UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________________
FORM 10-K
(Mark One)
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2014 | |
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | |
Commission File No. 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York | 13-0872805 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
6400 Poplar Avenue
Memphis, Tennessee
(Address of principal executive offices)
38197
(Zip Code)
Registrant’s telephone number, including area code: (901) 419-9000
_____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $1 per share par value | New York Stock Exchange | |
_____________________________________________________
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer | Non-accelerated filer | Smaller reporting company | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
The aggregate market value of the Company’s outstanding common stock held by non-affiliates of the registrant, computed by reference to the closing price as reported on the New York Stock Exchange, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2014) was approximately $21,745,527,580.
The number of shares outstanding of the Company’s common stock as of February 20, 2015 was 422,845,435.
Documents incorporated by reference:
Portions of the registrant’s proxy statement filed within 120 days of the close of the registrant’s fiscal year in connection with registrant’s 2015 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.
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INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2014
PART I. | ||
ITEM 1. | ||
ITEM 1A. | ||
ITEM 1B. | ||
ITEM 2. | ||
ITEM 3. | ||
ITEM 4. | ||
PART II. | ||
ITEM 5. | ||
ITEM 6. | ||
ITEM 7. | ||
INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2014
ITEM 7A. | ||
ITEM 8. | ||
ITEM 9. | ||
ITEM 9A. | ||
ITEM 9B. | ||
PART III. | ||
ITEM 10. | ||
ITEM 11. | ||
ITEM 12. | ||
ITEM 13. | ||
ITEM 14. | ||
PART IV. | ||
ITEM 15. | ||
APPENDIX I | ||
APPENDIX II | ||
International Paper Company (the “Company” or “International Paper,” which may also be referred to as “we” or “us”) is a global paper and packaging company with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia, Africa and the Middle East. We are a New York corporation, incorporated in 1941 as the successor to the New York corporation of the same name organized in 1898. Our home page on the Internet is www.internationalpaper.com. You can learn more about us by visiting that site.
In the United States, at December 31, 2014, the Company operated 25 pulp, paper and packaging mills, 177 converting and packaging plants, 18 recycling plants and three bag facilities. Production facilities at December 31, 2014 in Europe, Asia, Africa, India, Latin America and South America included 16 pulp, paper and packaging mills, 69 converting and packaging plants, and two recycling plants. We operate a printing and packaging products distribution business principally through 12 branches in Asia. At December 31, 2014, we owned or managed approximately 334,000 acres of forestland in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions.
For management and financial reporting purposes, our businesses are separated into three segments: Industrial Packaging; Printing Papers; and Consumer Packaging. A description of these business segments can be found on pages 26 through 27 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company’s 50% equity interest in Ilim Holding S.A. is also a separate reportable industry segment.
From 2010 through 2014, International Paper’s capital expenditures approximated $5.9 billion, excluding mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and environmental performance, as well as lower costs and maintain reliability of operations. Capital spending in 2014 was approximately $1.4 billion and is expected to be approximately $1.5 billion in 2015. You can find more information about capital expenditures on page 32 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Discussions of acquisitions can be found on pages 33 and 34 of Item 7. Management’s Discussion and
You can find discussions of restructuring charges and other special items on pages 24 through 26 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Throughout this Annual Report on Form 10-K, we “incorporate by reference” certain information in parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC permits us to disclose important information by referring to it in that manner. Please refer to such information. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with all other reports and any amendments thereto filed with or furnished to the SEC, are publicly available free of charge on the Investor Relations section of our Internet Web site at www.internationalpaper.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information contained on or connected to our Web site is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we filed with or furnished to the SEC.
The financial information concerning segments is set forth in Note 19 Financial Information by Industry Segment and Geographic Area on pages 84 through 86 of Item 8. Financial Statements and Supplementary Data.
The financial information concerning international and U.S. operations and export sales is set forth in Note 19 Financial Information by Industry Segment and Geographic Area on page 86 of Item 8. Financial Statements and Supplementary Data.
The markets in the pulp, paper and packaging product lines are large and fragmented. The major markets, both U.S. and non-U.S., in which the Company sells its principal products are very competitive. Our products compete with similar products produced by other forest products companies. We also compete, in some instances, with companies in other industries and against substitutes for wood-fiber products.
Many factors influence the Company’s competitive position, including price, cost, product quality and services. You can find more information about the impact of these factors on operating profits on pages 19 through 31 of Item 7. Management’s Discussion and
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Analysis of Financial Condition and Results of Operations. You can find information about the Company’s manufacturing capacities on page A-4 of Appendix II.
The Company sells packaging products, paper products and other products directly to end users and converters, as well as through agents, resellers and paper distributors.
The Company’s principal products are described on pages 26 and 27 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Sales volumes of major products for 2014, 2013 and 2012 were as follows:
Sales Volumes by Product (1)
In thousands of short tons | 2014 | 2013 | 2012 | |||
Industrial Packaging | ||||||
North American Corrugated Packaging (2) | 10,355 | 10,393 | 10,523 | |||
North American Containerboard (2) | 3,035 | 3,273 | 3,228 | |||
North American Recycling | 2,459 | 2,379 | 2,349 | |||
North American Saturated Kraft | 186 | 176 | 166 | |||
North American Gypsum/Release Kraft (2) | 168 | 157 | 135 | |||
North American Bleached Kraft | 26 | 132 | 114 | |||
EMEA Industrial Packaging (3) | 1,379 | 1,342 | 1,032 | |||
Asian Box | 408 | 416 | 410 | |||
Brazilian Packaging (4) | 318 | 297 | — | |||
Industrial Packaging | 18,334 | 18,565 | 17,957 | |||
Printing Papers | ||||||
U.S. Uncoated Papers | 1,968 | 2,508 | 2,617 | |||
European and Russian Uncoated Papers | 1,531 | 1,413 | 1,286 | |||
Brazilian Uncoated Papers | 1,141 | 1,150 | 1,165 | |||
Indian Uncoated Papers | 231 | 232 | 246 | |||
Uncoated Papers | 4,871 | 5,303 | 5,314 | |||
Market Pulp (5) | 1,776 | 1,711 | 1,593 | |||
Consumer Packaging | ||||||
North American Consumer Packaging | 1,486 | 1,556 | 1,507 | |||
European and Russian Coated Paperboard | 354 | 355 | 372 | |||
Asian Coated Paperboard | 1,358 | 1,430 | 1,059 | |||
Consumer Packaging | 3,198 | 3,341 | 2,938 | |||
(1) | Includes third-party and inter-segment sales and excludes sales of equity investees. |
(2) | Includes Temple-Inland volumes from date of acquisition in February 2012. |
(3) | Includes Turkish box plants beginning in Q1 2013 when a majority ownership was acquired. |
(4) | Includes Brazil Packaging from date of acquisition in mid- January 2013. |
(5) | Includes North American, European and Brazilian volumes and internal sales to mills. |
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The Company operates its primary research and development center in Loveland, Ohio, as well as several product laboratories. Additionally, the Company has an interest in ArborGen, Inc., a joint venture with certain other forest products companies.
We direct research and development activities to short-term, long-term and technical assistance needs of customers and operating divisions, and to process, equipment and product innovations. Activities include product development within the operating divisions; studies on innovation and improvement of pulping, bleaching, chemical recovery, papermaking, converting and coating processes; packaging design and materials development; mechanical packaging systems, environmentally sensitive printing inks and reduction of environmental discharges; re-use of raw materials in manufacturing processes; recycling of consumer and packaging paper products; energy conservation; applications of computer controls to manufacturing operations; innovations and improvement of products; and development of various new products. Our development efforts specifically address product safety as well as the minimization of solid waste. The cost to the Company of its research and development operations was $16 million in 2014, $18 million in 2013 and $13 million in 2012.
We own numerous patents, copyrights, trademarks, trade secrets and other intellectual property rights relating to our products and to the processes for their production. We also license intellectual property rights to and from others where advantageous or necessary. Many of the manufacturing processes are among our trade secrets. Some of our products are covered by U.S. and non-U.S. patents and are sold under well known trademarks. We derive a competitive advantage by protecting our trade secrets, patents, trademarks and other intellectual property rights, and by using them as required to support our businesses.
International Paper is subject to extensive federal and state environmental regulation as well as similar regulations internationally. Our continuing objectives include: (1) controlling emissions and discharges from our facilities into the air, water and groundwater to avoid adverse impacts on the environment, and (2) maintaining compliance with applicable laws and regulations. The Company spent $93 million in 2014 for capital projects to control environmental releases into the air and water, and to assure environmentally sound management and disposal of waste. We expect to spend approximately $134 million in 2015 for similar capital projects, including expenditures associated with the U.S. Environmental Protection Agency's (EPA) Boiler MACT (maximum achievable control technology)
regulations. Capital expenditures for 2016 environmental capital projects are anticipated to be approximately $96 million, including Boiler MACT costs. Capital expenditures for 2017 environmental capital projects are estimated to be $115 million, including Boiler MACT costs. On January 31, 2013, the EPA issued the final suite of Boiler MACT regulations. These regulations require owners of specified boilers to meet revised air emissions standards for certain substances. Several lawsuits have been filed to challenge all or portions of the Boiler MACT regulations and on December 1, 2014, EPA proposed limited revisions to the regulations. Litigation challenging these regulations is ongoing. As such, the projected capital expenditures for environmental capital projects represent our current best estimate of future expenditures with the recognition that the Boiler MACT regulations are subject to change.
In the U.S., revisions to National Ambient Air Quality Standards (NAAQS) for sulfur dioxide (SO2), nitrogen dioxide (NO2), and fine particulate (PM2.5) finalized between 2010 and 2012, and a proposed revision to the NAAQS for ozone in late 2014, have not had a material impact on the Company. Regulations addressing specific implementation issues related to the SO2 NAAQS are being developed by the EPA and are expected to be finalized during the next two years. Potentially material capital investment may be required in response to these emerging requirements.
Climate change refers to any significant change in the measure of the earth’s climatic conditions such as temperature, precipitation, or winds that persist for decades or longer. Climate change can be caused by natural factors, such as changes in the sun’s intensity and ocean circulation, and human activities can also affect the composition of the earth’s atmosphere, such as from the burning of fossil fuels. In an effort to mitigate the potential of climate change impacts from human activities, various international, national and sub-national (regional, state and local) governmental actions have been undertaken. Presently, these efforts have not materially impacted International Paper, but such efforts may have a material impact on the Company in the future.
International Efforts
The 1997 Kyoto Protocol established emission reduction obligations for certain countries where the Company had and continues to have operations. Though the Kyoto Protocol expired in 2012, several countries, and most notably the European Union (EU), extended their emissions commitments until 2020. A successor program to the Kyoto Protocol is the subject of on-going international negotiations including a
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Conference of the Parties to the Kyoto Protocol scheduled for December 2015. It is not yet clear if these negotiations will result in a new International Climate Change Agreement and, if so, what form it may take. Due to this uncertainty, it is not possible at this time to estimate the potential impacts of future international agreements on the Company.
To assist member countries in meeting obligations under the Kyoto Protocol, the EU established and continues to operate an Emissions Trading System (EU ETS). Currently, we have two sites directly subject to regulation under Phase III of the EU ETS, one in Poland and one in France. Other sites that we operate in the EU experience indirect impacts of the EU ETS through purchased power pricing. Neither the direct nor indirect impacts of the EU ETS have been material to the Company, but they could be material to the Company in the future depending on how allocation of and market prices for greenhouse gas (GHG) credits evolve over the coming years.
National Efforts
In the U.S., the Kyoto Protocol was not ratified and Congress has not passed GHG legislation. The U.S. EPA has enacted (i) regulations to control GHGs from mobile sources (through transportation fuel efficiency standards), (ii) New Source Performance Standards (NSPS) for new Electrical Generating Units (EGUs) and (iii) regulations requiring reporting of GHGs from sources of GHGs greater than 25,000 tons per year. In 2014, the Company reported to EPA the GHG emissions from 23 of our U.S. manufacturing sites and 8 landfills.
In 2010, EPA issued GHG regulations for new and modified sources under the New Source Review and Title V Operating Permit programs and shortly thereafter deferred the applicability of these GHGs regulations to biomass carbon emissions until the summer of 2014. EPA subsequently issued guidance clarifying that GHGs cannot be the sole basis for designating a new or modified source as a major source subject to new source review or Title V air permitting requirements. EPA also established that BACT (Best Available Control Technology) would be required for any GHG emissions increase above 75,000 tons per year if a new source or Title V review was required for other regulated pollutants.
On November 19, 2014 EPA issued a revised draft carbon accounting framework addressing the circumstances under which biomass combustion can be considered carbon neutral. EPA has stated it intends to issue future rulemakings to address how states may use the revised framework in implementing state permit rules and in developing plans for regulating GHGs from utility electric generators. Given the uncertainties regarding the framework and scope of future GHG
rulemaking, it is unclear what impacts, if any, EPA’s actions in this area will have on the Company’s operations.
In 2013, EPA issued final regulations establishing New Source Performance Standards (NSPS) for new Electrical Generating Units (EGUs). This regulation is the first of several expected NSPSs that EPA will implement over the coming years. The EPA has not yet identified the pulp and paper industry in the first phase of sectors to be covered by the new standards. However, we anticipate that at some future time pulp and paper sources will be subject to new GHG NSPS rules. It is unclear what impacts, if any, future GHG NSPS rules will have on the Company’s operations.
In 2014, EPA proposed regulations for GHGs from new and existing utility electric generators. These regulations have the potential to increase purchased electricity prices across the United States. The proposed rules phase in the compliance obligations between about 2018 and 2030 and they remain subject to substantive revisions before final promulgation. EPA estimates purchased electricity prices will increase by less than seven percent, but some utilities are estimating significantly higher price increases. Given the uncertainties regarding the scope of the final regulations, it is unclear what impacts, if any, these regulations will have on the Company’s operations.
State, Regional and Local Measures
A few U.S. states have enacted or are considering legal measures to require the reduction of emissions of GHGs by companies and public utilities, primarily through the development of GHG emission inventories or regional GHG cap-and-trade programs. One such state is California. The Company does not have any sites currently subject to California's GHG regulatory plan. There may be indirect impacts from changing input costs (such as electricity) at some of our California converting operations but these have yet to manifest themselves in material impacts. Although we are monitoring proposed programs in other states, it is unclear what impacts, if any, state-level GHG rules will have on the Company’s operations.
Summary
Regulation of GHGs continues to evolve in various countries in which we do business. While it is likely that there will be increased governmental action regarding GHGs and climate change, at this time it is not reasonably possible to estimate either a timetable for the implementation of any new regulations or our costs of compliance. In addition to possible direct impacts, future legislation and regulation could have indirect impacts on International Paper, such as higher prices for transportation, energy and other inputs, as well as more protracted air permitting processes, causing
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delays and higher costs to implement capital projects. International Paper has controls and procedures in place to stay informed about developments concerning possible climate change legislation and regulation in the U.S. and in other countries where we operate. We regularly assess whether such legislation or regulation may have a material effect on the Company, its operations or financial condition, and whether we have any related disclosure obligations.
Additional information regarding climate change and International Paper is available in our Sustainability Report found at http://www.internationalpaper.com/US/ EN/Company/Sustainability/SustainabilityReport.html, though this information is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the SEC.
As of December 31, 2014, we had approximately 58,000 employees, nearly 34,000 of whom were located in the United States. Of the U.S. employees, approximately 23,600 are hourly, with unions representing approximately 14,000 employees. Approximately 11,000 of the union employees are represented by the United Steel Workers (USW).
International Paper, the USW, and several other unions have entered into two master agreements covering various mills and converting facilities. These master agreements cover several specific items, including wages, select benefit programs, successorship, employment security, and health and safety. Individual facilities continue to have local agreements for other subjects not covered by the master agreements. If local facility agreements are not successfully negotiated at the time of expiration, under the terms of the master agreements the local contracts will automatically renew with the same terms in effect. The mill master agreement covers 19 of our U.S. pulp, paper, and packaging mills; the converting agreement includes 61 of our converting facilities. In addition, International Paper is party to a master agreement with District Council 2, International Brotherhood of Teamsters, covering 13 additional converting facilities.
During 2014, local labor agreements were negotiated at four mills and 27 converting facilities. In 2015, local labor agreements are scheduled to be negotiated at 18 facilities, including five mills and 13 converting facilities. Fourteen of these agreements will automatically renew under the terms of the applicable master agreement if new agreements are not reached.
Mark S. Sutton, 53, chairman (since January 1, 2015) & chief executive officer (since November 1, 2014). Mr. Sutton previously served as president & chief operating officer from June 1, 2014 to October 31, 2014, senior vice president - industrial packaging from November 2011 to May 31, 2014, senior vice president - printing and communications papers of the Americas from 2010 until 2011, senior vice president - supply chain from 2008 to 2009, vice president - supply chain from 2007 until 2008, and vice president - strategic planning from 2005 until 2007. Mr. Sutton joined International Paper in 1984.
John V. Faraci, 65, special advisor to the board since January 1, 2015. Mr. Faraci will retire as an officer and employee effective February 28, 2015. Mr. Faraci previously served as chairman from 2003 to December 31, 2014, and as chief executive officer from 2003 to October 31, 2014. Mr. Faraci joined International Paper in 1974.
W. Michael Amick, Jr., 51, senior vice president - North American papers, pulp & consumer packaging since November 1, 2014. Mr. Amick previously served as vice president - president, IP India, from August 2012 to October 31, 2014, and vice president and general manager for the coated paperboard business from 2010 to 2012. Mr. Amick joined International Paper in 1990.
C. Cato Ealy, 58, senior vice president - corporate development since 2003. Mr. Ealy is a director of Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Ealy joined International Paper in 1992.
William P. Hoel, 58, senior vice president, Container The Americas, since February 2012. Mr. Hoel previously served as vice president, Container The Americas, from 2005 until 2012, senior vice president, corporate sales and marketing, from 2004 until 2005, and vice president, Wood Products, from 2000 until 2004. Mr. Hoel joined International Paper in 1983.
Tommy S. Joseph, 55, senior vice president - manufacturing, technology, EHS&S and global sourcing since January 2010. Mr. Joseph previously served as senior vice president - manufacturing, technology, EHS&S from February 2009 until December 2009, and vice president - technology from 2005 until February 2009. Mr. Joseph is a director of Ilim Holding S.A., a Swiss Holding Company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Joseph joined International Paper in 1983.
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Thomas G. Kadien, 58, senior vice president - human resources, communications & global government relations since November 1, 2014. Mr. Kadien previously served as senior vice president - consumer packaging and IP Asia from January 2010 to October 31, 2014, and senior vice president and president - xpedx from 2005 until 2009. Mr. Kadien joined International Paper in 1978. Mr. Kadien serves on the board of directors of The Sherwin-Williams Company.
