International Paper Beats on Q2 Earnings, Misses Revenues

International Paper Company (IP) reported operating earnings (excluding one-time items) of $409 million or 95 cents per share for the second quarter of 2014 compared with $288 million or 64 cents in the year-ago quarter. The earnings comfortably beat the Zacks Consensus Estimate of 82 cents.

Results benefited from improved volumes and continued margin expansion. Strong operational performance at Ilim Joint Venture also contributed to the earnings beat.

Net earnings came in at $161 million or 37 cents per share compared with a net income of $259 million or 57 cents per share in the year-ago quarter. Earnings were hurt by weak growth in revenues across the company’s operating segments, along with high input costs.

Net sales for the second quarter were $7,213 million, down 1.7% from $7,335 million in the year-ago quarter and were below the Zacks Consensus Estimate of $7,431 million. Feeble year-over-year growth in sales was attributable to lower revenues from Printing Papers and Distribution, partially offset by Industrial Packaging.

Segment Performance

Industrial Packaging: Sales from this segment were relatively flat year over year at $3,800 million. Operating income came in at $537 million, up 13.3% from $474 million in the year-ago quarter. The significant year-over-year improvement in operating income was driven by higher packaging volume, leaner operating costs and lower input costs, partially offset by higher planned maintenance outage costs.

Printing Papers: Sales were down 7.7% year over year to $1,421 million in the reported quarter, while operating income was $69 million, down 9.2% from $76 million in the year-ago quarter. The dip in operating income was primarily a result of reduced revenues, lower volumes and higher maintenance and outage spending.

Consumer Packaging: Sales from this segment inched down 1.4% year over year to $843 million. Operating profit was $33 million versus $51 million in the year-ago quarter.

xpedx (Distribution Business): Sales from the segment declined 5.6% year over year to $1,326 million. For the quarter, the segment reported an operating profit of $12 million. International Paper completed the spin-off of xpedx on Jul 1, 2014. xpedx merged with Unisource Worldwide, Inc., the parent company of UWW Holdings, and the combined companies now operate as Veritiv Corporation (VRTV).

Balance Sheet

Cash and temporary investments aggregated $1,293 million at quarter-end. Cash flow from operating activities in the first half of 2014 was $1 billion, while long-term debt stood at $9.0 billion.

Earlier this month, International Paper’s board of directors authorized repurchase of additional shares of the company's common stock valued up to $1.5 billion, to supplement the $1.5 billion share repurchase program authorized in Sep 2013.

International Paper recorded Ilim joint venture equity earnings of $43 million for the quarter, compared with an equity loss of $34 million in the prior-year period. The venture witnessed robust mill performance, which was, however, somewhat offset by weaker pulp prices and seasonally higher fiber costs.

Xpedx Spin-off

On Jul 10, 2014 the company completed its Xpedx Spin-off. In Jan 2014, International Paper announced that its distribution business xpedx will merge with a distribution solution company, Unisource Worldwide, Inc., to form a new publicly traded company, Veritiv. International Paper received $400 million in cash apart from holding 51% stake of the new company, with UWW Holdings owning the remaining stake.

The spin-off is part of International Paper’s restructuring strategy to discard its non-core operations and focus on its core industrial-packaging businesses. It denotes an attempt to create value with an underperforming business by forming a stronger and more competitive company. The newly formed publicly traded company is expected to create an enhanced platform for profitable growth across packaging, print and facility solutions.

Outlook

Memphis-based International Paper is the world's leading producer of containerboards used to make corrugated brown boxes for shipping goods. Its performance in the reported quarter showed a strong rebound from the strained first-quarter results- which were adversely impacted by severe weather conditions, translating into lost revenues and higher costs.

The company recorded increased volumes and margin expansion even in the face of relatively high input costs. With the U.S. economy gaining more traction, the company looks set to strengthen its operations further.

International Paper currently has a Zacks Rank #3 (Hold). Other notable stocks in the basic material sector that are slated to report earnings soon include The Andersons, Inc. (ANDE) and Ashland Inc. (ASH), both carrying a Zacks Rank #2 (Buy).