International Paper Company — FY2022 Form 10-K Summary
Business context and reporting period
International Paper is a global producer of renewable fiber-based packaging and pulp products. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021. Continuing operations comprise Industrial Packaging and Global Cellulose Fibers. Results of the Ilim investment and previously spun-off or sold printing-paper businesses are presented as discontinued operations.
The company operated approximately 39,000 employees and manufacturing, converting, recycling and distribution facilities across North America, Latin America, Europe, North Africa and Asia. Its shares trade on the NYSE under the symbol IP.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $21.161 billion | $19.363 billion | +9% |
| Net earnings attributable to shareholders | $1.504 billion | $1.752 billion | Down |
| Diluted EPS | $4.10 | $4.47 | Down |
| Earnings from continuing operations | $1.741 billion | $811 million | Up materially |
| Adjusted operating earnings | $1.168 billion | $944 million | +24% |
| Adjusted operating EPS | $3.18 | $2.41 | +32% |
| Cash provided by operations | $2.174 billion | $2.030 billion | +$144 million |
| Free cash flow | $1.243 billion | $1.481 billion | Down |
| Capital spending | $931 million | $549 million | Up materially |
| Net interest expense | $325 million | $337 million | Down |
Industrial Packaging generated $17.451 billion of sales and $1.742 billion of operating profit, compared with $16.326 billion and $1.638 billion in 2021. Global Cellulose Fibers generated $3.227 billion of sales and $106 million of operating profit, compared with $2.732 billion and a $3 million loss in 2021.
At December 31, 2022, cash and temporary investments were $804 million. Total debt, including current maturities, was approximately $5.579 billion, while the company separately reported approximately $5.6 billion of outstanding indebtedness in its risk disclosures. The company had approximately $2.0 billion of credit facilities, with no borrowings under the $1.5 billion revolving credit agreement or $500 million receivables securitization program. Commercial paper outstanding was $410 million, with $590 million of remaining capacity. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales increased primarily from higher pricing and favorable commercial actions, while volumes declined, particularly in North American packaging, following stronger pandemic-related demand in 2021.
- Operating profits benefited from approximately $2.2 billion of higher average sales price realization and mix, but were reduced by lower volumes, approximately $657 million of higher operating costs, $1.1 billion of higher input costs and $70 million of higher maintenance outage costs.
- Inflation in energy, fiber, chemicals, freight, labor and services materially pressured margins. Price realization and the Building a Better IP program partly offset these pressures.
- Building a Better IP initiatives delivered approximately $250 million of earnings benefits in 2022.
- Capital spending rose substantially to $931 million, primarily for Industrial Packaging investments and capacity expansion in the U.S. box system.
- Shareholder returns totaled approximately $1.93 billion, including $1.26 billion of share repurchases and $673 million of dividends. The company repurchased approximately 28.3 million shares during 2022 and had approximately $3.2 billion remaining under its authorization at year-end.
- Net earnings declined because discontinued operations included a $533 million after-tax impairment of the Ilim investment in the fourth quarter. Continuing-operations earnings benefited from a $604 million tax benefit related to settlement of the timber monetization tax matter and other unusual items.
Fourth-quarter 2022
| Metric | Q4 2022 | Q3 2022 | Q4 2021 |
|---|---|---|---|
| Net sales | $5.133 billion | $5.402 billion | $5.086 billion |
| Net earnings attributable to shareholders | $(318) million | $951 million | $107 million |
| Diluted EPS | $(0.90) | $2.64 | $0.28 |
| Adjusted operating earnings | $309 million | $300 million | $235 million |
| Adjusted operating EPS | $0.87 | $0.83 | $0.61 |
| Free cash flow | $439 million | $197 million | $(94) million |
The fourth-quarter loss primarily reflected the $533 million after-tax Ilim impairment and related discontinued-operations effects. The company also recorded a $76 million EMEA Industrial Packaging goodwill impairment and other special items.
Guidance, outlook, commentary and unusual items
- Management expects 2023 cash from operations of $1.9 billion to $2.3 billion and free cash flow of $900 million to $1.1 billion, including approximately $190 million related to the timber monetization tax settlement.
- 2023 capital spending is expected to be approximately $1.0 billion to $1.2 billion, including increased investment in the U.S. box system.
- Management expects continued earnings improvement in Global Cellulose Fibers and additional cost reductions through Building a Better IP initiatives.
- For the first quarter of 2023, management expected higher packaging volumes from four additional shipping days but lower price and mix, higher outage and operating costs, and seasonally higher energy use. Cellulose Fibers volumes were expected to decline because of seasonality and customer inventory destocking.
- The company agreed to sell its 50% interest in Ilim for $484 million and received an indication of interest for its 2.39% JSC Ilim Group stake for $24 million. Completion is subject to regulatory approvals and other conditions, and is not assured.
- 2022 included $175 million of pre-tax special items in continuing operations, including $93 million of early debt extinguishment costs, a $76 million EMEA goodwill impairment, $63 million of environmental reserve adjustments and a $65 million favorable Sylvamo investment fair-value adjustment.
- The company expects approximately $102 million of U.S. pension expense in 2023, compared with $116 million of pension income in 2022.
Principal risks and contingencies
- Demand and pricing are cyclical and exposed to economic weakness, consumer destocking, competition and substitution by plastics or metals.
- Inflation, energy and fiber prices, transportation constraints, labor shortages and supply-chain disruptions may continue to pressure profitability.
- Approximately $127 million of variable-rate debt was still priced using LIBOR at December 31, 2022 and required transition to SOFR before the June 30, 2023 LIBOR cessation date.
- Russia-Ukraine conflict, sanctions, currency volatility, potential nationalization or regulatory action could impair the Ilim sale and the value or cash flows of Russian investments.
- Environmental remediation liabilities were approximately $243 million probable and estimable at year-end; asbestos-related liabilities were $105 million net of estimated insurance recoveries.
- The company faces potential additional exposure from the Brazilian goodwill tax matter. Assessments totaled approximately $111 million of tax and $361 million of interest, penalties and fees as of year-end; the company’s recorded contingent liability was $48 million.
- The company had $485 million of deferred tax liability associated with the Temple-Inland timber monetization structure, payable when the related notes mature in 2027, and $193 million of current tax and interest liabilities remaining under the 2022 settlement.
- Material adverse effects could also arise from facility outages, severe weather, climate regulation, cybersecurity incidents, litigation, pension-market volatility, credit-rating downgrades and labor negotiations.
Most important facts for investors to verify
- Reconcile GAAP net earnings and EPS with adjusted operating earnings, discontinued operations and the fourth-quarter Ilim impairment.
- Confirm the timing, regulatory approvals and expected proceeds from the Ilim and JSC Ilim Group divestitures.
- Assess whether pricing benefits can offset persistent inflation, lower volumes, maintenance outages and rising pension expense.
- Evaluate 2023 cash-flow guidance after the approximately $190 million timber-tax settlement payment and planned $1.0 billion to $1.2 billion capital spending.
- Review debt maturities, variable-rate exposure, the LIBOR-to-SOFR transition, credit ratings and the $2.0 billion liquidity facilities.
- Monitor environmental, asbestos, Brazilian tax, Sylvamo-related indemnification and other contingent liabilities for changes beyond recorded reserves.
- Confirm execution of the Building a Better IP savings program and the company’s ability to maintain dividends and opportunistic share repurchases without weakening the balance sheet.