Paul J. Karre, 62, senior vice president - human resources & communications since May 2009. Mr. Karre will retire as an officer and employee effective March 31, 2015. Mr. Karre previously served as vice president - human resources from 2000 until 2009. Mr. Karre joined International Paper in 1974.
Glenn R. Landau, 46, senior vice president - president, IP Latin America since November 1, 2014. Mr. Landau previously served as vice president - president IP Latin America from 2013 to October 31, 2014, vice president - investor relations from 2011 to 2013, and vice president and general manager, containerboard and recycling from 2007 to 2011. Mr. Landau joined International Paper in 1991.
Tim S. Nicholls, 53, senior vice president - industrial packaging since November 1, 2014. Mr. Nicholls previously served as senior vice president - printing and communications papers of the Americas from November 2011 to October 31, 2014, senior vice president and chief financial officer from 2007 until 2011, vice president and executive project leader of IP Europe during 2007, and vice president and chief financial officer - IP Europe from 2005 until 2007. Mr. Nicholls joined International Paper in 1991.
Jean-Michel Ribieras, 52, senior vice president - president, IP Europe, Middle East, Africa & Russia since June 2013. Mr. Ribieras previously served as president - IP Latin America from 2009 until 2013. Mr. Ribieras is a director of Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Ribieras joined International Paper in 1993.
Carol L. Roberts, 55, senior vice president & chief financial officer since November 2011. Ms. Roberts previously served as senior vice president - industrial packaging from 2008 until 2011 and senior vice president - IP packaging solutions from 2005 until 2008. Ms. Roberts serves on the board of directors of Alcoa Inc. and Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Ms. Roberts joined International Paper in 1981.
Sharon R. Ryan, 55, senior vice president, general counsel & corporate secretary since November 2011. Ms. Ryan previously served as vice president, acting
general counsel & corporate secretary from May 2011 until November 2011, vice president from March 2011 until May 2011, associate general counsel, chief ethics and compliance officer from 2009 until 2011, and associate general counsel from 2006 until 2009. Ms. Ryan joined International Paper in 1988.
Raw materials essential to our businesses include wood fiber, purchased in the form of pulpwood, wood chips and old corrugated containers (OCC), and certain chemicals, including caustic soda and starch. Information concerning fiber supply purchase agreements that were entered into in connection with the Company’s 2006 Transformation Plan and the CBPR acquisition in 2008 is presented in Note 11 Commitments and Contingent Liabilities on page 64 and 67 of Item 8. Financial Statements and Supplementary Data.
Certain statements in this Annual Report on Form 10-K that are not historical in nature may be considered “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar nature. These statements are not guarantees of future performance and reflect management’s current views with respect to future events, which are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include but are not limited to: (i) the level of our indebtedness and increases in interest rates; (ii) industry conditions, including but not limited to changes in the cost or availability of raw materials, energy and transportation costs, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products; (iii) global economic conditions and political changes, including but not limited to the impairment of financial institutions, changes in currency exchange rates, credit ratings issued by recognized credit rating organizations, the amount of our future pension funding obligation, changes in tax laws and pension and health care costs; (iv) unanticipated expenditures related to the cost of compliance with existing and new environmental and other governmental regulations and to actual or potential litigation; (v) whether we experience a material disruption at one of our manufacturing facilities; (vi) risks inherent in conducting business through a joint venture; and (vii) our ability to achieve the benefits we expect from strategic acquisitions, divestitures and restructurings. These and other factors that could cause or contribute to actual
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results differing materially from such forward looking statements are discussed in greater detail below in “Item 1A. Risk Factors.” We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
All financial information and statistical measures regarding our 50/50 Ilim joint venture in Russia (“Ilim”), other than historical International Paper Equity Earnings and dividends received by International Paper, have been prepared by the management of Ilim. In providing this information in this filing, we are relying on the effectiveness of Ilim's internal control environment. Any projected financial information and statistical measures reflect the current views of Ilim management and are subject to the risks and uncertainties that cause actual results to differ materially from those expressed or implied by such projections.
In addition to the risks and uncertainties discussed elsewhere in this Annual Report on Form 10-K (particularly in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations), or in the Company’s other filings with the Securities and Exchange Commission, the following are some important factors that could cause the Company’s actual results to differ materially from those projected in any forward-looking statement.
RISKS RELATING TO INDUSTRY CONDITIONS
CHANGES IN THE COST OR AVAILABILITY OF RAW MATERIALS, ENERGY AND TRANSPORTATION COULD AFFECT OUR PROFITABILITY. We rely heavily on the use of certain raw materials (principally virgin wood fiber, recycled fiber, caustic soda and starch), energy sources (principally natural gas, coal and fuel oil) and third-party companies that transport our goods. The market price of virgin wood fiber varies based upon availability and source. Increased demand for biomass to meet a growing number of government mandates and incentives to promote the use of biomass for renewable electrical energy generation may also impact pricing and availability of virgin wood fiber. In addition, the increase in demand of products manufactured, in whole or in part, from recycled fiber, on a global basis, may cause an occasional tightening in the supply of recycled fiber. Energy prices, in particular prices for oil and natural gas, have fluctuated dramatically in the past and may continue to fluctuate in the future.
Our profitability has been, and will continue to be, affected by changes in the costs and availability of such
raw materials, energy sources and transportation sources.
THE INDUSTRIES IN WHICH WE OPERATE EXPERIENCE BOTH ECONOMIC CYCLICALITY AND CHANGES IN CONSUMER PREFERENCES. FLUCTUATIONS IN THE PRICES OF, AND THE DEMAND FOR, OUR PRODUCTS COULD MATERIALLY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions. The length and magnitude of these cycles have varied over time and by product. In addition, changes in consumer preferences may increase or decrease the demand for our fiber-based products and non-fiber substitutes. These consumer preferences affect the prices of our products. Consequently, our operating cash flow is sensitive to changes in the pricing and demand for our products.
COMPETITION IN THE UNITED STATES AND INTERNATIONALLY COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. We operate in a competitive environment, both in the United States and internationally, in all of our operating segments. Product innovations, manufacturing and operating efficiencies, and marketing, distribution and pricing strategies pursued or achieved by competitors could negatively impact our financial results.
RISKS RELATING TO MARKET AND ECONOMIC FACTORS
ADVERSE DEVELOPMENTS IN GENERAL BUSINESS AND ECONOMIC CONDITIONS COULD HAVE AN ADVERSE EFFECT ON THE DEMAND FOR OUR PRODUCTS AND OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General economic conditions may adversely affect industrial non-durable goods production, consumer spending, commercial printing and advertising activity, white-collar employment levels and consumer confidence, all of which impact demand for our products. In addition, volatility in the capital and credit markets, which impacts interest rates, currency exchange rates and the availability of credit, could have a material adverse effect on our business, financial condition and our results of operations.
THE LEVEL OF OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND IMPAIR OUR ABILITY TO OPERATE OUR BUSINESS. As of December 31, 2014, International Paper had approximately $9.4 billion of outstanding indebtedness, including $8.7 billion of indebtedness outstanding under our floating and fixed rate notes. There was no indebtedness outstanding under our
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credit facilities as of December 31, 2014. The level of our indebtedness could have important consequences to our financial condition, operating results and business, including the following:
• | it may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, product development, dividends, share repurchases, debt service requirements, acquisitions and general corporate or other purposes; |
• | a portion of our cash flows from operations will be dedicated to payments on indebtedness and will not be available for other purposes, including operations, capital expenditures and future business opportunities; |
• | the debt service requirements of our indebtedness could make it more difficult for us to satisfy other obligations; |
• | our indebtedness that is subject to variable rates of interest exposes us to increased debt service obligations in the event of increased interest rates; |
• | it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt; and |
• | it may increase our vulnerability to a downturn in general economic conditions or in our business, and may make us unable to carry out capital spending that is important to our growth. |
In addition, we are subject to agreements that require meeting and maintaining certain financial ratios and covenants. A significant or prolonged downturn in general business and economic conditions may affect our ability to comply with these covenants or meet those financial ratios and tests and could require us to take action to reduce our debt or to act in a manner contrary to our current business objectives.
CHANGES IN CREDIT RATINGS ISSUED BY NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS COULD ADVERSELY AFFECT OUR COST OF FINANCING AND HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR SECURITIES. Maintaining an investment-grade credit rating is an important element of our financial strategy, and a downgrade of the Company’s ratings below investment grade may limit our access to the capital markets, have an adverse effect on the market price of our securities, increase our cost of borrowing and require us to post collateral for derivatives in a net liability position. The Company’s desire to maintain its investment grade rating may cause the Company to take certain actions designed to improve its cash flow, including sale of assets, suspension or reduction of our
dividend and reductions in capital expenditures and working capital.
Under the terms of the agreements governing approximately $3.3 billion of our debt as of December 31, 2014, the applicable interest rate on such debt may increase upon each downgrade in our credit rating. As a result, a downgrade in our credit rating may lead to an increase in our interest expense. There can be no assurance that such credit ratings will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in each rating agency’s judgment, circumstances so warrant. Any such downgrade of our credit ratings could adversely affect our cost of borrowing, limit our access to the capital markets or result in more restrictive covenants in agreements governing the terms of any future indebtedness that we may incur.
OUR INABILITY TO EXTEND, RENEW OR REFINANCE LOAN AGREEMENTS USED TO MONETIZE INSTALLMENT NOTES FROM THE SALE OF OUR FORESTLANDS MAY RESULT IN THE ACCELERATION OF DEFERRED TAXES. In connection with the 2006 International Paper installment sale of forestlands, we received installment notes (or timber notes), which we contributed to certain borrower entities. The entities to which these installment notes were contributed used the installment notes as collateral for approximately $4.8 billion in loans from third-party lenders. Of the $4.8 billion in loans from third-party lenders, $4.1 billion mature in September 2015, while the installment notes mature in August 2016 (unless extended). Failure to extend, renew or refinance these loans prior to their stated maturity could trigger the sale of the installment notes to facilitate the $4.1 billion debt payment which, in turn, would result in an acceleration of the payment of approximately $1.2 billion in deferred income taxes in 2015, rather than in 2016 when the installment notes mature (unless extended). The deferred taxes are currently recorded in the Company's consolidated financial statements. For further information, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources and Note 10 Income Taxes on pages 62 through 64 and Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 67 through 69 of Item 8. Financial Statements and Supplementary Data.
DOWNGRADES IN THE CREDIT RATINGS OF BANKS ISSUING CERTAIN LETTERS OF CREDIT WILL INCREASE OUR COST OF MAINTAINING CERTAIN INDEBTEDNESS AND MAY RESULT IN THE ACCELERATION OF DEFERRED TAXES. We are subject to the risk that a bank with currently issued irrevocable letters of credit supporting installment notes delivered to the Company in connection with our 2006
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and Temple-Inland's 2007 sales of forestlands may be downgraded below a required rating. Since 2006, certain banks have fallen below the required ratings threshold and were successfully replaced, or waivers were obtained regarding their replacement. As a result of continuing uncertainty in the banking environment, a number of the letter-of-credit banks currently in place remain subject to risk of downgrade and the number of qualified replacement banks remains limited. The downgrade of one or more of these banks may subject the Company to additional costs of securing a replacement letter-of-credit bank or could result in an acceleration of payments of up to $2.3 billion in deferred income taxes if replacement banks cannot be obtained. The deferred taxes are currently recorded in the Company's consolidated financial statements. See Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 67 through 69 and Note 10 Income Taxes on pages 62 through 64 of Item 8. Financial Statements and Supplementary Data for further information.
OUR PENSION AND HEALTH CARE COSTS ARE SUBJECT TO NUMEROUS FACTORS WHICH COULD CAUSE THESE COSTS TO CHANGE. We have defined benefit pension plans covering substantially all U.S. salaried employees hired prior to July 1, 2004 and substantially all hourly and union employees regardless of hire date. We provide retiree health care benefits to certain of our U.S. salaried and certain hourly employees. Our pension costs are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. Pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns, changes in general interest rates and changes in the number of retirees may result in increased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could increase pension costs. Health care reform under the Patient Protection and Affordable Care Act of 2010 could also increase costs with respect to medical coverage of the Company’s full-time employees. Significant changes in any of these factors may adversely impact our cash flows, financial condition and results of operations.
OUR PENSION PLANS ARE CURRENTLY UNDERFUNDED, AND OVER TIME WE MAY BE REQUIRED TO MAKE CASH PAYMENTS TO THE PLANS, REDUCING THE CASH AVAILABLE FOR OUR BUSINESS. We record a liability associated with our pension plans equal to the excess of the benefit obligation over the fair value of plan assets. The benefit liability recorded under the provisions of Accounting Standards Codification (ASC) 715, “Compensation – Retirement Benefits,” at December 31, 2014 was $3.9 billion. The amount and timing of future
contributions will depend upon a number of factors, including the actual earnings and changes in values of plan assets and changes in interest rates.
CHANGES IN INTERNATIONAL CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. Our operating results and business prospects could be substantially affected by risks related to the countries outside the United States in which we have manufacturing facilities or sell our products. Specifically, Russia, Brazil, Poland, China, India, and Turkey where we have substantial manufacturing facilities, are countries that are exposed to economic and political instability in their respective regions of the world. Fluctuations in the value of local currency versus the U.S. dollar (such as in Russia during 2014), downturns in economic activity, adverse tax consequences, nationalization or any change in social, political or labor conditions in any of these countries or regions could negatively affect our financial results. Trade protection measures in favor of local producers of competing products, including governmental subsidies, tax benefits and other measures giving local producers a competitive advantage over International Paper, may also adversely impact our operating results and business prospects in these countries. In addition, our international operations are subject to regulation under U.S. law and other laws related to operations in foreign jurisdictions. For example, the Foreign Corrupt Practices Act prohibits U.S. companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad. Failure to comply with domestic or foreign laws could result in various adverse consequences, including the imposition of civil or criminal sanctions and the prosecution of executives overseeing our international operations.
RISKS RELATING TO LEGAL PROCEEDINGS AND COMPLIANCE COSTS
WE ARE SUBJECT TO A WIDE VARIETY OF LAWS, REGULATIONS AND OTHER GOVERNMENT REQUIREMENTS THAT MAY CHANGE IN SIGNIFICANT WAYS, AND THE COST OF COMPLIANCE WITH SUCH REQUIREMENTS COULD IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS. Our operations are subject to regulation under a wide variety of U.S. federal and state and non-U.S. laws, regulations and other government requirements -- including, among others, those relating to the environment, health and safety, labor and employment and health care. There can be no assurance that laws, regulations and government requirements will not be changed, applied or interpreted in ways that will require us to modify our operations and objectives or affect our returns on investments by
10
restricting existing activities and products, subjecting them to escalating costs. For example, we have incurred, and expect that we will continue to incur, significant capital, operating and other expenditures complying with applicable environmental laws and regulations. There can be no assurance that future remediation requirements and compliance with existing and new laws and requirements, including with global climate change laws and regulations, Boiler MACT and NAAQSs, will not require significant expenditures, or that existing reserves for specific matters will be adequate to cover future costs. We could also incur substantial fines or sanctions, enforcement actions (including orders limiting our operations or requiring corrective measures), natural resource damages claims, cleanup and closure costs, and third-party claims for property damage and personal injury as a result of violations of, or liabilities under, environmental laws, regulations, codes and common law. The amount and timing of environmental expenditures is difficult to predict, and, in some cases, liability may be imposed without regard to contribution or to whether we knew of, or caused, the release of hazardous substances. As another example, we are subject to a number of labor and employment laws and regulations that could significantly increase our operating costs and reduce our operational flexibility.
RESULTS OF LEGAL PROCEEDINGS COULD HAVE A MATERIAL EFFECT ON OUR CONSOLIDATED FINANCIAL STATEMENTS. The costs and other effects of pending litigation against us cannot be determined with certainty. Although we believe that the outcome of any pending or threatened lawsuits or claims, or all of them combined, will not have a material effect on our business or consolidated financial statements, there can be no assurance that the outcome of any lawsuit or claim will be as expected.
RISKS RELATING TO OUR OPERATIONS
MATERIAL DISRUPTIONS AT ONE OF OUR MANUFACTURING FACILITIES COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. We operate our facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at our facilities. A material disruption at our corporate headquarters or one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our financial condition. Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:
• | fires, floods, earthquakes, hurricanes or other catastrophes; |
• | the effect of a drought or reduced rainfall on its water supply; |
• | the effect of other severe weather conditions on equipment and facilities; |
• | terrorism or threats of terrorism; |
• | domestic and international laws and regulations applicable to our Company and our business partners, including joint venture partners, around the world; |
• | unscheduled maintenance outages; |
• | prolonged power failures; |
• | an equipment failure; |
• | a chemical spill or release; |
• | explosion of a boiler; |
• | damage or disruptions caused by third parties operating on or adjacent to one of our manufacturing facilities; |
• | disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and tunnels; |
• | widespread outbreak of an illness or any other communicable disease, or any other public health crisis; |
• | labor difficulties; and |
• | other operational problems. |
Any such downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned expenditures. If one of these machines or facilities were to incur significant downtime, our ability to meet our production targets and satisfy customer requirements could be impaired, resulting in lower sales and having a negative effect on our business and financial results.
WE ARE SUBJECT TO CYBER-SECURITY RISKS RELATED TO BREACHES OF SECURITY PERTAINING TO SENSITIVE COMPANY, CUSTOMER, EMPLOYEE AND VENDOR INFORMATION AS WELL AS BREACHES IN THE TECHNOLOGY THAT MANAGES OPERATIONS AND OTHER BUSINESS PROCESSES. Our business operations rely upon secure information technology systems for data capture, processing, storage and reporting. Despite careful security and controls design, implementation, updating and independent third party verification, our information technology systems, and those of our third party providers, could become subject to cyber attacks. Network, system, application and data breaches could result in operational disruptions or information misappropriation including, but not limited to interruption to systems availability, denial of access
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to and misuse of applications required by our customers to conduct business with International Paper. Access to internal applications required to plan our operations, source materials, manufacture and ship finished goods and account for orders could be denied or misused. Theft of intellectual property or trade secrets, and inappropriate disclosure of confidential company, employee, customer or vendor information, could stem from such incidents. Any of these operational disruptions and/or misappropriation of information could result in lost sales, business delays, negative publicity and could have a material effect on our business.
SEVERAL OPERATIONS ARE CONDUCTED BY JOINT VENTURES THAT WE CANNOT OPERATE SOLELY FOR OUR BENEFIT. Several operations, particularly in emerging markets, are carried on by joint ventures such as the Ilim joint venture in Russia. In joint ventures, we share ownership and management of a company with one or more parties who may or may not have the same goals, strategies, priorities or resources as we do. In general, joint ventures are intended to be operated for the benefit of all co-owners, rather than for our exclusive benefit. Operating a business as a joint venture often requires additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. In joint ventures, we are required to pay more attention to our relationship with our co-owners as well as with the joint venture, and if a co-owner changes, our relationship may be adversely affected. In addition, the benefits from a successful joint venture are shared among the co-owners, so that we do not receive all the benefits from our successful joint ventures.
