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| SEE > SEC Filings for SEE > Form 10-Q on 10-May-2012 | All Recent SEC Filings |
10-May-2012
Quarterly Report
The information in our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read together with our condensed consolidated financial statements and related notes set forth in Item 1 of Part I of this quarterly report on Form 10-Q, our MD&A set forth in Item 7 of Part II of our 2011 Annual Report on Form 10-K and our consolidated financial statements and related notes set forth in Item 8 of Part II of our Form 10-K. See Part II, Item 1A, "Risk Factors" and "Cautionary Notice Regarding Forward-Looking Statements," below, and the information referenced therein, for a description of risks that we face and important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. All amounts and percentages are approximate due to rounding and all dollars are in millions, except per share amounts. When we cross-reference to a "Note," we are referring to our "Notes to Condensed Consolidated Financial Statements," unless the context indicates otherwise.
Cautionary Notice Regarding Forward-Looking Statements
This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our business, consolidated financial condition and results of operations. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, costs, plans and objectives are forward-looking statements. The SEC encourages companies to disclose forward-looking statements so that investors can better understand a company's future prospects and make informed investment decisions. Some of our statements in this report, in documents incorporated by reference into this report and in our future oral and written statements may be forward-looking. These statements reflect our beliefs and expectations as to future events and trends affecting our business, our consolidated financial condition and results of operations. These forward-looking statements are based upon our current expectations concerning future events and discuss, among other things, anticipated future financial performance and future business plans. Forward-looking statements are necessarily subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Forward-looking statements can be identified by such words as "anticipates," "believes," "plan," "assumes," "could," "should," "estimates," "expects," "intends," "potential," "seek," "predict," "may," "will" and similar expressions. Examples of these forward-looking statements include projections regarding our 2012 outlook EPS guidance and other projections relating to our financial performance such as those in the "Components of Change in Net Sales" and "Cost of Sales" sections of our MD&A.
The following are important factors that we believe could cause actual results to differ materially from those in our forward-looking statements: the implementation of our Settlement agreement regarding the various asbestos-related, fraudulent transfer, successor liability, and indemnification claims made against the Company arising from a 1998 transaction with W. R. Grace & Co.; global economic conditions; changes in our credit ratings; changes in raw material pricing and availability; changes in energy costs; competitive conditions; currency translation and devaluation effects, including in Venezuela; the success of our financial growth, profitability, cash generation and manufacturing strategies and our cost reduction and productivity efforts; the effects of animal and food-related health issues; pandemics; consumer preferences; environmental matters; regulatory actions and legal matters; successful integration of Diversey and the other information referenced below under Item 1A, "Risk Factors." Except as required by the federal securities laws, we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Non-U.S. GAAP Information
In our MD&A, we present financial information in accordance with U.S. GAAP. We also present financial information that does not conform to U.S. GAAP, which we refer to as non-U.S. GAAP, as our management believes it is useful to investors. In addition, non-U.S. GAAP measures are used by management to review and analyze our operating performance and, along with other data, as internal measures for setting annual budgets and forecasts, assessing financial performance, providing guidance and comparing our financial performance with our peers. The non-U.S. GAAP information has limitations as an analytical tool and should not be considered in isolation from or as a substitute for U.S. GAAP information. It does not purport to represent any similarly titled U.S. GAAP information and is not an indicator of our performance under U.S. GAAP. Further, non-U.S. GAAP financial measures that we present may not be comparable with similarly titled measures used by others. Investors are cautioned against placing undue reliance on these non-U.S. GAAP measures. Further, investors are urged to review and consider carefully the adjustments made by management to the most directly comparable U.S. GAAP financial measure to arrive at these non-U.S. GAAP financial measures.
