International Paper Company: FY2009 Form 10-K Summary
Business context and reporting period
International Paper is a global paper and packaging company with North American merchant distribution operations. Its reportable businesses include Industrial Packaging, Printing Papers, Consumer Packaging, Distribution, Forest Products, Specialty Businesses and Other, and a 50% equity investment in Ilim Holding S.A. The filing covers the fiscal year ended December 31, 2009; fourth-quarter information is included in the unaudited interim results.
The company operated 21 U.S. pulp, paper and packaging mills, 146 converting and packaging plants, 19 recycling plants and three bag facilities, with additional international operations. It had approximately 56,100 employees at year-end.
Financial performance and key metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $23.366 billion | $24.829 billion | Down 5.9% |
| Net earnings attributable to International Paper | $663 million | $(1.282) billion | Returned to profitability |
| Diluted EPS | $1.55 | $(3.05) | Improved |
| Gross margin | $8.146 billion, approximately 34.9% of sales | $6.087 billion, approximately 24.5% | Improved |
| Earnings from continuing operations before tax and equity earnings | $1.199 billion | $(1.153) billion | Improved |
| Industry segment operating profit | $2.360 billion | $1.393 billion | Up $967 million |
| Cash provided by continuing operations | $4.655 billion | $2.669 billion | Up $1.986 billion |
| Capital expenditures | $534 million | $1.002 billion | Down 47% |
| Long-term debt | $8.729 billion | $11.246 billion | Down $2.517 billion |
| Cash and temporary investments | $1.892 billion | $1.144 billion | Up $748 million |
Reported 2009 earnings included approximately $2.1 billion of alternative fuel mixture credits, producing approximately $1.4 billion of after-tax benefit, and approximately $1.4 billion of restructuring and other charges before tax, or $853 million after tax. Excluding special items, management stated that the effective tax rate was approximately 30%.
Segment operating profit was led by Printing Papers at $1.091 billion, Industrial Packaging at $761 million and Consumer Packaging at $433 million. Distribution generated $50 million, and Forest Products generated $25 million. The Ilim investment produced a $50 million after-tax loss in 2009 versus $54 million of earnings in 2008.
Material changes versus the prior comparable period
- Sales declined because of weaker global demand, lower prices and reduced volumes, particularly in Printing Papers and Distribution. Forest Products results fell sharply because 2008 included $261 million of mineral-rights proceeds.
- Profitability improved substantially due to lower energy, raw-material and freight costs, improved manufacturing performance, CBPR acquisition contributions and restructuring benefits.
- Industrial Packaging benefited from the full-year contribution of the Weyerhaeuser Containerboard, Packaging and Recycling acquisition completed in August 2008.
- 2009 included 3.6 million tons of downtime, including 1.1 million tons related to North American capacity shutdowns. The company closed or announced closure of five mills and 24 converting or distribution locations and reduced headcount by approximately 6,000.
- Debt was reduced by approximately $3.1 billion through debt repayments and refinancing. Net debt-to-capital improved to 43.3% for covenant purposes from the reported 2008 ratio of 73% in the selected financial data.
- Shareholder dividends declined to $0.325 per share from $1.00 per share in 2008, reflecting quarterly dividends of $0.25 in the first quarter and $0.025 thereafter.
Guidance, outlook, risks and unusual items
Management expected improved 2010 earnings in all major businesses and targeted approximately $800 million of capital spending. It planned to prioritize free cash flow, high-return cost-reduction projects and further debt reduction. Expected annual savings from facility closures, headcount reductions and other restructuring actions were approximately $650 million.
Near-term conditions were expected to remain difficult. First-quarter 2010 faced seasonal weakness, higher wood and recycled-fiber costs, higher planned maintenance outages and lower Distribution earnings because a favorable fourth-quarter inventory valuation adjustment would not recur. Management expected announced price increases and restructuring benefits to become more meaningful beginning in the second quarter.
- The alternative fuel mixture credit was a major, non-recurring benefit and expired December 31, 2009.
- Additional closure charges of approximately $320 million before tax were expected before final closure of the Franklin, Virginia mill.
- The U.S. pension plans were underfunded by approximately $2.8 billion at year-end. Management expected no required domestic qualified-plan contribution in 2010 but acknowledged that future contributions could be material.
- Debt totaled approximately $9.0 billion including current maturities. Long-term ratings were BBB and Baa3, each with a negative outlook.
- Liquidity consisted of approximately $1.9 billion of cash and $2.5 billion of committed facilities, with no borrowings under the principal bank and receivables facilities at year-end. The company was in compliance with debt covenants.
- Environmental remediation liabilities were estimated at approximately $58 million for 102 CERCLA-related matters, plus approximately $46 million for other remediation matters. The final cost of at least one EPA-related site could materially exceed the amount accrued.
- The company had substantial purchase obligations, including approximately $2.8 billion related to fiber-supply agreements, and total contractual obligations of approximately $23.9 billion when debt, leases and purchase obligations are combined.
- International Paper disclosed a potential obligation to acquire its Ilim joint-venture partner’s 50% interest for approximately $350 million to $400 million under certain deadlock circumstances, although the parties reported no current intention to initiate the process.
Most important facts for investors to verify
- Separate recurring operating performance from the approximately $1.4 billion after-tax alternative fuel mixture benefit and the restructuring charges.
- Assess whether price increases, facility closures, integration synergies and the stated $650 million annual savings can offset higher fiber, energy and maintenance costs.
- Reconcile reported debt with the approximately $5.7 billion of debt obligations offset against interests in nonconsolidated variable-interest entities.
- Monitor pension funding requirements, future restructuring charges and the additional Franklin mill closure costs.
- Evaluate demand, pricing and capacity utilization trends in Printing Papers, Industrial Packaging and Distribution.
- Review environmental, tax and litigation contingencies, including the EPA remediation matter and approximately $225 million of unrecognized tax benefits.
- Confirm the timing and financing capacity for the proposed approximately $1.5 billion Ilim investment program.
Deloitte & Touche LLP issued an unqualified audit opinion on the financial statements and internal control over financial reporting as of December 31, 2009.