WE MAY NOT ACHIEVE THE EXPECTED BENEFITS FROM STRATEGIC ACQUISITIONS, JOINT VENTURES, DIVESTITURES AND OTHER CORPORATE TRANSACTIONS. Our strategy for long-term growth, productivity and profitability depends, in part, on our ability to accomplish prudent strategic acquisitions, joint ventures, divestitures and other corporate transactions and to realize the benefits we expect from such transactions, and we are subject to the risk that we may not achieve the expected benefits. Among the benefits we expect from potential as well as recently completed acquisitions and joint ventures are synergies, cost savings, growth opportunities or access to new markets (or a combination thereof), and in the case of divestitures, the realization of proceeds from the sale of businesses and assets to purchasers placing higher strategic value on such businesses and assets than does International Paper.
None.
As of December 31, 2014, the Company owned or managed approximately 334,000 acres of forestlands in Brazil, and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia and Poland. All owned lands in Brazil are independently third-party certified for sustainable forestry under the Brazilian National Forest Certification Program (CERFLOR) and the Forest Stewardship Council (FSC).
A listing of our production facilities by segment, the vast majority of which we own, can be found in Appendix I hereto, which is incorporated herein by reference.
The Company’s facilities are in good operating condition and are suited for the purposes for which they are presently being used. We continue to study the economics of modernization or adopting other alternatives for higher cost facilities.
Given the size, scope and complexity of our business interests, we continually examine and evaluate a wide variety of business opportunities and planning alternatives, including possible acquisitions and sales or other dispositions of properties. You can find a discussion about the level of planned capital investments for 2015 on page 35, and dispositions and restructuring activities as of December 31, 2014, on pages 24 through 26 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and on pages 55 and 56 and pages 59 and 60 of Item 8. Financial Statements and Supplementary Data.
Information concerning the Company’s legal proceedings is set forth in Note 11 Commitments and Contingencies on pages 64 through 67 of Item 8. Financial Statements and Supplementary Data.
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Dividend per share data on the Company’s common stock and the high and low sales prices for the Company’s common stock for each of the four quarters in 2014 and 2013 are set forth on page 87 of Item 8. Financial Statements and Supplementary Data. As of
the filing of this Annual Report on Form 10-K, the Company’s common shares are traded on the New York Stock Exchange. As of February 20, 2015, there were approximately 13,267 record holders of common stock of the Company.
The table below presents information regarding the Company’s purchase of its equity securities for the time periods presented.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Period | Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in billions) | |||||
October 1, 2014 - October 31, 2014 | 2,825,448 | $46.80 | 2,825,448 | $1.59 | |||||
November 1, 2014 - November 30, 2014 | 177,532 | 52.68 | 177,300 | 1.58 | |||||
December 1, 2014 - December 31, 2014 | 545,681 | 53.84 | 533,340 | 1.56 | |||||
Total | 3,548,661 | ||||||||
(a) | 12,573 shares were acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs. The remainder were purchased under a share repurchase program that was approved by our Board of Directors and announced on September 10, 2013, and through which we were authorized to purchase, in open market transactions (including block trades), privately negotiated transactions or otherwise, up to $1.5 billion of our common stock by December 31, 2016. Another repurchase program was approved by our Board of Directors and announced on July 8, 2014, to supplement the former program. Through the latter program, which does not have an expiration date, we were authorized to purchase, in open market transactions (including block trades), privately negotiated transactions or otherwise, up to $1.5 billion of additional shares of our common stock. As of February 20, 2015, approximately $1.54 billion of shares of our common stock remained authorized for purchase under our share repurchase programs. |
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PERFORMANCE GRAPH
The performance graph shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.
The following graph compares a $100 investment in Company stock on December 31, 2009 with a $100 investment in our Return on Invested Capital (ROIC) Peer Group and the S&P 500 also made at market close on December 31, 2009. The graph portrays total return, 2009–2014, assuming reinvestment of dividends.
Note: The companies included in the ROIC Peer Group are Domtar Inc., Fibria Celulose S.A., Klabin S.A., MeadWestvaco Corp., Metsa Board Corporation, Mondi Group, Packaging Corporation of America, Rock-Tenn Company, Smurfit Kappa Group, Stora Enso Group, and UPM-Kymmene Corp.
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FIVE-YEAR FINANCIAL SUMMARY (a)
Dollar amounts in millions, except per share amounts and stock prices | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
RESULTS OF OPERATIONS | ||||||||||||||||||||
Net sales | $ | 23,617 | $ | 23,483 | $ | 21,852 | $ | 19,464 | $ | 18,496 | ||||||||||
Costs and expenses, excluding interest | 22,138 | 21,643 | 20,214 | 17,528 | 17,169 | |||||||||||||||
Earnings (loss) from continuing operations before income taxes and equity earnings | 872 | (b) | 1,228 | (e) | 967 | (h) | 1,395 | (k) | 719 | (n) | ||||||||||
Equity earnings (loss), net of taxes | (200 | ) | (39 | ) | 61 | 140 | 111 | |||||||||||||
Discontinued operations, net of taxes | (13 | ) | (c) | (309 | ) | (f) | 77 | (i) | 82 | (l) | 65 | (o) | ||||||||
Net earnings (loss) | 536 | (b-d) | 1,378 | (e-g) | 799 | (h-j) | 1,336 | (k-m) | 712 | (n-p) | ||||||||||
Noncontrolling interests, net of taxes | (19 | ) | (17 | ) | 5 | 14 | 21 | |||||||||||||
Net earnings (loss) attributable to International Paper Company | 555 | (b-d) | 1,395 | (e-g) | 794 | (h-j) | 1,322 | (k-m) | 691 | (n-p) | ||||||||||
FINANCIAL POSITION | ||||||||||||||||||||
Current assets less current liabilities | $ | 3,050 | $ | 3,898 | $ | 3,907 | $ | 5,718 | $ | 3,525 | ||||||||||
Plants, properties and equipment, net | 12,728 | 13,672 | 13,949 | 11,817 | 12,002 | |||||||||||||||
Forestlands | 507 | 557 | 622 | 660 | 747 | |||||||||||||||
Total assets | 28,684 | 31,528 | 32,153 | 27,018 | 25,409 | |||||||||||||||
Notes payable and current maturities of long-term debt | 742 | 661 | 444 | 719 | 313 | |||||||||||||||
Long-term debt | 8,631 | 8,827 | 9,696 | 9,189 | 8,358 | |||||||||||||||
Total shareholders’ equity | 5,115 | 8,105 | 6,304 | 6,645 | 6,875 | |||||||||||||||
BASIC EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS | ||||||||||||||||||||
Earnings (loss) from continuing operations | $ | 1.33 | $ | 3.85 | $ | 1.65 | $ | 2.87 | $ | 1.46 | ||||||||||
Discontinued operations | (0.03 | ) | (0.70 | ) | 0.17 | 0.19 | 0.15 | |||||||||||||
Net earnings (loss) | 1.30 | 3.15 | 1.82 | 3.06 | 1.61 | |||||||||||||||
DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS | ||||||||||||||||||||
Earnings (loss) from continuing operations | $ | 1.31 | $ | 3.80 | $ | 1.63 | $ | 2.84 | $ | 1.44 | ||||||||||
Discontinued operations | (0.02 | ) | (0.69 | ) | 0.17 | 0.19 | 0.15 | |||||||||||||
Net earnings (loss) | 1.29 | 3.11 | 1.80 | 3.03 | 1.59 | |||||||||||||||
Cash dividends | 1.4500 | 1.2500 | 1.088 | 0.975 | 0.400 | |||||||||||||||
Total shareholders’ equity | 12.18 | 18.57 | 14.33 | 15.21 | 15.71 | |||||||||||||||
COMMON STOCK PRICES | ||||||||||||||||||||
High | $ | 55.73 | $ | 50.33 | $ | 39.88 | $ | 33.01 | $ | 29.25 | ||||||||||
Low | 44.24 | 39.47 | 27.29 | 21.55 | 19.33 | |||||||||||||||
Year-end | 53.58 | 49.03 | 39.84 | 29.60 | 27.24 | |||||||||||||||
FINANCIAL RATIOS | ||||||||||||||||||||
Current ratio | 1.6 | 1.8 | 1.8 | 2.2 | 1.8 | |||||||||||||||
Total debt to capital ratio | 0.65 | 0.54 | 0.62 | 0.60 | 0.56 | |||||||||||||||
Return on shareholders’ equity | 7.7 | % | (b-d) | 20.2 | % | (e-g) | 11.6 | % | (h-j) | 17.9 | % | (k-m) | 11.4 | % | (n-p) | |||||
CAPITAL EXPENDITURES | $ | 1,366 | $ | 1,198 | $ | 1,383 | $1,159 | $775 | ||||||||||||
NUMBER OF EMPLOYEES | 58,000 | 64,000 | 65,000 | 56,000 | 53,000 | |||||||||||||||
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FINANCIAL GLOSSARY
Current ratio—
current assets divided by current liabilities.
Total debt to capital ratio—
long-term debt plus notes payable and current maturities of long-term debt divided by long-term debt, notes payable and current maturities of long-term debt and total shareholders’ equity.
Return on shareholders’ equity—
net earnings attributable to International Paper Company divided by average shareholders’ equity (computed monthly).
FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY
(a) | All periods presented have been restated to reflect the xpedx business and the Temple-Inland Building Products business as discontinued operations, if applicable. |
2014:
(b) | Includes restructuring and other charges of $846 million before taxes ($518 million after taxes) including pre-tax charges of $276 million ($169 million after taxes) for early debt extinguishment costs, pre-tax charges of $554 million ($338 million after taxes for costs associated with the shutdown of our Courtland, Alabama mill and a net pre-tax charge of $16 million ($11 million after taxes) for other items. Also included are a pre-tax charge of $47 million ($36 million after taxes) for a loss on the sale of a business by ASG in which we hold an investment and the subsequent partial impairment of our ASG investment, a goodwill impairment charge of $100 million (before and after taxes) related to our Asia Industrial Packaging business, pre-tax charges of $35 million ($21 million after taxes) for a multi-employer pension withdrawal liability, a pre-tax charge of $32 million ($17 million after taxes) for costs associated with a foreign tax amnesty program, a gain of $20 million (before and after taxes) for the resolution of a legal contingency in India, pre-tax charges of $16 million ($10 million after taxes) for costs associated with the integration of Temple-Inland, and a net gain of $4 million ($2 million after taxes) for other items. |
(c) | Includes the operating earnings of the xpedx business through the date of the spin-off on July 1, 2014, net pre-tax charges of $24 million ($16 million after taxes) for costs associated with the spin-off of the xpedx business, pre-tax charges of $1 million (a gain of $1 million after taxes) for costs associated with the restructuring of xpedx and pre-tax charges of $16 million ($9 million after taxes) for costs associated with the Building Products divestiture. |
(d) | Includes a tax benefit of $90 million related to internal restructurings and a net tax expense of $9 million for other items. |
2013:
(e) | Includes restructuring and other charges of $156 million before taxes ($98 million after taxes) including pre-tax charges of $25 million ($16 million after taxes) for early debt extinguishment costs, pre-tax charges of $118 million ($72 million after taxes) for costs associated with the shutdown of our Courtland, Alabama mill, a pre-tax gain of $30 million ($19 million after taxes) for insurance reimbursements related to the 2012 Guaranty Bank legal settlement, a pre-tax charge of $45 million ($28 million after taxes) for costs associated with the permanent shutdown of a paper machine at our Augusta, Georgia mill and a net pre-tax gain of $2 million (a loss of $1 million after taxes) for other items. Also included are a pre-tax goodwill and trade name intangible asset impairment of $127 million ($122 million after taxes) related to our India Papers business, pre-tax charges of $9 million ($5 million after taxes) to adjust the value of two Company airplanes to fair value, pre-tax charges of $62 million ($38 million after taxes) for integration costs associated with the acquisition of Temple-Inland, pre-tax charges of $6 million ($4 million after taxes) for an environmental reserve related to the Company's property in Cass Lake, Minnesota, and a gain of $13 million (before and after taxes) related to a bargain purchase adjustment on the acquisition of a majority share of our operations in Turkey. |
(f) | Includes the operating results of the xpedx business for the full year and the Temple-Inland Building Products business through the date of sale in July 2013. Also includes pre-tax charges of $32 million ($19 million after taxes) for costs associated with the restructuring of the Company's xpedx operations, pre-tax charges of $22 million ($14 million after taxes) for costs associated with the spin-off of our xpedx operations, a pre-tax goodwill impairment charge of $400 million ($366 million after taxes) related to our xpedx business and pre-tax charges of $23 million ($19 million after taxes) for expenses associated with the divestiture of the Temple-Inland Building Products business. |
(g) | Includes a tax benefit of $744 million associated with the closings of U.S. federal tax audits, a tax benefit of $31 million for an income tax reserve release and a net tax loss of $1 million for other items. |
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2012:
(h) | Includes restructuring and other charges of $65 million before taxes ($46 million after taxes) including pre-tax charges of $48 million ($30 million after taxes) for early debt extinguishment costs, pre-tax charges of $17 million ($12 million after taxes) for costs associated with the restructuring of the Company's Packaging business in EMEA. Also included are a pre-tax charge of $20 million ($12 million after taxes) related to the write-up of the Temple-Inland inventories to fair value, pre-tax charges of $164 million ($108 million after taxes) for integration costs associated with the acquisition of Temple-Inland, a pre-tax charge of $62 million ($38 million after taxes) to adjust the long-lived assets of the Hueneme mill in Oxnard, California to their fair value in anticipation of its divestiture, and pre-tax charges of $29 million ($55 million after taxes) for costs associated with the divestiture of three containerboard mills. |
(i) | Includes the operating earnings of the xpedx business and the Temple-Inland Building Products business, pre-tax charges of $44 million ($28 million after taxes) for costs associated with the restructuring of the Company's xpedx operations and pre-tax charges of $15 million ($9 million after taxes) for expenses associated with pursuing the divestiture of the Temple-Inland Building Products business. |
(j) | Includes a net tax expense of $14 million related to internal restructurings and a $5 million expense to adjust deferred tax assets related to post-retirement prescription drug coverage (Medicare Part D reimbursement). |
2011:
(k) | Includes restructuring and other charges of $53 million before taxes ($32 million after taxes) including pre-tax charges of $32 million ($19 million after taxes) for early debt extinguishment costs, pre-tax charges of $18 million ($12 million after taxes) for costs associated with the acquisition of a majority share of Andhra Pradesh Paper Mills Limited in India, pre-tax charges of $20 million ($12 million after taxes) for costs associated with signing an agreement to acquire Temple-Inland, and a pre-tax gain of $24 million ($15 million after taxes) related to the reversal of environmental and other reserves due to the announced repurposing of a portion of the Franklin mill. Also included are a pre-tax charge of $27 million ($17 million after taxes) for an environmental reserve related to the Company’s property in Cass Lake, Minnesota, a pre-tax charge of $129 million ($104 million after |
taxes) for a fixed-asset impairment of the North American Shorewood business, pre-tax charges of$78 million (a gain of $143 million after taxes) to reduce the carrying value of the Shorewood business based on the terms of the definitive agreement to sell that business, and a charge of $11 million (before and after taxes) for asset impairment costs associated with the Inverurie, Scotland mill which was closed in 2009.
(l) | Includes a pre-tax gain of $50 million ($30 million after taxes) for an earnout provision related to the sale of the Company’s Kraft Papers business completed in January 2007. Also, the Company sold its Brazilian Coated Paper business in the third quarter 2006. Local country tax contingency reserves were included in the business’ operating results in 2005 and 2006 for which the related statute of limitations has expired. The reserves were reversed and a tax benefit of $15 million plus associated interest income of $6 million ($4 million after taxes) was recorded. Also included are the operating results of our xpedx business and pre-tax charges of $49 million ($34 million after taxes) for costs associated with the restructuring of the Company's xpedx business. |
(m) | Includes a tax benefit of $222 million related to the reduction of the carrying value of the Shorewood business and the write-off of a deferred tax liability associated with Shorewood, a $24 million tax expense related to internal restructurings, a $9 million tax expense for costs associated with our acquisition of a majority share of Andhra Pradesh Paper Mills Limited in India, a $13 million tax benefit related to the release of a deferred tax asset valuation allowance, and a $2 million tax expense for other items. |
2010:
(n) | Includes restructuring and other charges of $390 million before taxes ($239 million after taxes) including pre-tax charges of $315 million ($192 million after taxes) for shutdown costs related to the Franklin, Virginia mill, a pre-tax charge of $35 million ($21 million after taxes) for early debt extinguishment costs, pre-tax charges of $7 million ($4 million after taxes) for closure costs related to the Bellevue, Washington container plant, a pre-tax charge of $11 million ($7 million after taxes) for an Ohio Commercial Activity tax adjustment, a pre-tax charge of $2 million ($1 million after taxes) for severance and benefit costs associated with the Company’s S&A reduction initiative, and a pre-tax charge of $8 million ($5 million after taxes) for costs associated with the reorganization of the Company’s Shorewood operations. Also included are a pre-tax charge of $18 million ($11 million after |
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taxes) for an environmental reserve related to the Company’s property in Cass Lake, Minnesota, and a pre-tax gain of $25 million ($15 million after taxes) related to the partial redemption of the Company’s interests in Arizona Chemical.
(o) | Includes the operating results of the Company's xpedx business. |
(p) | Includes tax expense of $14 million and $32 million for tax adjustments related to incentive compensation and Medicare Part D deferred tax write-offs, respectively, and a $40 million tax benefit related to cellulosic bio-fuel tax credits. |
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Operating Earnings (a non-GAAP measure) is defined as net earnings from continuing operations (a GAAP measure) excluding special items and non-operating pension expense. International Paper generated Operating Earnings per diluted share attributable to common shareholders of $3.00 in 2014, compared with $3.06 in 2013, and $2.51 in 2012. Diluted earnings (loss) per share attributable to common shareholders were $1.29 in 2014, compared with $3.11 in 2013 and $1.80 in 2012.
International Paper delivered strong results during 2014, driven by margin expansion in all our key businesses, most notably in our North American Industrial Packaging business. We generated record cash flow from operations which enabled the Company to return cash to our shareholders in the form of approximately $1 billion in share buy-backs and a 14% increase in the quarterly dividend beginning with the 2014 fourth quarter dividend payment. Finally, with respect to our balanced use of cash, we completed a bond issue and related tender offer which enabled us to address outstanding debt due in 2018 and 2019 as well as shift from higher cost to lower cost debt.
