes) to amortize the acquired pulp business inventory fair value step-up and a tax expense of $31 million associated with a tax rate change in Luxembourg.

Special items in the third quarter of 2016 included a pre-tax charge of $46 million ($29 million after taxes) for Restructuring and other charges. Included within Restructuring and other charges were a pre-tax charge of $29 million ($18 million after taxes) for debt extinguishment costs and a pre-tax charge of $17 million ($11 million after taxes) to write-off costs associated with the India Packaging business evaluation. Special items also included a pre-tax charge of $8 million ($5 million after taxes) for the write-off of certain regulatory pre-engineering costs, pre-tax charges of $7 million ($4 million after taxes) for costs associated with the agreement to purchase the Weyerhaeuser pulp business and pre-tax charges of $5 million ($4 million after taxes) for costs associated with the sale of our Asia corrugated packaging business.

Special items in the fourth quarter of 2015 included a pre-tax loss of $33 million ($20 million after taxes) for Restructuring and other charges. Included within Restructuring and other charges were a pre-tax charge of $15 million ($9 million after taxes) related to the sale of the Carolina® Coated Bristols brand and costs associated with the conversion of the Riegelwood, North Carolina facility to 100% pulp production, a pre-tax charge of $15 million ($9 million after taxes) to adjust a legal reserve and pre-tax charges of $3 million ($2 million after taxes) for other items. Special items also included a gain of $12 million (before and after taxes) to reflect the sale of the IP-Sun JV, a charge of $137 million (before and after taxes) for the impairment of the goodwill and other intangible assets of the Company's Brazil Packaging business and a tax expense of $2 million for other items.

International Paper (NYSE: IP) is a global leader in packaging and paper with manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. Its businesses include industrial and consumer packaging along with uncoated papers and pulp. To learn more, please visit: internationalpaper.com.

SOURCE: International Paper