Sealed Air Up on Q2 Earnings Beat, Increased Guidance

Shares of Sealed Air Corporation (SEE) went up 1.7% in pre-market trading as the packaging company reported a 20% year-over-year increase in the second quarter adjusted earnings per share to 42 cents. The company also raised its fiscal 2014 guidance based on strong performance in the first half as well as improved outlook for the second half. Earnings per share also outperformed the Zacks Consensus Estimate of 38 cents per share.

Adjusted earnings per share in the reported quarter, which excluded special items largely comprised of costs associated with previously announced restructuring programs. Including these items, earnings in the quarter also stood at 28 cents per share compared with 25 cents in the year-ago quarter.

Total revenue increased 2% on a reported basis to $1.97 billion in the quarter, ahead of the Zacks Consensus Estimate of $1.95 billion. However, on a constant dollar basis, net sales increased 3%, mainly due to favorable price/mix of 3.4% offset by a 0.4% decline in volume.

Region-wise, sales were led by 8% growth in Latin America, followed by 6.6% rise in Asia, Middle East, Africa and Turkey (AMAT). Sales also increased 2.7% in North America and 1.7% in Japan, Australia and New Zealand (JANZ). Sales in Europe increased a modest 0.7%. Net sales from Developing regions — Africa, Asia (exclusing Japan and South Korea), Central and Eastern Europe and Latin America — increased 7.6% in constant dollars, contibuting 26% of net sales.

Cost and Margins

Adjusted cost of sales edged up 1% year over year to $1.3 billion. Adjusted gross profit from continuing operations increased 3% year over year to $685 million. Gross margin expanded 50 basis points (bps) to 34.7% in the quarter from the year-ago quarter.

Selling, general and administrative expenses increased 3% to $454 million in the quarter from $443 million in the prior-year quarter. Adjusted operating profit from continuing operations grew 6% year over year to $199.8 million. Adjusted operating margin expanded 40 bps to 10.1%.

Adjusted earnings before interest, taxes and depreciation and amortization (EBITDA) for the quarter increased 8% to $284 million from of $262 million in the prior-year quarter. Adjusted EBITDA margin expanded 90 basis points to 14.4% from the prior-year quarter aided by favorable mix and price/cost spread and cost synergies, partially offset by non-material inflation, lower volumes and $4 million negative currency translation.

Segment Performance

Food Care: Net sales in this segment edged up 2% year over year to $962 million. On a constant dollar basis, Food Care net sales increased 4% mainly due to favorable price/mix of 4.1%, partially offset by a 0.9% decline in volume. Adjusted EBITDA increased 8% year over year to $159 million driven by favorable mix and price/cost spread as well as cost synergies. However, these benefits were partially offset by lower volumes, non-material inflation and a negative currency translation

Diversey Care: In this segment, net sales were $581 million, up 2% year over year on a reported basis. On a constant dollar basis, net sales increased 2.7% driven by strong growth in developing regions as well as improvement in Europe. Adjusted EBITDA decreased 1.4% to $72 million from $73 million.

Product Care: The segment reported net sales of $409 million, up 3.5% year over year on a reported basis. On a constant dollar basis, net sales increased 3.2% driven by a favorable price/mix of 3%. Adjusted EBITDA increased 16% to $71 million year over year, attributable to a favorable mix and price/cost spread as well as cost synergies.

Financial Updates

Cash and cash equivalents were $357 million as of Jun 30, 2014, a substantial decline from $992 million as of Dec 31, 2013. Cash used in continuing operations in the first six months of 2014 was $762 million compared with cash inflow of $60 million in the prior-year period.

Total debt stood at $4.8 billion as of June 30, 2014 compared with $5.3 billion as of Dec 31, 2013. The debt-to-capitalization ratio was at 77% as of Jun 30, 2014, compared with 79% as of Dec 31, 2013.

In the second quarter, Sealed Air repurchased approximately 3.9 million shares for $130 million. The repurchase was funded with $110 million from committed credit facilities and $20 million of accumulated cash and cash equivalents.

Guidance

For fiscal 2014, Sealed Air now expects net sales to be approximately $7.75 billion, up $50 million from the previous guidance. The company has factored in an unfavorable impact of 1% from foreign currency translation.

Adjusted earnings per share are currently projected in the range of $1.65 to $1.70, up from the previously provided guidance of $1.50 to $1.60. Compared with the adjusted earnings per share of $1.39 in 2013, this reflects an increase of 19% to 22%.

Adjusted EBITDA is now expected in the range of $1.085 billion to $1.095 billion, an increase from the previous guidance of $1.050 billion to $1.070 billion. For 2014, Sealed Air anticipates capital expenditures of approximately $150 million and cash restructuring payments of approximately $135 million. Free Cash Flow is expected to be approximately $485 million, up from the previous expectation of $425 million.

As part of its ‘Change the Game’ strategy and in line with the intention of transforming Sealed Air into a knowledge-based company, it has relocated its global headquarters to a new, state-of-the-art campus in Charlotte, NC. This move will create a stronger, one-company culture that will enable greater collaboration, accelerate innovation and drive operating efficiencies.

The completion of the W.R. Grace & Co. settlement rids Sealed Air of an overhang as it brings closure to this matter after more than a decade. Moreover, the company will benefit from cost savings from its ongoing Integration & Optimization Program as well as its recent additional restructuring plan.

Sealed Air carries a Zacks Rank #1 (Strong Buy). Some other stocks worth considering in the same industry include Graphic Packaging Holding Co. (GPK), MeadWestvaco Corporation (MWV) and Bemis Company, Inc. (BMS). While Graphic Packaging sports the same rank as Sealed Air, MeadWestvaco and Bemis Company carry a Zacks Rank #2 (Buy).