Our management will assess our financial results, such as gross profit, operating profit and diluted net earnings per common share ("EPS"), both on a U.S. GAAP basis and on an adjusted non-U.S. GAAP basis. Examples of some other supplemental financial metrics our management will also use to assess our financial performance include Earnings before Interest Expense, Taxes, Depreciation and Amortization ("EBITDA"), Adjusted EBITDA, Adjusted EPS, Adjusted Cash EPS and Free Cash Flow. These non-U.S. GAAP financial measures provide management with additional means to understand and evaluate the core operating results and trends in our ongoing business by eliminating certain one-time expenses and/or gains (which may not occur in each period presented) and other items that management believes might otherwise make comparisons of our ongoing business with prior periods and peers more difficult, obscure trends in ongoing operations or reduce management's ability to make useful forecasts. Our non-U.S. GAAP financial measures may also be considered in calculations of our performance measures set by the Organization and Compensation Committee of our Board of Directors for purposes of determining incentive compensation.
The non-U.S. GAAP financial metrics mentioned above exclude items we consider unusual or special items and also exclude their related tax effects. We evaluate the unusual or special items on an individual basis. Our evaluation of whether to exclude an unusual or special item for purposes of determining our non-U.S. GAAP financial measures considers both the quantitative and qualitative aspects of the item, including, among other things (i) its nature, (ii) whether or not it relates to our ongoing business operations, and (iii) whether or not we expect it to occur as part of our normal business on a regular basis.
Another non-U.S GAAP financial metric we present is our core income tax rate or provision ("core tax rate"). Our core tax rate is a measure of our U.S. GAAP effective tax rate, adjusted to exclude the tax impact from the special items that are excluded from our Adjusted net earnings and Adjusted EPS metrics. We consider our core tax rate as an indicator of the taxes on our core business. The tax situation and effective tax rate in the specific countries where the excluded or special items occur will determine the impact (positive or negative) to our core tax rate.
In our "Highlights of Financial Performance," "Net Sales by Segment Reporting Structure," "Net Sales by Geographic Region" and in some of the discussions and tables that follow, we exclude the impact of foreign currency translation when presenting net sales information, which we define as "constant dollar." Changes in net sales excluding the impact of foreign currency translation are non-U.S. GAAP financial measures. As a worldwide business, it is important that we take into account the effects of foreign currency translation when we view our results and plan our strategies. Nonetheless, we cannot control changes in foreign currency exchange rates. Consequently, when our management looks at our financial results to measure the core performance of our business, we exclude the impact of foreign currency translation. We also may exclude the impact of foreign currency translation when making incentive compensation determinations. As a result, our management believes that these presentations are useful internally and may be useful to investors.
Recent Events
Dividends
On April 19, 2012, our Board of Directors declared a quarterly cash dividend of $0.13 per common share. This dividend is payable on June 15, 2012 to stockholders of record at the close of business on June 1, 2012. The estimated amount of this dividend payment is $25 million based on 194 million shares of our common stock issued and outstanding as of April 30, 2012.
On February 16, 2012, our Board of Directors declared a quarterly cash dividend of $0.13 per common share, which was paid on March 16, 2012 to stockholders of record at the close of business on March 2, 2012. We used $25 million of available cash to pay this quarterly cash dividend.
Acquisition of Diversey
On October 3, 2011, we completed the acquisition of Diversey. The financial results presented in this MD&A include the financial results of Diversey for the three months ended March 31, 2012. See Note 1, "Organization and Basis of Presentation," and Note 3, "Acquisition of Diversey Holdings, Inc.," for further details.
2012 Outlook
We continue to anticipate our 2012 Adjusted EPS to be in the range of $1.50 per share to $1.60 per share.
Our Adjusted EPS range reflects the following revised or updated assumptions:
• net sales in the lower end of the range of $8.2 billion to $8.3 billion, reflecting current economic conditions in Europe. Our full year net sales assumptions include 3% - 4% constant dollar sales growth in our Food Packaging and Food Solutions segments, 4% - 5% constant dollar sales growth in our Protective Packaging segment and 3% constant dollar sales growth in our Diversey segment compared with legacy Diversey 2011 net sales;
• non-cash, share-based compensation of $55 million, which now includes an anticipated $30 million for our 2012 U.S. profit sharing contribution in Company stock;
• a core tax rate of 27%, resulting from a more favorable mix of pre-tax net earnings on an Adjusted EPS basis; and
• cost synergies from our 2011-2014 Integration and Optimization Program of $70 million in 2012 (See "2011-2014 Integration and Optimization Program" below).