Our 2014 results reflect continued margin expansion driven by sustained price improvements in our North American Industrial Packaging business along with improved pricing in our North American Printing Papers and Consumer Packaging businesses. In aggregate, volumes were down, largely due to declines in our North American Printing Papers business following the completion of the Courtland mill closure. Input costs increased year over year largely due to higher wood costs and higher energy costs, which were impacted by the significant adverse weather events experienced in much of the U.S. during the 2014 first quarter. Our Ilim joint venture delivered continued solid operational performance in 2014 associated with the productivity ramp-up of the two joint venture funded capital projects and other efficiency improvements. Ilim’s 2014 results were significantly impacted by unfavorable non-cash foreign currency movements associated with Ilim’s U.S. dollar denominated debt, particularly in the 2014 fourth quarter. Finally, during 2014, we completed the spin-off of the xpedx distribution business which included our receipt of $411 million in special payments.
Overall, 2014 reflects our successful efforts to drive margin growth across all of our key businesses. We once again generated returns in excess of our cost of capital while returning cash to our shareholders in the form of increased dividends and share repurchases. We exited
2014 with significant momentum, entering 2015 with a particular focus on execution to drive continued earnings growth and strong free cash flow.
Looking ahead to the 2015 first quarter, we expect volume to be largely flat with the exception of seasonally lower volumes in our Brazilian and European Printing Papers businesses. The fourth quarter historically represents the strongest volume quarter for our Brazilian Printing Papers business. Pricing is expected to be relatively stable except for our European Printing Papers and European Industrial Packaging businesses where pricing pressure continues due to the challenging economic conditions. We expect improved operating performance as we move past the isolated issues that impacted the 2014 fourth quarter in our North American Industrial Packaging and Brazil Printing Papers businesses. Input costs should be relatively stable in the 2015 first quarter with some improvement in the North American Industrial Packaging business, primarily related to lower energy and fuel costs. Planned maintenance downtime costs should increase primarily driven by outages in our North American Industrial Packaging business. Equity earnings from our Ilim joint venture are expected to benefit from the absence of the significant negative impact from remeasurement of Ilim’s U.S. dollar denominated debt due to devaluation of the Russian ruble in the 2014 fourth quarter.
For the 2015 full year, we anticipate an overall challenging macroeconomic environment but expect to benefit from the strengthening U.S. economy. Even in those markets facing economic headwinds, namely Brazil and Russia, our low cost export position should enable us to effectively navigate these challenges. There continues to be significant optimization opportunities in our North American Industrial Packaging business which we expect to further realize during 2015. Additionally, we expect improvement in the results of our Brazilian Industrial Packaging business along with the benefits of continued margin expansion at the Ilim joint venture. We also expect to take further advantage of the growing demand for fiber-based food packaging. In addition, we expect to realize the benefits of the repositioned North American Printing Papers business following the completion of the Courtland mill closure. Finally, we expect to generate strong free cash flow results but we do expect some impact from higher cash taxes driven by changes in our geographic mix of earnings and other non-repeating events that benefitted 2014 cash taxes.
Free cash flow (a non-GAAP measure) of $2.1 billion generated in 2014 was higher than the $1.8 billion generated in 2013 and the $1.6 billion generated in 2012 (see reconciliation on page 32).
Operating Earnings per share attributable to common shareholders of $0.53 in the 2014 fourth quarter were lower than the $0.95 in the 2014 third quarter and the $0.81 in the 2013 fourth quarter. Diluted earnings (loss)
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per share attributable to common shareholders were $0.32 in the 2014 fourth quarter, compared with $0.83 in the 2014 third quarter and $0.98 in the 2013 fourth quarter.
Free cash flow of $739 million generated in the 2014 fourth quarter was higher than the $696 million generated in the 2014 third quarter and the $598 million generated in the 2013 fourth quarter (see reconciliation on page 32).
Operating Earnings and Operating Earnings Per Share are non-GAAP measures. Diluted earnings (loss) per share attributable to International Paper Company common shareholders is the most directly comparable GAAP measure. The Company calculates Operating Earnings by excluding the after-tax effect of items considered by management to be unusual from the earnings reported under GAAP, non-operating pension expense and discontinued operations. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. The Company believes that using this information, along with the most directly comparable GAAP measure, provides for a more complete analysis of the results of operations. The following are reconciliations of Operating Earnings per share attributable to International Paper Company common shareholders to diluted earnings (loss) per share attributable to International Paper Company common shareholders.
2014 | 2013 | 2012 | |||||||
Operating Earnings (Loss) Per Share Attributable to Shareholders | $ | 3.00 | $ | 3.06 | $ | 2.51 | |||
Non-operating pension expense | (0.30 | ) | (0.44 | ) | (0.26 | ) | |||
Special items | (1.39 | ) | 1.18 | (0.62 | ) | ||||
Diluted Earnings (Loss) Per Share from Continuing Operations | 1.31 | 3.80 | 1.63 | ||||||
Discontinued operations | (0.02 | ) | (0.69 | ) | 0.17 | ||||
Diluted Earnings (Loss) Per Share Attributable to Shareholders | $ | 1.29 | $ | 3.11 | $ | 1.80 | |||
Three Months Ended December 31, 2014 | Three Months Ended September 30, 2014 | Three Months Ended December 31, 2013 | ||||||||||
Operating Earnings (Loss) Per Share Attributable to Shareholders | $ | 0.53 | $ | 0.95 | $ | 0.81 | ||||||
Non-operating pension expense | (0.07 | ) | (0.08 | ) | (0.11 | ) | ||||||
Special items | (0.12 | ) | (0.08 | ) | 1.08 | |||||||
Diluted Earnings (Loss) Per Share from Continuing Operations | 0.34 | 0.79 | 1.78 | |||||||||
Discontinued operations | (0.02 | ) | 0.04 | (0.80 | ) | |||||||
Diluted Earnings (Loss) Per Share Attributable to Shareholders | $ | 0.32 | $ | 0.83 | $ | 0.98 | ||||||
Results of Operations
Industry segment operating profits are used by International Paper’s management to measure the earnings performance of its businesses. Management believes that this measure allows a better understanding of trends in costs, operating efficiencies, prices and volumes. Industry segment operating profits are defined as earnings before taxes, equity earnings, noncontrolling interests, interest expense, corporate items and corporate special items. Industry segment operating profits are defined by the Securities and Exchange Commission as a non-GAAP financial measure, and are not GAAP alternatives to net income or any other operating measure prescribed by accounting principles generally accepted in the United States.
International Paper operates in three segments: Industrial Packaging, Printing Papers and Consumer Packaging.
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The following table presents a reconciliation of net earnings (loss) attributable to International Paper Company to its total industry segment operating profit:
In millions | 2014 | 2013 | 2012 | ||||||
Net Earnings (Loss) Attributable to International Paper Company | $ | 555 | $ | 1,395 | $ | 794 | |||
Deduct – Discontinued operations: | |||||||||
(Earnings) from operations | (11 | ) | (109 | ) | (120 | ) | |||
Special items (gain) loss | 24 | 418 | 43 | ||||||
Earnings (Loss) From Continuing Operations Attributable to International Paper Company | 568 | 1,704 | 717 | ||||||
Add back (deduct): | |||||||||
Income tax provision | 123 | (498 | ) | 306 | |||||
Equity (earnings) loss, net of taxes | 200 | 39 | (61 | ) | |||||
Net earnings (loss) attributable to noncontrolling interests | (19 | ) | (17 | ) | 5 | ||||
Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings | 872 | 1,228 | 967 | ||||||
Interest expense, net | 601 | 612 | 671 | ||||||
Noncontrolling interests / equity earnings included in operations | 2 | (1 | ) | — | |||||
Corporate items | 51 | 61 | 87 | ||||||
Special items: | |||||||||
Restructuring and other charges | 282 | 10 | 51 | ||||||
Net losses (gains) on sales and impairments of businesses | 38 | — | (2 | ) | |||||
Non-Operating Pension Expense | 212 | 323 | 159 | ||||||
$ | 2,058 | $ | 2,233 | $ | 1,933 | ||||
Industry Segment Operating Profit | |||||||||
Industrial Packaging | $ | 1,896 | $ | 1,801 | $ | 1,066 | |||
Printing Papers | (16 | ) | 271 | 599 | |||||
Consumer Packaging | 178 | 161 | 268 | ||||||
Total Industry Segment Operating Profit | $ | 2,058 | $ | 2,233 | $ | 1,933 | |||
Industry segment operating profits in 2014 included a net loss from special items of $732 million compared with $336 million in 2013 and $286 million in 2012. Operationally, compared with 2013, the benefit from higher average sales price realizations and favorable mix ($563 million) and lower other costs ($16 million) were offset by lower sales volumes ($35 million), higher operating costs ($138 million), higher input costs ($141 million), higher maintenance outage costs ($3 million) and higher costs associated with the closure of our Courtland, Alabama mill ($41 million).
The principal changes in operating profit by segment were as follows:
• | Industrial Packaging’s profits of $1.9 billion were $95 million higher than in 2013 as the net benefit of higher average sales price realizations and mix were partially offset by lower sales volumes, higher operating costs, higher maintenance outage costs and higher input costs. In addition, 2014 operating profits included $16 million of costs associated with the integration of Temple-Inland, a goodwill impairment charge of $100 million related to our Asia Industrial Packaging business, a charge of $35 million for costs associated with a multi-employer pension plan withdrawal liability and a net charge of $7 million for other items. Operating profits in 2013 included $62 million of costs associated with the integration of Temple-Inland and a $13 million gain for a bargain purchase adjustment on the acquisition of a majority share of our operations in Turkey. |
• | Printing Papers’ operating loss of $16 million represented a $287 million reduction in operating profits from 2013. The benefits of higher average sales price realizations and a more favorable mix, lower maintenance outage costs, the absence of a provision for bad debt related to a large envelope customer that was booked in 2013, and lower foreign exchange and other costs were more than offset by lower sales volumes, higher operating costs, higher input costs and higher costs associated with the closure of our Courtland, Alabama mill. The 2014 operating loss also included a special items charge of $554 million for costs associated with the shutdown of our Courtland, Alabama mill, a gain of $20 million for the resolution of a legal contingency in India and a charge of $32 million for costs associated with a foreign tax amnesty program. Operating profits in 2013 included $118 million of costs associated with the shutdown of our Courtland, Alabama mill and net charges of $123 million for the |
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impairment of the goodwill and a trade name intangible asset of the Company's India Papers business.
• | Consumer Packaging’s profits of $178 million were $17 million higher than in 2013. The benefits from higher average sales price realizations and a favorable mix were more than offset by lower sales volumes, higher operating costs, higher planned maintenance downtime costs, higher input costs and higher other expenses. Operating profits in 2014 included $8 million of sheet plant closure costs. Operating profits in 2013 included costs of $45 million associated with the permanent shutdown of a paper machine at our Augusta, Georgia mill. |
Corporate items, net, of $51 million of expense in 2014 were lower than the $61 million of expense in 2013 due to lower pension costs partially offset by a one-time non-cash foreign exchange charge related to the administrative restructuring of some international entities. The decrease in 2013 from the expense of $87 million in 2012 primarily reflects lower supply chain initiative expenses.
Corporate special items, including restructuring and other items and net losses on sales and impairments of businesses were a loss of $320 million in 2014 compared with a loss of $4 million in 2013 and a loss of $49 million in 2012. The higher loss in 2014 is due to higher debt extinguishment costs and a loss on the sale of a business by ASG, in which we hold an investment, and the subsequent partial impairment of our ASG investment
Interest expense, net, was $607 million ($601 million excluding special items net interest expense reported in the Printing Papers business segment) in 2014 compared with $612 million in 2013 and $671 million in 2012. The decrease in 2014 compared with 2013 reflects lower average interest rates. The decrease in 2013 compared with 2012 reflects lower average debt levels and the reversal of interest reserves related to U.S. federal income tax audits.
A net income tax provision of $123 million was recorded for 2014, including a tax benefit of $90 million related to internal restructurings and a net tax expense of $9 million for other items. The 2013 income tax benefit of $498 million includes a tax benefit of $770 million associated with the settlement of tax audits and a net tax benefit of $4 million for other items. The 2012 income tax provision of $306 million includes a net expense of $14 million related to internal restructurings and an expense of $5 million to adjust deferred tax assets related to post-retirement prescription drug coverage (Medicare Part D reimbursements).
Discontinued Operations
2014: On July 1, 2014, International Paper completed the spinoff of its distribution business, xpedx, which subsequently merged with Unisource Worldwide, Inc., with the combined companies now operating as Veritiv Corporation (Veritiv). The xpedx business had historically represented the Company's Distribution reportable segment.
The spinoff was accomplished by the contribution of the xpedx business to Veritiv and the distribution of 8,160,000 shares of Veritiv common stock on a pro-rata basis to International Paper shareholders. International Paper received payments of approximately $411 million, financed with new debt in Veritiv's capital structure.
2013: On April 1, 2013, the Company finalized the sale of Temple-Inland's 50% interest in Del-Tin Fiber L.L.C. to joint venture partner Deltic Timber Corporation for $20 million in assumed liabilities and cash.
On July 19, 2013 the Company finalized the sale of its Temple-Inland Building Products division to Georgia-Pacific Building Products, LLC for approximately $726 million in cash.
2012: Upon the acquisition of Temple-Inland, management committed to a plan to sell the Temple-Inland Building Products business, and on December 12, 2012, International Paper reached an agreement to sell the business (including Del-Tin Fiber L.L.C.) to Georgia-Pacific for $750 million in cash, subject to satisfaction of customary closing conditions, including satisfactory review by the DOJ, and to certain pre-and post-closing purchase price adjustments. The assets to be sold included 16 manufacturing facilities.
Liquidity and Capital Resources
For the year ended December 31, 2014, International Paper generated $3.1 billion of cash flow from operations compared with $3.0 billion in 2013. Cash flow from operations included $353 million and $31 million of cash pension contributions in 2014 and 2013, respectively. Capital spending for 2014 totaled $1.4 billion, or 97% of depreciation and amortization expense. Net decreases in debt totaled $113 million. Our liquidity position remains strong, supported by approximately $2.0 billion of credit facilities that we believe are adequate to meet future liquidity requirements. Maintaining an investment-grade credit rating for our long-term debt continues to be an important element in our overall financial strategy.
We expect to generate strong free cash flow again in 2015 and will continue our balanced use of cash through investments in capital projects, the reduction of total debt, including the Company’s unfunded pension obligation, returning value to shareholders and strengthening our
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businesses through strategic acquisitions, as appropriate.
Capital spending for 2015 is targeted at $1.5 billion, or about 105% of depreciation and amortization.
Legal
See Note 11 Commitments and Contingent Liabilities on pages 64 through 67 of Item 8. Financial Statements and Supplementary Data for a discussion of legal matters.
While the operating results for International Paper’s various business segments are driven by a number of business-specific factors, changes in International Paper’s operating results are closely tied to changes in general economic conditions in North America, Europe, Russia, Latin America, Asia, Africa and the Middle East. Factors that impact the demand for our products include industrial non-durable goods production, consumer spending, commercial printing and advertising activity, white-collar employment levels, and movements in currency exchange rates.
Product prices are affected by general economic trends, inventory levels, currency exchange rate movements and worldwide capacity utilization. In addition to these revenue-related factors, net earnings are impacted by various cost drivers, the more significant of which include changes in raw material costs, principally wood, recycled fiber and chemical costs; energy costs; freight costs; salary and benefits costs, including pensions; and manufacturing conversion costs.
The following is a discussion of International Paper’s results of operations for the year ended December 31, 2014, and the major factors affecting these results compared to 2013 and 2012.
For the year ended December 31, 2014, International Paper reported net sales of $23.6 billion, compared with $23.5 billion in 2013 and $21.9 billion in 2012. International net sales (including U.S. exports) totaled $9.3 billion or 39% of total sales in 2014. This compares with international net sales of $9.5 billion in 2013 and $8.4 billion in 2012.
Full year 2014 net earnings attributable to International Paper Company totaled $555 million ($1.29 per share), compared with net earnings of $1.4 billion ($3.11 per share) in 2013 and $794 million ($1.80 per share) in 2012. Amounts in all periods include the results of discontinued operations.
Earnings from continuing operations attributable to International Paper Company after taxes in 2014 were
$568 million, including $599 million of net special items charges and $129 million of non-operating pension expense compared with $1.7 billion, including $528 million of net special items gains and $197 million of non-operating pension expense in 2013, and $717 million, including $272 million of net special items charges and $113 million of non-operating pension expense in 2012. Compared with 2013, the benefit from higher average sales price realizations and mix, lower corporate and other costs and lower interest expense were offset by lower sales volumes, higher operating costs, higher maintenance outage costs, higher input costs, higher costs associated with the closure of the Courtland mill, and higher tax expense. In addition, 2014 results included lower equity earnings, net of taxes, relating to the Company’s investment in Ilim Holdings, SA.
See Industry Segment Results on pages 27 through 31 for a discussion of the impact of these factors by segment.
Discontinued Operations
2014:
In 2014, $24 million of net income adjustments were recorded relating to discontinued businesses, including $16 million of costs associated with the spin-off of the xpedx business and $9 million of costs associated with the divestiture of the Temple-Inland Building Products business. Also included are the operating earnings of the xpedx business prior to the spin-off on July 1, 2014.
2013:
In 2013, $418 million of net income adjustments were recorded relating to discontinued businesses, including goodwill impairment charges of $366 million associated with the xpedx business, $19 million for costs associated with the restructuring of the xpedx business, $14 million for costs associated with the spin-off of the xpedx business and $19 million for costs associated with the sale of the Temple-Inland Building Products business. Also included are the operating profits for the xpedx business for the full year and for the Temple-
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Inland Building Products business through the date of sale of July 19, 2013.
2012:
In 2012, $43 million of net income adjustments were recorded relating to discontinued businesses, including $33 million of costs associated with the restructuring of the xpedx business and $9 million of costs associated with the announced agreement to sell the Temple-Inland Building Products business. Also included are the operating profits for the xpedx and Temple-Inland Building Products businesses.
Income Taxes
A net income tax provision of $123 million was recorded for 2014, including a tax benefit of $90 million related to internal restructurings and a net $9 million tax expense for other items. Excluding these items, a $372 million net tax benefit for other special items and a $83 million tax benefit related to non-operating pension expense, the tax provision was $659 million, or 31% of pre-tax earnings before equity earnings.
A net income tax benefit of $498 million was recorded for 2013 including a tax benefit of $770 million related to the settlement of tax audits and a net benefit of $4 million for other items. Excluding these items, a $95 million net tax benefit for other special items and a $126 million tax benefit related to non-operating pension expense, the tax provision was $497 million, or 26% of pre-tax earnings before equity earnings.
A net income tax provision of $306 million was recorded for 2012, including a net tax expense of $14 million related to internal restructurings and a $5 million expense to adjust deferred tax assets related to post-retirement prescription drug coverage (Medicare Part D reimbursements). Excluding these items, an $82 million net tax benefit for other special items and a $46 million tax benefit related to non-operating pension expense, the tax provision was $415 million, or 28% of pre-tax earnings before equity earnings.
