Sealed Air Corporation (SEE) delivered adjusted EPS of 43 cents for the third quarter ended September 30, 2010, on par with the Zacks Consensus Estimate. Earnings per share in the quarter manifested a 13% increase over 38 cents in the year-ago quarter. Growth in Protective Packaging and both of the Food segments, reflecting robust end-market demand, improved price/mix performance benefiting from earlier pricing announcements resulted in the improvement.

During the quarter, the company recorded a foreign currency exchange loss of 1 cent per share related to a Venezuelan subsidiary and a 1 cent per share gain on sale on other-than-temporary impairment of available-for-sale securities. In the previous year quarter, Sealed Air recorded a restructuring charge of 2 cents per share pertaining to the company’s Global Manufacturing Strategy (GMS), a charge of a penny each for other-than-temporary impairment of available-for-sale securities and loss on debt redemption. Including these gains/charges, the company reported an EPS of 43 cents in the quarter (same as adjusted EPS), compared with 34 cents in the year-earlier quarter.

Sales

Sealed Air’s sales of $1.13 billion, unlike EPS, fell short of the Zacks Consensus Estimate of $1.15 billion. On a year-over-year basis, sales upped 5% with total volumes increasing 5% helped by a 1% higher price/mix but partially offset by an unfavorable foreign exchange impact of 1%.

Costs & Margin Performance

In dollar terms, cost of sales increased 5% year over year to $809.5 million and based on sales, it increased 45 basis points to 72% in the reported quarter. Gross profit went up 3% to $321 million on an annualized basis as productivity improvements and the benefits of operating leverage offset $25 million of higher resin costs in the quarter. However, gross margin contracted 45 basis points to 28%.

Marketing, administrative and development expenses dipped 4% year over year to $173.3 million and based on sales, expenses dipped 140 basis points to 15.3%. Sealed Air’s adjusted operating income upped 12% year over year to $147.2 million, with operating margin also going up by 90 basis points to 13%.

Segment Performance

The Protective Packaging segment posted the highest year-over-year growth of 7% to reach sales of $327 million. The outperformance was driven by volumes growth of 9% led by increased demand in North America and Europe, and relatively flat price/mix. Operating profit increased 13% to $46.7 million with operating margin moving up 80 basis points to 14.3%.

The Food Solutions segment posted sales growth of 5% to $240.4 million due to higher demand across all regions. Operating profit increased 29% to $27.5 million and segment operating margin expanded 210 basis points to 11.4%.

Sales at the Food Packaging segment went up by 4% to $483.4 million driven by a 3% hike in volumes fueled by increased volumes in Latin America and North America of 7% and 5% respectively. Price/mix was 1% higher, led by a 2% increase in North America.  Operating profit increased 11% to $70.3 million, and segment margin shot up 80 basis points to 15%.

The Other Category segment’s sales posted a drop of 2% to $79.2 million. However excluding a foreign currency impact, sales increased 3%, with 2% higher price/mix and 1% higher volumes, led by a 12% volume increase in the Specialty Materials business. Operating profit decreased 44% to $2.7 million and operating margin plunged 250 basis points to 3.4%. The decline was blamed on lower volumes in the medical business in Asia as customers bought inventory in advance in the first quarter ahead of a formulation license renewal that occurred late in the third quarter.

Financial Position

As of September 30, 2010, Sealed Air had cash and cash equivalents of $762 million, up from $662 million as of June 30, 2010. Free cash flow for the nine months ended September 30, 2010 was $205.8 million compared with $338.5 million in the comparable year-ago period.

At the end of the reported quarter, the debt-to-capitalization ratio improved marginally to 39.8% compared with 41.6% as of June 30, 2010.

Outlook

Based on the growth in order level through October, Sealed Air expects fourth quarter volumes to maintain its momentum and anticipates an increase in price/mix contribution compared with last year. For the full year 2010, the company estimates a foreign exchange translation of 1% to 2%. The company upped its effective income tax rate guidance to 28% from its previous expectation of 27%, anticipating an extension of some U.S. income tax credits that expired in 2009.

This has led the company to narrow its full-year 2010 EPS guidance range to $1.56 to $1.62 on an adjusted basis (excluding a 2 cent per share charge relating to the GMS program) from the previous range of $1.50 to $1.70.

Our Take

Sealed Air is pursuing a multi-year global manufacturing strategy to revitalize its bottom line. The major initiatives of this strategy include the expansion of global production capabilities in growing markets such as China, Eastern Europe and Mexico, improvement of operating efficiencies and implementation of new technologies. The company expects to realize an incremental $10 million of benefits in 2010, bringing the program’s full annual estimated benefit run rate to $55 million.

Sealed Air is seeing improved results with an increase in volumes in recent quarters, mainly driven by the emerging markets and a revitalizing economy. It was also able to increase prices to counter higher resin costs, thereby protecting its margins. We expect Sealed Air to sustain this positive momentum in the forthcoming quarters as well. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

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 with packaging and performance-based materials and equipment systems under several market leading brands serving food, medical and an array of industrial and consumer applications. The company reports its operations in four segments: Food Packaging, Protective Packaging, Food Solutions and the Other Category segment.

 
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