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International Paper Co. (IP - Analyst Report) reported third-quarter 2012 adjusted earnings of 75 cents per share, down 7% from the prior-year quarter earnings of 81 cents per share. The result also fell short of the Zacks Consensus Estimate of 77 cents.

After including special items, earnings in the quarter stood at 51 cents a share compared with $1.08 per share in the prior-year quarter. Net sales rose 6% year over year to $7.03 billion, but missed the Zacks Consensus Estimate of $7.1 billion.

Cost and Margins
Adjusted cost of goods sold amounted to $5.14 billion, a 7% increase from $4.79 billion in the year-earlier quarter. Adjusted selling and administrative expenses decreased 2% to $469 million. Segment operating income decreased 5% year over year to $634 million.
Segment Performance
Industrial Packaging: Sales for this segment surged 25% year over year to $3.3 billion. Adjusted operating income increased 14% to $342 million. 
Printing Papers: Sales increased 2% to $1.58 billion in the quarter. The segment’s adjusted operating income dipped 16% to $201 million. 
Consumer Packaging: Sales decreased 20% to $765 million from $955 million in the year-earlier quarter. Adjusted operating profit was $67 million in the quarter versus $103 million in the year-ago quarter. 
Xpedx (Distribution Business): Sales for the segment dropped 10% to $1.50 billion from $1.7 billion in the year-ago quarter. Adjusted operating income of this segment decreased 11% to $24 million.
Financial Position
Cash and cash equivalents were $1.27 billion at the end of the quarter compared with $1.22 billion at the end of the second quarter. Cash flow from operating activities improved to $2.27 billion during the first nine months of fiscal 2012 from $2.04 billion in the prior-year comparable period. Debt-to-capitalization ratio was 59.9% as of September 30, 2012 compared with 62.9% as of June 30, 2012.
Our View
Mergers and acquisitions continue to be International Paper’s key strategy to strengthen its businesses over the long term. The company’s acquisition of Temple-Inland is expected to be highly accretive beyond 2013. The combination will fortify the packaging business of North America by increasing its share in the corrugated packaging market to 34% from the current level of 27%.
Furthermore, through its joint ventures, International Paper has significant projects underway in Russia and China, which will help the company sustain its earnings growth. International Paper retains a short-term Zacks #2 Rank (Buy). 
Memphis, Tennessee-based International Paper is a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper conducts its businesses through five segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution (Xpedx) and Forest Products. 

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