Equity Earnings, Net of Taxes
Equity earnings, net of taxes in 2014, 2013 and 2012 consisted principally of the Company’s share of earnings from its 50% investment in Ilim Holding S.A. in Russia (see page 31).
Corporate Items and Interest Expense
Corporate items totaled $51 million of expense for the year ended December 31, 2014 compared with $61 million in 2013 and $87 million in 2012. The decrease in 2014 from 2013 reflects lower pension expenses partially offset by a one-time non-cash foreign exchange charge related to the administrative restructuring of some international entities. The
decrease in 2013 from 2012 reflects lower supply chain initiative expenses, partially offset by higher pension expense.
Net corporate interest expense totaled $601 million in 2014, $612 million in 2013 and $671 million in 2012. The decrease in 2014 compared with 2013 reflects lower average interest rates. The decrease in 2013 compared with 2012 reflects lower average debt levels and the reversal of interest reserves related to U.S. federal income tax audits.
Net earnings attributable to noncontrolling interests totaled a loss of $19 million in 2014 compared with a loss of $17 million in 2013 and earnings of $5 million in 2012. The decrease in 2014 reflects the impact of the acquisition of the remaining 25% share of Orsa IP from the joint venture partner. The decrease in 2013 primarily reflects lower earnings for the Shandong IP & Sun Food Packaging Co., Ltd. joint venture in China due to competitive pressures on sales prices and higher pulp costs. In addition, 2013 includes a $15 million pre-tax charge for the impairment of a tradename intangible asset related to our India Papers business which has a net $3 million impact on noncontrolling interest.
Special Items
Restructuring and Other Charges
International Paper continually evaluates its operations for improvement opportunities targeted to (a) focus our portfolio on our core businesses, (b) rationalize and realign capacity to operate fewer facilities with the same revenue capability and close high cost facilities, and (c) reduce costs. Annually, strategic operating plans are developed by each of our businesses. If it subsequently becomes apparent that a facility’s plan will not be achieved, a decision is then made to (a) invest additional capital to upgrade the facility, (b) shut down the facility and record the corresponding charge, or (c) evaluate the expected recovery of the carrying value of the facility to determine if an impairment of the asset value of the facility has occurred. In recent years, this policy has led to the shutdown of a number of facilities and the recording of significant asset impairment charges and severance costs. It is possible that additional charges and costs will be incurred in future periods in our core businesses should such triggering events occur.
2014: During 2014, corporate restructuring and other charges totaling $277 million before taxes ($169 million after taxes) were recorded. These charges included:
• | a $276 million charge before taxes ($169 million after taxes) for costs related to the early extinguishment of debt (see Note 13 Debt and Lines of Credit on pages 69 and 70 of Item 8. Financial Statements and Supplementary Data) |
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In addition, restructuring and other charges totaling $569 million before taxes ($349 million after taxes) were recorded in the Industrial Packaging, Printing Papers and Consumer Packaging industry segments including:
• | a $554 million charge before taxes ($338 million after taxes) for costs related to the shutdown of the Courtland, Alabama mill, and |
• | a $15 million charge before taxes ($11 million after taxes) for other items. |
2013: During 2013, corporate restructuring and other charges totaling a gain of $5 million before taxes ($3 million after taxes) were recorded. These charges included:
• | a $25 million charge before taxes ($16 million after taxes) for costs related to the early extinguishment of debt (see Note 13 Debt and Lines of Credit on pages 69 and 70 of Item 8. Financial Statements and Supplementary Data), and |
• | a $30 million gain before taxes ($19 million after taxes) for insurance reimbursements related to the Guaranty Bank legal settlement. |
In addition, restructuring and other charges totaling $161 million before taxes ($101 million after taxes) were recorded in the Industrial Packaging, Printing Papers and Consumer Packaging industry segments including:
• | a $118 million charge before taxes ($72 million after taxes) for costs related to the shutdown of the Courtland, Alabama mill, |
• | a $45 million charge before taxes ($28 million after taxes) for costs related to the shutdown of a paper machine at the Augusta, Georgia mill, and |
• | a $2 million gain before taxes (loss of $1 million after taxes) for other items. |
2012: During 2012, corporate restructuring and other charges totaling $51 million before taxes ($35 million after taxes) were recorded. These charges included:
• | a $48 million charge before taxes ($30 million after taxes) for costs related to the early extinguishment of debt (see Note 13 Debt and Lines of Credit on pages 69 and 70 of Item 8. Financial Statements and Supplementary Data), and |
• | a $3 million charge before taxes ($5 million after taxes) for other items. |
In addition, restructuring and other charges totaling $14 million before taxes ($11 million after taxes) were recorded in the Industrial Packaging and Consumer Packaging industry segments including:
• | a $17 million charge before taxes ($12 million after taxes) related to the restructuring of our Packaging business in EMEA, and |
• | a $3 million gain before taxes ($1 million after taxes) for other items. |
Impairments of Goodwill
In the fourth quarter of 2014, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Asia Industrial Packaging business using expected discounted future cash flows and determined that due to a change in the strategic outlook, all of the goodwill of this business, totaling $100 million, should be written off. The decline in the fair value of the Asia Industrial Packaging business and resulting impairment charge was due to a change in the strategic outlook for the business.
In the fourth quarter of 2013, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its India Papers business using expected discounted future cash flows and determined that due to a change in the strategic outlook, all of the goodwill of this business, totaling $112 million, should be written off. The decline in the fair value of the India Papers reporting unit and resulting impairment charge was due to a change in the strategic outlook for the India Papers operations.
Also in the fourth quarter of 2013, the Company calculated the estimated fair value of its xpedx business using the discounted future cash flows and wrote off all of the goodwill of its xpedx business, totaling $400 million, which has been included in Discontinued operations in the accompanying consolidated statement of operations. The decline in the fair value of the xpedx reporting unit and resulting impairment charge was due to a significant decline in earnings and a change in the strategic outlook for the xpedx operations.
Also during 2013, the Company recorded a pre-tax charge of $15 million ($7 million after taxes and noncontrolling interest) for the impairment of a trade name intangible asset related to our India Papers business.
No goodwill impairment charges were recorded in 2012.
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Net Losses (Gains) on Sales and Impairments of Businesses
Net losses (gains) on sales and impairments of businesses included in special items totaled a pre-tax loss of $38 million ($31 million after taxes) in 2014, a pre-tax loss of $3 million ($1 million after taxes) in 2013 and a pre-tax loss of $86 million ($87 million after taxes) in 2012. The principal components of these gains/losses were:
2014: During 2014, the Company recorded net pre-tax charges of $47 million ($36 million after taxes) for a loss on the sale of a business by ASG in which we hold an investment and the subsequent partial impairment of our ASG investment, and a pre-tax gain of $9 million ($5 million after taxes) related to the sale of an investment.
2013: During 2013, the Company recorded net pre-tax charges of $3 million ($1 million after taxes) for adjustments related to the divestiture of three containerboard mills in 2012 and the sale of the Shorewood business.
2012: As referenced in Note 6 Acquisitions and Joint Ventures on pages 56 through 59 in Item. 8 Financial Statements and Supplementary Data, on July 2, 2012, International Paper finalized the sales of its Ontario and Oxnard (Hueneme), California containerboard mills to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee containerboard mill to Hood Container Corporation. During 2012, the Company recorded pre-tax charges of $29 million ($55 million after taxes) for costs associated with the divestitures of these mills. Also during 2012, in anticipation of the divestiture of the Hueneme mill, a pre-tax charge of $62 million ($38 million after taxes) was recorded to adjust the long-lived assets of the mill to their fair value.
Industry Segment Operating Profits
Industry segment operating profits of $2.1 billion in 2014 decreased from $2.2 billion in 2013. The benefits from higher average sales price realizations and mix ($563 million) and lower other costs ($16 million) were offset by lower sales volumes ($35 million), higher operating costs ($138 million), higher input costs ($141 million), higher mill outage costs ($3 million) and higher costs associated with the closure of our Courtland, Alabama mill ($41 million). Special items were a $732 million net loss in 2014 compared with a net loss of $336 million in 2013.
Market-related downtime in 2014 decreased to approximately 281,000 tons from approximately 412,000 tons in 2013.
International Paper’s industry segments discussed below are consistent with the internal structure used to manage these businesses. All segments are differentiated on a common product, common customer basis consistent with the business segmentation generally used in the forest products industry.
Industrial Packaging
International Paper is the largest manufacturer of containerboard in the United States. Our production capacity is about 13 million tons annually. Our products include linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. About 80% of our production is converted domestically into corrugated boxes and other packaging by our 168 U.S. container plants. Additionally, we recycle approximately one million tons of OCC and mixed and white paper through our 20 recycling plants. In EMEA, our operations include three recycled fiber containerboard mills in Morocco and Turkey and 27 container plants in France, Italy, Spain, Morocco and Turkey. In Brazil our operations include three containerboard mills and four box plants. In Asia, our operations include 17 container plants in China and additional container plants in Indonesia, Malaysia, Singapore, and Thailand. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives.
Printing Papers
International Paper is one of the world’s leading producers of printing and writing papers. Products in this segment include uncoated papers and pulp.
Uncoated Papers: This business produces papers for use in copiers, desktop and laser printers and digital imaging. End use applications include advertising and promotional materials such as brochures, pamphlets, greeting cards, books, annual reports and direct mail. Uncoated papers also produces a variety of grades that are converted by our customers into envelopes, tablets, business forms and file folders. Uncoated papers are sold under private label and International Paper brand names that include Hammermill, Springhill, Williamsburg, Postmark, Accent, Great White, Chamex, Ballet, Rey, Pol, and Svetocopy. The mills producing uncoated papers are located in the United States, France, Poland, Russia, Brazil and India. The mills have uncoated paper production capacity of approximately 4 million tons annually. Brazilian operations function through International Paper do Brasil, Ltda, which owns or manages approximately 334,000 acres of forestlands in Brazil.
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Pulp: Pulp is used in the manufacture of printing, writing and specialty papers, towel and tissue products and filtration products. Pulp is also converted into products such as diapers and sanitary napkins. Pulp products include fluff, and southern softwood pulp, as well as southern and birch hardwood paper pulps. These products are produced in the United States, France, Poland, Russia, and Brazil and are sold around the world. International Paper facilities have annual dried pulp capacity of about 1.8 million tons.
Consumer Packaging
International Paper is the world’s largest producer of solid bleached sulfate board with annual U.S. production capacity of about 1.6 million tons. Our coated paperboard business produces high quality coated paperboard for a variety of packaging and commercial printing end uses. Our Everest®, Fortress®, and Starcote® brands are used in packaging applications for everyday products such as food, cosmetics, pharmaceuticals, computer software and tobacco products. Our Carolina® brand is used in commercial printing end uses such as greeting cards, paperback book covers, lottery tickets, direct mail and point-of-purchase advertising. Our U.S. capacity is supplemented by about 352,000 tons of capacity at our mills producing coated board in Poland and Russia and by our International Paper & Sun Cartonboard Co., Ltd. joint venture in China which has annual capacity of 1.4 million tons.
Our Foodservice business produces cups, lids, food containers and plates through three domestic plants and four international facilities.
Ilim Holding S.A.
In October 2007, International Paper and Ilim Holding S.A. (Ilim) completed a 50:50 joint venture to operate a pulp and paper business located in Russia. Ilim’s facilities include three paper mills located in Bratsk, Ust-Ilimsk, and Koryazhma, Russia, with combined total pulp and paper capacity of over 3.2 million tons. Ilim has exclusive harvesting rights on timberland and forest areas exceeding 14.1 million acres (5.7 million hectares).
Products and brand designations appearing in italics are trademarks of International Paper or a related company.
Industrial Packaging
Demand for Industrial Packaging products is closely correlated with non-durable industrial goods production, as well as with demand for processed foods,
poultry, meat and agricultural products. In addition to prices and volumes, major factors affecting the profitability of Industrial Packaging are raw material and energy costs, freight costs, manufacturing efficiency and product mix.
Industrial Packaging net sales and operating profits include the results of the Temple-Inland packaging operations from the date of acquisition in February 2012 and the results of the Brazil Packaging business from the date of acquisition in January 2013. In addition, due to the acquisition of a majority share of Olmuksa International Paper Sabanci Ambalaj Sanayi Ve Ticaret A.S., (now called Olmuksan International Paper or Olmuksan) net sales for our corrugated packaging business in Turkey are included in the business segment totals beginning in the first quarter of 2013 and the operating profits reflect a higher ownership percentage than in previous years. Net sales for 2014 increased 1% to $14.9 billion compared with $14.8 billion in 2013, and 13% compared with $13.3 billion in 2012. Operating profits were 5% higher in 2014 than in 2013 and 78% higher than in 2012. Excluding costs associated with the acquisition and integration of Temple-Inland, goodwill impairment charges, the divestiture of three containerboard mills, costs associated with a multi-employer pension liability and other special items, operating profits in 2014 were 11% higher than in 2013 and 52% higher than in 2012. Benefits from the net impact of higher average sales price realizations and mix ($308 million) were offset by lower sales volumes ($12 million), higher operating costs ($21 million), higher maintenance outage costs ($20 million), higher input costs ($49 million) and higher other costs ($1 million). Additionally, operating profits in 2014 include a goodwill impairment charge of $100 million related to our Asia Industrial Packaging business, costs of $16 million associated with the integration of Temple-Inland, a charge of $35 million associated with a multi-employer pension plan withdrawal liability and a net charge of $7 million for other items, while operating profits in 2013 include costs of $62 million associated with the integration of Temple-Inland, a gain of $13 million related to a bargain purchase adjustment on the acquisition of a majority share of our operations in Turkey, and a net gain of $1 million for other items.
Industrial Packaging | |||||||||
In millions | 2014 | 2013 | 2012 | ||||||
Sales | $ | 14,944 | $ | 14,810 | $ | 13,280 | |||
Operating Profit | 1,896 | 1,801 | 1,066 | ||||||
North American Industrial Packaging net sales were $12.7 billion in 2014 compared with $12.5 billion in 2013 and $11.6 billion in 2012. Operating profits in 2014 were $2.0 billion (both including and excluding costs associated with the integration of Temple-Inland, a multi-employer pension withdrawal liability and other
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special items) compared with $1.8 billion (both including and excluding costs associated with the integration of Temple-Inland and other special items) in 2013 and $1.0 billion ($1.3 billion excluding costs associated with the acquisition and integration of Temple-Inland and mill divestiture costs) in 2012.
Sales volumes decreased in 2014 compared with 2013 reflecting slightly softer market demand for boxes. Average sales price realizations were higher mainly due to the realization of price increases for boxes and domestic containerboard that were implemented in 2013. Input costs were significantly higher for wood and energy. Freight costs also increased. Planned maintenance downtime costs were $20 million higher than in 2013. Manufacturing operating costs decreased, but were offset by inflation and higher overhead and distribution costs. The business took about 655,000 tons of total downtime in 2014 of which 240,000 were market-related and 415,000 were maintenance downtime. In 2013, the business took about 777,000 tons of total downtime of which about 377,000 were market-related and 400,000 were maintenance downtime. Operating profits in 2014 included $16 million of costs associated with the integration of Temple-Inland and a charge of $35 million associated with a multi-employer pension withdrawal liability. Operating profits in 2013 included $62 million of costs associated with the integration of Temple-Inland.
Looking ahead to 2015, compared with the fourth quarter of 2014, sales volumes for boxes in the first quarter are expected to be stable. Input costs are expected to be similar for wood and recycled fiber, but lower for mill energy. Planned maintenance downtime spending is expected to be about $18 million higher with outages scheduled at the Pine Hill, Savannah, Pensacola and Vicksburg mills. Manufacturing and other operating costs are expected to improve.
EMEA Industrial Packaging net sales in 2014 and 2013 include the sales of our packaging operations in Turkey which are fully consolidated as of the beginning of 2013. Net sales were $1.3 billion in 2014 compared with $1.3 billion in 2013 and $1.0 billion in 2012. Operating profits in 2014 were $25 million ($31 million excluding restructuring costs) compared with $43 million ($32 million excluding a gain on a bargain purchase price adjustment on the acquisition of a majority share of our operations in Turkey and restructuring costs) in 2013 and $53 million ($72 million excluding restructuring costs) in 2012.
Sales volumes in 2014 were higher than in 2013 reflecting recovering economic conditions and improved demand for industrial packaging. Average sales margins were higher due to increased sales prices for boxes, partially offset by higher board costs. Other input costs, primarily for energy, were lower. Operating
profits included net gains of $2 million and $13 million in 2014 and 2013, respectively, for insurance settlements and Italian government grants, partially offset by additional operating costs in 2013, related to the earthquakes in Northern Italy in May 2012, which affected our San Felice box plant.
Entering the first quarter of 2015, sales volumes are expected to increase slightly reflecting continuing economic recovery. Average sales margins are expected to be favorably impacted by lower board costs, but box prices may decline due to competitive pressures. Other input costs should be about flat.
Brazilian Industrial Packaging net sales were $349 million in 2014 compared with $335 million in 2013. Operating profits in 2014 were a loss of $3 million ($4 million excluding a net gain related to acquisition and integration costs) compared with a loss of $2 million (a net gain of $2 million excluding acquisition and integration costs) in 2013.
Sales volumes in 2014 decreased compared with 2013 due to overall weaker market demand and lower box consumption in the product segments of some of our key customers. Average sales price realizations were higher reflecting the impact of sales price increases implemented in the first half of 2014. Input costs were higher, primarily for recycled fiber and chemicals. Operating costs were higher.
Looking ahead to the first quarter of 2015, sales volumes are expected to be stable. Average sales margins should improve reflecting a more favorable product mix. Input costs are expected to be stable.
Asian Industrial Packaging net sales were $625 million in 2014 compared with $685 million in 2013 and $660 million in 2012. Operating profits were a loss of $112 million (a loss of $5 million excluding goodwill impairment charges and restructuring costs) in 2014 compared with a loss of $2 million (a gain of $2 million excluding restructuring costs) in 2013 and a gain of $5 million in 2012. Operating profits were negatively impacted in 2014 compared with 2013 by lower average sales margins and lower sales volumes, partially offset by decreased operating costs Looking ahead to the first quarter of 2015, sales volumes and average sales margins are expected to be seasonally soft.
Printing Papers
Demand for Printing Papers products is closely correlated with changes in commercial printing and advertising activity, direct mail volumes and, for uncoated cut-size products, with changes in white-collar employment levels that affect the usage of copy and laser printer paper. Pulp is further affected by changes in currency rates that can enhance or disadvantage producers in different geographic
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regions. Principal cost drivers include manufacturing efficiency, raw material and energy costs and freight costs.