Our Adjusted EPS outlook continues to exclude the accretive impact of the payment of the Settlement agreement, as the timing of the settlement is unknown. Final payment of the Settlement agreement is expected to be accretive to EPS by approximately $0.13 annually following the payment date under the assumption of using a substantial portion of cash on hand for the payment and ceasing to accrue interest on the Settlement agreement amount and using a 35% tax rate.
None of the other assumptions outlined in our 2011 Annual Report on Form 10-K for our Adjusted EPS guidance have changed.
Highlights of Financial Performance
Below are highlights of our financial performance.
First Quarter of %
2012 2011 Change
Net sales $ 1,917.5 $ 1,128.5 70 %
Gross profit $ 649.7 $ 309.0 #
As a % of net sales 33.9 % 27.4 %
Marketing, administrative and development
expenses(1) 478.1 183.5 #
As a % of net sales 24.9 % 16.3 %
Amortization expense of intangible assets
acquired 34.2 2.5 #
Costs related to the acquisition of Diversey 1.8 - #
Restructuring and other charges 48.1 - #
Operating profit $ 87.5 $ 123.0 (29 )%
As a % of net sales 4.6 % 10.9 %
Interest expense $ (97.8 ) $ (37.0 ) #
Other expense, net $ (4.1 ) $ (3.9 ) 5 %
Net (loss) earnings available to common
stockholders $ (6.0 ) $ 59.7 #
Net (loss) earnings available to common
stockholders-diluted $ (6.1 ) $ 59.3 #.
Net (loss) earnings per common share:
Basic $ (0.03 ) $ 0.37 #
Diluted $ (0.03 ) $ 0.34 #
Weighted average number of common shares
outstanding:
Basic 191.9 158.7
Diluted 191.9 176.9
Non-U.S. GAAP adjusted diluted net earnings per
common share(2) $ 0.18 $ 0.34 (47 )%
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# Denotes a variance greater than or equal to 100%.
(1) The marketing, administrative and development expenses for 2011 have been adjusted to exclude amortization expense of intangible assets acquired to conform to the 2012 presentation.
(2) See "Diluted Net Earnings per Common Share" below for a reconciliation of our U.S. GAAP EPS to our non-U.S. GAAP adjusted EPS.
Diluted Net Earnings per Common Share
The following table presents a reconciliation of our U.S. GAAP EPS to our
non-U.S. GAAP Adjusted EPS.
First Quarter of
2012 2011(1)
Net Net
Earnings EPS Earnings EPS
U.S. GAAP net (loss) earnings and
EPS available to common
stockholders $ (6.0 ) $ (0.03 ) $ 59.7 $ 0.34
Items excluded from the
calculation of adjusted net
earnings available to common
stockholders and Adjusted EPS, net
of taxes when applicable:
Special items:
Add: 2011-2014 Integration and
Optimization Program restructuring
charges 32.3 0.15 - -
Add: Other restructuring charges 0.6 - - -
Add: 2011-2014 Integration and
Optimization Program associated
costs 3.8 0.02 - -
Add: Non-recurring associated
costs from legacy Diversey
restructuring programs 5.4 0.03 - -
Add: Costs related to the
acquisition of Diversey 1.3 0.01 - -
Add: European manufacturing
facility closure charges - - 0.2 -
Non-U.S. GAAP Adjusted net
earnings and EPS $ 37.4 $ 0.18 $ 59.9 $ 0.34
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(1) Our 2011 Adjusted EPS calculation has been revised to conform to our 2012 presentation. There was no material impact to our Adjusted EPS results due to this revision.
