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Sealed Air Misses, Trims Guidance

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Sealed Air Corporation (SEE - Free Report) reported second-quarter 2012 adjusted net earnings of 20 cents per share, which fell well short of the Zacks Consensus Estimate of 35 cents and the year-ago earnings of 40 cents per share.

Total revenue jumped 65% year over year to $2 billion but missed the Zacks Consensus Estimate of $2.05 billion. The Diversey acquisition contributed 67% to the growth while organic growth was 2%, offset by an unfavorable foreign currency translation of 4%. Volumes showed a slight improvement across all regions barring Europe.

Cost and Margins

Cost of sales increased 51% year over year. Gross profit soared 104% to $662.6 million. Consequently, gross margin expanded 640 basis points (bps) to 33.1% in the quarter.

Marketing, administrative and development expenses increased a whopping 157% to $479 million in the quarter. Adjusted operating profit increased 18% to $162.5 million. However, adjusted operating margin contracted 330 bps to 8.1%.

Segment Performance

Food Packaging Segment: Net sales declined 0.4% year over year to $499.4 million, up 4% on a constant dollar basis with a 3% contribution from price mix. Volumes inched up 1% due to strong growth in Latin America, partially offset by lower volumes in North America and EMEA. Adjusted operating profit plunged 22% to $48.3 million in the quarter, affected by an unfavorable product mix, a negotiated labor agreement and costs related to manufacturing consolidation activities.

Food Solutions Segment: Net sales were $247 million, down 6% on reported and 2% on constant dollar basis. Price mix remained steady year over year while volumes dipped 2%. Adjusted operating profit increased 10% to $27.7 million.

Protective Packaging Segment: The segment reported net sales of $344.6 million, down 3% but up 1% on a constant dollar basis. Volumes were up 2% with growth in North America offset by weaker volumes in EMEA. Adjusted operating profit declined 7% to $43 million in the quarter.

Diversey Segment: Net sales were $816 million and adjusted operating profit was $40.5 million in the quarter.

Financial Updates

Cash and cash equivalents were $503.9 million as of June 30, 2012, compared with $538.5 million as of March 31, 2012. Long-term debt, excluding current portion, amounted to $4.93 billion as of June 30, 2012, compared with $4.99 billion as of March 31, 2012. Free cash flow was $102 million during the second quarter versus $29 million a year ago. The debt-to-capitalization ratio increased to 63.5% as of June 30, 2012, compared with 62.2% as of March 31, 2012.

Outlook for 2012

The company expects adjusted earnings in the range of $1.00 to $1.10 per share and cash earnings in the range of $1.60 to $1.70. Net sales are expected to be around $7.7 billion. Adjusted EBITDA is expected in the range of $1,050 to $1,075 million. Furthermore, free cash flows are expected in the range of $425-$450 million and net debt target is pegged at $4.95 million.

2011-2014 Integration & Optimization Program

Sealed Air had announced its 2011-2014 Integration & Optimization Program in the fourth quarter of 2011, which was expanded in the second quarter to address increasing macroeconomic weakness and realize additional cost reduction opportunities. These initiatives will result in an incremental $20 million of benefits in 2012 and a further $50 million in 2013. In addition with the previous program, annual savings are estimated at approximately $195 million to $200 million by the end of 2014.

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 ongoing weakness in the European economy has made the situation challenging as it has significant exposure to the European market. Sealed Air faces competition from companies like Bemis Company (BMS - Free Report) and Sonoco Products Co. (SON - Free Report) .

Currently, we have a long-term Underperform recommendation on Sealed Air. The stock retains a short-term Zacks #4 Rank (Sell).

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