Printing Papers net sales for 2014 decreased 8% to $5.7 billion compared with $6.2 billion in 2013 and 8% compared with $6.2 billion in 2012. Operating profits in 2014 were 106% lower than in 2013 and 103% lower than in 2012. Excluding facility closure costs, impairment costs and other special items, operating profits in 2014 were 7% higher than in 2013 and 8% lower than in 2012. Benefits from higher average sales price realizations and a favorable mix ($178 million), lower planned maintenance downtime costs ($26 million), the absence of a provision for bad debt related to a large envelope customer that was booked in 2013 ($28 million), and lower foreign exchange and other costs ($25 million) were offset by lower sales volumes ($82 million), higher operating costs ($49 million), higher input costs ($47 million), and costs associated with the closure of our Courtland, Alabama mill ($41 million). In addition, operating profits in 2014 include special items costs of $554 million associated with the closure of our Courtland, Alabama mill. During 2013, the Company accelerated depreciation for certain Courtland assets, and evaluated certain other assets for possible alternative uses by one of our other businesses. The net book value of these assets at December 31, 2013 was approximately $470 million. In the first quarter of 2014, we completed our evaluation and concluded that there were no alternative uses for these assets. We recognized approximately $464 million of accelerated depreciation related to these assets in 2014. Operating profits in 2014 also include a charge of $32 million associated with a foreign tax amnesty program, and a gain of $20 million for the resolution of a legal contingency in India, while operating profits in 2013 included costs of $118 million associated with the announced closure of our Courtland, Alabama mill and a $123 million impairment charge associated with goodwill and a trade name intangible asset in our India Papers business.
Printing Papers | |||||||||
In millions | 2014 | 2013 | 2012 | ||||||
Sales | $ | 5,720 | $ | 6,205 | $ | 6,230 | |||
Operating Profit (Loss) | (16 | ) | 271 | 599 | |||||
North American Printing Papers net sales were $2.1 billion in 2014, $2.6 billion in 2013 and $2.7 billion in 2012. Operating profits in 2014 were a loss of $398 million (a gain of $156 million excluding costs associated with the shutdown of our Courtland, Alabama mill) compared with gains of $36 million ($154 million excluding costs associated with the Courtland mill shutdown) in 2013 and $331 million in 2012.
Sales volumes in 2014 decreased compared with 2013 due to lower market demand for uncoated freesheet
paper and the closure our Courtland mill. Average sales price realizations were higher, reflecting sales price increases in both domestic and export markets. Higher input costs for wood were offset by lower costs for chemicals, however freight costs were higher. Planned maintenance downtime costs were $14 million lower in 2014. Operating profits in 2014 were negatively impacted by costs associated with the shutdown of our Courtland, Alabama mill but benefited from the absence of a provision for bad debt related to a large envelope customer that was recorded in 2013.
Entering the first quarter of 2015, sales volumes are expected to be stable compared with the fourth quarter of 2014. Average sales margins should improve reflecting a more favorable mix although average sales price realizations are expected to be flat. Input costs are expected to be stable. Planned maintenance downtime costs are expected to be about $16 million lower with an outage scheduled in the 2015 first quarter at our Georgetown mill compared with outages at our Eastover and Riverdale mills in the 2014 fourth quarter.
Brazilian Papers net sales for 2014 were $1.1 billion compared with $1.1 billion in 2013 and $1.1 billion in 2012. Operating profits for 2014 were $177 million ($209 million excluding costs associated with a tax amnesty program) compared with $210 million in 2013 and $163 million in 2012.
Sales volumes in 2014 were about flat compared with 2013. Average sales price realizations improved for domestic uncoated freesheet paper due to the realization of price increases implemented in the second half of 2013 and in 2014. Margins were favorably affected by an increased proportion of sales to the higher-margin domestic market. Raw material costs increased for wood and chemicals. Operating costs were higher than in 2013 and planned maintenance downtime costs were flat.
Looking ahead to 2015, sales volumes in the first quarter are expected to decrease due to seasonally weaker customer demand for uncoated freesheet paper. Average sales price improvements are expected to reflect the partial realization of announced sales price increases in the Brazilian domestic market for uncoated freesheet paper. Input costs are expected to be flat. Planned maintenance outage costs should be $5 million lower with an outage scheduled at the Luiz Antonio mill in the first quarter.
European Papers net sales in 2014 were $1.5 billion compared with $1.5 billion in 2013 and $1.4 billion in 2012. Operating profits in 2014 were $140 million compared with $167 million in 2013 and $179 million in 2012.
Compared with 2013, sales volumes for uncoated freesheet paper in 2014 were slightly higher in both
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Russia and Europe. Average sales price realizations for uncoated freesheet paper decreased in both Europe and Russia, reflecting weak economic conditions and soft market demand. In Russia, sales prices in rubles increased, but this improvement is masked by the impact of the currency depreciation against the U.S. dollar. Input costs were significantly higher for wood in both Europe and Russia, partially offset by lower chemical costs. Planned maintenance downtime costs were $11 million lower in 2014 than in 2013. Manufacturing and other operating costs were favorable.
Entering 2015, sales volumes in the first quarter are expected to be seasonally weaker in Russia, and about flat in Europe. Average sales price realizations for uncoated freesheet paper are expected to remain steady in Europe, but increase in Russia. Input costs should be lower for oil and wood, partially offset by higher chemicals costs.
Indian Papers net sales were $178 million in 2014, $185 million ($174 million excluding excise duties which were included in net sales in 2013 and prior periods) in 2013 and $185 million ($178 million excluding excise duties) in 2012. Operating profits were $8 million (a loss of $12 million excluding a gain related to the resolution of a legal contingency) in 2014, a loss of $145 million (a loss of $22 million excluding goodwill and trade name impairment charges) in 2013 and a loss of $16 million in 2012.
Average sales price realizations improved in 2014 compared with 2013 due to the impact of price increases implemented in 2013. Sales volumes were flat, reflecting weak economic conditions. Input costs were higher, primarily for wood. Operating costs and planned maintenance downtime costs were lower in 2014. Looking ahead to the first quarter of 2015, sales volumes are expected to be seasonally higher. Average sales price realizations are expected to decrease due to competitive pressures.
Asian Printing Papers net sales were $59 million in 2014, $90 million in 2013 and $85 million in 2012. Operating profits were $0 million in 2014 and $1 million in both 2013 and 2012.
U.S. Pulp net sales were $895 million in 2014 compared with $815 million in 2013 and $725 million in 2012. Operating profits were $57 million in 2014 compared with $2 million in 2013 and a loss of $59 million in 2012.
Sales volumes in 2014 increased from 2013 for both fluff pulp and market pulp reflecting improved market demand. Average sales price realizations increased significantly for fluff pulp, while prices for market pulp were also higher. Input costs for wood and energy were higher. Operating costs were lower, but planned maintenance downtime costs were $1 million higher.
Compared with the fourth quarter of 2014, sales volumes in the first quarter of 2015, are expected to decrease for market pulp, but be slightly higher for fluff pulp. Average sales price realizations are expected to to be stable for fluff pulp and softwood market pulp, while hardwood market pulp prices are expected to improve. Input costs should be flat. Planned maintenance downtime costs should be about $13 million higher than in the fourth quarter of 2014.
Consumer Packaging
Demand and pricing for Consumer Packaging products correlate closely with consumer spending and general economic activity. In addition to prices and volumes, major factors affecting the profitability of Consumer Packaging are raw material and energy costs, freight costs, manufacturing efficiency and product mix.
Consumer Packaging net sales in 2014 decreased 1% from 2013, but increased 7% from 2012. Operating profits increased 11% from 2013, but decreased 34% from 2012. Excluding sheet plant closure costs, costs associated with the permanent shutdown of a paper machine at our Augusta, Georgia mill and costs related to the sale of the Shorewood business, 2014 operating profits were 11% lower than in 2013, and 30% lower than in 2012. Benefits from higher average sales price realizations and a favorable mix ($60 million) were offset by lower sales volumes ($11 million), higher operating costs ($9 million), higher planned maintenance downtime costs ($12 million), higher input costs ($43 million) and higher other costs ($7 million). In addition, operating profits in 2014 include $8 million of costs associated with sheet plant closures, while operating profits in 2013 include costs of $45 million related to the permanent shutdown of a paper machine at our Augusta, Georgia mill and $2 million of costs associated with the sale of the Shorewood business.
Consumer Packaging | |||||||||
In millions | 2014 | 2013 | 2012 | ||||||
Sales | $ | 3,403 | $ | 3,435 | $ | 3,170 | |||
Operating Profit | 178 | 161 | 268 | ||||||
North American Consumer Packaging net sales were $2.0 billion in 2014 compared with $2.0 billion in 2013 and $2.0 billion in 2012. Operating profits were $92 million ($100 million excluding sheet plant closure costs) in 2014 compared with $63 million ($110 million excluding paper machine shutdown costs and costs related to the sale of the Shorewood business) in 2013 and $165 million ($162 million excluding a gain associated with the sale of the Shorewood business in 2012).
Coated Paperboard sales volumes in 2014 were lower than in 2013 reflecting weaker market demand. The business took about 41,000 tons of market-related downtime in 2014 compared with about 24,000 tons in 2013. Average sales price realizations increased year-
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over-year due to the impact of sales price increases implemented in 2013 and 2014. Input costs increased, primarily for wood and energy. Planned maintenance downtime costs were $11 million higher in 2014. Operating costs were also higher.
Foodservice sales volumes increased in 2014 compared with 2013 reflecting strong market demand. Average sales margins were flat as higher average sales prices and a more favorable customer mix were offset by higher input costs for board and resins. Operating costs and distribution costs were both higher.
Looking ahead to the first quarter of 2015, Coated Paperboard sales volumes are expected to be seasonally weaker than in the fourth quarter of 2014. Average sales price realizations are expected to be slightly higher, and margins should also benefit from a more favorable product mix. Input costs are expected to be higher for wood and energy. Planned maintenance downtime costs should be $4 million higher with a planned maintenance outage scheduled at our Augusta mill in the first quarter. Foodservice sales volumes are expected to be seasonally lower. Average sales margins are expected to improve due to the realization of sales price increases effective with our January contract openers. Input costs, primarily for resin, are expected to improve and operating costs are expected to decrease.
European Consumer Packaging net sales in 2014 were $365 million compared with $380 million in 2013 and $380 million in 2012. Operating profits in 2014 were $91 million compared with $100 million in 2013 and $99 million in 2012. Sales volumes in 2014 compared with 2013 were flat as an increase in the Russian market was offset by a decrease in the European market. Average sales price realizations were higher in the Russian market. In Europe, average sales price realizations decreased and average sales margins were also negatively impacted by an unfavorable geographic mix. Input costs, primarily for wood, increased year-over-year. Planned maintenance downtime costs were $1 million lower in 2014 than in 2013.
Looking forward to the first quarter of 2015, sales volumes are expected to be lower than in the fourth quarter of 2014 reflecting weak economic conditions. Average sales price realizations are expected to be slightly higher in both Russia and Europe. Input costs are expected to be lower, primarily for fuel.
Asian Consumer Packaging net sales were $1.0 billion in 2014 compared with $1.1 billion in 2013 and $830 million in 2012. Operating profits in 2014 were a loss of $5 million compared with a loss of $2 million in 2013 and a gain of $4 million in 2012. Sales volumes and average sales price realizations were lower in 2014 due to over-supplied market conditions and competitive
pressures. The currency depreciation of the Chinese renminbi against the U.S. dollar also negatively impacted year-over-year results. However, average sales margins benefited from a more favorable product mix. Input costs and freight costs were lower and operating costs also decreased.
In the first quarter of 2015, sales volumes are expected to be slightly lower. Average sales price realizations are expected to be flat reflecting continuing competitive pressures. The business will drive earnings improvement through operational excellence.
Equity Earnings, Net of Taxes – Ilim Holding S.A.
International Paper accounts for its investment in Ilim Holding S.A. (Ilim), a separate reportable industry segment, using the equity method of accounting.
The Company recorded equity earnings, net of taxes, related to Ilim of a loss of $194 million in 2014 compared with a loss of $46 million in 2013 and a gain of $56 million in 2012. Operating results recorded in 2014 included an after-tax non-cash foreign exchange loss of $269 million compared with an after-tax foreign exchange loss of $32 million in 2013 and an after-tax foreign exchange gain of $16 million in 2012 primarily on the remeasurement of Ilim's U.S. dollar-denominated net debt.
Sales volumes for the joint venture increased year-over-year for shipments to China of hardwood pulp, softwood pulp and linerboard. Sales volumes in the domestic Russian market increased for linerboard, but decreased for softwood pulp and hardwood pulp. Average sales price realizations were higher in 2014 for sales to China of softwood pulp, but lower for hardwood pulp . In the domestic market, average sales price realizations were lower for pulp and linerboard. Input costs increased year-over-year for wood, chemicals and energy. The Company received cash dividends from the joint venture of $56 million in 2014. No dividends were paid in 2013 and 2012.
Entering the first quarter of 2015, sales volumes are expected to be seasonally lower than in the fourth quarter of 2014 due to the January holidays in Russia. Average sales price realizations are expected to remain strong for exported hardwood pulp and domestic linerboard and paper, partially offset by lower sales prices for exported softwood pulp. Input costs for wood and energy should be higher and distribution costs are also expected to increase.
Overview
A major factor in International Paper’s liquidity and capital resource planning is its generation of operating cash flow, which is highly sensitive to changes in the
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pricing and demand for our major products. While changes in key cash operating costs, such as energy, raw material and transportation costs, do have an effect on operating cash generation, we believe that our focus on pricing and cost controls has improved our cash flow generation over an operating cycle.
Cash uses during 2014 were primarily focused on working capital requirements, capital spending, debt reductions and returning cash to shareholders.
Cash Provided by Operating Activities
Cash provided by operations totaled $3.1 billion in 2014 compared with $3.0 billion for 2013 and $3.0 billion for 2012.
The major components of cash provided by operations are earnings from operations adjusted for non-cash income and expense items, cash pension contributions and changes in working capital. Earnings from operations, adjusted for non-cash income and expense items and cash pension contributions decreased by $279 million in 2014 versus 2013 driven mainly by increased cash pension contributions in 2014. Cash used for working capital components, accounts receivable and inventory less accounts payable and accrued liabilities, interest payable and other totaled $158 million in 2014, compared with a cash use of $486 million in 2013 and cash provided of $84 million in 2012.
The Company generated free cash flow of approximately $2.1 billion, $1.8 billion and $1.6 billion in 2014, 2013 and 2012, respectively. Free cash flow is a non-GAAP measure and the most comparable GAAP measure is cash provided by operations. Management uses free cash flow as a liquidity metric because it measures the amount of cash generated that is available to maintain our assets, make investments or acquisitions, pay dividends and reduce debt. The following are reconciliations of free cash flow to cash provided by operations:
In millions | 2014 | 2013 | 2012 | ||||||
Cash provided by operations | $ | 3,077 | $ | 3,028 | $ | 2,967 | |||
(Less)/Add: | |||||||||
Cash invested in capital projects | (1,366 | ) | (1,198 | ) | (1,383 | ) | |||
Cash contribution to pension plan | 353 | 31 | 44 | ||||||
Cash received from unwinding a timber monetization | — | — | (251 | ) | |||||
Change in control payments related to Temple-Inland acquisition | — | — | 120 | ||||||
Insurance reimbursement for Guaranty Bank settlement | — | (30 | ) | 80 | |||||
Free Cash Flow | $ | 2,064 | $ | 1,831 | $ | 1,577 | |||
In millions | Three Months Ended December 31, 2014 | Three Months Ended September 30, 2014 | Three Months Ended December 31, 2013 | ||||||
Cash provided by operations | $ | 1,144 | $ | 933 | $ | 1,037 | |||
(Less)/Add: | |||||||||
Cash invested in capital projects | (405 | ) | (327 | ) | (439 | ) | |||
Cash contribution to pension plan | — | 90 | — | ||||||
Free Cash Flow | $ | 739 | $ | 696 | $ | 598 | |||
Alternative Fuel Mixture Credit
On July 19, 2011, the Company filed an amended 2009 tax return claiming alternative fuel mixture tax credits as non-taxable income. The amended position has been accepted by the Internal Revenue Service (IRS) in the closing of the IRS tax audit for the years 2006 - 2009. As a result, during 2013, the Company recognized an income tax benefit of $753 million related to the non-taxability of the alternative fuel mixture tax credits.
Investment Activities
Investment activities in 2014 were up from 2013 reflecting an increase in capital spending. The Company maintains an average capital spending target of $1.4 billion per year over the course of an economic cycle. Capital spending was $1.4 billion in 2014, or 97% of depreciation and amortization, compared with $1.2 billion in 2013, or 77% of depreciation and amortization, and $1.4 billion, or 93% of depreciation and amortization in 2012. Across our businesses, capital spending as a percentage of depreciation and amortization ranged from 87% to 104% in 2014.
The following table shows capital spending for operations by business segment for the years ended December 31, 2014, 2013 and 2012.
In millions | 2014 | 2013 | 2012 | ||||||
Industrial Packaging | $ | 754 | $ | 629 | $ | 565 | |||
Printing Papers | 318 | 294 | 449 | ||||||
Consumer Packaging | 233 | 208 | 296 | ||||||
Distribution | — | 9 | 10 | ||||||
Subtotal | 1,305 | 1,140 | 1,320 | ||||||
Corporate and other | 61 | 58 | 63 | ||||||
Total | $ | 1,366 | $ | 1,198 | $ | 1,383 | |||
Capital expenditures in 2015 are currently expected to be about $1.5 billion, or 105% of depreciation and amortization.
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Acquisitions and Joint Ventures
OLMUKSAN
2014: In May 2014, the Company conducted a voluntary tender offer for the remaining outstanding 12.6% public shares of Olmuksan. The Company also purchased outstanding shares of Olmuksan outside of the tender offer. As of December 31, 2014, the Company owned 91.7% of Olmuksan's outstanding and issued shares.
2013: On January 3, 2013, International Paper completed the acquisition (effective date of acquisition on January 1, 2013) of the shares of its joint venture partner, Sabanci Holding, in the Turkish corrugated packaging company, Olmuksa International Paper Sabanci Ambalaj Sanayi ve Ticaret A.S., now called Olmuksan International Paper Ambalaj Sanayi ve Ticaret A.S. (Olmuksan), for a purchase price of $56 million. The acquired shares represented 43.7% of Olmuksan's shares. Prior to this acquisition, International Paper held a 43.7% equity interest in Olmuksan.
Because the transaction resulted in International Paper becoming the majority shareholder, owning 87.4% of Olmuksan's outstanding and issued shares, its completion triggered a mandatory call for tender of the remaining public shares which began in March 2013 and ended in April 2013, with no shares tendered. As a result, the 12.6% owned by other parties were considered non-controlling interests. Olmuksan's financial results have been consolidated with the Company's Industrial Packaging segment beginning January 1, 2013, the effective date which International Paper obtained majority control of the entity.
