01—Abstract
Summary
Summary of the 10-K filed February 20, 2019. Cited figures are marked; the original filing is the authoritative source.
International Paper Company, a global producer of renewable fiber-based packaging, pulp and paper products, reported 2018 net sales of $23.3 billiona, up from $21.7 billion in 2017, and net earnings attributable to the company of $2.0 billion ($4.85 per diluted share), compared with $2.1 billion ($5.13 per diluted share) in 2017.
The 2017 figure included a provisional net tax benefit of $1.2 billionb ($2.93 per diluted share) from the Tax Cuts and Jobs Act. Business segment operating profit rose to $2.9 billion from $2.1 billion, driven primarily by price and mix improvements. Adjusted operating earnings per diluted share were $5.32 in 2018, versus $3.49 in 2017.
Free cash flow was approximately $1.7 billionc, and cash provided by operations was $3.2 billion. The company reduced balance sheet debt by about $500 million and returned $1.5 billion to shareholders through about $800 million in dividends and about $700 million in share repurchases. Total indebtedness was approximately $10.7 billion at December 31, 2018.
The company completed the transfer of its North American Consumer Packaging business to Graphic Packaging in exchange for a 20.5% interest in the combined business, which generated a pre-tax gain of $488 milliond in 2018. Management expects 2019 capital spending of about $1.4 billion, roughly $200 million lower than 2018, and expects to receive about $200 million in cash dividends from its Ilim joint venture.
Management guided to softer first-quarter 2019 conditions, including lower seasonal demand in North American Industrial Packaging, customer destocking, and heavier planned maintenance outage expense, with first-half 2019 representing nearly 80% of total planned maintenance outage expense for the year. Key risks disclosed include a $1.4 billion portion of debt subject to rating-based interest rate step-ups, up to $538 million in deferred income taxes that could accelerate if letter-of-credit banks are downgraded, and an unresolved Brazilian tax dispute with assessments of approximately $150 million in tax and $380 million in interest and penalties.
02—Key points
Key Highlights
- Net sales rose to $23.3 billion in 2018 from $21.7 billion in 2017; net earnings attributable to International Paper were $2.0 billion ($4.85 per diluted share).
- Business segment operating profit increased to $2.9 billion from $2.1 billion, driven primarily by price and mix improvements; Industrial Packaging operating profit was $2.1 billion.
- Adjusted operating earnings per diluted share were $5.32 in 2018, compared with $3.49 in 2017.
- Cash provided by operations was $3.2 billion and free cash flow was approximately $1.7 billion in 2018.
- Returned $1.5 billion to shareholders through about $800 million in dividends and about $700 million in share repurchases; the quarterly dividend was raised to $0.50 per share.
- Total indebtedness was approximately $10.7 billion at December 31, 2018, with long-term credit ratings of BBB (S&P) and Baa2 (Moody's), both stable outlook.
- 2019 capital spending is planned at $1.4 billion, and the company expects about $200 million in cash dividends from its Ilim joint venture in 2019.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, International Paper kept $0.09.
- Revenue$23.31B100.0%
- Cost of revenue−$15.55B66.7%
- Gross profit$7.75B33.3%
- Operating costs−$6.08B26.1%
- Operating income$1.67B7.2%
- Interest, other & tax$345.0M1.5%
- Net income$2.01B8.6%
Where FY2018 revenue went
$23.31B- Cost of revenue: $15.55B, 67% of revenue
- Other operating costs: $4.36B, 19% of revenue
- Operating income: $1.67B, 7.2% of revenue
- SG&A: $1.72B, 7.4% of revenue
Kept 7.2% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 20, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $23.31B$21.74B | +7.2% |
| Cost of Revenue | $15.55B$14.80B | +5.1% |
| Gross Profit | $7.75B$6.94B | +11.7% |
| SG&A Expenses | $1.72B$1.62B | +6.3% |
| Operating Income | $1.67B$2.11B | −21.0% |
| Interest Expense | $734.00M$758.00M | −3.2% |
| Net Income | $2.01B$2.14B | −6.2% |
| EPS (Basic) | $4.91$5.19 | −5.4% |
| EPS (Diluted) | $4.85$5.13 | −5.5% |
| Shares Outstanding (Basic) | 409.10M412.70M | −0.9% |
| Shares Outstanding (Diluted) | 414.20M417.70M | −0.8% |
05—Questions
Frequently Asked Questions
What drove the change in earnings in 2018?
Net earnings attributable to International Paper were $2.0 billion ($4.85 per diluted share), down from $2.1 billion ($5.13 per diluted share) in 2017, which included a provisional net tax benefit of $1.2 billion related to the Tax Cuts and Jobs Act. Business segment operating profit rose to $2.9 billion from $2.1 billion, driven primarily by price and mix improvements, with a $488 million pre-tax gain on the transfer of the North American Consumer Packaging business also contributing to 2018 results.
How much debt does the company carry and how is its credit rating structured?
Outstanding indebtedness was approximately $10.7 billion at December 31, 2018. Approximately $1.4 billion of debt has interest rates that may increase upon a downgrade below investment grade, and a downgrade could also eliminate access to the commercial paper market. The company held BBB (stable outlook) from S&P and Baa2 (stable outlook) from Moody's.
What are the company's capital spending and cash return plans for 2019?
Capital spending for 2019 is planned at $1.4 billion, about $200 million lower than 2018, including approximately $400 million of strategic investments. Management expects meaningful growth in cash generation and plans to return cash to shareholders through dividends and share repurchases, with $2.2 billion of share repurchase authority remaining as of February 15, 2019.
What near-term headwinds did management identify for 2019?
For the first quarter of 2019, management anticipates lower seasonal demand in North American Industrial Packaging and Brazil Papers, lower export volume as customers destock, and downward pressure on export price and mix. Planned maintenance outage expense is expected to increase significantly, with first-half 2019 representing nearly 80% of total planned maintenance outage expense for the year.
What are the notable contingent risks disclosed?
Up to $538 million in deferred income taxes could be accelerated if letter-of-credit banks supporting installment notes are downgraded and replacement banks cannot be obtained. The company also received unfavorable decision in October 2018 in a Brazilian tax matter, with assessments of approximately $150 million in tax and $380 million in interest and penalties, which the company intends to appeal. A Signature Industrial Services lawsuit resulted in a judgment of approximately $137 million, which the company has appealed and expects to be immaterial.
06—Continue