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International Paper Co. (IP - Analyst Report) reported fourth quarter 2012 earnings of $235 million or 53 cents per share compared to $281 million or 65 cents per share in the year-earlier quarter. Excluding one-time items, operating earnings for the reported quarter were $305 million or 69 cents per share versus $319 million or 73 cents per share in the year-ago quarter.

Although the operating earnings for fourth quarter 2012 decreased year over year, it surpassed the Zacks Consensus Estimate by 5 cents.

For full year 2012, the company reported earnings of $794 million or $1.80 per share compared to $1.3 billion or $3.03 per share in the previous year. Operating earnings for 2012 stood at $1.2 billion or $2.65 per share compared to $1.4 billion or $3.12 per share in the prior year. The operating earnings for the year well exceeded the Zacks Consensus Estimate of $2.44.

Net sales for the reported quarter surged 10.9% year over year to $7.1 billion and were in sync with the Zacks Consensus Estimate. The healthy increase in quarterly sales was primarily attributable to the accretive effect of the Temple-Inland acquisition. For full year 2012, net sales were $27.8 billion compared to $26.0 billion in 2011.

Segment Performance

Industrial Packaging: Sales for this segment surged 34.7% year over year to $3.4 billion. Adjusted operating income increased to $368 million from $316 million in the year-ago quarter, driven by improved pricing in North America and seasonally higher sales volume in Europe.

Printing Papers: Sales increased marginally to $1.6 billion in the quarter, while adjusted operating income dipped to $147 million from $190 million in the prior-year period. The segment performance was negatively affected by higher planned outage-related maintenance expenses, seasonally lower sales, and lower average sales price for paper in North America.

Consumer Packaging: Sales decreased 9.9% year over year to $815 million, while adjusted operating profit plummeted to $39 million from $62 million in the year-ago quarter. The year-over-year dip in segment results was due to higher outage-related maintenance expenses and lower average sales price.

Xpedx (Distribution Business): Sales for the segment dropped 5.8% year over year to $1.5 billion. Segment adjusted operating income decreased 66.67% to $11 million, largely due to high operating expenses.

Balance Sheet

Cash and temporary investments dipped significantly to $1.3 billion at year-end 2012 compared with $4.0 billion in the prior-year period. Cash flow from operating activities improved to $3.0 billion during 2012 from $2.7 billion in the previous year. Long-term debt increased to $9.7 billion from $9.2 billion in 2011.

Moving Forward

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.

However, the company needs to be wary of stiff competition from leading players in the industry like Clearwater Paper Corporation (CLW - Snapshot Report), KapStone Paper and Packaging Corporation (KS - Snapshot Report), and Kimberly-Clark de M (KCDMY), each carrying a Zacks Rank #2 (Buy). International Paper currently retains a Zacks Rank #1 (Strong Buy).

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