International Paper Company — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 25, 2011. The filing includes unaudited fourth-quarter results. International Paper is a global paper, packaging and distribution company operating across North America, Europe, Latin America, Russia, Asia and North Africa.
Financial performance and position
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $25.179 billion | $23.366 billion | +8% |
| Net earnings attributable to International Paper | $644 million | $663 million | -3% |
| Diluted EPS | $1.48 | $1.55 | -5% |
| Industry segment operating profit | $1.686 billion | $2.360 billion | -29% |
| Cash flow from continuing operations | $1.631 billion | $4.655 billion | -65% |
| Free cash flow | $1.749 billion | $2.232 billion | -22% |
| Capital expenditures | $775 million | $534 million | +45% |
| Net interest expense | $608 million | $669 million | -9% |
Reported 2010 earnings included $394 million of restructuring and other charges before tax, a $25 million pre-tax gain from the partial redemption of the retained Arizona Chemical interest, a $2 million impairment charge, and tax adjustments including a $40 million cellulosic bio-fuel credit. Management reported diluted EPS before special items of $2.05 in 2010 versus $0.88 in 2009.
Fourth-quarter 2010 net sales were $6.531 billion, compared with $5.977 billion in fourth-quarter 2009. Fourth-quarter net earnings attributable to International Paper were $316 million, or $0.73 diluted EPS, compared with a $101 million loss, or $(0.24) per diluted share, in the prior-year quarter.
Liquidity, debt and balance sheet
- Cash and temporary investments were $2.073 billion at December 31, 2010, compared with $1.892 billion at year-end 2009.
- Working capital was $3.525 billion; the current ratio was 1.8.
- Long-term debt was $8.358 billion, and current maturities and notes payable were $313 million.
- Total debt to capital was 56% under the five-year summary measure; the company reported a 41.2% covenant ratio and $12.4 billion of covenant net worth.
- Debt was reduced by $383 million during 2010. Contractually committed credit facilities totaled approximately $2.5 billion, with no borrowings under the principal bank facility or receivables securitization program at year-end.
- The company paid $175 million of dividends in 2010 and increased the quarterly dividend from $0.025 to $0.125; in January 2011 it announced a further increase to $0.1875 per share.
Segment results and material changes
| Segment | 2010 sales | 2010 operating profit | Change in profit versus 2009 |
|---|---|---|---|
| Industrial Packaging | $9.840 billion | $826 million | +$65 million |
| Printing Papers | $5.940 billion | $481 million | -$610 million |
| Consumer Packaging | $3.400 billion | $207 million | -$226 million |
| Distribution | $6.735 billion | $78 million | +$28 million |
| Forest Products | $220 million | $94 million | +$69 million |
- Sales improved through higher price realizations, volume recovery, better operating performance and stronger equity earnings from the Ilim joint venture.
- Higher energy, virgin and recycled fiber, freight and outage costs reduced operating profit by significant amounts, partly offsetting pricing and volume gains.
- 2009 benefited from approximately $2.1 billion of alternative fuel mixture credits, making year-over-year operating profit comparisons unfavorable despite improved underlying operations.
- Industrial Packaging benefited from stronger box and linerboard demand, pricing and cost reductions following mill closures. The company acquired SCA Packaging Asia for approximately $205 million, including $171 million in cash and $34 million of assumed debt.
- Printing Papers and Consumer Packaging reported lower GAAP operating profit largely because 2009 included substantial alternative fuel mixture credits and because 2010 included Franklin, Virginia mill closure costs.
- Forest Products included $39 million of mineral-rights gains and $50 million of land-sale gains. Substantially all remaining land sales were completed, and Forest Products ceased being a separate reportable segment beginning in 2011.
Guidance, outlook and unusual items
- Management expected 2011 to show accelerating improvement as the economy recovered, but anticipated first-quarter results to be slightly below fourth-quarter 2010 because of seasonal weakness and rising input costs.
- 2011 capital expenditures were targeted at approximately $1.2 billion to $1.3 billion, versus $775 million in 2010.
- Management expected stable first-quarter volumes overall, higher input costs for fiber, energy and chemicals, and continued price and volume improvement through 2011.
- The company expected approximately $90 million of 2011 environmental capital spending, compared with $62 million in 2010. Preliminary environmental-control estimates were approximately $300 million for 2012 and $350 million for 2013, subject to final Boiler MACT and other regulatory requirements.
- U.S. defined-benefit pension plans were underfunded by approximately $1.5 billion at year-end. The company made $1.15 billion of voluntary pension contributions in 2010 and estimated 2011 U.S. pension expense of approximately $179 million.
- Potential obligations include $2.3 billion of fiber-supply purchase commitments, $188 million of unrecognized tax benefits excluded from the contractual-obligations table, and possible future environmental expenditures.
- The Cass Lake, Minnesota environmental reserve increased from $6 million to $24 million. The final remediation plan was not approved, and the cost could be materially higher under the most expensive alternative.
- The company’s 50% Ilim joint venture generated $55 million of equity earnings in 2010 versus a $50 million equity loss in 2009. Under the shareholder agreement, International Paper could be required to purchase its partners’ interest for an estimated $550 million to $600 million if specified deadlock procedures were initiated; the parties reported no current intention to do so.
- The company stated that its financial statements and internal control over financial reporting received unqualified opinions from Deloitte & Touche LLP. SCA Packaging Asia, representing approximately 1% of consolidated sales and assets, was excluded from the 2010 internal-control assessment.
Investor verification checklist
- Reconcile reported EPS with management’s non-GAAP EPS before special items and assess the recurring impact of restructuring, closure and tax items.
- Evaluate underlying segment margins after removing the 2009 alternative fuel mixture credits and the 2010 Franklin mill closure charge.
- Review debt maturities, the $2.5 billion committed liquidity facilities, covenant calculations and the effect of the variable-interest-entity debt offsets.
- Assess the sustainability of cash generation after the $1.15 billion pension contribution, planned 2011 capital spending and higher input costs.
- Monitor pension funding requirements, environmental remediation exposure, Boiler MACT and climate-related regulation.
- Confirm the status and economics of the Ilim investment, including the potential $550 million to $600 million partner-buyout obligation.
- Review the IRS treatment of alternative fuel and cellulosic bio-fuel credits, including the possibility that some previously received cash credits could require repayment with interest.