Domtar (UFS) Surpasses Q2 Earnings & Revenue Estimates

Domtar Corporation (TO:UFS) reported adjusted income of $38 million or 61 cents per share for the second quarter of 2016 versus $39 million or 61 cents per share in the year-ago quarter. Earnings comprehensively beat the Zacks Consensus Estimate of 19 cents.

GAAP net income was $18 million or 29 cents per share versus $38 million or 60 cents per share in the year-ago quarter. The year-over-year decline in earnings was primarily due to lower revenues.

Sales in the quarter were $1,267 million versus $1,310 million in the year-ago quarter. Revenues however beat the Zacks Consensus Estimate of $1,258 million.

Operating income for the reported quarter came in at $39 million, compared to $18 million in the first quarter of 2016. The increase in operating income was driven by lower impairment of property, plant & equipment charge, increased average selling prices and fall in operational costs.

Segment Performance

Pulp and Paper: Sales from this segment were $1,054 million versus $1,110 million in the year-ago period. Operating income came in at $35 million versus $55 million in the year-ago quarter. Paper inventories decreased by 37,000 tons, while pulp inventories decreased by 16,000 metric tons.

The conversion of the Ashdown paper machine to fluff pulp is still in progress and operations are scheduled to begin in the third quarter. Through such endeavors, the company is actively pursuing growth opportunities to capitalize on its existing strengths and core competencies.

Personal Care: Sales were $228 million versus $216 million in the year-earlier quarter, while operating income was $15 million versus $17 million in the year-ago quarter.

Acquisitions

During the quarter, Domtar acquired the assets of Butterfly Health Inc. for an undisclosed amount. The strategic acquisition extends the Personal Care segment of Domtar with complementary products. The company’s Personal Care segment manufactures and sells a wide range of incontinence solutions for adults, children and infants under leading brands like ATTENDS, ATTENDS DISCREET and COMFEES. This acquisition will facilitate the company to strengthen its position in the market. Domtar is expected to leverage its global footprint to extend its presence in additional healthcare markets, with a focus on Europe.

Balance Sheet

Cash and cash equivalents totaled $111 million as of Jun 30, 2016. Long-term debt was $1,237 million at quarter end. Cash flow from operating activities totaled $118 million and capital expenditures were $119 million. Domtar’s net debt-to-total capitalization ratio was 30% as of June 30, 2016.

The company did not have any shares repurchases during the quarter. At the end of the quarter, the company had 62.7 million shares outstanding.

Outlook

The company expects its paper business to benefit from recently announced price increases in the second half of 2016. It, however, expects some short-term pricing volatility in pulp. Lower maintenance activity and better productivity should boost results in Pulp and Paper. Personal Care results are expected to benefit from new customer wins, market growth and cost savings from the new manufacturing platform. Raw material unit costs are expected to increase moderately.

Domtar carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks to consider include Carlisle Companies Incorporated (NYSE:CSL) , Leucadia National Corporation (NYSE:LUK) and Swire Pacific Limited (OTC:SWRAY) . Each of these stocks holds a Zacks Rank #2 (Buy).