International Paper Co. (IP) delivered a record adjusted earnings per share (EPS) of 91 cents for the third quarter ended September 30, 2010, comfortably beating the Zacks Consensus Estimate of 78 cents. Reported quarter EPS was more than double that of the year-ago quarter of 37 cents and the preceding quarter of 41 cents.

The outperformance was driven by strong paper and packaging businesses, benefits from announced price increases and restructuring activities, improved operations and favorable business mix.

Reported quarter EPS did not include any special items. The third quarter of fiscal 2009 EPS excluded a benefit of 50 cents and the second quarter fiscal 2010 EPS excluded special items of 21 cents. Including these, International Paper’s EPS of 91 cents increased 5% from 87 cents in the year-ago quarter and was more than four times the EPS of 21 cents in the preceding quarter.

Revenues $6.7 billion were ahead of the Zacks Consensus Estimate of $6.5 billion. Revenues jumped 14% year over year and 10% sequentially, driven by strong performance across all of its segments.

Adjusted cost of sales increased 47% year over year to $4.75 billion, and, as a percentage of revenues, it increased to 71% from 55% in the year-ago quarter. Adjusted selling, general and administrative expenses declined 1% year over year to $504 million, and, as a percentage of sales, it contracted 110 basis points to 8%.

Segment Performance

The Industrial Packaging segment posted a revenue growth of 17% year over year and 7% sequentially, amounting to $2.6 billion. Its operating profit was $332 million, up 55% year over year and 723% sequentially. Realization of announced price increases for boxes and linerboard, fewer mill outages, improved input costs, and continued strong mill operations led the company’s North American operations to deliver record quarterly earnings.

The Printing Papers segment clocked a revenue growth of 5% year over year and 7% sequentially, climbing to $1.5 billion. The segment’s operating profit was $278 million, a whopping increase of 101% year over year and 78% sequentially.

North American printing papers recorded the second best quarterly earnings on International Paper’s records. Favorable pulp and paper pricing, reduced fixed costs, fewer mill outages, bad debt recovery, and increased shipments in the U.S. and Europe drove the sequential increase.

Consumer Packaging posted revenues of $870 million in the quarter, up 10% year over year and 3% sequentially. The segment’s operating profit was $71 million, compared with $68 million in the year-ago quarter and $49 million in the second quarter of fiscal 2010. The North American coated paperboard business generated record quarterly earnings. Higher volumes, benefits from price increases, and fewer maintenance outages led to the sequential improvement.

Revenues at the Forest Products segment were recorded at $205 million, a substantial improvement from $5 million in both the year-ago and sequentially preceding quarters. Operating profit totaled $49 million, up from $2 million in the prior-year quarter and $40 million in the second quarter of fiscal 2010. The improvement over the previous quarter was due to the sale of the majority of its remaining land portfolio.

The company’s Distribution business, xpedx, reported a 5% year-over-year and 8% sequential jump in revenues to $1.7 billion. Its operating profit increased 5% year over year to $22 million. However, on a sequential basis, operating profit dipped 15%, as higher sales volumes were offset by lower margins and increased overhead costs.

Financial Position

As of September 30, 2010, International Paper had cash and cash equivalents of $1.43 billion, down from $1.87 billion as of June 30, 2010.

As of September 30, 2010, the debt-to-capitalization ratio was 57.9% compared with 61.1% as of June 30, 2010.

Our Take

The economic downturn proved to be a severe headwind for the company. The company has been struggling to combat the tough environment by closing capacities and cutting costs. The company’s debt levels heightened following the Weyerhaeuser acquisition in 2008. Even though the company has ever since been working on lowering its debt load, the same remains uncomfortable.

Further, its underfunded pension liability is an added concern. This curbs the company’s ability to ramp up its capital expenditure to take advantage of emerging market opportunities and improve its projects in the more mature markets. We currently have a Zacks #4 Rank (short-term Sell recommendation) on the stock.

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 five segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution (Xpedx) and Forest Products.

 
INTL PAPER (IP): Free Stock Analysis Report
 
Zacks Investment Research