International Paper Company: FY2019 Form 10-K Summary
Business context and reporting period
International Paper is a global producer of fiber-based packaging, cellulose fibers and printing papers, operating across North America, Latin America, Europe, North Africa and Russia. The filing covers the fiscal year ended December 31, 2019, with fourth-quarter results included. Reportable segments are Industrial Packaging, Global Cellulose Fibers and Printing Papers, with equity-method investments in Ilim and Graphic Packaging International Partners.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $22.376 billion | $23.306 billion | Down 4.0% |
| Net earnings attributable to International Paper | $1.225 billion | $2.012 billion | Down 39% |
| Diluted EPS | $3.07 | $4.85 | Down $1.78 |
| Adjusted operating earnings | $1.768 billion | $2.204 billion | Down 20% |
| Adjusted operating EPS | $4.43 | $5.32 | Down $0.89 |
| Cash provided by operations | $3.610 billion | $3.226 billion | Up 12% |
| Free cash flow | $2.334 billion | $1.654 billion | Up 41% |
| Capital spending | $1.276 billion | $1.572 billion | Down 19% |
| Total debt, including current maturities | Approximately $9.8 billion | $10.654 billion of reported debt | Lower year over year |
GAAP net earnings margin was approximately 5.5% in 2019 versus 8.6% in 2018. Business Segment Operating Profit declined to $2.599 billion from $3.082 billion. Segment operating profit was $2.076 billion for Industrial Packaging, a $6 million loss for Global Cellulose Fibers and $529 million for Printing Papers.
At December 31, 2019, cash and temporary investments were $511 million, current assets were $6.639 billion and current liabilities were $8.646 billion, including $4.220 billion of current nonrecourse liabilities of variable interest entities. The company had approximately $2.1 billion of credit facilities, no borrowings under its principal bank facility or receivables securitization program, and was in compliance with debt covenants. Long-term credit ratings were BBB with a stable outlook from S&P and Baa2 with a stable outlook from Moody’s.
Material changes versus the prior comparable period
- Sales declined primarily because of lower prices and unfavorable mix, lower volumes, export-market weakness and customer destocking, partly offset by lower recovered-fiber and energy costs.
- Industrial Packaging profit fell 9% as lower prices, weaker volumes and higher operating costs outweighed input-cost and maintenance benefits.
- Global Cellulose Fibers moved from $262 million of operating profit to a $6 million operating loss, driven by sharply lower pulp prices, unfavorable mix and higher operating costs. The company recorded a $52 million goodwill impairment for this reporting unit.
- Printing Papers profit declined modestly to $529 million. Higher price realizations were offset by lower volumes, higher input and maintenance costs, and higher operating costs.
- Equity earnings declined to $250 million from $336 million, including Ilim earnings of $207 million versus $290 million in 2018. Ilim results benefited from a $32 million after-tax foreign-exchange gain in 2019 versus an $82 million loss in 2018.
- The company sold its controlling interest in India Papers for net proceeds of $82 million, retained a 20% interest and recorded a $159 million pretax impairment charge.
- Debt declined by approximately $1 billion during 2019. The company returned approximately $1.3 billion to shareholders through approximately $800 million of dividends and $500 million of share repurchases.
Guidance, outlook, risks and unusual items
Management expected solid 2020 cash generation but anticipated earnings headwinds from 2019 price carryover, the January 2020 containerboard index movement, higher planned maintenance outages, Riverdale mill conversion costs and unabsorbed fixed costs. Planned 2020 capital spending was approximately $1.0 billion, including approximately $250 million of strategic investments. Management expected packaging and fluff-pulp fundamentals to remain solid and intended to continue dividends, share repurchases, debt management and strategic investment, subject to conditions and board approval.
2019 included approximately $418 million of pretax special items, including the India impairment, Global Cellulose Fibers goodwill impairment, litigation reserves, a $32 million Italian antitrust fine, environmental remediation adjustments, abandoned-property removal, debt-extinguishment costs and restructuring charges. A $203 million foreign deferred-tax valuation allowance was also recorded. The company’s 2019 continuing-operations tax provision was $634 million, or approximately 40% of pretax earnings after equity earnings; management reported an operational tax rate of approximately 26% after specified adjustments.
- Variable-interest-entity financing included approximately $4.2 billion of nonrecourse bank loans maturing in the fourth quarter of 2020, secured primarily by approximately $4.8 billion of timber notes. The company was evaluating refinancing or extension alternatives.
- The company had approximately $1.6 billion of pension benefit liability and U.S. pension plans were underfunded by approximately $1.5 billion on a projected-benefit-obligation basis. No required U.S. qualified-plan contribution was expected for 2020, although future voluntary contributions could be material.
- Environmental remediation liabilities were approximately $157 million at year-end. Additional losses related to the Kalamazoo River and Harris County San Jacinto matters could be material but were not reasonably estimable beyond recorded amounts.
- The company faces exposure to cyclical product demand, pricing, raw-material, energy and transportation costs, foreign exchange, international political and economic conditions, facility disruptions, cyber risks, environmental regulation, tax audits, litigation and credit-rating changes.
- The filing discusses COVID-19, first detected in China in December 2019, as an emerging risk; management stated that the ultimate financial impact was uncertain.
Important facts investors should verify
- Whether 2020 pricing, volumes and maintenance costs confirm or worsen management’s stated earnings headwinds.
- The refinancing or extension of the approximately $4.2 billion VIE loans maturing in late 2020.
- Progress and eventual cost of the Riverdale conversion and other strategic capital projects.
- Cash conversion after capital spending, dividends, repurchases and debt reduction.
- Future exposure from pension underfunding, environmental remediation, Brazilian tax assessments and pending litigation.
- The effect of the January 2020 sale of approximately 19% of the GPIP investment for $250 million and the expected gain in first-quarter 2020.
- The sustainability of the dividend and repurchase program given leverage, liquidity and cyclical industry conditions.