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Mixed Bag for International Paper

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International Paper Co. (IP - Free Report) reported first quarter adjusted EPS of 57 cents, a 26% drop from the prior-year quarter but outperforming the Zacks Consensus Estimate of 51 cents.

After including special items, EPS in the quarter stood at 42 cents compared with 70 cents in the prior-year quarter. Net sales were $6.65 billion, versus $6.39 billion during the year-ago quarter, missing the Zacks Consensus Estimate of $6.84 billion.

Cost and Margins

Adjusted cost of goods sold amounted to $5 billion, an 8% increase from $4.6 billion during the year-earlier quarter. Adjusted selling and administrative expenses increased 157% to $556 million. Segment operating income decreased 21% to $462 million from the prior-year quarter.

Segment Performance

Industrial Packaging: Sales for this segment increased 22% to $3.1 billion. Adjusted operating income increased 1% to $278 million. Income in North America was impacted by operational issues, increased annual outages and higher costs.

Export market containerboard price erosion also affected results.  However, improvement in volumes, lower input costs and earnings from the acquired Temple-Inland packaging operations provided some relief.

Printing Papers: Sales increased 2% to $1.56 billion compared to the year-earlier quarter. The segment’s adjusted operating income dipped 31% to $145 million from the year ago quarter.

North American earnings were adversely impacted by lower pulp and export paper prices as well as higher Franklin fluff pulp mill start-up costs, which were partially offset by increased exports and lower outages.  Earnings in Brazil were also affected as lower export prices and seasonally lower market demand led to a higher export mix.

Consumer Packaging: Sales decreased 10% to $810 million from $905 million in the year-earlier quarter. Adjusted operating profit was $96 million in the quarter versus $101 million in the year-ago quarter. North American Coated Paperboard operating earnings benefitted from the absence of annual maintenance outages during the quarter.

Higher volume and favorable manufacturing operations were offset by higher costs.  Foodservice delivered record earnings in the quarter attributed to higher margins, favorable operations and improved sales volumes.

Xpedx (Distribution Business): Sales for the segment dropped to $1.47 billion from $1.64 billion in the year-ago quarter. However, adjusted operating income of this segment increased 58% to $19 million.

Financial Position

Cash and cash equivalents of the company were $1.29 billion as of quarter end compared with $3.994 billion as of fiscal 2011 end. Cash flow from operating activities improved to $633 million during the quarter compared with $514 million in the prior year quarter. As of March 31, 2012, the debt-to-capitalization ratio was 62.2% compared with 59.9% as of December 31, 2011.

Performance of Competitors

International Paper competes with MeadWestvaco Corporation and Weyerhaeuser Co. (WY - Free Report) . MeadWestvaco reported adjusted earnings of 34 cents per share compared with 43 cents in the year-ago quarter. Adjusted earnings were ahead of the Zacks Consensus Estimate of 24 cents. Weyerhaeuser reported adjusted earnings of 2 cents per share compared with breakeven results last quarter, outperforming the Zacks Consensus Estimate of $0.00 per share.

Our Take

The company continues with its merger and acquisition strategy to strengthen its businesses. International Paper’s merger with Temple-Inland will increase its share of the North American corrugated-packaging market from 27% to 34%.

International Paper’s acquisition of a 75% stake in Andhra Pradesh Paper Mills will help capitalize on the burgeoning demand for paper and packaging products in India. Furthermore, through its joint ventures, International Paper has significant projects underway in Russia and China, which will help the company sustain its earnings growth.

We expect International Paper to continue utilizing its sound cash flow by investing in capital projects, acquisitions and reducing its total debt. However, integration risks associated with the Temple-Inland merger, margin headwinds and high debt levels remain concerns. The shares of International Paper currently retain a Zacks #3 Rank (short-term Hold rating).

Memphis, Tennessee-based International Paper Company is a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper conducts its business through four segments: Printing Papers, Industrial Packaging, Consumer Packaging and Distribution.

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