International Paper Company — FY2014 Form 10-K Summary
Business context and reporting period
International Paper is a global paper and packaging company operating in Industrial Packaging, Printing Papers, and Consumer Packaging, with a 50% equity-method investment in Ilim Holding S.A. The filing covers the fiscal year ended December 31, 2014, including fourth-quarter results. Historical results have been recast for the July 1, 2014 spin-off of the xpedx distribution business, which merged with Unisource to form Veritiv and is reported as discontinued operations.
Key financial metrics
| Metric | FY2014 | FY2013 | Change or commentary |
|---|---|---|---|
| Net sales | $23.617 billion | $23.483 billion | Up approximately 1% |
| Gross margin | $7.363 billion; approximately 31.2% of sales | $7.201 billion; approximately 30.7% | Margin expansion |
| Industry segment operating profit | $2.058 billion | $2.233 billion | Down approximately 8%; affected by special items and higher costs |
| Operating Earnings per diluted share | $3.00 | $3.06 | Non-GAAP; broadly stable |
| Continuing-operations earnings attributable to IP | $568 million; $1.31 diluted EPS | $1.704 billion; $3.80 diluted EPS | Significantly lower due mainly to special items and lower equity earnings |
| Net earnings attributable to IP | $555 million; $1.29 diluted EPS | $1.395 billion; $3.11 diluted EPS | Includes discontinued operations |
| Cash flow from operations | $3.077 billion | $3.028 billion | Record operating cash flow according to management |
| Free cash flow | $2.064 billion | $1.831 billion | Non-GAAP; increased approximately 13% |
| Capital expenditures | $1.366 billion | $1.198 billion | Approximately 97% of depreciation and amortization |
| Total debt | $9.373 billion | $9.488 billion | Net debt reduction of approximately $113 million during 2014 |
| Cash and temporary investments | $1.881 billion | $1.802 billion | Liquidity increased |
| Credit facilities | $2.0 billion available; no borrowings | Not stated in comparable table | Includes a $1.5 billion committed facility |
Fourth-quarter 2014 net sales were $5.943 billion, compared with $5.848 billion in the fourth quarter of 2013. Fourth-quarter diluted EPS was $0.32 versus $0.98, while Operating Earnings per diluted share was $0.53 versus $0.81. Fourth-quarter free cash flow was $739 million versus $598 million.
Segment performance and material changes
- Industrial Packaging: Sales increased to $14.944 billion from $14.810 billion, and operating profit increased to $1.896 billion from $1.801 billion. Higher pricing and mix more than offset lower volumes and higher wood, energy, freight, operating, and maintenance costs. The segment recorded a $100 million goodwill impairment for Asia Industrial Packaging.
- Printing Papers: Sales declined to $5.720 billion from $6.205 billion. Operating profit fell to a $16 million loss from $271 million of profit, primarily because of lower volumes and the Courtland, Alabama mill shutdown. The shutdown generated $554 million of restructuring charges, including $464 million of accelerated depreciation.
- Consumer Packaging: Sales declined slightly to $3.403 billion from $3.435 billion, while operating profit increased to $178 million from $161 million. Pricing and mix benefits were partly offset by lower volumes and higher input, operating, and maintenance costs.
- Ilim joint venture: Equity earnings were a $194 million loss versus a $46 million loss in 2013. Results included a $269 million after-tax, non-cash foreign-exchange loss, principally from remeasurement of U.S.-dollar-denominated debt following the Russian ruble depreciation.
- Capital allocation: The company repurchased approximately $983 million of stock under its program, paid $620 million of dividends, increased the quarterly dividend from $0.35 to $0.40 beginning in the fourth quarter, and completed a debt refinancing that replaced higher-cost 2018–2019 debt with $1.6 billion of notes due in 2024 and 2044.
- Portfolio changes: The xpedx spin-off generated approximately $411 million of cash proceeds. International Paper also acquired the remaining 25% of Orsa IP and owned 91.7% of Olmuksan at year-end.
