International Paper (IP) reported record third quarter 2013 operating earnings with a solid performance across the board and a healthy margin improvement due to higher prices. Net income for the reported quarter was $382 million or 85 cents per share compared with $237 million or 54 cents per share in the year-earlier quarter.
Excluding one-time items, operating earnings for the reported quarter were $471 million or $1.05 per share, versus $358 million or 81 cents per share in the year-ago quarter. The operating earnings well exceeded the Zacks Consensus Estimate of 94 cents.
Net sales for the reported quarter were $7.4 billion versus $7.0 billion in the year-ago quarter. The year-over-year increase in sales was attributable to stellar contribution from the Industrial Packaging and Consumer Packaging segments. However, the quarterly sales missed the Zacks Consensus Estimate of $7.5 billion.
Segment Performance
Industrial Packaging: Sales from this segment increased 12.6% year over year to $3.8 billion. Operating income stood at $499 million (including special items) in the reported quarter versus $255 million in the year-ago quarter. The increase in year-over-year operating income was driven by higher selling prices for boxes and containerboard, and lower maintenance outage costs in North America; offset partially by higher wood and waste fiber costs.
Printing Papers: Sales were down 1.6% year over year to $1,555 million in the reported quarter, while operating income declined to $93 million from $202 million in the prior-year period. The dip in operating income was driven by higher wood costs due to wet weather conditions in the southeastern U.S.
Consumer Packaging: Sales from this segment increased 15.7% year over year to $885 million. Operating profit was up 9.0% to $73 million as it benefited from lower maintenance outage costs and favorable pricing.
xpedx (Distribution Business): Sales for the segment declined 5.9% year over year to $1.4 billion. The segment reported a 13.3% drop in operating profit to $13 million in the year-ago quarter largely due to strategic restructuring efforts.
Mill Closure
During the reported quarter, International Paper announced its plans to shutdown the Courtland, Ala., paper mill manufacturing facility owing to decelerating demand for uncoated freesheet across the continent. The phased closure is likely to be completed by the end of first quarter 2014.
The mill produced papers for diverse applications like forms, envelopes, labels, copiers, printers and magazines. With increased digitalization, consumers shifted to online publications, electronic billing and filing, due to which demand for uncoated freesheet in North America fell drastically.
With the permanent shutdown of the facility, International Paper’s North American uncoated and coated freesheet paper production capacity will reduce by 950,000 tons, including 765,000 tons of uncoated freesheet.
Going forward, International Paper’s Printing and Communications Papers Business, of which the Courtland mill used to be a part, will comprise four paper mills focused on uncoated freesheet, bristols and specialty papers markets. These include two uncoated freesheet paper mills in Eastover, S.C. and Riverdale, Ala., and two specialty paper mills in Georgetown, S.C. and Ticonderoga, N.Y.
The strategic decision is likely to affect the livelihood of 1,100 mill employees, both contractual and salaried. International Paper will work in unison with the union officials to fairly compensate the employees through severance packages, outplacement assistance, benefits and other assistance programs.
Related to the planned closure, International Paper will record $550 million in pre-tax non-cash asset write-off and accelerated depreciation charges and $125 million in pre-tax cash severance and other shutdown charges during the remainder of 2013 and in 2014.
Balance Sheet
Cash and temporary investments at quarter-end aggregated $1.9 billion. Cash flow from operating activities stood at $2.0 billion for the first nine months of 2013, while long-term debt was $8.9 billion.
International Paper recorded Ilim Joint Venture equity earnings of $11 million in the reported quarter versus $33 million in third quarter 2013.
The company increased its quarterly dividend by 17% year over year to 35 cents per share. The fourth quarter 2013 dividend is payable in cash on Dec 16 to shareholders of record at the close of business on Nov 15. At the same time, management authorized a share repurchase program to purchase common shares worth $1.5 billion over a period of 2-3 years in open market transactions.
Historically, International Paper has consistently returned significant cash to its shareholders through dividends and share repurchases. The current dividend increase and share repurchase authorization further reflects the inherent strength of International Paper’s business and due diligence of management to generate long-term profitability and sustainable free cash flow.
Outlook
International Paper expects to further improve its performance in the remainder of the year to complement is strong third quarter results. The company also remains bullish about its performance in 2014. Although the company did not provide any specific guidance, we remain impressed by the robust performance of the company during the quarter that witnessed a healthy top- and bottom-line growth.
International Paper currently has a Zacks Rank #4 (Sell). Other stocks that look promising and are worth considering in the industry include Boise Inc. (BZ), Rexam plc (REXMY) and Packaging Corporation of America (PKG), each carrying a Zacks Rank #2 (Buy).
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