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SEE > SEC Filings for SEE > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for SEALED AIR CORP/DE

Form 10-K for SEALED AIR CORP/DE


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The information in this MD&A should be read together with our consolidated financial statements and related notes set forth in Part II, Item 8, as well as the discussion included in Part I, Item 1A, "Risk Factors," of this Annual Report on Form 10-K. All amounts and percentages are approximate due to rounding and all dollars are in millions, except per share amounts.

The results include the operating results of Diversey beginning October 3, 2011 (date of acquisition). All results prior to October 3, 2011 include historical Sealed Air results only.

On December 6, 2013, we completed the sale of the rigid medical packaging business, and accordingly the operating results were reclassified to discontinued operations, net of tax, on the consolidated statements of operations for 2013, 2012 and 2011. On November 14, 2012, we completed the sale of Diversey Japan, and accordingly the operating results were reclassified to discontinued operations, net of tax, on the consolidated statements of operations for 2012 and 2011. Also, the assets and liabilities of the rigid medical packaging business operations were reclassified to assets and liabilities held for sale as of December 31, 2012. See Note 3, "Divestitures," for further details. All results and discussion included in this MD&A are presented on a continuing operations basis.

In the third quarter of 2013, we renamed our global business divisions under our segment reporting structure, which did not have any impact to the reportable segment results. The following are the changes to the names of our three global business divisions:

• Food Care, which was previously named Food & Beverage;

• Diversey Care, which was previously named Institutional & Laundry; and

• Product Care, which was previously named Protective Packaging.

We also have an Other Category, which includes our medical applications and new ventures businesses. The changes to the segment names had no effect on our historical consolidated results of operations. See Note 5, "Segments," for further details of our segment structure.

Overview

We are a global leader in food safety and security, facility hygiene and product protection. We serve an array of end markets including food and beverage processing, food service, retail, healthcare and industrial, and commercial and consumer applications. We have widely recognized and inventive brands such as Bubble Wrap® brand cushioning, Cryovac®brand food packaging solutions and Diversey® brand cleaning and hygiene


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solutions. Our focus is on achieving quality sales growth through leveraging our geographic footprint, technological know-how and leading market positions to bring measureable, sustainable value to our customers, employees and investors.

As of December 31, 2013, we employed approximately 7,300 sales, marketing and customer service personnel throughout the world who sell and market our products to and through a large number of distributors, fabricators, converters, e-commerce and mail order fulfillment firms, and contract packaging firms as well as directly to end-users such as food processors, foodservice businesses, supermarket retailers, lodging, retail pharmaceutical companies, healthcare facilities, medical device manufacturers, and other manufacturers. We have no material long-term contracts for the distribution of our products. In 2013, no customer or affiliated group of customers accounted for 10% or more of our consolidated net sales.

Historically, net sales in our Food Care segment have tended to be slightly lower in the first quarter and slightly higher towards the end of the third quarter through the fourth quarter, due to holiday events. Net sales in our Diversey Care segment have tended to be slightly lower in the first quarter; second quarter sales represent a modest seasonal increase due to higher occupancy rates in European lodging; and the third and fourth quarters of the year are relatively the same level as the second quarter. Net sales in our Product Care segment have also tended to be slightly lower in the first quarter and higher in the mid-third quarter and through the fourth quarter due to holiday events. On a consolidated basis, there is little seasonality in the business with net sales slightly lower in the first quarter and slightly higher towards the end of the third quarter through the fourth quarter. Our consolidated net earnings typically trend directionally the same as our net sales seasonality. Cash flow from operations has tended to be lower in the first quarter and higher in the fourth quarter, reflecting seasonality of sales and working capital changes, including the timing of certain annual incentive compensation payments.

Other factors may outweigh the effects of seasonal changes in our net earnings results including, but not limited to, changes in raw materials and other costs, foreign exchange rates, interest rates, taxes and the timing and amount of acquisition synergies and restructuring and other non-recurring charges.

Competition for most of our packaging products is based primarily on packaging performance characteristics, service and price. Competition is also based upon innovations in packaging technology and, as a result, we maintain ongoing research and development programs to enable us to maintain technological leadership. Our Food Care hygiene solutions and Diversey Care solutions businesses face a wide spectrum of competitors across each product category. Competition is both global and regional in scope and includes numerous small, local competitors with limited product portfolios and geographic reach. For more details, see "Competition" included in Part I, Item 1 "Business."