The following table details the tax effect on special items included above:
First Quarter of
2012 2011
2011-2014 Integration and Optimization Program
restructuring charges $ 15.0 $ -
Other restructuring charges 0.2 -
2011-2014 Integration and Optimization Program associated
costs 2.0 -
Non-recurring costs associated from legacy Diversey
restructuring programs 2.1 -
Costs related to the acquisition of Diversey 0.5 -
European manufacturing facility closure charges - 0.1
$ 19.8 $ 0.1
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Effective Income Tax Rate
The following table presents a reconciliation of U.S. GAAP Effective Income Tax
Rate to Non-U.S. GAAP Core Tax Rate for the three months ended March 31, 2012.
Three Months Ended March 31, 2012
U.S. GAAP Special Items Non-U.S. GAAP
(Loss) earnings before income
tax provision $ (14.4 ) $ 63.2 $ 48.8
Income tax (benefit) provision (8.4 ) 19.8 11.4
Net (loss) earnings available
to common stockholders $ (6.0 ) $ 43.4 $ 37.4
Effective income tax rate 58.3 % 31.3 % 23.4 %
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See Note 16, "Net Earnings Per Common Share," for details on the calculation of our U.S. GAAP basic and diluted EPS.
The discussions that follow provide further details about the material factors that contributed to the changes in our EPS in 2012 compared with 2011.
Net Sales by Segment Reporting Structure
The following table presents net sales by our segment reporting structure.
First Quarter of %
2012 2011 Change
Net sales:
Food Packaging $ 488.2 $ 474.9 3 %
As a % of net sales 25.5 % 42.1 %
Food Solutions 238.2 228.8 4
As a % of net sales 12.4 % 20.3 %
Protective Packaging 345.6 335.1 3
As a % of net sales 18.0 % 29.7 %
Diversey 750.9 - -
As a % of net sales 39.2 % - %
Other 94.6 89.7 5
As a % of net sales 4.9 % 7.9 %
Total $ 1,917.5 $ 1,128.5 70 %
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# Denotes a variance greater than 100%.
Net Sales by Geographic Region
The following tables present our net sales by geographic region and the components of change in net sales by geographic region.
First Quarter of %
2012 2011 Change
Net sales:
U.S. $ 647.9 $ 518.9 25 %
As a % of net sales 33.8 % 46.0 %
International 1,269.6 609.6 #
As a % of net sales 66.2 % 54.0 %
Total net sales $ 1,917.5 $ 1,128.5 70 %
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First Quarter of 2012 U.S. International Total Company Volume-Units $ 10.4 2.0 % $ 10.4 1.7 % $ 20.8 1.8 % Volume-Acquired businesses, net of (dispositions) 106.5 20.5 645.3 # 751.8 66.6 Product price/mix 12.1 2.3 9.7 1.6 21.8 1.9 Foreign currency translation - - (5.4 ) (0.9 ) (5.4 ) (0.5 ) Total $ 129.0 24.8 % $ 660.0 # % $ 789.0 69.8 % |
# Denotes a variance greater than 100%.
Foreign Currency Translation Impact on Net Sales
As shown above, 66% of our consolidated net sales in the first three months of 2012 were generated outside the U.S. Since we are a U.S. domiciled company, we translate our foreign currency-denominated net sales into U.S. dollars. Due to the changes in the value of foreign currencies relative to the U.S. dollar, translating our net sales from foreign currencies to U.S. dollars may result in a favorable or unfavorable impact. The most significant currencies that contributed to the translation of our net sales and our other consolidated financial results in the first three months of 2012 were the euro, the Australian dollar, the Brazilian real, the Canadian dollar and the British pound.
In the first quarter of 2012, we experienced an unfavorable foreign currency translation impact on net sales of $5 million compared with the same period of 2011 due to the strengthening of the U.S. dollar against most of the foreign currencies that contributed to the translation of our net sales mentioned above. This unfavorable impact was mostly due to the strengthening of the U.S. dollar relative to the euro and the Brazilian real.
