International Paper Company — FY2021 Form 10-K Summary
Business context and reporting period
International Paper is a global producer of fiber-based packaging and pulp products, reported through Industrial Packaging and Global Cellulose Fibers, with a 50% equity interest in Ilim S.A. The filing covers the fiscal year ended December 31, 2021; quarterly data indicates fourth-quarter 2021 net sales of $5.1 billion and net earnings attributable to shareholders of $107 million.
On October 1, 2021, the Company completed the tax-free spin-off of its Printing Papers business and certain related assets into Sylvamo Corporation. Results of the spun-off businesses and the Kwidzyn, Poland mill sale are presented as discontinued operations, with prior periods revised accordingly.
Key financial metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $19.363 billion | $17.565 billion | Up 10% |
| Continuing operations earnings attributable to IP | $1.122 billion | $230 million | Up $892 million |
| Net earnings attributable to IP | $1.752 billion | $482 million | Up $1.270 billion |
| Diluted EPS | $4.47 | $1.22 | Up $3.25 |
| Adjusted operating earnings | $1.255 billion | $848 million | Up 48% |
| Adjusted operating EPS | $3.20 | $2.14 | Up 50% |
| Cash provided by operations | $2.030 billion | $3.063 billion | Down $1.033 billion |
| Free cash flow | $1.481 billion | $2.312 billion | Down $831 million |
| Capital spending | $549 million | $751 million | Down $202 million |
| Interest expense, net | $337 million | $446 million | Down $109 million |
Continuing-operations earnings benefited from higher prices and favorable mix, lower interest expense, lower tax expense, and stronger equity earnings. The operational tax rate was 19% in 2021 versus 25% in 2020, excluding specified special items and non-operating pension effects.
Segment performance and margins
| Segment | FY2021 sales | FY2021 operating profit | FY2020 operating profit |
|---|---|---|---|
| Industrial Packaging | $16.326 billion | $1.638 billion | $1.757 billion |
| Global Cellulose Fibers | $2.732 billion | $(3) million | $(218) million |
| Total business segment operating profit | — | $1.635 billion | $1.539 billion |
Industrial Packaging operating margin was approximately 10.0% in 2021 versus 11.8% in 2020. Global Cellulose Fibers improved to approximately breakeven from a significant operating loss. Company-wide net earnings margin was approximately 9.1% in 2021 versus 2.7% in 2020, although the comparison was substantially affected by discontinued-operation gains and special items.
Liquidity, debt and capital allocation
- Cash and temporary investments were $1.295 billion at year-end, compared with $468 million at December 31, 2020.
- Debt, including current maturities, was approximately $5.6 billion at year-end, down from approximately $8.1 billion at year-end 2020. The Company reduced debt by approximately $2.5 billion during 2021 and recorded $461 million of early debt-extinguishment costs.
- The Company had approximately $2.1 billion of credit facilities, consisting of a $1.5 billion committed bank facility and up to $550 million under a receivables securitization program. No borrowings were outstanding under these facilities or the $1.0 billion commercial paper program at year-end.
- Credit ratings were BBB with a stable outlook from S&P and Baa2 with a stable outlook from Moody’s. The Company was in compliance with debt covenants.
- Share repurchases and restricted-stock tax withholdings totaled $839 million, including $811 million of repurchases. Approximately $2.9 billion remained authorized under the repurchase program at year-end.
- Cash dividends paid were $780 million. Management expects to maintain a competitive dividend, targeting a payout of 40% to 50% of free cash flow, subject to Board approval and debt-document restrictions.
- U.S. qualified pension assets exceeded obligations by approximately $595 million at year-end; management reported a 105% funded status and did not expect required U.S. qualified-plan contributions in 2022.
Material changes versus the prior comparable period
- Revenue increased primarily from price realization and favorable product mix; volumes were essentially flat because of operating, labor, transportation and supply-chain constraints.
- Input costs increased by approximately $981 million and operating costs by approximately $350 million; maintenance outage costs increased by approximately $177 million.
- Equity earnings increased to $313 million from $77 million, primarily because Ilim earnings rose to $311 million from $48 million.
- Cash from operations and free cash flow declined because of working-capital investment, approximately $500 million of tax payments related to asset monetizations and deferred payroll taxes, and other transaction-related effects.
- The Company received $4.85 billion from settlement of the 2015 timber monetization structure and approximately $630 million representing its equity in the related variable-interest entities. The transaction generated a $72 million tax liability and left an $813 million deferred tax liability.
- Discontinued operations generated a $630 million after-tax gain in 2021, including gains on the Kwidzyn mill and La Mirada distribution center, compared with a $252 million gain in 2020.
- International Paper initiated its “Building a Better IP” program and committed to delivering $350 million to $430 million of incremental earnings in 2024.
Guidance, outlook, risks and unusual items
For 2022, management expects solid demand for corrugated packaging and pulp, with demand growth normalizing as COVID-19-related constraints ease. Planned capital expenditures are approximately $1.1 billion, primarily for packaging capabilities and box-system capacity. First-quarter 2022 expectations include lower seasonal volume, higher maintenance outages, additional Prattville mill recovery and start-up costs, and some improvement in recovered-fiber and energy costs.
- COVID-19 Omicron-related labor shortages, supply-chain disruptions, transportation constraints and inflation continued to pressure costs and operations, particularly in the fourth quarter.
- The Prattville mill experienced a high-density storage-tank failure in the fourth quarter, creating anticipated recovery and start-up costs in 2022.
- Key cost exposures include recovered fiber, wood, energy, chemicals, freight, labor and maintenance outages. Competitive markets may limit the Company’s ability to recover cost inflation through pricing.
- Climate change, severe weather, environmental regulation, emissions requirements and remediation obligations may increase capital and operating costs. Environmental remediation liabilities were approximately $182 million at year-end.
- The Brazilian goodwill tax matter involved assessments of approximately $106 million in tax and $351 million in interest, penalties and fees as of December 31, 2021. The Company recorded a $48 million contingent liability and remains responsible for substantial portions of any adverse resolution under its agreement with Sylvamo.
- The IRS is examining the 2015 timber monetization restructuring. An unfavorable resolution could accelerate payment of all or part of the remaining $813 million deferred tax liability.
- The Company faces asbestos, environmental, antitrust, tax, cybersecurity, pension, joint-venture and labor risks. Management believes existing legal contingencies are not expected to materially affect financial position or liquidity, but adverse developments could materially affect results or cash flows in a particular period.
- The Sylvamo spin-off was supported by an IRS private letter ruling and tax opinions, but a contrary IRS or court determination could create significant tax liabilities.
Most important facts for investors to verify
- Reconcile reported GAAP earnings with adjusted operating earnings and isolate the effects of discontinued operations, pension income and special items.
- Assess whether pricing and mix can continue to offset elevated fiber, energy, freight, labor and maintenance costs.
- Monitor execution of the Building a Better IP program and progress toward the $350 million to $430 million 2024 incremental-earnings commitment.
- Verify 2022 capital spending, free-cash-flow generation, debt reduction, dividend sustainability and share-repurchase activity.
- Track the Prattville mill recovery, labor availability, transportation constraints and the durability of packaging and pulp demand.
- Review the Brazilian tax matter, IRS timber-monetization examination, Sylvamo indemnification arrangements and the tax status of the spin-off.
- Consider exposure to Ilim, including Russia-related geopolitical, regulatory, currency, logistics and joint-venture risks.
- Confirm the filing’s audited status: Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.