Sealed Air Corporation (SEE) has reported its fiscal 2011 third quarter results posting an adjusted EPS of 48 cents versus 43 cents in the prior year quarter and a penny below the Zacks Consensus Estimate.
The quarter noted net costs related to the acquisition of Diversey of 7 cents per share. Including this, the EPS amounted to 48 cents versus 43 cents in the year-ago quarter.
Total revenue in the reported quarter increased 10% year over year to $1.25 billion in the quarter, slightly above the Zacks Consensus Estimate of $1.23 billion. Constant dollar sales increased 4% in U.S. and Europe, 7% in developing regions from the prior year quarter levels. Volumes increased 1%, led by 9% in Asia-Pacific, 3% in Protective Packaging and price mix increased 3%, led by 5% in U.S., 4% in Food segments versus the prior year quarter.
Costs and Margins
Cost of sales increased 13% year over year to $911.4 million in the reported quarter. Gross profit was up 5% year over year to $335.7 million; however, gross margins contracted 150 basis points year over year to 26.9%.
Marketing, administrative and development expenses soared 5% year over year to $181.9 million in the quarter. Adjusted operating profit was $153.8 million versus $147.2 million in the year ago quarter. However, operating margins declined 70 basis points year over year to 12.3% in the reported quarter.
Segmental Performance
Food Packaging: The segment reported net sales of $529.8 million, up 10% on the year over year basis, or 4% on a constant dollar basis, with 4% contribution from higher price/mix. Global volumes remained steady versus the prior year as a 3% increase in Europe and a 4% increase in Asia-Pacific were primarily offset by lower volumes in Canada. Operating profit was up 7% year over year to $75 million during the quarter with operating margin contracting 30 basis points to 14.2%.
Food Solutions: The segment reported total revenue of $265.5 million, up 10% year over year in the reported quarter. The sales increased 3% on a constant dollar basis, with a 4% contribution from higher price/mix largely in North America and Europe. Volumes, however, declined 1%. Income from operations increased 7% year over year to $29 million in the reported quarter. However operating margin declined 30 basis points to 11.1%.
Protective Packaging: The segment’s sales amounted to $361.2 million, up 10% year over year. On a constant dollar basis sales increased 5%, with a 3% contribution from higher volumes, led by increased demand in North America and Asia-Pacific. Price-mix was up 3%. Operating income increased 4% year over year to $49 million and operating margin dipped 90 basis points to 13.4%.
Other: This segment reported net sales of $90.6 million versus $79.2 million in the year-earlier quarter. On a constant dollar basis sales increased 7%, along with a 6% contribution from volumes. Price/mix was higher by 1% reflecting prior pricing actions in North America and Europe in the Specialty Materials business. Operating profit was $0.5 million compared with $2.7 million due to higher raw material and freight costs. Operating margin declined 280 basis points to 0.6%.
Financial Position
As of September 30, 2011, cash and cash equivalents increased to $800.3 million from $705 million as of June 30, 2011 and $761.8 million as of September 30, 2010. Free cash flow for the first nine months of 2011 was $187 million, declining from $260 million in the comparable period last year.
As of September 30, 2011, the debt-to-capitalization ratio was 36% compared with 35.4% as of June 30, 2011.
On October 3, 2011, Sealed Air completed the Diversey acquisition, a leading solutions provider to the global cleaning and sanitization market.
Outlook
Management lowered its full year EPS guidance to the range of $1.70 to $1.75 from the previous $1.75 to $1.85; reflecting the slowing pace of economic growth. The guidance includes Diversey’s financial results for the fourth quarter of 2011, acquisition-related costs and interest expense on the debt issued to finance the Diversey acquisition and to repay Diversey’s debt, and the issuance of 31.7 million shares of Sealed Air’s common stock as part of the total consideration for the transaction.
Performance of Competitors
Sealed Air competes with the likes of Bemis Company, Inc. (BMS) and Sonoco Products Co. (SON). Bemis reported third quarter EPS of 56 cents, a 2% decline from the prior year quarter and falling short of the Zacks Consensus Estimate of 58 cents. On the other hand, Sonoco reported third-quarter EPS of 66 cents, a penny more than the year-earlier quarter and above the Zacks Consensus Estimate of 64 cents.
Our Take
With the Diversey acquisition, Sealed Air will expand its presence beyond specialty packaging solutions by gaining access into a $40 billion chemical cleaning and hygiene industry. This combination is expected to enhance Sealed Air’s earnings per share and free cash flow generation.
Diversey has operations in more than 60 countries and is a market leader in Europe, Asia Pacific, Turkey, Brazil, Africa and other high growth developing regions. Sealed Air will further reinforce its global footprint and will be uniquely positioned to capitalize on the requirement for improving hygiene and food safety standards in developing markets.
The acquisition is the second largest in company history, behind the $4.8 billion purchase of the Cryovac food-packaging business in 1998 from W.R. Grace & Co. We remain skeptical considering the magnitude of the acquisition and the inherent risks of integration. Furthermore, increase in debt following the acquisition remains a worry. The shares of Sealed Air currently retain a Zacks #4 Rank (short-term Sell rating).
Elmwood Park, New Jersey-based Sealed Air Corp. is a major specialty packaging services provider catering to a diverse set of end-markets. The company operates in the United States and in 50 other countries. The company reports its operations in four segments: Food Packaging, Protective Packaging, Food Solutions and the Other.
BEMIS (BMS): Free Stock Analysis Report
SEALED AIR CORP (SEE): Free Stock Analysis Report
SONOCO PRODUCTS (SON): Free Stock Analysis Report
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