International Paper Company — FY2012 Form 10-K Summary
Business context and reporting period
International Paper is a global paper, packaging and merchant distribution company operating through Industrial Packaging, Printing Papers, Consumer Packaging and Distribution, with a 50% equity investment in Ilim Holding. The filing covers the fiscal year ended December 31, 2012, including fourth-quarter results. Temple-Inland results are included from February 13, 2012.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $27.833 billion | $26.034 billion | +6.9% |
| Gross margin | $7.246 billion; approximately 26.0% of sales | $7.074 billion; approximately 27.2% | Margin declined |
| Net earnings attributable to IP | $794 million; $1.80 diluted EPS | $1.322 billion; $3.03 diluted EPS | Down materially |
| Continuing-operations earnings attributable to IP | $749 million; $1.70 diluted EPS | $1.273 billion; $2.92 diluted EPS | Down materially |
| Operating Earnings per diluted share | $2.65 | $3.12 | Down 15% |
| Cash provided by continuing operations | $2.960 billion | $2.675 billion | +11% |
| Free cash flow | $1.570 billion | $1.727 billion | Down 9% |
| Capital expenditures | $1.383 billion | $1.159 billion | +19% |
| Total debt | Approximately $10.1 billion | $9.9 billion | Higher after acquisition financing |
Net margin was approximately 2.9%, versus approximately 5.1% in 2011. Continuing-operations earnings before taxes and equity earnings were $1.024 billion, compared with $1.458 billion in 2011. Net interest expense rose to $672 million from $541 million, primarily because of the Temple-Inland acquisition.
- Industry segment operating profit was $1.955 billion, down from $2.216 billion.
- Industrial Packaging generated $13.280 billion of sales and $1.066 billion of operating profit.
- Printing Papers generated $6.230 billion of sales and $599 million of operating profit.
- Consumer Packaging generated $3.170 billion of sales and $268 million of operating profit.
- Distribution generated $6.040 billion of sales and $22 million of operating profit.
- Cash and temporary investments were $1.302 billion at year-end, down from $3.994 billion.
- Committed credit facilities totaled approximately $2.5 billion; there were no borrowings under the principal bank or receivables facilities at year-end.
- The current ratio was 1.8, and reported total debt-to-capital was 62%; the covenant calculation, which excludes specified items, was 42%.
Material changes versus the prior comparable period
- International Paper completed the $3.7 billion cash acquisition of Temple-Inland and assumed approximately $700 million of debt. Temple-Inland contributed approximately 19% of consolidated sales and 25% of total assets for 2012.
- Temple-Inland volumes and integration synergies contributed approximately $379 million to the year-over-year operating profit comparison, but acquisition-related integration costs were $164 million before tax.
- The Company divested three containerboard mills required by the Department of Justice, recording related costs and impairments. The divestitures reduced earnings and capacity but generated $474 million of proceeds in 2012.
- Industrial Packaging operating profit declined 7% despite acquisition benefits, primarily because of lower price realizations, unfavorable mix, higher operating costs, maintenance outages, step-up depreciation and mill divestitures.
- Printing Papers operating profit fell 31%, driven by lower pricing, higher operating, maintenance, raw material and freight costs.
- Consumer Packaging operating profit increased 64%, partly because 2011 included substantial Shorewood impairment and sale charges; underlying 2012 performance was weaker excluding those items.
- Distribution sales declined 9% and operating profit declined to $22 million, including $49 million of reorganization costs.
- Special items increased: restructuring and other charges were $109 million before tax, and net losses on sales and impairments of businesses were $86 million, compared with $102 million and $218 million, respectively, in 2011.
- The annual dividend increased 14% to $1.20 per share, with the fourth-quarter dividend increased to $0.30 per share.
Guidance, outlook, risks and unusual items
Management expected stable first-quarter 2013 demand in North American and Asian paper and packaging, seasonally weaker demand in Europe, Russia and Brazil, higher costs for recycled fiber, wood and energy, and continued benefits from North American packaging price increases. For full-year 2013, management based its outlook on global economic growth of 3% to 4% and U.S. growth of 1% to 2%, with expected earnings improvement from pricing, industrial-packaging optimization and strategic projects. Capital expenditures were targeted at approximately $1.4 billion.
- Management expected strong 2013 free cash flow and continued debt reduction, shareholder returns, pension funding, capital investment and selective acquisitions.
- Estimated 2013 effective tax rate was 31% to 33%; expected 2013 U.S. defined-benefit pension expense was approximately $561 million, up from $342 million in 2012.
- The U.S. pension benefit obligation exceeded plan assets by approximately $4.1 billion. Required 2013 pension contributions were estimated at approximately $31 million, subject to possible voluntary contributions.
- The Company agreed to sell the Temple-Inland Building Products business for an adjusted purchase price of approximately $710 million, subject to closing conditions and Department of Justice review. The business was classified as discontinued operations and held for sale.
- Environmental capital expenditures were expected to be approximately $90 million in 2013, with substantially higher projected spending in 2014 and 2015 associated largely with the Boiler MACT rules. Regulatory requirements and costs remained subject to change.
- Environmental remediation liabilities were approximately $92 million. Additional exposure remained uncertain for the Cass Lake, Kalamazoo River and San Jacinto River matters, as well as related litigation.
- Containerboard antitrust litigation, environmental claims, tax examinations, labor negotiations and other legal proceedings could produce losses that the Company could not reliably estimate in certain cases.
- Key operating risks include cyclicality and pricing pressure, raw-material and energy costs, transportation, foreign exchange, international political conditions, facility disruptions, cyber-security incidents, pension funding, credit ratings and joint-venture governance.
- The Company had approximately $620 million of unrecognized tax benefits excluded from the contractual-obligations table and estimated that up to $860 million could be reduced during the following twelve months through examinations, settlements and statute expirations.
- The filing reported effective internal controls and unqualified audit opinions, but Temple-Inland was excluded from the internal-control evaluation because of the timing of the acquisition.
Important facts for investors to verify
- Whether Temple-Inland integration synergies and strategic projects delivered the projected 2013 earnings improvement after normalization for acquisition, divestiture and restructuring costs.
- The timing and final proceeds of the Temple-Inland Building Products sale and any required regulatory approvals or purchase-price adjustments.
- Debt reduction, refinancing needs and compliance with the minimum-net-worth and debt-to-capital covenants.
- The effect of higher pension expense, required and voluntary contributions, and changes in discount-rate assumptions on future cash flow.
- Actual environmental compliance costs under Boiler MACT and other air, water and climate-related regulations.
- Potential outcomes and insurance recoveries related to the Guaranty Bank settlement, environmental proceedings, antitrust litigation and tax disputes.
- Underlying segment margins and cash generation excluding non-GAAP adjustments, special items and discontinued operations.