Following the transaction, the Company's previously held 43.7% equity interest in Olmuksan was remeasured to a fair value of $75 million, resulting in a gain of $9 million. In addition, the cumulative translation adjustment balance of $17 million relating to the previously held equity interest was reclassified, as expense, from accumulated other comprehensive income.
The final purchase price allocation indicated that the sum of the cash consideration paid, the fair value of the noncontrolling interest and the fair value of the previously held interest was less than the fair value of the underlying assets by $21 million, resulting in a bargain purchase price gain being recorded on this transaction. The aforementioned remeasurement of equity interest gain, the cumulative translation adjustment to expense, and the bargain purchase gain are included in the Net bargain purchase gain on acquisition of business in the accompanying consolidated statement of operations.
ORSA
2014: On April 8, 2014, the Company acquired the remaining 25% of shares of Orsa International Paper Embalangens S.A. (Orsa IP) from its joint venture partner, Jari Celulose, Papel e Embalagens S.A. (Jari), a Grupo Orsa company, for approximately $127 million, of which $105 million was paid in cash with the remaining $22 million held back pending satisfaction of certain indemnification obligations by Jari. International Paper will release the amount held back, or any amount for which we have not notified Jari of a claim, by March 30, 2016. An additional $11 million, which was not included in the purchase price, was placed in an escrow account pending resolution of certain open matters. During 2014, these open matters were successfully resolved, which resulted in $9 million paid out of escrow to Jari and correspondingly added to the final purchase consideration. The remaining $2 million was released back to the Company. As a result of this transaction, the Company reversed the $168 million of Redeemable noncontrolling interest included on the March 31, 2014 consolidated balance sheet. The net difference between the Redeemable noncontrolling interest balance plus $14 million of currency translation adjustment reclassified out of Other comprehensive income less the 25% purchase price was reflected as an increase to Retained earnings on the consolidated balance sheet.
2013: On January 14, 2013, International Paper and Jari formed Orsa IP with International Paper holding a 75% stake. The value of International Paper's investment in Orsa IP was approximately $471 million. Because International Paper acquired a majority control of the joint venture, Orsa IP's financial results have been consolidated with our Industrial Packaging segment from the date of formation on January 14, 2013. The 25% owned by Jari was considered a redeemable noncontrolling interest and met the requirements to be classified outside permanent equity. As such, the Company reported $163 million in Redeemable noncontrolling interest in the December 31, 2013 consolidated balance sheet.
TEMPLE-INLAND, INC.
2012: On February 13, 2012, International Paper completed the acquisition of Temple-Inland, Inc. (Temple-Inland). International Paper acquired all of the outstanding common stock of Temple-Inland for $32.00 per share in cash, totaling approximately $3.7 billion, and assumed approximately $700 million of Temple-Inland’s debt. As a condition to allowing the transaction to proceed, the Company entered into an agreement on a Final Judgment with the Antitrust Division of the U.S. Department of Justice (DOJ) that required the Company to divest three containerboard mills, with approximately 970,000 tons of aggregate
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containerboard capacity. On July 2, 2012, International Paper sold its Ontario and Oxnard (Hueneme), California containerboard mills to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee containerboard mill to Hood Container Corporation. By completing these transactions, the Company satisfied its divestiture obligations under the Final Judgment. See Note 7 Divestitures/Spinoff on pages 59 and 60 of Item 8. Financial Statements and Supplementary Data for further details of these divestitures.
Temple-Inland's results of operations are included in the consolidated financial statements from the date of acquisition on February 13, 2012.
Financing Activities
Amounts related to early debt extinguishment during the years ended December 31, 2014, 2013 and 2012 were as follows:
In millions | 2014 | 2013 | 2012 | ||||||
Debt reductions (a) | $ | 1,625 | $ | 574 | $ | 1,272 | |||
Pre-tax early debt extinguishment costs (b) | 276 | 25 | 48 | ||||||
(a) | Reductions related to notes with interest rates ranging from 1.63% to 9.38% with original maturities from 2014 to 2041 for the years ended December 31, 2014, 2013 and 2012. |
(b) | Amounts are included in Restructuring and other charges in the accompanying consolidated statements of operations. |
2014: Financing activities during 2014 included debt issuances of $2.0 billion and retirements of $2.1 billion, for a net decrease of $113 million.
International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2014, International Paper had interest rate swaps with a total notional amount of $230 million and maturities in 2018 (see Note 14 Derivatives and Hedging Activities on pages 70 through 74 of Item 8. Financial Statements and Supplementary Data). During 2014, existing swaps and the amortization of deferred gains on previously terminated swaps decreased the weighted average cost of debt from 6.8% to an effective rate of 6.7%. The inclusion of the offsetting interest income from short-term investments reduced this effective rate to 6.3%.
During the second quarter of 2014, International Paper issued $800 million of 3.65% senior unsecured notes with a maturity date in 2024 and $800 million of 4.80% senior unsecured notes with a maturity date in 2044. The proceeds from this borrowing were used to repay approximately $960 million of notes with interest rates ranging from 7.95% to 9.38% and original maturities from 2018 to 2019. Pre-tax early debt retirement costs of $262 million related to these debt repayments, including $258 million of cash premiums, are included
in Restructuring and other charges in the accompanying consolidated statement of operations for the twelve months ended December 31, 2014.
Other financing activities during 2014 included the net repurchase of approximately 22.5 million shares of treasury stock, including restricted stock withholding, and the issuance of 1.6 million shares of common stock for various plans, including stock options exercises that generated approximately $66 million of cash. Repurchases of common stock and payments of restricted stock withholding taxes totaled $1.06 billion, including $983 million related to shares repurchased under the Company's share repurchase program.
In September 2014, International Paper announced that the quarterly dividend would be increased from $0.35 per share to $0.40 per share, effective for the 2014 fourth quarter.
2013: Financing activities during 2013 included debt issuances of $241 million and retirements of $845 million, for a net decrease of $604 million.
International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2013, International Paper had interest rate swaps with a total notional amount of $175 million and maturities in 2018 (see Note 14 Derivatives and Hedging Activities on pages 70 through 74 of Item 8. Financial Statements and Supplementary Data). During 2013, existing swaps and the amortization of deferred gains on previously terminated swaps decreased the weighted average cost of debt from 6.7% to an effective rate of 6.5%. The inclusion of the offsetting interest income from short-term investments reduced this effective rate to 6.2%.
Other financing activities during 2013 included the net repurchase of approximately 10.9 million shares of treasury stock, including restricted stock withholding, and the issuance of 7.3 million shares of common stock for various plans, including stock options exercises that generated approximately $298 million of cash. Repurchases of common stock and payments of restricted stock withholding taxes totaled $512 million, including $461 million related to shares repurchased under the Company's share repurchase program.
In September 2013, International Paper announced that the quarterly dividend would be increased from $0.30 per share to $0.35 per share, effective for the 2013 fourth quarter.
2012: Financing activities during 2012 included debt issuances of $2.1 billion and retirements of $2.5 billion, for a net decrease of $356 million.
In February 2012, International Paper issued a $1.2 billion term loan with an initial interest rate of LIBOR plus a margin of 138 basis points that varies depending
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on the credit rating of the Company and a $200 million term loan with an interest rate of LIBOR plus a margin of 175 basis points, both with maturity dates in 2017. The proceeds from these borrowings were used, along with available cash, to fund the acquisition of Temple-Inland. During 2012, International Paper fully repaid the $1.2 billion term loan.
International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2012, International Paper had interest rate swaps with a total notional amount of $150 million and maturities in 2013 (see Note 14 Derivatives and Hedging Activities on pages 70 through 74 of Item 8. Financial Statements and Supplementary Data). During 2012, existing swaps and the amortization of deferred gains on previously terminated swaps decreased the weighted average cost of debt from 6.8% to an effective rate of 6.6%. The inclusion of the offsetting interest income from short-term investments reduced this effective rate to 6.2%.
Other financing activities during 2012 included the issuance of approximately 1.9 million shares of treasury stock, net of restricted stock withholding, and 1.0 million shares of common stock for various incentive plans, including stock options exercises that generated approximately $108 million of cash. Payment of restricted stock withholding taxes totaled $35 million.
Off-Balance Sheet Variable Interest Entities
Information concerning off-balance sheet variable interest entities is set forth in Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 67 through 69 of Item 8. Financial Statements and Supplementary Data for discussion.
Liquidity and Capital Resources Outlook for 2015
Capital Expenditures and Long-Term Debt
International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2015 through current cash balances and cash from operations. Additionally, the Company has existing credit facilities totaling $2.0 billion of which nothing has been used.
The Company was in compliance with all its debt covenants at December 31, 2014. The Company’s financial covenants require the maintenance of a minimum net worth of $9 billion and a total debt-to-capital ratio of less than 60%. Net worth is defined as the sum of common stock, paid-in capital and retained earnings, less treasury stock plus any cumulative goodwill impairment charges. The calculation also excludes accumulated other comprehensive income/loss and Nonrecourse Financial Liabilities of Special Purpose Entities. The total debt-to-capital ratio is
defined as total debt divided by the sum of total debt plus net worth. At December 31, 2014, International Paper’s net worth was $14.0 billion, and the total-debt-to-capital ratio was 40%.
The Company will continue to rely upon debt and capital markets for the majority of any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure planning objectives. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors.
Maintaining an investment grade credit rating is an important element of International Paper’s financing strategy. At December 31, 2014, the Company held long-term credit ratings of BBB (stable outlook) and Baa2 (stable outlook) by S&P and Moody’s, respectively.
Contractual obligations for future payments under existing debt and lease commitments and purchase obligations at December 31, 2014, were as follows:
In millions | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | ||||||||||||
Maturities of long-term debt (a) | $ | 742 | $ | 543 | $ | 71 | $ | 1,229 | $ | 605 | $ | 6,184 | ||||||
Debt obligations with right of offset (b) | — | 5,202 | — | — | — | — | ||||||||||||
Lease obligations | 142 | 106 | 84 | 63 | 45 | 91 | ||||||||||||
Purchase obligations (c) | 3,266 | 761 | 583 | 463 | 422 | 1,690 | ||||||||||||
Total (d) | $ | 4,150 | $ | 6,612 | $ | 738 | $ | 1,755 | $ | 1,072 | $ | 7,965 | ||||||
(a) | Total debt includes scheduled principal payments only. |
(b) | Represents debt obligations borrowed from non-consolidated variable interest entities for which International Paper has, and intends to effect, a legal right to offset these obligations with investments held in the entities. Accordingly, in its consolidated balance sheet at December 31, 2014, International Paper has offset approximately $5.2 billion of interests in the entities against this $5.3 billion of debt obligations held by the entities (see Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 67 through 69 in Item 8. Financial Statements and Supplementary Data). |
(c) | Includes $2.3 billion relating to fiber supply agreements entered into at the time of the 2006 Transformation Plan forestland sales and in conjunction with the 2008 acquisition of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business. |
(d) | Not included in the above table due to the uncertainty as to the amount and timing of the payment are unrecognized tax benefits of approximately $119 million. |
As discussed in Note 12 Variable Interest Entities and Preferred Securities of Subsidiaries on pages 67 through 69 in Item 8. Financial Statements and Supplementary Data, in connection with the 2006 International Paper installment sale of forestlands, we received $4.8 billion of installment notes (or timber notes), which we contributed to certain non-consolidated borrower entities. The installment notes mature in August 2016 (unless extended). The deferred
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tax liability of $1.4 billion related to the 2006 forestlands sale will be settled in connection with the maturity of the timber notes. The entities to which these installment notes were contributed used the installment notes as collateral for $4.8 billion of borrowings from third-party lenders. Of these third-party loans, $4.1 billion mature in September 2015. Failure to extend, renew or refinance these third-party loans prior to their stated maturity, which we believe is unlikely, could trigger the sale of the installment notes to facilitate the $4.1 billion debt payment which, in turn, would result in an acceleration of the payment of the deferred income taxes that resulted from the 2006 forestlands sale. As a result, we could have tax payment obligations of approximately $1.2 billion in 2015. We expect we would fund these tax payments, if required, from current cash balances, cash from operations, borrowings under our existing credit facilities, accessing capital markets, or a combination thereof.
We consider the undistributed earnings of our foreign subsidiaries as of December 31, 2014, to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. As of December 31, 2014, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $1 billion. We do not anticipate the need to repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.
Pension Obligations and Funding
At December 31, 2014, the projected benefit obligation for the Company’s U.S. defined benefit plans determined under U.S. GAAP was approximately $3.8 billion higher than the fair value of plan assets. Approximately $3.4 billion of this amount relates to plans that are subject to minimum funding requirements. Under current IRS funding rules, the calculation of minimum funding requirements differs from the calculation of the present value of plan benefits(the projected benefit obligation) for accounting purposes. In December 2008, the Worker, Retiree and Employer Recovery Act of 2008 (WERA) was passed by the U.S. Congress which provided for pension funding relief and technical corrections. Funding contributions depend on the funding method selected by the Company, and the timing of its implementation, as well as on actual demographic data and the targeted funding level. The Company continually reassesses the amount and timing of any discretionary contributions and elected to make contributions totaling $353 million and $31 million for the years ended December 31, 2014 and 2013, respectively. At this time, we expect that required contributions to its plans in 2015 will be approximately $63 million, although the Company may elect to make future voluntary contributions. The timing
and amount of future contributions, which could be material, will depend on a number of factors, including the actual earnings and changes in values of plan assets and changes in interest rates.
Ilim Holding S.A. Shareholder’s Agreement
In October 2007, in connection with the formation of the Ilim Holding S.A. joint venture, International Paper entered into a shareholder’s agreement that includes provisions relating to the reconciliation of disputes among the partners. This agreement was amended on May 7, 2014. Pursuant to the amended agreement, beginning on January 1, 2017, either the Company or its partners may commence certain procedures specified under the deadlock provisions. If these or any other deadlock provisions are commenced, the Company may in certain situations, choose to purchase its partners’ 50% interest in Ilim. Any such transaction would be subject to review and approval by Russian and other relevant antitrust authorities. Any such purchase by International Paper would result in the consolidation of Ilim’s financial position and results of operations in all subsequent periods.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.
Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include the accounting for contingencies, impairment or disposal of long-lived assets and goodwill, pensions and postretirement benefit obligations, stock options and income taxes. The Company has discussed the selection of critical accounting policies and the effect of significant estimates with the Audit Committee of the Company’s Board of Directors.
Contingent Liabilities
Accruals for contingent liabilities, including legal and environmental matters, are recorded when it is probable that a liability has been incurred or an asset impaired and the amount of the loss can be reasonably estimated. Liabilities accrued for legal matters require judgments regarding projected outcomes and range of loss based on historical experience and recommendations of legal counsel. Liabilities for
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environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs.
Impairment of Long-Lived Assets and Goodwill
An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through cash flows from future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of goodwill and intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material, energy and freight costs, and various other projected operating economic factors. As these key factors change in future periods, the Company will update its impairment analyses to reflect its latest estimates and projections.
Under the provisions of Accounting Standards Codification (ASC) 350, “Intangibles – Goodwill and Other,” the testing of goodwill for possible impairment is a two-step process. In the first step, the fair value of the Company’s reporting units is compared with their carrying value, including goodwill. If fair value exceeds the carrying value, goodwill is not considered to be impaired. If the fair value of a reporting unit is below the carrying value, then step two is performed to measure the amount of the goodwill impairment loss for the reporting unit. This analysis requires the determination of the fair value of all of the individual assets and liabilities of the reporting unit, including any currently unrecognized intangible assets, as if the reporting unit had been purchased on the analysis date. Once these fair values have been determined, the implied fair value of the unit’s goodwill is calculated as the excess, if any, of the fair value of the reporting unit determined in step one over the fair value of the net assets determined in step two. The carrying value of goodwill is then reduced to this implied value, or to zero if the fair value of the assets exceeds the fair value of the reporting unit, through a goodwill impairment charge.
The impairment analysis requires a number of judgments by management. In calculating the estimated fair value of its reporting units in step one, the Company uses the projected future cash flows to be generated by each unit over the estimated remaining useful operating lives of the unit’s assets, discounted using the estimated cost-of-capital discount rate for
each reporting unit. These calculations require many estimates, including discount rates, future growth rates, and cost and pricing trends for each reporting unit. Subsequent changes in economic and operating conditions can affect these assumptions and could result in additional interim testing and goodwill impairment charges in future periods. Upon completion, the resulting estimated fair values are then analyzed for reasonableness by comparing them to earnings multiples for historic industry business transactions, and by comparing the sum of the reporting unit fair values and other corporate assets and liabilities divided by diluted common shares outstanding to the Company’s market price per share on the analysis date.
In the fourth quarter of 2014, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its Asia Industrial Packaging business using the discounted future cash flows and determined that all of the goodwill in this business, totaling $100 million, should be written off. The decline in the fair value of the Asia Industrial Packaging business and resulting impairment charge was due to a change in the strategic outlook for the business.
In the fourth quarter of 2013, in conjunction with the annual testing of its reporting units for possible goodwill impairments, the Company calculated the estimated fair value of its India Papers business using the discounted future cash flows and determined that all of the goodwill of this business, totaling $112 million, should be written off. The decline in the fair value of the India Papers reporting unit and resulting impairment charge was due to a change in the strategic outlook for the India Papers operations.
Also in the fourth quarter of 2013, the Company calculated the estimated fair value of its xpedx business using the discounted future cash flows and wrote off all of the goodwill of its xpedx business, totaling $400 million. The decline in fair value of the xpedx reporting unit and resulting impairment charge was due to a significant decline in earnings and a change in the strategic outlook for the xpedx operations. As a result, during the fourth quarter of 2013, the Company recorded a total goodwill impairment charge of $512 million ($485 million after taxes and a gain of $3 million related to noncontrolling interest), representing all of the recorded goodwill of the xpedx business and the India Papers business.
Also during 2013, the Company recorded a pre-tax charge of $15 million ($7 million after taxes and noncontrolling interest) for the impairment of a trade name intangible asset related to our India Papers business.
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No goodwill impairment charges were recorded in 2012.
Pension and Postretirement Benefit Obligations
The charges recorded for pension and other postretirement benefit obligations are determined annually in conjunction with International Paper’s consulting actuary, and are dependent upon various assumptions including the expected long-term rate of return on plan assets, discount rates, projected future compensation increases, health care cost trend rates and mortality rates.
The calculations of pension and postretirement benefit obligations and expenses require decisions about a number of key assumptions that can significantly affect liability and expense amounts, including the expected long-term rate of return on plan assets, the discount rate used to calculate plan liabilities, the projected rate of future compensation increases and health care cost trend rates.