Our net sales are sensitive to developments in our customers' business or market conditions, changes in the global economy, and the effects of foreign currency translation. Our costs can vary materially due to changes in input costs, including petrochemical-related costs (primarily resin costs), which are not within our control. Consequently, our management focuses on reducing those costs that we can control and using petrochemical-based and other raw materials as efficiently as possible. We also believe that our global presence helps to insulate us from localized changes in business conditions.

We manage our businesses to generate substantial operating cash flow. We believe that our operating cash flow will permit us to continue to spend on innovative research and development and to invest in our business by means of capital expenditures for property and equipment and acquisitions. Moreover, we expect that our ability to generate substantial operating cash flow should provide us with the flexibility to repay debt and to return capital to our stockholders.

2014 Outlook

We expect net sales to be relatively flat in 2014 compared to 2013 net sales of $7.7 billion with organic growth of approximately 3% to 4% due to positive trends in volume and product price/mix. This is expected to be offset


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by the impact of product rationalization of approximately 1% to 2% and an estimated unfavorable impact of more than 2% from foreign currency translation. Adjusted EPS, excluding the impact of Stock Appreciation Rights ("SARs") expense, is expected to be in the range of $1.50 to $1.60. This represents an estimated increase of 8% to 15% compared with 2013 Adjusted EPS of $1.39, excluding SARs expense. Adjusted EPS guidance excludes the impact of special items. Our core tax rate for 2014 is expected to be approximately 25%. We also estimate interest expense to be approximately $295 million ($280 million of cash interest expense) and depreciation and amortization to be approximately $315 million.

Adjusted EBITDA for 2014, including non-cash profit sharing expense and excluding the impact of SARs, is estimated to be in the range of $1.050 billion to $1.070 billion. This represents an estimated increase of 1% to 3% compared with 2013 Adjusted EBITDA of $1.038 billion.

For 2014, we anticipate capital expenditures of approximately $170 million, cash payments related to the Earnings Quality Improvement Program ("EQIP") and the Integration and Optimization Program ("IOP") of approximately $150 million and cash taxes between $100 million and $120 million. As a result of higher capital expenditures and restructuring payments in 2014 as compared to 2013, we anticipate Free Cash Flow for 2014 to be approximately $410 million.

Highlights of Financial Performance

Below are the highlights of our financial performance for the three years ended
December 31, 2013.



                                                                                    2013 vs. 2012         2012 vs. 2011
                                   2013             2012             2011             % Change              % Change
Net sales                        $ 7,690.8       $  7,559.2        $ 5,467.3                     2 %                  38 %

Gross profit                     $ 2,587.5       $  2,522.3        $ 1,580.6                     3 %                  60 %

As a % of net sales                   33.6 %           33.4 %           28.9 %
Operating profit (loss)          $   602.1       $ (1,427.7 )      $   420.8                     # %                   # %

As a % of net sales                    7.8 %          (18.9 )%           7.7 %
Net earnings (loss) available
to common stockholders from
continuing operations            $    93.7       $ (1,617.9 )      $   132.7                     # %                   # %

Net earnings (loss) per
common share from continuing
operations - basic               $    0.48       $    (8.39 )      $    0.79                     # %                   # %

Net earnings (loss) per
common share from continuing
operations - diluted             $    0.44       $    (8.39 )      $    0.71                     # %                   # %

Weighted average number of
common shares outstanding:
Basic                                194.6            192.8            167.0

Diluted                              213.5            192.8            185.4

Non-U.S. GAAP adjusted
diluted net earnings per
common share - continuing
operations(1)                    $    1.23       $     0.91        $    1.22                    35 %                 (25 )%

Non-U.S. GAAP adjusted
diluted net earnings per
common share - continuing
operations, excluding the
impact of SARs                   $    1.39       $     0.98        $    1.22                    42 %                 (20 )%

# Denotes a variance greater than or equal to 100%, or not meaningful.

(1) See "Diluted Net Earnings per Common Share" for a reconciliation of our U.S. GAAP EPS to our non-U.S. GAAP adjusted EPS.


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Diluted Net Earnings per Common Share

The following table presents a reconciliation of our U.S. GAAP EPS to non-U.S.
GAAP adjusted EPS.



