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Sealed Air Falls Short of Estimates

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Sealed Air Corporation (SEE - Analyst Report) reported third-quarter 2012 adjusted net earnings from continuing  operations of 28 cents per share, which fell short of the Zacks Consensus Estimate of 31 cents and was 42% lower than the year-ago earnings of 48 cents per share.

The company recently announced the sale of its Diversey Japan business and has classified it as discontinued operation as of September 30, 2012.  Including discontinued operations, earnings per share were 31 cents in the quarter compared with 48 cents in the year-ago quarter.
 
Including a $6.18 per share non-cash goodwill impairment charge and 18 cents per share unfavorable effect from special items and 2 cents per share impact of dilutive shares, Sealed Air reported a loss of $6.06 per share from continuing operations in the quarter. Including special items, EPS was 41 cents in the year-ago quarter.
 
Total revenue surged 52% year over year to $1.9 billion but missed the Zacks Consensus Estimate of $1.99 billion. The Diversey acquisition contributed 56% to the growth while organic growth was 2%, offset by an unfavorable foreign currency translation of 5%. Volumes showed a slight improvement across all regions barring Europe.
 
Cost and Margins
 
Cost of sales increased 38% year over year to $1.2 billion. Adjusted gross profit from continuing operations shot up 91% to $643.2 million. Consequently, gross margin expanded 690 basis points (bps) to 33.8% in the quarter.
 
Marketing, administrative and development expenses increased a whopping 139% to $429 million in the quarter. Adjusted operating profit from continuing operations increased 21% to $185.8 million. However, adjusted operating margin contracted 250 bps to 9.8%.
 
Segment Performance
 
Food Packaging Segment: Net sales declined 4% year over year to $509.8 million, up 2% on a constant dollar basis. Volumes edged up 2% led by strong growth in Latin America. Benefits from prior as well as current pricing actions were offset by unfavorable product mix, primarily in North America. Adjusted operating profit decreased 7.8% to $69.5 million in the quarter.
 
Food Solutions Segment: Net sales were $254 million, down 4% on reported basis but up 1% on constant dollar basis. Volumes increased 2% led by strength in fluids packaging in North America while price/mix declined by 1%, primarily in North America. Adjusted operating profit increased 10% to $32.3 million.
 
Protective Packaging Segment: The segment reported net sales of $344 million, down 5% on a reported basis and 1% on a constant dollar basis. Volumes were up 2% with growth in North America offset by weaker volumes in EMEA. Adjusted operating profit inched up 1% to $49 million in the quarter.
 
Diversey Segment: Net sales were $698.5 million and adjusted operating profit was $29.6 million in the quarter. The company has reported results assuming the Diversey merger had been consummated on January 1, 2011. Based on this, sales in the third quarter of fiscal 2011 was $746.3 million with operating profit of $36.4 million. 
 
Financial Updates
 
Cash and cash equivalents were $540.8 million as of September 30, 2012, compared with $503.9 million as of June 30, 2012. Long-term debt, excluding current portion, amounted to $4.49 billion as of September 30, 2012, compared with $4.93 billion as of June 30, 2012.
 
Free cash flow from continuing operations was $28 million during the third quarter versus $149 million a year ago. The debt-to-capitalization ratio increased to 73.6% as of September 30, 2012, compared with 63.5% as of June 30, 2012.
 
On October 30, 2012, Sealed Air announced its intention to sell its Diversey Japan business for approximately $377 million. The company expects to record a pre-tax gain on the sale of approximately $ 260 million in the fourth quarter. The transaction, pursuant to customary closing conditions, is expected to be completed by year end.
 
Outlook for 2012
 
The company expects adjusted earnings in the range of 90 cents to $1.00 per share, down from the previous expectation of $1.00 to $1.10.  Net sales are expected to be around $7.7 billion. This includes an assumption of $300 million of unfavorable foreign currency translation compared with prior assumption of $400 million.
 
Adjusted EBITDA is expected in the range of $995 to $1,010 million compared with the previous range of $1,050 to $1,075 million. Furthermore, free cash flows are expected in the range of $375-$400 million (down from $425-$450 million) and net debt target is pegged at $4.95 million.
 
Our Take
 
With the Diversey acquisition, Sealed Air expanded its presence beyond specialty packaging solutions. This combination is expected to further enhance Sealed Air’s earnings per share and free cash flow generation. Even though Diversey has added to the company's growth profile, it also raised its risk due to the high levels of leverage the company has incurred to fund the acquisition.
 
Furthermore, the prevailing weakness in the European economy has made the situation challenging as it has significant exposure to the European market. The stock retains a short-term Zacks #2 Rank (Buy).
 
Elmwood Park, New Jersey-based Sealed Air is a major specialty packaging service provider to a diverse set of end markets. The company operates in the United States and in 50 other countries with packaging and performance-based materials and equipment systems serving food, medical, and an array of industrial and consumer applications. Sealed Air faces competition from companies like Bemis Company (BMS - Analyst Report) and Sonoco Products Co. (SON - Analyst Report).

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