International Paper Co. (IP) delivered adjusted earnings per share (EPS) of 42 cents for the second quarter ended June 30, 2010, beating the Zacks Consensus Estimate by a penny. EPS in the quarter was more than double that of the year-ago quarter, driven by strong results across all of its segments.
EPS in both quarters excluded special items. Including them, the company reported an EPS of 21 cents, a 34% drop from 32 cents in the year-earlier quarter. Special items include the net effect of restructuring and other charges, and alternative fuel mixture credits earned under 2007 legislation which provides tax credits for companies that use alternative fuel mixtures to produce energy for operating their businesses, etc.
Revenue of $6.1 billion, however, fell marginally short of the Zacks Consensus Estimate of $6.2 billion, but posted a hike of 5% on a year-over-year basis.
Cost of sales increased 36% year over year to $4.5 billion, and as a percentage of revenues it increased to 73.4% from 56.9% in the year-ago quarter. Selling, general and administrative expenses declined 4% year over year to $472 million, and as a percentage of sales it contracted 70 basis points to 7.7%.
Segment Performance
The Industrial Packaging segment’s revenue posted a 7% year-over-year growth to $2.4 billion. Its adjusted operating profit was $193 million, down from $255 million in the year-ago quarter. However, compared on a sequential basis, earnings improved from $46 million in the first quarter of fiscal 2010, driven by increases in linerboard and North America box demand, fewer mill outages and further realization of announced price increases.
The Printing Papers segment’s revenue increased 6% to $1.4 billion. The segment’s adjusted operating profit was $158 million, an improvement from $86 million in the year-ago quarter and $126 million in the first quarter of 2010. Favorable pulp and paper pricing, as well as improved operations, more than offset higher mill outage costs.
Consumer Packaging posted the highest revenue growth in the quarter of 10% to $845 million. The segment’s adjusted operating profit was $49 million, compared with $38 million in the year-ago quarter and $31 million in the first quarter of 2010. Results were positively impacted by higher volumes, further realization of announced coated paperboard price increases and stronger operations, partially offset by planned maintenance outages and relatively higher input costs.
Revenues at the Forest Products segment declined 50% to $5 million and operating profits totaled $40 million, up from $3 million in the prior-year quarter due to a mineral rights sale.
The company’s Distribution business, xpedx, reported a 160% jump in revenues to $1.6 billion and its operating profit was $26 million, up from $10 million in the year-ago quarter and $21 million in the first quarter of 2010. The earnings improvement was primarily driven by stronger volumes, lower costs and improved margins.
Financial Position
As of June 30, 2010, International Paper had cash and cash equivalents of $1.871 billion, up from $1.749 billion as of March 31, 2010.
As of June 30, 2010, the debt-to-capitalization ratio was 61.1% compared to 60.6% as of March 31, 2010.
Outlook
The company stated that operating rates are strong, inventories are low, and input costs are moderating, positioning the company for a much improved third quarter.
Our Take
The economic downturn has proven to be a severe headwind for the company. However, the company has been taking proactive measures to combat the tough environment by curtailing and closing capacities, further reducing costs and preserving cash. During the first quarter, International Paper witnessed the first year-over-year increase in quarterly revenues since the recession. The momentum also continued in the second quarter, which bodes well for the upcoming quarters.
During 2009, the company closed or announced the closure of five mills globally, closed 24 converting or distribution locations and reduced the overhead headcount by 6,000. These actions helped the company reduce its fixed costs and bring down payroll costs. These actions should result in higher operating rates in 2010 and beyond. The annual savings from these actions are expected to be around $650 million.
We believe International Paper’s acquisition of Sweden-based SCA’s Asian packaging business in April 2010 provides the scope to expand in the growing Chinese packaging market.
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.
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