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Sealed Air Corporation (SEE) reported fourth-quarter 2012 adjusted net earnings from continuing operations of 34 cents per share, ahead of the Zacks Consensus Estimate of 29 cents and increased almost seven fold from the year-ago earnings of 6 cents per share.

The company sold its Diversey Japan business in Nov 2012 and its results have been classified as discontinued operations. Including discontinued operations, earnings per share were $1.21 in the quarter compared with 11 cents in the year-ago quarter.
 
Including special items of 39 cents per share and 1 cent per share impact of dilutive shares, Sealed Air reported a loss of 6 cents per share from continuing operations in the quarter. Including special items of 35 cents and 2 cents per share impact of dilutive shares, loss per share was 31 cents in the year-ago quarter.
 
Total revenue inched up 1% year over year to $1.978 billion, beating the Zacks Consensus Estimate of $1.938 billion. Volumes improved 2.6% offset by an unfavorable foreign currency translation of 1.7%. Region wise, sales was led by in Asia, Middle East, Africa and Turkey with 9.6% growth, followed by 7.5% rise in Latin America, 2.3% in North America and 2.0% for Japan/Australia/New Zealand. Sales decline of 5.6% in Europe was a dampener. 
 
Cost and Margins
 
Adjusted cost of sales remained flat at $1.3 billion. Adjusted gross profit from continuing operations increased 2% to $658.7 million. Gross margin expanded 30 basis points (bps) to 33.3% in the quarter.
 
Marketing, administrative and development expenses decreased 5% to $441.5 million in the quarter. Adjusted operating profit from continuing operations increased 21% to $191 million. Adjusted operating margin expanded 160 bps to 9.7%.
 
Segment Performance
 
Effective from the fourth quarter, Sealed Air’s segment information is presented under three new reportable segments and an Other category. These are - Food & Beverage (F&B), Institutional & Laundry (I&L), Protective Packaging segments. The Medical Applications and New Ventures businesses comprise the Other category segment. 
 
F&B includes the legacy Food Packaging and Food Solutions businesses and the food and beverage hygiene solutions business from Diversey. I&L represent the remainder of the Diversey segment or solutions for the building services, food service, health care, hospitality and retail markets. Protective Packaging represents legacy Protective Packaging and the specialty materials foam business, which was previously included in the Other category.
 
Food & Beverage (F&B): Net sales edged up 0.9% year over year to $986.4 million, up 2.4% on a constant dollar basis. Volumes edged up 3.1% led by 3.6% volume growth in hygiene solutions and 2.9% volume growth in the food packaging and food solutions businesses.
 
This was offset by 0.7% lower price/mix due to pricing pressures in Europe and the impact of contract pricing in North America, and unfavorable currency translation of 1.5%. Adjusted operating profit increased 21% to $124.5 million in the quarter.
 
Institutional & Laundry (I&L): Net sales were $533.6 million, flat year over year on a reported basis but up 2.3% on constant dollar basis. Volumes increased 0.7% led by strength in new healthcare business offset by a decline in consumer brands and lower equipment sales in Europe. Higher price/mix aided sales by 1.6%, offset by 2.4% of unfavorable currency translation. Adjusted operating profit increased a whopping 206% to $10.4 million.
 
Protective Packaging Segment: The segment reported net sales of $407.4 million, up 1% on a reported basis and 1.5% on a constant dollar basis. Volumes were up 2.6% led by growth in North America. Adjusted operating profit increased 9% to $59 million in the quarter.
 
Medical Applications and New Ventures (Other category): Net sales were $50.4 million, up 9% on a reported basis and 13.4% on a constant dollar basis.  Volumes increased 12.7% higher volumes and acquisition added 1.1%. The sales increase was primarily driven by increased market penetration in Europe. The segment reported adjusted operating loss of $2.6 million in the quarter compared with $2.2 million in the year ago quarter.
 
Fiscal 2012 Performance
 
Sealed Air reported adjusted earnings per share of 95 cents in 2012, down 25% from $1.26 in 2011 and ahead of the Zacks Consensus Estimate of 93 cents. Adjusted earnings per share were at the mid point of management guidance range of 90 cents to $1.00 per share.
 
Including special items, the company reported loss per share of $6.63 compared with earnings per share of 75 cents in 2011. Including discontinued operations, earnings per share were $1.90 in 2012 compared with $1.31 in 2011.
 
Total revenue improved 38% year over year to $7.65 billion, missing the Zacks Consensus Estimate of $7.68 billion.
 
Financial Updates
 
As of 2012 end, cash and cash equivalents were $679.6 million versus $703.6 million as of 2011 end. Cash from operating activities increased to $404 million in the year from $372 million in the prior year. Free cash flow from continuing operations was $280 million during the year versus $249 million in 2011. 
 
Long-term debt, excluding current portion, amounted to $4.54 billion as of Dec 31, 2012, compared with $4.97 billion as of Dec 31, 2011. The debt-to-capitalization ratio increased to 72.1% as of Dec 31, 2012, compared with 62.8% as of Dec 31, 2011.
 
In Nov 2012, Sealed Air sold its Diversey Japan business and utilized the cash proceeds and available cash on hand to reduce term loan balances by $370 million.
 
Outlook for 2013
 
The company expects adjusted earnings in the range of $1.10 to $1.20 per share. Net sales are expected to be within $7.7 to $7.9 billion. Adjusted EBITDA is expected in the range of $1.01 to $1.03 billion. Furthermore, free cash flows are expected in the range of $300-$350 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, volumes at Diversey have been weaker than expected due to its significant exposure in Europe.
 
The company’s Integration & Optimization Program will generate cost savings and benefits of approximately $195 million to $200 million by the end of 2014. Recently, Sealed Air has announced certain leadership changes that might lead to a turnaround in the company. However, the prevailing weakness in the European economy has made the situation challenging as the company has significant exposure to the European market. The stock retains a short-term Zacks Rank #3 (Hold).
 
Elmwood Park, N.J-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. 
 
Peer Performance
 
Bemis Company, Inc. (BMS - Analyst Report) reported fourth quarter 2012 adjusted earnings of 52 cents per share, up 7% from 45 cents earned in the year-ago quarter. The result surpassed the Zacks Consensus Estimate of 49 cents. 
 
Packaging Corporation of America (PKG - Snapshot Report) reported fourth quarter adjusted income of 61 cents per share compared to 40 cents per share in the year-ago quarter. 
 
Sonoco Products Co. (SON - Analyst Report) reported fourth-quarter 2012 adjusted earnings of 56 cents per share compared with 46 cents in the year-ago quarter, ahead of the Zacks Consensus Estimate of 54 cents per share.

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