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Sealed Air Corporation (SEE - Analyst Report) reported first-quarter 2013 adjusted net earnings from continuing operations of 17 cents per share, up 6% from the year-ago earnings of 16 cents per share but a penny short of the Zacks Consensus Estimate.
Excluding $15 million (net of taxes) of expense ensuing from cash-settled Stock Appreciation Rights (SAR) granted as part of the Diversey acquisition, adjusted EPS was 24 cents in the quarter compared with 20 cents in the prior-year quarter.
Including special items viz. a loss on debt redemption, loss related to the devaluation of the Venezuelan bolivar in Feb 2013 and costs associated with Sealed Air’s 2011 – 2014 Integration and Optimization Program, earnings from continuing operations stood at 1 cent in the quarter. Including restructuring charges associated with the 2011 – 2014 Integration and Optimization Program, loss per share was 4 cents in the year-ago quarter.
Total revenue inched up 0.4% year over year to $1.85 billion, narrowly missing the Zacks Consensus Estimate of $1.86 billion. Volumes improved 1% and a positive 0.2% price/mix were offset by an unfavorable foreign currency translation of 0.8%. Region wise, sales were led by in Asia, Middle East, Africa and Turkey with 7.1% growth, followed by 5.4% rise in Latin America, 0.2% in North America. Sales decline of 2.3% in Japan/Australia/New Zealand and 2.1% in Europe were dampeners.
Cost and Margins
Adjusted cost of sales inched up 1% to $1.23 billion. Adjusted gross profit from continuing operations decreased 2% to $619 million. Gross margin contracted 70 basis points (bps) to 33.4% in the quarter. Marketing, administrative and development expenses decreased 2% to $437 million in the quarter. Adjusted operating profit from continuing operations decreased 6% to $136 million. Adjusted operating margin declined 60 bps to 7.3%.
Segment Performance
Food & Beverage (F&B): Net sales edged up 0.8% year over year and 1.9% on constant currency to $902 million. Volumes edged up 1.8 % led by 2.5% volume growth in hygiene solutions and 1.7% volume growth in the food packaging and food solutions businesses. Price/mix was higher by 0.1%, driven by strength in Latin America, which helped offset pricing pressures in Europe and the impact of contract pricing in North America. Currency translation had a negative 1.1% impact on sales. Adjusted operating profit increased 8% to $96.8 million in the quarter.
Institutional & Laundry (I&L): Net sales were $513 million, up 0.5% year over year on a reported basis and 1.2% on constant dollar basis. Volumes increased 0.1% and higher price/mix aided sales by 1.1%, offset by 0.7% unfavorable currency translation. The segment reported an adjusted operating loss of $7.6 million compared with an adjusted operating profit of $4.8 million.
Protective Packaging Segment: The segment reported net sales of $387 million, down 0.8% on a reported basis and 1.2% on a constant dollar basis. Volumes were up 0.1% led by growth in North America offset by decline in Europe and Japan/Australia/New Zealand. Adjusted operating profit decreased 7% to $47 million in the quarter.
Medical Applications and New Ventures (Other category): Net sales were $50.8 million, up 4% on a reported and constant dollar basis. Volumes increased 2.5% and favorable price/mix added 1.6%. The sales increase was primarily driven by increased market penetration in Europe, offset by weakness in China. The segment reported adjusted operating loss of $0.5 million in the quarter compared with a loss of $0.6 million in the year-ago quarter.
Financial Updates
As of Mar 31, 2013, cash and cash equivalents were $626 million versus $679.6 million as of Dec 31, 2012. Cash from operating activities was an outflow of $39 million in the quarter compared with $93 million in the prior-year quarter. 
Long-term debt, excluding current portion, amounted to $4.4 billion as of Mar 31, 2013, compared with $4.4 billion as of Dec 31, 2012. The debt-to-capitalization ratio remained flat at 76% as of Mar 31, 2013, compared with Dec 31, 2012.
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.
Sealed Air also announced an earnings quality improvement plan intended at delayering management in a bid to make the company more cost efficient, especially in Europe. The plan is expected to result in annualized savings of approximately $80 million by the end of 2015 for an estimated total cost in the range of $180 to $200 million. Savings for 2013 are expected to be minimal and one-time cash costs for 2013 are estimated to be approximately $65 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. 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 first-quarter 2013 adjusted earnings of 53 cents per share, up 8% from 49 cents earned in the year-ago quarter. The result beat the Zacks Consensus Estimate by a penny and was at the midpoint of management’s guidance of 50 cents to 56 cents per share.
Packaging Corporation of America (PKG - Snapshot Report) posted first-quarter earnings per share of 62 cents, up 48% from 42 cents in the year-earlier quarter and beat the Zacks Consensus Estimate by 6 cents. 
Graphic Packaging Holding Company (GPK - Snapshot Report) reported earnings per share of 10 cents, a 67% year-over-year increase and ahead of the Zacks Consensus Estimate of 8 cents. 

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