                                                             Year Ended December 31,
                                           2013                       2012                         2011
                                     Net                        Net                          Net
                                   Earnings        EPS        Earnings         EPS         Earnings        EPS
U.S. GAAP net earnings (loss)
and EPS available to common
stockholders - continuing
operations                        $     93.7     $  0.44     $ (1,617.9 )    $ (8.39 )    $    132.7     $  0.71

Special items, net of tax(1)           169.5        0.79        1,811.0         9.30            94.3        0.51

Non-U.S. GAAP Adjusted net
earnings and Adjusted EPS         $    263.2     $  1.23     $    193.1      $  0.91      $    227.0     $  1.22

Weighted average number of
common shares outstanding -
Diluted(2)                                         213.5                       211.2                       185.4

(1) Special items are certain one-time costs/credits that are included in our U.S. GAAP reported results. For 2013, special items primarily included restructuring and other charges of $74 million ($59 million, net of taxes) and associated costs of $26 million ($18 million, net of taxes), related to both EQIP and IOP, $50 million increase to the valuation allowance in connection with the deferred tax asset related to the Settlement agreement, loss on debt redemption of $36 million ($24 million, net of taxes), write down of non-strategic assets of $5 million ($3 million, net of taxes) and foreign currency exchange losses related to Venezuelan subsidiaries of $13 million ($11 million, net of taxes). For 2012, these items primarily included (i) impairment of goodwill and other intangible assets,
(ii) restructuring charges and (iii) loss on debt redemption. For 2011, these items primarily include costs related to the acquisition and integration of Diversey and restructuring charges.

(2) For 2012, for purposes of calculating Adjusted EPS, the dilutive impact of:
(i) the effect of the assumed issuance of 18 million shares of common stock reserved for the Settlement agreement and (ii) the effect of non-vested restricted stock and restricted stock units using the treasury stock method was included because we reported adjusted net earnings for 2012. These shares differ from the shares used to calculate net loss per common share included in the consolidated statement of operations for U.S. GAAP reporting purposes because we reported a net loss for 2012, which does not include the effect of the items mentioned above as the effect was anti-dilutive. See Note 21, "Net (Loss) Earnings Per Common Share," for details on the calculation of our U.S. GAAP basic and diluted EPS and "Non-U.S. GAAP Information" above, for further details.

Our U.S. GAAP and non-U.S. GAAP income taxes are as follows:

                                                                      Year Ended December 31,
                                            2013                               2012                                2011
                                                  Effective         (Benefit)         Effective                          Effective
                                 Provision        Tax Rate          Provision         Tax Rate          Provision        Tax Rate
U.S. GAAP Income Taxes          $      84.0             47.3 %     $    (264.7 )            14.1 %     $      56.7             29.9 %

Non-U.S. GAAP Income Taxes
(Core Taxes)                    $      73.5             21.8 %     $      68.2              26.1 %     $      99.7             30.5 %


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Foreign Currency Translation Impact on Consolidated Financial Results

Since we are a U.S. domiciled company, we translate our foreign currency-denominated financial results into U.S. dollars. Due to the changes in the value of foreign currencies relative to the U.S. dollar, translating our financial results from foreign currencies to U.S. dollars may result in a favorable or unfavorable impact. Historically, the most significant currencies that have impacted the translation of our consolidated financial results are the euro, the Australian dollar, the Brazilian real, the British pound, the Canadian dollar and the Mexican peso.

As shown below, 65% of our consolidated net sales in 2013 were generated outside the U.S.

The following table presents the approximate favorable or (unfavorable) impact foreign currency translation had on some of our consolidated financial results:

                                                 2013 vs. 2012        2012 vs. 2011
 Net sales                                      $         (75.6 )    $        (146.1 )
 Cost of sales                                             62.0                111.0
 Selling, general and administrative expenses               9.0                 27.0

 Operating profit                               $          (4.6 )    $          (8.1 )

Net Sales by Geographic Region

Net sales by geographic region for three years ended December 31, 2013 as
follows:



                                         Year Ended December 31,                   2013 vs. 2012           2012 vs. 2011
                                 2013             2012             2011              % Change                % Change
North America                  $ 3,006.9        $ 2,952.4        $ 2,452.2                    1.8 %                  20.4 %
As a % of net sales                 39.1 %           39.1 %           44.9 %
Europe                           2,447.8          2,416.5          1,581.9                    1.2 %                  52.8 %
As a % of net sales                 31.8 %           32.0 %           28.9 %
Latin America                      824.3            799.7            545.7                    3.1 %                  46.5 %
As a % of net sales                 10.7 %           10.6 %           10.0 %
AMAT(1)                            846.8            794.4            346.0                    6.5 %                     # %
As a % of net sales                 11.0 %           10.5 %            6.3 %
JANZ(2)                            565.0            596.2            541.5                   (5.2 )%                 10.1 %
As a % of net sales                  7.3 %            7.9 %            9.9 %

Total                          $ 7,690.8        $ 7,559.2        $ 5,467.3                    1.7 %                  38.3 %

# Denotes a variance greater than or equal to 100%, or not meaningful

(1) AMAT = Asia, Middle East, Africa and Turkey

(2) JANZ = Japan, Australia and New Zealand


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By geographic region, the components of the increase in net sales for 2013 compared with 2012 were as follows:

Change in net sales                     North                          Latin
2013 Compared with 2012                America         Europe         America         AMAT(1)         JANZ(2)         Total
Volume - Units                        $    18.7        $  (2.2 )      $   36.5        $   54.3        $    6.7       $ 114.0
% change                                    0.6 %         (0.1 )%          4.6 %           6.8 %           1.1 %         1.5 %
Volume - Acquired businesses, net
of (dispositions)                          (1.2 )          0.3             0.1             0.3              -           (0.5 )
% change                                     -  %           -  %            -  %            -  %            -  %          -  %
Product price/mix                          44.5           (3.8 )          40.5            16.3            (3.8 )        93.7
% change                                    1.5 %         (0.2 )%          5.1 %           2.0 %          (0.6 )%        1.2 %
Foreign currency translation               (7.5 )         37.1           (52.5 )         (18.6 )         (34.1 )       (75.6 )
% change                                   (0.3 )%         1.5 %          (6.6 )%         (2.3 )%         (5.7 )%       (1.0 )%

Total                                 $    54.5        $  31.4        $   24.6        $   52.3        $  (31.2 )     $ 131.6

% change                                    1.8 %          1.2 %           3.1 %           6.5 %          (5.2 )%        1.7 %
Impact of foreign currency
translation                                 7.5          (37.1 )          52.5            18.6            34.1          75.6

Total constant dollar change
(Non-U.S. GAAP)                       $    62.0        $  (5.7 )      $   77.1        $   70.9        $    2.9       $ 207.2

Constant dollar % change                    2.1 %         (0.3 )%          9.7 %           8.8 %           0.5 %         2.7 %

# Denotes a variance greater than or equal to 100%, or not meaningful.

(1) AMAT = Asia, Middle East, Africa and Turkey

(2) JANZ = Japan, Australia and New Zealand

By geographic region, the components of the increase in net sales for 2012 compared with 2011 were as follows:

Change in net sales                   North                         Latin
2012 Compared with 2011              America        Europe         America         AMAT(1)          JANZ(2)          Total
Volume - Units                       $   45.5       $ (42.6 )      $   38.8        $   51.0        $     2.3       $    95.0
% change                                  1.9 %        (2.7 )%          7.1 %          14.7 %            0.4 %           1.7 %
Volume - Acquired businesses, net
of (dispositions)                       455.3         970.8           231.9           404.5             52.8         2,115.3
% change                                 18.6 %        61.4 %          42.5 %             # %            9.8 %          38.7 %
Product price/mix                         0.5          (0.7 )          33.2            (1.1 )           (4.2 )          27.7
% change                                   -  %          -  %           6.1 %          (0.3 )%          (0.8 )%          0.5 %
Foreign currency translation             (1.2 )       (92.8 )         (49.9 )          (6.0 )            3.8          (146.1 )
% change                                   -  %        (5.9 )%         (9.1 )%         (1.7 )%           0.7 %          (2.7 )%

Total                                $  500.1       $ 834.7        $  254.0        $  448.4        $    54.7       $ 2,091.9

% change                                 20.4 %        52.8 %          46.5 %             # %           10.1 %          38.3 %
Impact of foreign currency
translation                               1.2          92.8            49.9             6.0             (3.8 )         146.1

