International Paper Company — FY2013 Form 10-K Summary
Business context and reporting period
International Paper is a global paper and packaging company with four operating segments: Industrial Packaging, Printing Papers, Consumer Packaging and Distribution. It also holds a 50% equity interest in Ilim Holding S.A. The filing covers the fiscal year ended December 31, 2013, with fourth-quarter comparisons to the third quarter of 2013 and fourth quarter of 2012. The company operated approximately 69,000 employees and manufacturing and distribution facilities across North America, Europe, Latin America, Russia, Asia, Africa and the Middle East.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $29.08 billion | $27.83 billion | Up 4% |
| Net earnings attributable to International Paper | $1.395 billion | $794 million | Up $601 million |
| Diluted EPS | $3.11 | $1.80 | Up $1.31 |
| Continuing-operations diluted EPS | $3.01 | $1.70 | Up $1.31 |
| Operating Earnings per diluted share | $3.16 | $2.65 | Up $0.51 |
| Cash flow from continuing operations | $2.998 billion | $2.960 billion | Up modestly |
| Free cash flow | $1.801 billion | $1.570 billion | Up $231 million |
| Capital expenditures | $1.198 billion | $1.383 billion | Down $185 million |
| Interest expense, net | $612 million | $672 million | Down $60 million |
The reported 2013 income tax benefit was $523 million, producing an effective tax rate of negative 62%. This result was substantially affected by a $753 million benefit related to the resolution of alternative fuel mixture tax treatment and other U.S. tax audit benefits. Excluding special items and non-operating pension expense, management reported a 27% effective tax rate versus 29% in 2012.
Cash and temporary investments totaled $1.802 billion at year-end. Total debt was approximately $9.488 billion, including $8.827 billion of long-term debt and $661 million of current maturities. The company reported a 39% total debt-to-capital ratio for covenant purposes, was in compliance with its covenants, and had approximately $2.0 billion of available credit facilities with no borrowings under the principal bank facility or receivables securitization program.
Segment performance and material changes
| Segment | 2013 sales | 2013 operating profit | Change in operating profit |
|---|---|---|---|
| Industrial Packaging | $14.810 billion | $1.801 billion | Up $735 million |
| Printing Papers | $6.205 billion | $271 million | Down $328 million |
| Consumer Packaging | $3.435 billion | $161 million | Down $107 million |
| Distribution | $5.650 billion | $(389) million | Down $411 million |
- Industrial Packaging benefited from higher pricing, particularly in North America, and solid manufacturing performance. Results included $62 million of Temple-Inland integration costs and a $13 million bargain-purchase gain related to the Turkish acquisition.
- Printing Papers declined because of lower pricing and volumes, higher input costs, the Courtland, Alabama mill shutdown and $123 million of India Papers impairment charges.
- Consumer Packaging was pressured by lower pricing, unfavorable mix and higher operating costs. The Augusta, Georgia paper-machine shutdown generated $45 million of restructuring charges.
- Distribution sales declined 6% and operating profit included a $400 million xpedx goodwill impairment and $32 million of reorganization costs. Excluding those items, management reported a $43 million operating gain.
- Equity earnings from Ilim declined to a $46 million loss from $56 million of earnings in 2012, primarily because of foreign-exchange losses, higher costs and start-up expenses for new equipment.
Fourth-quarter results
Fourth-quarter 2013 net sales were $7.249 billion versus $7.075 billion in the fourth quarter of 2012. Diluted EPS was $0.98 versus $0.53, while Operating Earnings per diluted share was $0.83 versus $0.69. Fourth-quarter operating cash flow was $1.034 billion and free cash flow was $595 million. Fourth-quarter results included substantial impairment and restructuring items, including $400 million of xpedx goodwill impairment and $127 million of India Papers goodwill and trade-name impairment.
Cash allocation, acquisitions and balance-sheet actions
- Debt decreased by $604 million during 2013; debt issuances were $241 million and retirements were $845 million.
