Sorting through International Paper's financials is a tall order
Friday, 30 October 2009

By Matthew Quinn

A press release from International Paper on Wednesday said the paper giant posted a third-quarter profit of $371 million, up from $149 million a year earlier.

If only it were that simple, says Gimme Credit analyst Carol Levenson.

"We continue to struggle with determining what is 'normal' when it comes to International Paper's results," she wrote in a note to investors Thursday.

Not including special items in the just finished quarter and the third quarter of 2008, earnings plunged 56 percent, to $157 million, by Levenson's calculations.

One issue in the current earnings report was IP's $6 billion acquisition of Weyerhaeuser's packaging business last year. Because of the deal's closing date, only two months of ownership were included in IP's third quarter 2008 results.

Additionally, IP's Q3 2008 results benefitted from a $261 million gain on the sale of mineral rights in its forest products segment. That gain wasn't excluded from adjusted results because, as Levenson explains, "creating gains by selling land is precisely what this business is supposed to do."

So what's the problem? Well, there's the matter of consistency in reporting.

Though the gain was included in adjusted results, the forest products division as a whole mysteriously disappeared when management boasted about margins expanding 140 basis points during the quarter, compared to a year earlier. If the segment was included, margins contracted by 300 basis points to 6.8 percent, Levenson found.

Additionally, IP and its peers have been benefiting from cash windfalls from alternative fuel mixture tax credits. Unfortunately for them, the credits are scheduled to expire at the end of this year.

That, of course, is easy enough to factor into earnings models, but complicates things when trying to figure out normalized cash flows and how aggressively IP will be able to reduce its $9.3 billion in long-term debt. Year-to-date, the credits boosted cash flow by $1.3 billion.

Not only that, "a receivables sale, deferred taxes, and working capital items all contributed to higher cash flow than earnings alone would imply," Levenson wrote.

IP has been using the boosted cash flow to reduce its long-term debt, shaving nearly 18 percent off of it since the beginning of the year. But Levenson wonders if its underlying business can continue to do so.

"IP has reduced debt faster than we had anticipated, thanks to the IRS," she wrote. "The next leg of the race will be more difficult."

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