Sealed Air Corporation’s (SEE) fourth-quarter 2014 adjusted earnings per share of 59 cents increased 51% year over year and also outpaced the Zacks Consensus Estimate of 47 cents, a positive earnings surprise of 26%.
Including special items, viz. loss recorded on the repurchase of 8.125% senior notes, restructuring and other associated costs in the reported quarter, increase to the company’s income tax provision resulting from a rise in its valuation allowance with respect to the a settlement agreement, earnings in the quarter stood at 31 cents per share compared with 2 cents in the year-ago quarter.
Total revenue dipped 1.9% on a reported basis to $1.974 billion in the quarter, falling short of the Zacks Consensus Estimate of $1.987 billion. However, on a constant dollar basis, net sales increased 3.3%, mainly due to a favorable price/mix of 3% as volumes remained flat year over year.
Region-wise, sales were led by 8.4% growth in Latin America, followed by 6.8% rise in Asia, Middle East, Africa and Turkey (AMAT). Sales increased 2.3% in North America and a modest 2.2% in Europe, while marginally increasing 0.8% in Japan, Australia and New Zealand (JANZ).
Cost and Margins
Adjusted cost of sales declined 3% year over year to $1.3 billion. Adjusted gross profit from continuing operations edged up 1% year over year to $677 million. Gross margin expanded 100 basis points (bps) year over year to 34% in the quarter.
Selling, general and administrative (SG&A) expenses increased 4% to $451 million in the quarter from $433 million in the prior-year quarter. Adjusted operating profit from continuing operations decreased 3% year over year to $200 million. Adjusted operating margin contracted to 10.1% from 10.3% in the-year ago quarter.
Adjusted earnings before interest, taxes and depreciation and amortization (EBITDA) for the quarter increased 4% to $282 million from of $270 million in the prior-year quarter. Adjusted EBITDA margin expanded 90 basis points to 14.3% from the prior-year quarter aided by favorable mix and price/cost spread as well as cost synergies, partially offset by higher SG&A expenses and unfavorable currency translation.
Segment Performance
Food Care: Net sales in this segment went down 2.7% year over year to $985 million. On a constant dollar basis, net sales increased 3% mainly due to favorable price/mix of 3.5%. However, currency had a negative impact of 5.7% on net sales. Adjusted EBITDA increased 7% year over year to $172 million, driven by favorable mix and price/cost spread as well as cost synergies. However, these benefits were partially offset by unfavorable currency translation and higher SG&A expenses.
Diversey Care: In this segment, net sales were at $536 million, down 1.8% year over year on a reported basis. On a constant dollar basis, net sales increased 4.1% on the back of positive volume and price/mix trends along with continued strength in emerging markets. Currency had a negative impact of 5.9% on the segment’s sales. Adjusted EBITDA decreased 4% to $58 million from $61 million due to unfavorable currency translation and supply chain costs.
Product Care: The segment reported net sales of $432 million, up 1.6% year over year on a reported basis. On a constant dollar basis, net sales increased 4.6% driven by a favorable price/mix of 4%. However, volumes remained flat year over year. Adjusted EBITDA increased 6% to $77 million year over year, attributable to a favorable mix and price/cost spread, partially offset by higher SG&A expenses.
2014 Performance
Sealed Air reported 2014 adjusted earnings per share of $1.86, up 34% from $1.39 in the prior year and ahead of the Zacks Consensus Estimate of $1.74. Including one-time items, earnings in fiscal 2014 stood at $1.20 compared with 44 cents in the 2013. Revenues in 2014 increased 0.8% to $7.75 billion but failed to match the Zacks Consensus Estimate of $7.77 billion.
Financial Updates
Cash and cash equivalents were $323 million as of Dec 31, 2014, a substantial decline from $992 million as of Dec 31, 2013. Cash used in continuing operations in 2014 was $202 million compared with cash inflow of $625 million in the prior year.
Total debt stood at $4.6 billion as of Sep 30, 2014 compared with $5.3 billion as of Dec 31, 2013. The debt-to-capitalization ratio remained high at 79% as of Dec 31, 2014, compared with 76% as of Dec 31, 2013.
In the reported quarter, Sealed Air issued $425 million aggregate principal amount of 4.875% senior notes due 2022 and $425 million aggregate principal amount of 5.125% senior notes due 2024. The proceeds from the offering were utilized to repurchase $750 million aggregate principal amount of 8.125% senior notes due 2019.
The company amended and restated its senior secured credit facilities totaling $2.13 billion in Jul 2014. With the amendment and issuance of senior notes with extended maturities, the company estimates annualized interest expense savings to be approximately $30 million.
Restructuring Program
Sealed Air initiated a new restructuring program: The Fusion Program, consisting of projects across its three divisions and functional support. Aggregate costs is projected at approximately $275 million to $285 million, of which the net cash cost is expected to be in the range of $210 million to $220 million. The program is expected to be completed by the end of 2017. Sealed Air estimates annualized savings of approximately $80 million to $85 million by the end of 2018.
Guidance
For 2015, Sealed Air expects net sales to be approximately $7.4 billion. The company has factored in an unfavorable impact of 7% from foreign currency translation.
Adjusted earnings per share are currently projected in the range of $2.08 to $2.18, compared with the adjusted earnings per share of $1.86 in 2014, reflecting an increase of 12% to 17%.
Adjusted EBITDA is now projected in the range of $1.15 to $1.18 billion. For 2015, Sealed Air anticipates capital expenditures of approximately $180 million and cash restructuring payments of approximately $120 million. Free cash flow is expected to be approximately $600 million.
The company expects adjusted EBITDA to be in the range of $1.15 billion to $1.18 billion, compared with 2014 Adjusted EBITDA of $1.12 billion. Sealed Air will continue to stay disciplined on its value-added selling approach and ‘Get Fit and Change the Game’ initiatives, both of which are expected to contribute to margin expansion. Additionally, it expects to generate approximately $600 million in free cash flow in 2015.
Our Take
In 2015, lower input costs along with Sealed Air’s continued focus on improving its earnings will help offset unfavorable currency translation impact. Cheaper oil as well as recovering employment scenario will lead to a positive turn in consumer spending patterns and improve packaging demand, thereby facilitating Sealed Air's growth. The company will also benefit from cost savings from its restructuring programs.
Sealed Air carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the same industry include Berry Plastics Group, Inc. (BERY), Bemis Company, Inc. (BMS) and Sonoco Products Co. (SON). While Berry Plastics sports a Zacks Rank #1 (Strong Buy), Bemis and Sonoco hold a Zacks Rank #2 (Buy).
Peer Performance
Berry Plastics reported first-quarter fiscal 2015 (ended Dec 27, 2014) adjusted earnings from continuing operations of 27 cents per share in the quarter, beating the Zacks Consensus Estimate by a penny.
Bemis reported earnings of 57 cents per share in fourth-quarter 2014, up 16% from 49 cents earned in the year-ago quarter. Earnings also beat the Zacks Consensus Estimate by a penny and came close to the upper end of the company’s guidance range of 53–58 cents.
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