Components of Change in Net Sales
The following table presents the components of change in net sales by our
segment reporting structure as compared to the prior year. We also present the
change in net sales excluding the impact of foreign currency translation, a
non-U.S. GAAP measure, which we define as "constant dollar." We believe using
constant dollar measures aids in the comparability between periods.
Food Food Protective
First Quarter of 2012 Packaging Solutions Packaging Diversey Other Total Company
Volume-Units $ 4.5 1.0 % $ 2.2 1.0 % $ 9.8 2.9 % $ - - % $ 4.3 4.8 % $ 20.8 1.8 %
Volume-Acquired businesses, net of
(dispositions) 0.3 0.1 - - - - 750.9 - 0.6 0.7 751.8 66.6
Product price/mix(1) 10.7 2.2 7.4 3.2 2.8 0.8 - - 0.9 1.0 21.8 1.9
Foreign currency translation (2.2 ) (0.5 ) (0.2 ) (0.1 ) (2.1 ) (0.6 ) - - (0.9 ) (1.0 ) (5.4 ) (0.5 )
Total change (U.S. GAAP) $ 13.3 2.8 % $ 9.4 4.1 % $ 10.5 3.1 % $ 750.9 - % $ 4.9 5.5 % $ 789.0 69.8 %
Impact of foreign currency translation $ 2.2 0.5 % $ 0.2 0.1 % $ 2.1 0.6 % $ - - % $ 0.9 1.0 % $ 5.4 0.5 %
Total constant dollar change (Non-U.S.
GAAP) $ 15.5 3.3 % $ 9.6 4.2 % $ 12.6 3.7 % $ 750.9 - % $ 5.8 6.5 % $ 794.4 70.3 %
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(1) Our product price/mix reported above includes the net impact of our pricing actions and rebates as well as the period-to-period change in the mix of products sold. Also included in our reported product price/mix is the net effect of some of our customers purchasing our products in non-U.S. dollar or euro denominated countries at selling prices denominated in U.S. dollars or euros. This primarily arises when we export products from the U.S. and euro-zone countries. The impact to our reported product price/mix of these purchases in other countries at selling prices denominated in U.S. dollars or euros was not material for the periods included in the tables above.
Food Packaging Segment Net Sales
The $16 million, or 3%, constant dollar increase in net sales in the first quarter of 2012 compared with the same period of 2011 was primarily due to:
• favorable product price/mix in the U.S. of $6 million, or 3%, and in Latin America of $4 million, or 6%, both from the benefits of pricing actions that were implemented to offset rising raw material costs and formula-based contractual price adjustments;
• higher unit volumes in Australia/New Zealand of $3 million, or 6%, due to higher demand for our fresh dairy packaging products as a result of an increase in dairy customers' production rates and, to a lesser extent, new business gains in this region. Also contributing to this region's higher unit volume results was increased customer production rates for fresh red meat; and
• higher unit volumes in Europe of $2 million, or 3%, mostly due to higher equipment sales.
These favorable drivers were partially offset by lower unit volumes in the U.S. of $3 million, or 1%, primarily due to lower customer production rates and a customer loss. This customer loss is not considered material to our consolidated net sales.
Food Solutions Segment Net Sales
The $10 million, or 4%, constant dollar increase in net sales in the first quarter of 2012 compared with the same period of 2011 was primarily due to:
• favorable product price/mix in the U.S. of $4 million, or 4%, and in Australia/New Zealand of $2 million, or 5%, both from the benefits of pricing actions that were implemented to offset rising raw material costs and formula-based contractual price adjustments; and
• higher unit volumes in the U.S. of $2 million, or 2%, due to an increase in demand for our solutions as a result of higher customer production rates.
Protective Packaging Segment Net Sales
The $13 million, or 4%, constant dollar increase in net sales in the first . . .
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