Sealed Air Corporation‘s (SEE) fiscal 2011 fourth quarter adjusted earnings per share (EPS) dropped to 8 cents from 46 cents in the prior-year quarter. Earnings also fell short of the Zacks Consensus Estimate of 50 cents.
On October 3, 2011, Sealed Air completed the Diversey acquisition, a leading solutions provider to the global cleaning and sanitization market. Net costs related to the acquisition of Diversey and special items of 68 cents per share were included in the quarter’s results. Including these, EPS came in at a loss of 26 cents versus 29 cents in the year-ago quarter.
Total revenue in the reported quarter increased 70% year over year to $2.05 billion comfortably surpassing the Zacks Consensus Estimate of $1.68 billion. The improvement in sales was driven by increases of 66% in acquisitions and 3% in price mix as well as 1% in volumes.
Fiscal 2011 Performance
For fiscal 2011, adjusted EPS was reported at $1.31 as opposed to $1.60 in 2010. Adjusted EPS missed the Zacks Consensus Estimate of $1.73. Including some special items and the effect of the Diversey acquisition, EPS was 80 cents compared with $1.44 in 2010.
Total revenue in 2011 increased 26% to $5.64 billion compared with $535 million in 2010. Total revenue surpassed the Zacks Consensus Estimate of $5.19 billion. The increase was attributable to an 18% rise in acquisition, positive influences of 3% from foreign exchange translation and 3% from price mix, and 2% volume expansion.
Costs and Margins
Cost of sales increased 57% year over year to $1,380.5 million in the reported quarter. Gross profit was up year over year at $672.2 million; consequently, gross margins expanded 530 basis points year over year to 32.7%.
Marketing, administrative and development expenses rose to $485.9 million in the quarter from $187.4 million in the prior-year quarter. Adjusted operating profit was $152.5 million versus $142.0 million in the year-ago quarter. However, operating margins declined 430 basis points year over year to 7.4%.
Segmental Performance
Food Packaging: The segment reported net sales of $546.6 million in the fourth quarter, up 2% on a year-over-year basis, or 3% on a constant dollar basis, with 3% contribution from higher price/mix. Global volumes declined slightly due to lower North American volumes, partially offset by growth in Latin America and Europe. Operating profit declined 3% year over year to $76.2 million, with operating margin contracting 80 basis points to 13.9%.
Food Solutions: The segment reported total revenue of $259.2 million in the reported quarter, up 5% year over year. Sales increased 4% on a constant dollar basis, with a 5% contribution from higher price/mix across all regions. Volumes, however, declined 1%. Income from operations declined marginally year over year to $27.5 million from $27.7 million in the prior-year quarter. Consequently, operating margin declined 60 basis points to 10.6%.
Protective Packaging: The segment’s sales amounted to $359.7 million in the fourth quarter, up 4% year over year. On a constant dollar basis, sales increased 4%, with 2% higher volumes, led by increased demand in North America and Asia-Pacific. Price-mix was up 2%. Operating income increased 29% year over year to $49 million and operating margin soared 260 basis points to 13.6%.
Other: This segment reported fourth quarter net sales of $91.3 million versus $83.4 million in the year-earlier quarter. On a constant dollar basis, sales increased 9%, along with an 8% contribution from volumes. Price/mix was higher by 1%. Operating profit was $2.7 million compared with a loss of $2.1 million primarily from the new ventures.
Financial Position
As of December 31, 2011, cash and cash equivalents were $722.8 million versus $800.3 million in September 30, 2011 and $705 million as of June 30, 2011. Free cash flow for 2011 was $353.6 million, declining from $388.3 million in the previous year.
As of December 31, 2011, the debt-to-capitalization ratio was 62.9% compared with 36% as of September 30, 2011 and 35.4% as of June 30, 2011.
2012 Guidance
Management expects adjusted EPS in the range of $1.50 to $1.60 and adjusted cash EPS in the range of $2.10 to $2.20 for 2012. The guidance of adjusted EPS includes net sales of $8.2 to $8.3 billion, cost of sales to be 65% of net sales, SG&A to be 24% to 25% of net sales, depreciation and amortization of $320 million, interest expense of $380 million.
Capital expenditure is expected in the range of $180 million to $190 million.Sealed Air expects free cash flow of approximately $450 million to $475 million, and has set a net debt target of approximately $4.90 billion for the year-end.
In Conclusion
With the Diversey acquisition, Sealed Air has expanded its presence beyond specialty packaging solutions by gaining access into a $70 billion chemical cleaning and hygiene industry. This combination is expected to enhance Sealed Air’s earnings per share and free cash flow generation. However, given the size of the deal, we are apprehensive of integration risks.
Sealed Air competes with the likes of Bemis Company, Inc. (BMS) and Sonoco Products Co. (SON). Currently, the shares of Sealed Air have Zacks #3 Rank (short-term Hold recommendation).
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.
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