Benefit obligations and fair values of plan assets as of December 31, 2014, for International Paper’s pension and postretirement plans were as follows:
In millions | Benefit Obligation | Fair Value of Plan Assets | ||||
U.S. qualified pension | $ | 14,343 | $ | 10,918 | ||
U.S. nonqualified pension | 398 | — | ||||
U.S. postretirement | 306 | — | ||||
Non-U.S. pension | 233 | 180 | ||||
Non-U.S. postretirement | 59 | — | ||||
The table below shows assumptions used by International Paper to calculate U.S. pension obligations for the years shown:
2014 | 2013 | 2012 | ||||
Discount rate | 4.10 | % | 4.90 | % | 4.10 | % |
Rate of compensation increase | 3.75 | % | 3.75 | % | 3.75 | % |
Additionally, health care cost trend rates used in the calculation of U.S. postretirement obligations for the years shown were:
2014 | 2013 | |||
Health care cost trend rate assumed for next year | 7.00 | % | 7.00 | % |
Rate that the cost trend rate gradually declines to | 5.00 | % | 5.00 | % |
Year that the rate reaches the rate it is assumed to remain | 2022 | 2017 | ||
International Paper determines these actuarial assumptions, after consultation with our actuaries, on December 31 of each year to calculate liability information as of that date and pension and postretirement expense for the following year. The expected long-term rate of return on plan assets is
based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. The discount rate assumption was determined based on a hypothetical settlement portfolio selected from a universe of high quality corporate bonds.
The expected long-term rate of return on U.S. pension plan assets used to determine net periodic cost for the year ended December 31, 2014 was 7.75%.
Increasing (decreasing) the expected long-term rate of return on U.S. plan assets by an additional 0.25% would decrease (increase) 2015 pension expense by approximately $25 million, while a (decrease) increase of 0.25% in the discount rate would (increase) decrease pension expense by approximately $36 million. The effect on net postretirement benefit cost from a 1% increase or decrease in the annual health care cost trend rate would be approximately $1 million.
Actual rates of return earned on U.S. pension plan assets for each of the last 10 years were:
Year | Return | Year | Return | ||
2014 | 6.4 | % | 2009 | 23.8 | % |
2013 | 14.1 | % | 2008 | (23.6 | )% |
2012 | 14.1 | % | 2007 | 9.6 | % |
2011 | 2.5 | % | 2006 | 14.9 | % |
2010 | 15.1 | % | 2005 | 11.7 | % |
The 2012, 2013 and 2014 returns above represent weighted averages of International Paper and Temple-Inland asset returns. International Paper and Temple-Inland assets were combined in October 2014. The annualized time-weighted rate of return earned on U.S. pension plan assets was 10.3% and 8.1% for the past five and ten years, respectively. The following graph shows the growth of a $1,000 investment in International Paper’s U.S. Pension Plan Master Trust. The graph portrays the time-weighted rate of return from 2004 – 2014.
ASC 715, “Compensation – Retirement Benefits,” provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to
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changes in the assumed discount rate, differences between the actual and expected return on plan assets, and other assumption changes. These net gains and losses are recognized in pension expense prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans to the extent that they are not offset by gains and losses in subsequent years. The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic pension cost for the U.S. pension plans over the next fiscal year are $475 million and $43 million, respectively.
Net periodic pension and postretirement plan expenses, calculated for all of International Paper’s plans, were as follows:
In millions | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
Pension expense | |||||||||||||||
U.S. plans (non-cash) | $ | 387 | $ | 545 | $ | 342 | $ | 195 | $ | 231 | |||||
Non-U.S. plans | — | 5 | 3 | 1 | — | ||||||||||
Postretirement expense | |||||||||||||||
U.S. plans | 7 | (1 | ) | (4 | ) | 7 | 6 | ||||||||
Non-U.S. plans | 7 | 7 | 1 | 2 | 1 | ||||||||||
Net expense | $ | 401 | $ | 556 | $ | 342 | $ | 205 | $ | 238 | |||||
The decrease in 2014 U.S. pension expense principally reflects an increase in the discount rate and lower amortization of unrecognized actuarial losses. The increase in 2014 U.S. postretirement expense is principally due to lower amortization of prior service credits.
Assuming that discount rates, expected long-term returns on plan assets and rates of future compensation increases remain the same as in 2014, projected future net periodic pension and postretirement plan expenses would be as follows:
In millions | 2016 (1) | 2015 (1) | ||||
Pension expense | ||||||
U.S. plans (non-cash) | $ | 390 | $ | 488 | ||
Non-U.S. plans | 6 | 7 | ||||
Postretirement expense | ||||||
U.S. plans | 13 | 9 | ||||
Non-U.S. plans | 7 | 6 | ||||
Net expense | $ | 416 | $ | 510 | ||
(1) | Based on assumptions at December 31, 2014. |
The Company estimates that it will record net pension expense of approximately $488 million for its U.S. defined benefit plans in 2015, with the increase from expense of $387 million in 2014 reflecting a decrease in the assumed discount rate to 4.10% in 2015 from 4.65% in 2014, updated mortality assumptions and higher unrecognized losses.
The market value of plan assets for International Paper’s U.S. qualified pension plan at December 31, 2014 totaled approximately $10.9 billion, consisting of approximately 47% equity securities, 33% debt securities, 10% real estate and 10% other assets. Plan assets include an immaterial amount of International Paper common stock.
The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plan, tax deductibility, the cash flows generated by the Company, and other factors. The Company continually reassesses the amount and timing of any discretionary contributions and could elect to make voluntary contributions in the future. The required contribution for the U.S. qualified pension plans in 2015 is approximately $63 million. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $38 million for the year ended December 31, 2014.
Accounting for Stock Options
International Paper follows ASC 718, “Compensation – Stock Compensation,” in accounting for stock options. Under this guidance, expense for stock options is recorded over the related service period based on the grant-date fair market value.
During each reporting period, diluted earnings per share is calculated by assuming that “in-the-money” options are exercised and the exercise proceeds are used to repurchase shares in the marketplace. When options are actually exercised, option proceeds are credited to equity and issued shares are included in the computation of earnings per common share, with no effect on reported earnings. Equity is also increased by the tax benefit that International Paper will receive in its tax return for income reported by the optionees in their individual tax returns.
At December 31, 2014 and 2013, 0.07 million options, and 1.8 million options, respectively, were outstanding with exercise prices of $39.03 per share for 2014 and a range of $38.41 to $48.19 per share for 2013.
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Income Taxes
International Paper records its global tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where the Company believes that a tax position is supportable for income tax purposes, the item is included in its income tax returns. Where treatment of a position is uncertain, liabilities are recorded based upon the Company’s evaluation of the “more likely than not” outcome considering technical merits of the position based on specific tax regulations and facts of each matter. Changes to recorded liabilities are only made when an identifiable event occurs that changes the likely outcome, such as settlement with the relevant tax authority, the expiration of statutes of limitation for the subject tax year, change in tax laws, or a recent court case that addresses the matter.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. The realization of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning strategies.
While International Paper believes that these judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts.
The Company’s effective income tax rates, before equity earnings and discontinued operations, were 14%, (41)% and 32% for 2014, 2013 and 2012, respectively. These effective tax rates include the tax effects of certain special items that can significantly affect the effective income tax rate in a given year, but may not recur in subsequent years. Management believes that the effective tax rate computed after excluding these special items may provide a better estimate of the rate that might be expected in future years if no additional special items were to occur in those years. Excluding these special items, the effective income tax rate for 2014 was 31% of pre-tax earnings compared with 26% in 2013 and 28% in 2012. We estimate that the 2015 effective income tax rate will be approximately 33% based on expected earnings and business conditions.
There were no new accounting pronouncements issued or effective during the fiscal year which have had or are expected to have a material impact on the Company’s consolidated financial statements. See Note 2 Recent Accounting Developments on pages 53 and 54 of
Item 8. Financial Statements and Supplementary Data for a discussion of new accounting pronouncements.
Information concerning the Company’s environmental and legal proceedings is set forth in Note 11 Commitments and Contingencies on pages 64 through 67 of Item 8. Financial Statements and Supplementary Data.
While inflationary increases in certain input costs, such as energy, wood fiber and chemical costs, have an impact on the Company’s operating results, changes in general inflation have had minimal impact on our operating results in each of the last three years. Sales prices and volumes are more strongly influenced by economic supply and demand factors in specific markets and by exchange rate fluctuations than by inflationary factors.
International Paper has operations in a number of countries. Its operations in those countries also export to, and compete with, imports from other regions. As such, currency movements can have a number of direct and indirect impacts on the Company’s financial statements. Direct impacts include the translation of international operations’ local currency financial statements into U.S. dollars and the remeasurement impact associated with non-functional currency financial assets and liabilities. Indirect impacts include the change in competitiveness of imports into, and exports out of, the United States (and the impact on local currency pricing of products that are traded internationally). In general, a weaker U.S. dollar and stronger local currency is beneficial to International Paper. The currencies that have the most impact are the Euro, the Brazilian real, the Polish zloty and the Russian ruble.
We use financial instruments, including fixed and variable rate debt, to finance operations, for capital spending programs and for general corporate purposes. Additionally, financial instruments, including various derivative contracts, are used to hedge exposures to interest rate, commodity and foreign currency risks. We do not use financial instruments for trading purposes. Information related to International Paper’s debt obligations is included in Note 13 Debt and Lines of Credit on pages 69 and 70 of Item 8. Financial Statements and Supplementary Data. A discussion of derivatives and hedging activities is included in Note 14 Derivatives and Hedging Activities on pages 70 through 74 of Item 8. Financial Statements and Supplementary Data.
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The fair value of our debt and financial instruments varies due to changes in market interest and foreign currency rates and commodity prices since the inception of the related instruments. We assess this market risk utilizing a sensitivity analysis. The sensitivity analysis measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in interest and currency rates and commodity prices.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to short- and long-term debt obligations and investments in marketable securities. We invest in investment-grade securities of financial institutions and money market mutual funds with a minimum rating of AAA and limit exposure to any one issuer or fund. Our investments in marketable securities at December 31, 2014 and 2013 are stated at cost, which approximates market due to their short-term nature. Our interest rate risk exposure related to these investments was not material.
We issue fixed and floating rate debt in a proportion consistent with International Paper’s targeted capital structure, while at the same time taking advantage of market opportunities to reduce interest expense as appropriate. Derivative instruments, such as interest rate swaps, may be used to implement this capital structure. At December 31, 2014 and 2013, the net fair value liability of financial instruments with exposure to interest rate risk was approximately $9.8 billion and $10.1 billion, respectively. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would have been approximately $410 million and $480 million at December 31, 2014 and 2013, respectively.
Commodity Price Risk
The objective of our commodity exposure management is to minimize volatility in earnings due to large fluctuations in the price of commodities. Commodity swap and option contracts have been used to manage risks associated with market fluctuations in energy prices. The net fair value of such outstanding energy hedge contracts at December 31, 2014 and 2013 was approximately a $2 million liability and a $2 million asset, respectively. The potential loss in fair value resulting from a 10% adverse change in the underlying commodity prices would have been approximately $1 million and $2 million at December 31, 2014 and 2013, respectively.
Foreign Currency Risk
International Paper transacts business in many currencies and is also subject to currency exchange rate risk through investments and businesses owned and operated in foreign countries. Our objective in managing the associated foreign currency risks is to minimize the effect of adverse exchange rate fluctuations on our after-tax cash flows. We address these risks on a limited basis by financing a portion of our investments in overseas operations with borrowings denominated in the same currency as the operation’s functional currency, or by entering into cross-currency and interest rate swaps, or foreign exchange contracts. At December 31, 2014 and 2013, the net fair value of financial instruments with exposure to foreign currency risk was approximately a $1 million and a $4 million asset, respectively. The potential loss in fair value for such financial instruments from a 10% adverse change in quoted foreign currency exchange rates would have been approximately $52 million and $88 million at December 31, 2014 and 2013, respectively.
See the preceding discussion and Note 14 Derivatives and Hedging Activities on pages 70 through 74 of Item 8. Financial Statements and Supplementary Data.
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REPORT OF MANAGEMENT ON:
Financial Statements
The management of International Paper Company is responsible for the preparation of the consolidated financial statements in this annual report and for establishing and maintaining adequate internal controls over financial reporting. The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America considered appropriate in the circumstances to present fairly the Company’s consolidated financial position, results of operations and cash flows on a consistent basis. Management has also prepared the other information in this annual report and is responsible for its accuracy and consistency with the consolidated financial statements.
As can be expected in a complex and dynamic business environment, some financial statement amounts are based on estimates and judgments. Even though estimates and judgments are used, measures have been taken to provide reasonable assurance of the integrity and reliability of the financial information contained in this annual report. We have formed a Disclosure Committee to oversee this process.
The accompanying consolidated financial statements have been audited by the independent registered public accounting firm, Deloitte & Touche LLP. During its audits, Deloitte & Touche LLP was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders and the board of directors and all committees of the board. Management believes that all representations made to the independent auditors during their audits were valid and appropriate.
Internal Control Over Financial Reporting
The management of International Paper Company is also responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and therefore can provide only reasonable assurance of achieving the designed control objectives. The Company’s internal control
system is supported by written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified.
The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2014. In making this assessment, it used the criteria described in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management believes that, as of December 31, 2014, the Company’s internal control over financial reporting was effective.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has issued its report on the effectiveness of the Company’s internal control over financial reporting. The report appears on pages 44 and 45.
Internal Control Environment And Board Of Directors Oversight
Our internal control environment includes an enterprise-wide attitude of integrity and control consciousness that establishes a positive “tone at the top.” This is exemplified by our ethics program that includes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in the conduct of International Paper business, which have been distributed to all employees; a toll-free telephone helpline whereby any employee may anonymously report suspected violations of law or International Paper’s policy; and an office of ethics and business practice. The internal control system further includes careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility, dissemination of accounting and business policies throughout International Paper, and an extensive program of internal audits with management follow-up.
The Board of Directors, assisted by the Audit and Finance Committee (Committee), monitors the integrity of the Company’s financial statements and financial reporting procedures, the performance of the Company’s internal audit function and independent auditors, and other matters set forth in its charter. The Committee, which consists of independent directors, meets regularly with representatives of management, and with the independent auditors and the Internal Auditor, with and without management representatives in attendance, to review their activities. The Committee’s Charter takes into account the New York Stock Exchange rules relating to Audit Committees and
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the SEC rules and regulations promulgated as a result of the Sarbanes-Oxley Act of 2002. The Committee has reviewed and discussed the consolidated financial statements for the year ended December 31, 2014, including critical accounting policies and significant management judgments, with management and the independent auditors. The Committee’s report recommending the inclusion of such financial statements in this Annual Report on Form 10-K will be set forth in our Proxy Statement.
MARK S. SUTTON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
CAROL L. ROBERTS
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
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To the Board of Directors and Shareholders of International Paper Company:
We have audited the accompanying consolidated balance sheets of International Paper Company and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of International Paper Company and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014, based on
the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
Memphis, Tennessee
February 26, 2015
To the Board of Directors and Shareholders of International Paper Company:
We have audited the internal control over financial reporting of International Paper Company and subsidiaries (the "Company") as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2014 of the Company and our report dated February 26, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.
Memphis, Tennessee
February 26, 2015
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In millions, except per share amounts, for the years ended December 31 | 2014 | 2013 | 2012 | ||||||
NET SALES | $ | 23,617 | $ | 23,483 | $ | 21,852 | |||
COSTS AND EXPENSES | |||||||||
Cost of products sold | 16,254 | 16,282 | 15,287 | ||||||
Selling and administrative expenses | 1,793 | 1,796 | 1,674 | ||||||
Depreciation, amortization and cost of timber harvested | 1,406 | 1,531 | 1,473 | ||||||
Distribution expenses | 1,521 | 1,583 | 1,470 | ||||||
Taxes other than payroll and income taxes | 180 | 178 | 159 | ||||||
Restructuring and other charges | 846 | 156 | 65 | ||||||
Impairment of goodwill and other intangibles | 100 | 127 | — | ||||||
Net (gains) losses on sales and impairments of businesses | 38 | 3 | 86 | ||||||
Net bargain purchase gain on acquisition of business | — | (13 | ) | — | |||||
Interest expense, net | 607 | 612 | 671 | ||||||
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY EARNINGS | 872 | 1,228 | 967 | ||||||
Income tax provision (benefit) | 123 | (498 | ) | 306 | |||||
Equity earnings (loss), net of taxes | (200 | ) | (39 | ) | 61 | ||||
EARNINGS (LOSS) FROM CONTINUING OPERATIONS | 549 | 1,687 | 722 | ||||||
Discontinued operations, net of taxes | (13 | ) | (309 | ) | 77 | ||||
NET EARNINGS (LOSS) | 536 | 1,378 | 799 | ||||||
Less: Net earnings (loss) attributable to noncontrolling interests | (19 | ) | (17 | ) | 5 | ||||
NET EARNINGS (LOSS) ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY | $ | 555 | $ | 1,395 | $ | 794 | |||
BASIC EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS | |||||||||
Earnings (loss) from continuing operations | $ | 1.33 | $ | 3.85 | $ | 1.65 | |||
Discontinued operations, net of taxes | (0.03 | ) | (0.70 | ) | 0.17 | ||||
Net earnings (loss) | $ | 1.30 | $ | 3.15 | $ | 1.82 | |||
DILUTED EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS | |||||||||
Earnings (loss) from continuing operations | $ | 1.31 | $ | 3.80 | $ | 1.63 | |||
Discontinued operations, net of taxes | (0.02 | ) | (0.69 | ) | 0.17 | ||||
Net earnings (loss) | $ | 1.29 | $ | 3.11 | $ | 1.80 | |||
AMOUNTS ATTRIBUTABLE TO INTERNATIONAL PAPER COMPANY COMMON SHAREHOLDERS | |||||||||
Earnings (loss) from continuing operations | $ | 568 | $ | 1,704 | $ | 717 | |||
Discontinued operations, net of taxes | (13 | ) | (309 | ) | 77 | ||||
Net earnings (loss) | $ | 555 | $ | 1,395 | $ | 794 | |||
The accompanying notes are an integral part of these financial statements.
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In millions for the years ended December 31 | 2014 | 2013 | 2012 | ||||||
NET EARNINGS (LOSS) | $ | 536 | $ | 1,378 | $ | 799 | |||
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | |||||||||
Amortization of pension and post-retirement prior service costs and net loss: | |||||||||
U.S. plans (less tax of $154, $195 and $124) | 242 | 307 | 195 | ||||||
Pension and postretirement liability adjustments: | |||||||||
U.S. plans (less tax of $798, $756 and $583) | (1,253 | ) | 1,188 | (914 | ) | ||||
Non-U.S. plans (less tax of $5, $3 and $9) | (18 | ) | (4 | ) | (25 | ) | |||
Change in cumulative foreign currency translation adjustment | (876 | ) | (426 | ) | (131 | ) | |||
Net gains/losses on cash flow hedging derivatives: | |||||||||
Net gains (losses) arising during the period (less tax of $3, $2 and $1) | 10 | — | 15 | ||||||
Reclassification adjustment for (gains) losses included in net earnings (less tax of $1, $3 and $13) | (4 | ||||||||