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Sealed Air Beats on Q3 Earnings

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Sealed Air Corporation (SEE - Free Report) reported third-quarter 2013 adjusted net earnings from continuing operations of 39 cents per share, up 39% from the year-ago earnings of 28 cents per share. The results beat the Zacks Consensus Estimate of 34 cents per share.

Including special items consisting of costs related to the acquisition and integration of Diversey, and restructuring charges, earnings per share was 18 cents in the reported quarter compared with a loss per share of $6.41 in the year-ago quarter.

Total revenue climbed 2% year over year to $1.93 billion, in line with the Zacks Consensus Estimate. Volumes improved 1.4% and a price/mix contributed 1.5% to the increase. Region wise, sales were led by 6.9% growth in AMAT (Asia, Middle East, Africa and Turkey), followed by 3.5% rise in Europe, 1.9% in North America and 1.3% Latin America, partly offset by decline in sales of 9.3% in JANZ (Japan/Australia/New Zealand).
Cost and Margins

Adjusted cost of sales increased 1.7% year over year to $1.28 billion. Adjusted gross profit from continuing operations increased 2.5% year over year to $660 million. Gross margin remained flat at 34% in the quarter from the year-ago quarter.

Marketing, administrative and development expenses increased marginally to $423.6 million in the quarter from $421.7 million in the prior-year quarter. Adjusted operating profit from continuing operations grew 6.6% year over year to $198 million. Adjusted operating margin expanded 40 basis points (bps) to 10.2%.
Segment Performance

Food Care: Net sales in this segment increased 1.7% year over year to $950.5 million. Volumes increased 1.5%, led by positive trends in all regions, partially offset by decline in JANZ. Additionally, price-mix was higher in all regions except Europe. Adjusted operating profit increased 10% year over year to $119.6 million in the quarter.
Diversey Care: In this segment, net sales were $534.6 million, up 1.4% year over year on a reported basis. Volumes remained flat compared to a year ago especially in AMAT and Latin America, partly offset by decrease in Europe and North America. Price-mix was up 1.8%. The segment reported an adjusted operating profit of $19 million compared with $25 million in the year-ago quarter.
Product Care: The segment reported net sales of $402.7 million, up 3.6% year over year on a reported basis. Volumes were up 3.4% and a 0.6% favorable price/mix was recorded. Adjusted operating profit increased 3.5% year over year to 55.7 million in the quarter.

Medical Applications and New Ventures (Other Category): Net sales for this segment rose 4.3% year over year to $50.8 million. Favorable price/mix of 1.6% was offset by a 0.5% decline in volume. The segment reported adjusted operating profit of $3.8 million in the quarter versus a loss of $1.8 million in the year-ago quarter.
Financial Updates

Cash and cash equivalents was $776.7 million as of Sep 30, 2013, an increase from $680 million as of Dec 31, 2012. Cash from operations for the nine-month period ended Sep 30, 2013, was $275 million, up from $65 million in the prior-year comparable period.
Long-term debt, excluding current portion, amounted to $4.3 billion as of Sep 30, 2013, compared with $4.5 billion as of Dec 31, 2012. The debt-to-capitalization ratio remained flat at 76% as of Sep 30, 2013, compared with Dec 31, 2012.
Sealed Air raised its guidance for fiscal 2013 adjusted earnings per share to the range $1.25 to $1.30 from $1.10 to $1.20. Outlook for net sales also modified to $7.7 billion from $7.7 to $7.9 billion. Adjusted EBITDA outlook is also changed from the range of $1.01 to $1.03 billion to around $1.055 billion. Free cash flow is expected to be around $375 million.

Our Take

With the Diversey acquisition, Sealed Air expanded its presence beyond specialty packaging solutions. This is expected to further improve Sealed Air’s earnings per share and free cash flow generation. Even though Diversey has added to the company's growth profile, it has raised risks 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.
Sealed Air will benefit from price hikes of most of its products in the Food Care and Product Care units, in North America. This hike was made to combat higher costs of major petrochemical raw materials. Sealed Air’s efforts towards minimizing the impact of cost increases will also help customers in the long run. However, the prevailing weakness in the European economy remains headwinds.
Elmwood Park, N.J.-based Sealed Air is a major specialty packaging service provider to a diverse range of end markets. The company operates in the United States and in 50 other countries producing packaging and performance-based materials, and equipment systems serving food, medical, industrial and consumer applications.
Sealed Air retains a short-term Zacks Rank #4 (Sell). Packaging Corporation of America (PKG - Free Report) also belongs to the packaging industry and holds a Zacks Rank #2 (Buy).

Among Sealed Air’s peers, MeadWestvaco Corporation reported third-quarter 2013 adjusted earnings from continuing operations of 49 cents per share, up 26% year over year. However, earnings fell short of the Zacks Consensus Estimate of 52 cents. Another competitor, Sonoco Products Co. (SON - Free Report) reported adjusted earnings of 63 cents per share, managing to beat the Zacks Consensus Estimate of 61 cents and increasing 14% from 55 cents earned in the year-ago quarter.

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