Total constant dollar change
(Non-U.S. GAAP)                      $  501.3       $ 927.5        $  303.9        $  454.4        $    50.9       $ 2,238.0

Constant dollar % change                 20.4 %        58.6 %          55.7 %             # %            9.4 %          40.9 %

# Denotes a variance greater than or equal to 100%, or not meaningful.

(1) AMAT = Asia, Middle East, Africa and Turkey

(2) JANZ = Japan, Australia and New Zealand


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Net Sales by Segment Reporting Structure

The following table presents net sales by our segment reporting structure:



                                          Year Ended December 31,                   2013 vs. 2012          2012 vs.  2011
                                  2013             2012             2011              % Change                 Change
Net sales:
Food Care                       $ 3,811.1        $ 3,739.6        $ 3,240.6                    1.9 %                  15.4 %
As a % of net sales                  49.6 %           49.5 %           59.3 %
Diversey Care                     2,160.4          2,131.5            534.0                    1.4 %                     #
As a % of net sales                  28.1 %           28.2 %            9.8 %
Product Care                      1,608.0          1,578.4          1,594.4                    1.9 %                  (1.0 )%
As a % of net sales                  20.9 %           20.9 %           29.2 %
Other Category                      111.3            109.7             98.3                    1.5 %                  11.6 %
As a % of net sales                   1.4 %            1.5 %            1.8 %

Total                           $ 7,690.8        $ 7,559.2        $ 5,467.3                    1.7 %                  38.3 %

# Denotes a variance greater than or equal to 100%, or not meaningful.

Components of Change in Net Sales by Segment Reporting Structure

The following tables present the components of change in net sales by our segment reporting structure for 2013 compared with 2012 and 2012 compared with 2011. 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 as it eliminates the volatility of changes in foreign currency exchange rates.

Change in net sales                                                                                                      Other
2013 Compared with 2012                Food Care                Diversey Care              Product Care                Category                Total Company
Volumes - Units                   $  63.4          1.7 %     $  11.3          0.5 %     $ 40.6          2.6 %     $ (1.3 )       (1.2 )%    $ 114.0          1.5 %
Volumes - Acquired business,
net of (dispositions)                  -            -             -            -            -            -          (0.5 )       (0.5 )        (0.5 )         -
Product price/mix(1)                 60.9          1.6          32.8          1.5         (2.5 )       (0.2 )        2.5          2.3          93.7          1.2
Foreign currency translation        (52.8 )       (1.4 )       (15.2 )       (0.7 )       (8.5 )       (0.5 )        0.9          0.8         (75.6 )       (1.0 )

Total change (U.S. GAAP)          $  71.5          1.9 %     $  28.9          1.3 %     $ 29.6          1.9 %     $  1.6          1.4 %     $ 131.6          1.7 %

Impact of foreign currency
translation                       $  52.8          1.4       $  15.2          0.7       $  8.5          0.5       $ (0.9 )       (0.8 )     $  75.6          1.0

Total constant dollar change
(Non-U.S. GAAP)                   $ 124.3          3.3 %     $  44.1          2.0 %     $ 38.1          2.4 %     $  0.7          0.6 %     $ 207.2          2.7 %


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Change in net sales                                                                                                              Other
2012 Compared with 2011                    Food Care                 Diversey Care                Product Care                 Category                 Total Company
Volumes - Units                       $  51.1          1.6 %           2.9          0.5 %        21.5          1.4 %        19.5         19.8 %     $    95.0          1.7 %
Volumes - Acquired business, net
of (dispositions)                       516.7         15.9         1,598.6            #            -            -             -            -          2,115.3         38.7
Product price/mix(1)                     22.5          0.7             8.8          1.7          (1.4 )       (0.1 )        (2.2 )       (2.2 )          27.7          0.5
Foreign currency translation            (91.1 )       (2.8 )         (13.0 )       (2.4 )       (36.1 )       (2.3 )        (5.9 )       (6.0 )        (146.1 )       (2.7 )

Total change (U.S. GAAP)              $ 499.2         15.4 %     $ 1,597.3            # %     $ (16.0 )       (1.0 )%     $ 11.4         11.6 %     $ 2,091.9         38.3 %

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