Unusual items, outlook, and management commentary
- 2014 restructuring and other charges totaled $846 million pretax, or $518 million after tax, including $554 million for the Courtland shutdown and $276 million for early debt extinguishment.
- Other notable items included the $100 million Asia Industrial Packaging goodwill impairment, a $47 million pretax loss related to an ASG investment, a $35 million multi-employer pension withdrawal liability, a $32 million foreign tax amnesty charge, and a $20 million gain from resolving an Indian legal contingency.
- Management expected broadly flat first-quarter 2015 volumes, stable overall pricing, lower energy and fuel costs in North American Industrial Packaging, and higher planned maintenance downtime. European Printing Papers and European Industrial Packaging were expected to face pricing pressure.
- For full-year 2015, management anticipated a challenging macroeconomic environment but expected benefits from a stronger U.S. economy, Industrial Packaging optimization, Brazilian Industrial Packaging improvement, Ilim margin expansion, fiber-based food-packaging demand, and the repositioned North American Printing Papers business. Capital spending was targeted at approximately $1.5 billion, and the effective tax rate was estimated at approximately 33%.
- Pension obligations remained significant. The company contributed $353 million in 2014, reported a pension benefit obligation exceeding plan assets by approximately $3.9 billion, expected approximately $63 million of required 2015 contributions, and forecast approximately $488 million of 2015 U.S. pension expense.
Liquidity, debt, contingencies, and principal risks
- Reported debt was approximately $9.4 billion, with $742 million of current maturities and $8.6 billion of long-term debt. The company was in compliance with its covenants, including a minimum net worth requirement of $9 billion and a total debt-to-capital covenant below 60%; management reported a 40% covenant ratio.
- A material liquidity contingency relates to approximately $4.1 billion of third-party loans backed by timber notes that mature in September 2015. Failure to refinance or extend them could accelerate approximately $1.2 billion of deferred income taxes into 2015. Management considered this outcome unlikely.
- The company had approximately $2.3 billion of deferred tax liabilities related to forestland installment sales, including $1.4 billion tied to the 2006 sale and $840 million tied to the 2007 Temple-Inland sale.
- Environmental remediation reserves totaled approximately $95 million for CERCLA matters plus approximately $41 million for other remediation costs. The Kalamazoo River proceedings and related allocation litigation remain unresolved, and potential losses were not estimable. Other environmental, antitrust, labor, tax, and personal-injury matters are also disclosed.
- Key operating risks include cyclicality, competitive pricing, raw-material and energy costs, facility disruptions, foreign exchange volatility, political and economic conditions in Russia and Brazil, pension funding, credit-rating changes, environmental regulation, climate-related regulation, cybersecurity, and dependence on joint ventures.
- Environmental capital expenditures were $93 million in 2014, with approximately $134 million expected in 2015. Boiler MACT, air-quality, greenhouse-gas, and other regulatory requirements could increase future compliance costs.
Investor verification checklist
- Reconcile GAAP EPS of $1.29 with Operating Earnings EPS of $3.00 and assess the recurrence of the $846 million of 2014 special charges.
- Review whether Industrial Packaging pricing and margin gains can offset volume pressure and higher fiber, energy, freight, and maintenance costs.
- Evaluate the ongoing cash and earnings effects of the Courtland shutdown and the repositioned Printing Papers portfolio.
- Monitor Ilim’s Russian operations, foreign-exchange exposure, debt remeasurement effects, and the possibility of changes to the joint-venture structure after 2017.
- Verify refinancing or extension of the $4.1 billion timber-note-related loans before their September 2015 maturity and the associated deferred-tax exposure.
- Assess pension funding requirements, projected expense, discount-rate sensitivity, and the approximately $3.9 billion funded-status deficit.
- Track environmental and legal proceedings, particularly Kalamazoo River allocation litigation, Harris County matters, antitrust claims, and regulatory capital requirements.
The financial statements received an unqualified audit opinion from Deloitte & Touche LLP, and management and the auditors concluded that internal control over financial reporting was effective as of December 31, 2014.