Sealed Air Q4 & FY13 Earnings Lag Ests
Sealed Air Corporation (SEE) reported fourth-quarter 2013 adjusted net earnings from continuing operations of 34 cents per share, up 6% from the year-ago earnings of 32 cents per share. The results, however, fell short of the Zacks Consensus Estimate of 37 cents per share.
The adjusted earnings per share in the reported quarter excluded special items of 32 cents per share. Among other items, this included 23 cents per share increase to the company’s income-tax provision related to the W.R. Grace & Co. (GRA) settlement agreement.
Including such one-time items, earnings per share in the fourth quarter reached 2 cents. In the year-ago quarter, Sealed Air had reported a loss of $1.70 per share, including special items worth $2.11, mostly due to the non-cash impairment of goodwill and other intangible assets.
Total revenue climbed 2.9% (4.1% in constant dollars) year over year to $2.01 billion, ahead of the Zacks Consensus Estimate of $2 billion. Volumes improved 1.4% and a price/mix contributed 2.7% to the increase.
Region-wise, sales were led by 8% growth in AMAT (Asia, Middle East, Africa and Turkey), followed by 6.7% in Latin America. Sales also increased 3.6% in North America and 2.7% in Japan, Australia and New Zealand (:JANZ),while Europe rose 2.6%.
Cost and Margins
Adjusted cost of sales increased 3% year over year to $1.35 billion. Adjusted gross profit from continuing operations increased 2% year over year to $668 million. Gross margin contracted 20 basis points (bps) to 33% in the quarter from the year-ago quarter.
Selling, general and administrative expenses increased 3% to $439 million in the quarter from $426 million in the prior-year quarter. Adjusted operating profit from continuing operations grew 5% year over year to $193 million. Adjusted operating margin expanded 20 bps to 9.6%.
Segment Performance
Food Care: Net sales in this segment increased 4.2% in constant dollars year over year to $1.01 billion. Favorable price/mix of 3.2% and continued strength in Latin America as well as Asia, Middle East, Africa and Turkey (AMAT) led to the improvement. Adjusted operating profit increased 4% year over year to $123 million in the quarter.
Diversey Care: In this segment, net sales were $546 million, up 2.3% year over year on a reported basis. The segment reported an adjusted operating profit of $12.4 million, compared with $10.5 million in the year-ago quarter.
Product Care: The segment reported net sales of $424 million, up 4% year over year on a reported basis. Volumes were up 3.1% and a 1.7% favorable price/mix was recorded. Adjusted operating profit remained flat at $59 million, compared to the year-ago quarter.
Medical Applications and New Ventures (Other Category): Net sales for this segment rose 8% year over year to $31 million. The segment reported adjusted operating loss of $1.4 million in the quarter, narrower than the year-ago quarter’s operating loss of $5.2 million.
Fiscal 2013 Performance
Sealed Air reported adjusted earnings per share of $1.23 in fiscal 2013, up 35% from the prior year’s earnings per share of 91 cents. Results fell short of the Zacks Consensus Estimate of $1.28. Including one-time items, earnings per share were at 44 cents compared with the year-ago loss per share of $8.39.
Revenues edged up 1.7% (2.7% in constant dollars) year over year to $7.69 billion but fell short of the Zacks Consensus Estimate of $7.76 billion.
Financial Updates
Cash and cash equivalents were $992 million as of Dec 31, 2013, an increase from $680 million as of Dec 31, 2012. Cash from operations in fiscal 2013 was $625 million, up from $394 million in the prior year.
Long-term debt, excluding current portion, amounted to $4.1 billion as of Dec 31, 2013, compared with $4.8 billion as of Dec 31, 2012. The debt-to-capitalization ratio remained flat at 79% as of Dec 31, 2013, compared with Dec 31, 2012.
Completed W. R. Grace & Co. Settlement Agreement
In Feb 2014, Sealed Air completed the W. R. Grace & Co. settlement agreement. Sealed Air will no longer incur interest expenses related to the settlement liability, which amounted to $48 million in 2013.
The company anticipates a cash tax benefit of more than $200 million in 2015. Sealed Air funded the $930-million liability with cash on hand and committed liquidity and issued 18 million shares which were previously reserved for the settlement agreement.
Outlook
For fiscal 2014, Sealed Air expects net sales to be relatively flat compared to net sales of $7.7 billion in 2013. Organic growth will be compensated by product rationalization and an estimated unfavorable impact of more than 2% from foreign currency translation.
Adjusted earnings per share, excluding the impact of stock appreciation rights (SARs) is projected in the range of $1.50 to $1.60. Compared with the adjusted EPS (excluding SARs) of $1.39, this reflects an increase of 8% to 15%. The Company’s core tax rate for 2014 is expected to increase to approximately 25%.
Adjusted earnings before interest, taxes and depreciation and amortization (:EBITDA) for 2014, are estimated to be in the range of $1.050 billion to $1.070 billion, a projected 1% to 3% climb from adjusted EBITDA in 2013. For 2014, Sealed Air anticipates capital expenditures of approximately $170 million and cash restructuring payments of approximately $150 million. Free Cash Flow is expected to be approximately $410 million.
Our Take
The completion of the W. R. Grace & Co. settlement agreement removes an overhang for Sealed Air as it brings closure to this matter after more than a decade. The company will no longer incur interest on the settlement liability and will benefit from cash tax benefits over the next several years. This will provide Sealed Air with more financial flexibility.
Moreover, Sealed Air will benefit from cost savings from its ongoing Integration & Optimization Program as well as its recent additional restructuring plan. The company is doing a good job of generating volume growth and realizing significant cost savings.
Elmwood Park, NJ-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 #3 (Hold).
Peer Performance
Among Sealed Air’s peers, Bemis Company, Inc. (BMS) reported fourth-quarter 2013 adjusted earnings of 54 cents per share, in line with the Zacks Consensus Estimate but up 4% from the year-ago quarter. Earnings were within the management’s guidance range of 50–56 cents per share.
MeadWestvaco Corp. (MWV) reported fourth-quarter 2013 adjusted earnings from continuing operations of 29 cents per share, reversing the year-ago quarter’s loss of 5 cents. Despite sluggish consumer demand, growth across targeted packaging and specialty chemicals end markets, improved pricing and operational performance led to the year-over-year rise. Earnings surpassed the Zacks Consensus Estimate of 23 cents.
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