- The company repurchased approximately $461 million of common stock under its $1.5 billion repurchase program and paid $554 million of dividends.
- The quarterly dividend increased 17%, from $0.30 to $0.35 per share beginning with the fourth-quarter 2013 payment.
- International Paper acquired additional ownership in Turkish packaging company Olmuksan and consolidated it from January 1, 2013.
- The company formed Orsa IP in Brazil, owning 75%, with an investment value of approximately $471 million.
- The Temple-Inland Building Products business was sold in July 2013 for approximately $733 million in cash and customary adjustments; its results were reported as discontinued operations.
Guidance, outlook and unusual items
- Management expected a meaningful year-over-year increase in 2014 earnings despite no significant improvement in macroeconomic conditions, supported by North American Industrial Packaging optimization, Ilim project ramp-up and cost synergies at Orsa.
- Management expected input-cost inflation in 2014 to be similar to 2013 and estimated a normalized 2014 effective tax rate of approximately 33%, as 2013 tax benefits were not expected to recur.
- 2014 capital expenditures were targeted at approximately $1.4 billion, or about 95% of depreciation and amortization.
- First-quarter 2014 results were expected to be affected by seasonal weakness, the Courtland shutdown, the Kwidzyn coated-paperboard project, planned maintenance outages and severe U.S. winter weather. Pricing improvements were expected in several North American and Brazilian businesses.
- On January 28, 2014, the company announced a planned tax-free spin-off of xpedx into SpinCo and its merger with Unisource. International Paper shareholders were expected to own approximately 51% of SpinCo, and the transaction was expected to close in mid-2014. International Paper expected a $400 million special payment, subject to adjustments, financed with new SpinCo debt, plus a potential earn-out.
- 2013 included $210 million of restructuring and other charges, $527 million of goodwill and other intangible impairments, and a $523 million income tax benefit. These items materially affected reported earnings and comparability.
Risks and contingencies
- The business is cyclical and sensitive to product pricing, demand, industry capacity, raw-material availability, energy, transportation, foreign exchange and general economic conditions.
- Debt was approximately $9.5 billion, with additional debt obligations of approximately $5.3 billion payable to non-consolidated variable-interest entities that were offset for balance-sheet presentation. Credit-rating downgrades could increase borrowing costs, restrict access to capital and require derivative collateral.
- Defined benefit pension plans were underfunded by approximately $2.2 billion at year-end. Required U.S. qualified-plan contributions for 2014 were estimated at approximately $443 million.
- Environmental remediation liabilities were estimated at approximately $94 million. Material uncertainty remains regarding the Cass Lake, Minnesota and Kalamazoo River matters, among others.
- Pending antitrust litigation concerns alleged containerboard price and supply restrictions and gypsum-board pricing and supply practices. The company stated that outcomes and potential losses could not be estimated for certain matters and that material loss was not considered probable for the gypsum-board matters.
- The xpedx-Unisource transaction was subject to closing conditions, regulatory and tax requirements, integration risks and the risk that expected synergies would not be realized. Failure to qualify as a tax-free spin-off could create substantial tax liabilities.
- Climate-change, Boiler MACT, air-quality and other environmental regulations may require additional capital expenditures beyond current estimates.
Most important facts an investor should verify
- Reconcile reported earnings and EPS to normalized results excluding the $753 million tax benefit, $512 million goodwill impairment, restructuring charges and pension expense.
- Assess the sustainability of Industrial Packaging pricing and margins against higher fiber, energy and transportation costs.
- Verify the financial consequences, closing status and tax treatment of the xpedx-Unisource spin-off and merger.
- Review debt maturities, including $661 million due in 2014, approximately $1.84 billion due in 2018 and the approximately $5.3 billion of offset debt obligations due in 2016.
- Evaluate pension funding requirements, assumptions and sensitivity to discount rates and asset returns.
- Monitor Courtland asset utilization, India Papers performance, Distribution restructuring and any further impairment risk.
- Review environmental, antitrust, tax and other legal contingencies for developments that could exceed recorded reserves.