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Sealed Air Earnings More than Double

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Sealed Air Corporation (SEE - Free Report) reported second-quarter 2013 adjusted net earnings from continuing operations of 35 cents per share, which more than doubled from the year-ago earnings of 16 cents per share and were 10 cents ahead of the Zacks Consensus Estimate.

Strong growth in Asia, Middle East, Africa and Turkey (AMAT) and Latin America and modest growth in North America, margin expansion in the Food & Beverage and Institutional & Laundry divisions, benefits from pricing initiatives, and focus on manufacturing and operational improvements led to the strong earnings performance.

Including special items viz. costs related to the acquisition and integration of Diversey, and restructuring charges, earnings per share were 26 cents in the reported quarter compared with a loss per share of 11 cents in the year-ago quarter.

Total revenue edged up 1.94% year over year to $1.961 billion, narrowly missing the Zacks Consensus Estimate of $1.965 billion. Volumes improved 2.4% and a price/mix contributed 0.8% to the increase. Region wise, sales were led by 9.4% growth in AMAT, followed by 7.6% rise in Latin America and 2.1% growth in North America. Sales decline of 3% in Japan/Australia/New Zealand and 1.5% in Europe were the dampeners.
Cost and Margins
Adjusted cost of sales remained flat at $1.29 billion. Adjusted gross profit from continuing operations increased 6% to $669 million. Gross margin expanded 130 basis points (bps) to 34.1% in the quarter. Marketing, administrative and development expenses decreased 2% to $445 million in the quarter. Adjusted operating profit from continuing operations increased 28% to $192 million. Adjusted operating margin expanded 200 bps to 9.8%.
Segment Performance
Food & Beverage (F&B): Net sales increased 2.6% year over year to $946 million. Volumes edged up 2.5%, led by growth in AMAT and Latin America and a slight increase in North America, offset by decline in Europe and JANZ. Adjusted operating profit increased 40% to $106.2 million in the quarter.
Institutional & Laundry (I&L): Net sales were $570 million, up 2% year over year on a reported basis. Volumes increased across all regions except Europe. Pricing was up 1.5%. The segment reported an adjusted operating profit of $38 million compared with $28 million in the year-ago quarter.
Protective Packaging Segment: The segment reported net sales of $394 million, up 1% on a reported basis. Volumes were up 3.8%, offset by 2.0% lower price/mix. Adjusted operating profit decreased 3% year over year to $46 million in the quarter.
Medical Applications and New Ventures (Other category): Net sales remained flat at $50.9 million. Favorable price mix of 2.1% was offset by a 1.1% decline in volume. Modest growth in Europe was offset by declines in North America and AMAT. The segment reported adjusted operating profit of $1.6 million in the quarter compared with a loss of $1.1 million in the year-ago quarter.
Financial Updates
As of Jun 30, 2013, cash and cash equivalents were $660 million versus $680 million as of Dec 31, 2012. Cash from operating activities was $63 million in the first half of 2013, a substantial improvement compared with the outflow of $62 million in the prior-year comparable period.
Long-term debt, excluding current portion, amounted to $4.3 billion as of Jun 30, 2013, compared with $4.5 billion as of Dec 31, 2012. The debt-to-capitalization ratio increased 90 basis points to 76.9% as of Jun 30, 2013, compared with Dec 31, 2012.
Outlook for 2013

Sealed Air maintained its guidance for fiscal 2013 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.

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. The company announced an additional restructuring plan with projected annualized savings of $80 million by 2015.

On the flipside, the additional restructuring plan will increase Sealed Air’s costs by $180 million to $200 million by 2015, including $65 million in 2013. 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, NJ-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
Among Sealed Air’s peers, Packaging Corporation of America (PKG - Free Report) posted second-quarter earnings per share of 71 cents, up 45% from 49 cents in the year-earlier quarter and beat the Zacks Consensus Estimate of 63 cents.

Graphic Packaging Holding Co. (GPK - Free Report) reported earnings per share of 13 cents, an 18% year-over-year increase, beating the Zacks Consensus Estimate by a penny.

Sonoco Products Co. (SON - Free Report) reported second-quarter 2013 adjusted earnings of 59 cents per share, beating the prior-year quarter’s earnings and Zacks Consensus Estimate by a penny.

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