International Paper Company: 2017 Form 10-K Summary
Business context and reporting period
International Paper is a global producer of renewable fiber-based packaging, cellulose fibers and paper products. Reported segments are Industrial Packaging, Global Cellulose Fibers and Printing Papers; the 50% Ilim Holding joint venture is accounted for under the equity method. This Form 10-K covers the fiscal year ended December 31, 2017, with fourth-quarter results included. Prior periods were revised to present the North American Consumer Packaging business as discontinued operations.
The company operated approximately 56,000 employees and reported $21.7 billion of 2017 sales, including $8.4 billion of international sales. The filing was audited by Deloitte & Touche, which issued unqualified opinions on the financial statements and internal control over financial reporting.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $21.743 billion | $19.495 billion | +12% |
| Net earnings attributable to International Paper | $2.144 billion | $904 million | +137% |
| Continuing operations earnings attributable to International Paper | $2.110 billion | $802 million | +163% |
| Diluted EPS | $5.13 | $2.18 | +135% |
| Diluted continuing-operations EPS | $5.05 | $1.93 | +162% |
| Adjusted operating earnings | $1.456 billion | $1.285 billion | +13% |
| Adjusted operating EPS | $3.49 | $3.09 | +13% |
| Cash provided by operations | $1.757 billion | $2.478 billion | -29% |
| Free cash flow | $1.970 billion | $1.880 billion | +5% |
| Capital expenditures | $1.391 billion | $1.348 billion | +3% |
Reported net margin was approximately 9.9%; continuing-operations earnings represented approximately 9.7% of sales. The reported profit increase was substantially affected by a provisional $1.22 billion tax benefit from the Tax Cuts and Jobs Act. Excluding special items and non-operating pension expense, adjusted operating earnings increased more modestly.
- Segment operating profit: Industrial Packaging $1.547 billion, down from $1.741 billion; Global Cellulose Fibers $65 million, versus a $179 million loss; Printing Papers $457 million, down from $540 million.
- Balance sheet: Cash and temporary investments were $1.018 billion; current assets were $8.277 billion and current liabilities were $5.102 billion.
- Debt: Long-term debt was $10.846 billion, with $311 million of current maturities; total reported debt, including current maturities, was approximately $11.2 billion. Nonrecourse financial liabilities of special purpose entities were an additional $6.291 billion.
- Liquidity: Credit facilities totaled approximately $2.1 billion, with no borrowings under the principal bank facility or receivables securitization program at year-end. The current ratio was 1.6 and the total debt-to-capital ratio was 0.63.
- Shareholder returns: The quarterly dividend increased to $0.475 per share in the fourth quarter, and 2017 dividends totaled $1.8625 per share. No shares were repurchased under the public repurchase program during the reported fourth quarter.
Material changes versus the prior comparable period
- Sales benefited from higher prices and mix, particularly in North American Industrial Packaging and Global Cellulose Fibers, higher volumes and the full-year contribution from the Weyerhaeuser pulp acquisition.
- Higher recovered-fiber, energy, transportation and other operating costs offset much of the pricing benefit. Industrial Packaging profit declined 11%, and Printing Papers profit declined 15%.
- Global Cellulose Fibers improved materially as pricing, lower maintenance costs, acquisition synergies and the acquired pulp business offset other costs.
- Operating cash flow declined because of a $1.25 billion voluntary pension contribution and increased working-capital requirements. Free cash flow nevertheless rose to approximately $2.0 billion after adding back the pension contribution and other specified items.
- The company issued $1.0 billion of 4.35% senior unsecured notes due 2048 and used available cash and borrowings to fund the pension contribution. It also retired approximately $900 million of existing notes, incurring $83 million of pre-tax debt-extinguishment costs.
- On January 1, 2018, the company transferred its North American Consumer Packaging business to a Graphic Packaging subsidiary for a 20.5% equity interest and related consideration. The business generated 2017 sales of $1.559 billion and after-tax discontinued-operations income of $34 million. International Paper expected to record a gain in the first quarter of 2018, but the fair value had not been finalized at filing.
- The company acquired Europac’s Tangier, Morocco corrugated-packaging facility for approximately $38 million after adjustments.
Guidance, outlook, risks and unusual items
- Management expected strong 2018 industry conditions, continued price realization, cost reductions, additional synergies and strong cash generation.
- 2018 capital expenditures were targeted at approximately $1.5 billion, including about $500 million for strategic projects such as the Madrid and Riverdale mill conversions.
- Management expected a 2018 effective tax rate of approximately 25% to 27%, compared with a reported 2017 rate of negative 128%, primarily because of the Tax Act benefit. Tax Act accounting remained provisional and could change through December 2018.
- Management expected approximately $167 million of U.S. defined-benefit pension expense in 2018, compared with $717 million in 2017. No required U.S. qualified-plan contribution was expected in 2018, although voluntary contributions remained possible.
- 2017 unusual items included the $354 million Kleen Products antitrust settlement, $484 million of non-operating pension expense, $83 million of debt-extinguishment costs, acquisition-related costs, and the $1.22 billion provisional Tax Act benefit. The fourth quarter included a $376 million non-cash pension settlement charge associated with a group annuity transaction.
- Key operating risks include cyclicality and pricing pressure, raw-material and energy-cost volatility, transportation constraints, foreign-exchange exposure, severe weather and mill disruptions, high leverage, pension underfunding, environmental regulation, climate-related requirements, cybersecurity, international political risk and joint-venture dependence.
- Environmental remediation liabilities were estimated at approximately $128 million. The company identified potentially material uncertainty regarding future costs at the San Jacinto River Waste Pits site. It also disclosed an approximately $137 million judgment in the Signature Industrial Services matter, which it planned to appeal and considered unlikely to result in a material loss.
- Debt covenants were satisfied at year-end. Investment-grade ratings were BBB with stable outlook from S&P and Baa2 with stable outlook from Moody’s. A downgrade could increase borrowing costs and trigger collateral or other requirements.
Most important facts for an investor to verify
- Separate the $2.144 billion GAAP net earnings from the $1.456 billion adjusted operating earnings and assess the sustainability of earnings excluding the provisional $1.22 billion tax benefit.
- Reconcile free cash flow to operating cash flow, including the $1.25 billion pension contribution and the company’s definition of free cash flow.
- Review total leverage, debt maturities, covenant definitions and the distinction between recourse debt and nonrecourse special-purpose-entity liabilities.
- Verify the final accounting, gain and ongoing equity-method impact of the January 1, 2018 Graphic Packaging transaction.
- Assess pension funded status, future contributions, actuarial assumptions and the expected reduction in 2018 pension expense.
- Monitor the provisional Tax Act accounting, the effective tax rate and potential changes to foreign earnings reinvestment assertions.
- Review environmental matters, antitrust claims and the Signature judgment for possible losses beyond recorded reserves.
- Evaluate whether 2017 pricing gains can offset higher recovered fiber, energy, transportation, maintenance and other operating costs.