Sealed Air Corporation (SEE) delivered adjusted earnings per share (EPS) of 35 cents for the second quarter ended June 30, 2010, missing the Zacks Consensus Estimate by 2 cents. Earnings per share in the quarter manifested a 3% increase over 34 cents in the year-ago quarter. Higher volumes across all regions, benefits from prior pricing actions and robust performance at the Protective Packaging segment contributed to the year-over-year improvement.
The EPS of 35 cents, however, excluded a foreign currency exchange gain of 3 cents related to a Venezuelan subsidiary. The adjusted EPS of 34 cents in the year-ago quarter excluded a 1-cent restructuring charge related to the company’s Global Manufacturing Strategy (GMS). Incuding these gains/charges, the company reported EPS of 38 cents in the quarter, compared with 33 cents in the year-earlier quarter.
Revenues
Sealed Air’s total revenue of $1.09 billion, unlike EPS, just outpaced the Zacks Consensus Estimate of $1.08 billion. On a year-over-year basis, revenue upped 6% with total volumes increasing 5% helped by a favorable foreign exchange impact of 3%, but partially offset by 1% due to lower price/mix.
Costs & Margin Performance
In dollar terms, cost of goods sold (COGS) increased 7% year over year to $788.2 million, excluding a $1 million charge related to its GMS program. As a percentage of revenues, COGS increased 30 basis points to 72.3% in the reported quarter. Adjusted gross profit went up 5% to $301.5 million on an annualized basis, but gross margin contracted 30 basis points to 27.7%.
Marketing, administrative and development expenses increased 1% year over year to $171.6 million, whereas, as a percentage of sales, expenses dipped 80 basis points to 15.7%. Sealed Air’s adjusted operating income upped 9% year over year to $129.9 million, with operating margin also going up by 30 basis points to 11.9%.
Segment Performance
The Protective Packaging segment was the star performer in terms of both revenues and margins. The segment posted the highest year-over-year growth of 14%, with revenues increasing to $320.9 million. Operating profit increased 39% to $45.3 million, and segment margin shot up 260 basis points to 14.1%. The outperformance was driven by volumes growth of 11.8%, led by increased demand in North America and Europe.
The Food Solutions segment posted revenue growth of 4% to $228.2 million due to higher demand across all regions. Operating profit increased 3% to $23.1 million, whereas segment operating margin dipped 5 basis points to 10.1%.
Revenue at the Food Packaging segment went up by 2% to $459.4 million, as a 2% hike in volumes, led by increased demand in Latin America and Europe, was partially offset by approximately 3% lower price/mix due to the timing of the North American contract price adjustments for resin. Operating profit declined 8% to $57.5 million with segment margin dipping 140 basis points to 12.5%.
The Other Category segment posted a revenue increase of 5% to $81.2 million as a result of higher volumes, particularly led by a 15% volume surge in the Specialty Materials business. The segment’s operating profit doubled to $3 million, and segment margin soared 180 basis points to 3.7%.
Financial Position
As of June 30, 2010, Sealed Air had cash and cash equivalents of $663 million, up from $627.5 million as of March 31, 2010.
At the end of the reported quarter, the debt-to-capitalization ratio was 41.6% compared with 41.5% as of March 31, 2010 and 49.7% as of June 30, 2009.
Based on its sound cash position, Sealed Air announced an increase in its quarterly cash dividend from 12 cents to 13 cents per share. This translates to an 8% annualized increase in dividends. The increased dividend will be paid on September 17, 2010 to shareholders of record as of September 3, 2010.
Outlook
Sealed Air expects its constant dollar sales growth rate to accelerate in the back half of the year, led by its industrial businesses, increased food customer production rates, new food contracts, the successful launch and adoption of new solutions and technologies, and growth in developing regions. The company also expects margins to benefit in the second half of the year as it realizes benefits of its pricing actions as well as favorable contract adjustments.
Foreign exchange translation is, however, expected to be unfavorable in the second half of the year, but the company is projecting a modest 1% to 2% average benefit from foreign exchange for the fiscal 2010. Sealed Air maintained its fiscal 2010 EPS guidance of $1.50 to $1.70. However, including a 2-cent charge pertaining to its GMS program, the guidance stands in the range of $1.48 to $1.68.
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.
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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