Sealed Air has reported financial results for the fourth quarter and full year 2018, as announced on December 13, 2018.
Image: Sealed Air Corporation reported financial results for the fourth quarter and full year 2018. Photo: courtesy of Master isolated images at FreeDigitalPhotos.net.
Sealed Air’s primary focus is on the implementation of its Reinvent SEE strategy, which enhances earnings growth and addresses cost savings opportunities in the following four key initiatives: speed to market for new innovations, SG&A productivity, product cost efficiency, and channel optimization and customer service enhancements.
“Our focus on SEE Operational Excellence enabled us to deliver an Adjusted EBITDA increase of 7% on sales growth of 6% and an Adjusted Earnings Per Share increase of 38% in 2018, despite currency headwinds and higher input costs,” said Ted Doheny, Sealed Air President and CEO.
“We are continuing to execute on our Reinvent SEE strategy, which we are confident will transform Sealed Air into a company that delivers world-class performance as ‘One SEE.’ By improving how we innovate, buy, make, and solve, we will address our customers’ most critical packaging challenges, lead the industry with sustainable solutions and make every customer a reference. We are committed to creating long-term value for our shareholders through consistent profitable growth and increased earnings power.”
Unless otherwise stated, all results compare fourth quarter 2018 results to fourth quarter 2017 results from continuing operations. Year-over-year financial discussions present operating results from continuing operations as reported, on an organic basis and on a constant dollar basis. Organic refers to changes in unit volume and price/mix performance and excludes acquisition and divestiture activity and the impact of currency translation. Constant dollar refers to changes in unit volume, price/mix performance and acquisition and divestiture activity and excludes the impact of currency translation. Additionally, non-U.S. GAAP adjusted financial measures, such as Adjusted Earnings Before Interest Expense, Taxes, Depreciation and Amortization (“Adjusted EBITDA”), Adjusted Net Earnings, Adjusted Diluted Earnings Per Share (“Adjusted EPS”) and Adjusted Tax Rate, exclude the impact of specified items (“Special Items”), such as restructuring charges, charges related to the sale of Diversey, gains and losses related to acquisition and divestiture of businesses, special tax items (“Tax Special Items”) and certain other infrequent or one-time items. Please refer to the supplemental information included with this press release for a reconciliation of U.S. GAAP to Non-U.S. GAAP financial measures.
Fourth Quarter Financial and Business Highlights
In the fourth quarter, Food Care net sales of $772 million increased 1% as reported. Currency negatively impacted Food Care by $40 million or 5%. On a constant dollar basis, net sales increased $47 million or 6% driven by favorable price/mix of 4% and volume growth of 2%. The increase in volume was led by 8% growth in Asia Pacific and 2% in both North America and EMEA, respectively. Adjusted EBITDA of $162 million, or 21.0% of net sales, increased 12% as reported. The increase in adjusted EBITDA was primarily attributable to favorable mix and price/cost spread, restructuring savings and higher volumes. Currency fluctuations had an $9 million unfavorable impact on Adjusted EBITDA.
Product Care net sales of $489 million in the fourth quarter were up 5% as reported. Currency negatively impacted Product Care by $8 million or 2%. On a constant dollar basis, net sales increased $33 million or 7%, including $27 million or 6% from acquisition activity and favorable price/mix of $6 million or 1%. Adjusted EBITDA of $85 million, or 17.5% of net sales, increased 5% as reported. The increase in adjusted EBITDA was primarily attributable to restructuring savings. Currency fluctuations had a $2 million unfavorable impact on Adjusted EBITDA.
Reinvent SEE
On December 13, 2018, Sealed Air announced its Reinvent SEE strategy to enhance earnings growth and address cost savings in the following key areas: speed to market for new innovations, SG&A productivity, product cost efficiency, and channel optimization and customer service enhancements. As previously announced, the Reinvent SEE strategy includes a three-year restructuring program (“New Program”). The New Program is expected to generate total annualized savings in the range of approximately $215 to $235 million by the end of 2021, of which approximately $45 million will be realized in 2019. The total cash cost of this program is estimated to be in the range of $190 to $220 million, of which approximately $80 million will be incurred in 2019.
Sealed Air will combine the New Program with its existing restructuring program, largely related to the elimination of stranded costs. In 2019, total annualized savings from both programs are expected to be approximately $70 million and cash restructuring payments and costs are expected to be approximately $115 million. The existing program will be completed in 2019 and the New Program will be completed by the end of 2021. Upon completion of both programs, total annualized savings are estimated to be $240 to $260 million from 2019 to 2021 and cash restructuring payments and costs are expected to be $225 to $255 million over the same period.
As part of Reinvent SEE, Sealed Air is enhancing the Company’s operating model to drive market penetration, increase speed to market for new innovations and optimize channel and customer service. Sealed Air will consolidate the commercial leadership of two divisions to one SEE Commercial team led by Karl Deily who will serve as Chief Commercial Officer.
The Company will maintain its segment reporting structure of two reportable segments in its 2018 Annual Report on Form 10-K and will continue to assess the changes in the management of the Company and the effect on segment reporting.
Fourth Quarter and Full Year 2018 U.S. GAAP Summary
Fourth quarter net sales of $1.3 billion increased 3% on a reported basis. Currency had a negative impact on total net sales of $48 million or 4%. For the full year 2018, net sales of $4.7 billion increased 6% on a reported basis. Currency had a negative impact on total net sales of $44 million or 1%. As reported, net sales increased across all regions for the full year 2018.
Fourth quarter net earnings from continuing operations on a reported basis was $199 million, or $1.28 per diluted share, compared to net earnings from continuing operations of $25 million, or $0.14 per diluted share, in the fourth quarter 2017. Net earnings in the fourth quarter 2018 was favorably impacted by $82 million of special items. Special item income was primarily driven by $129 million in tax benefit resulting from nonrecurring items including a decrease to the previously recognized estimate of the one-time tax on unrepatriated earnings (transition tax) and the release of valuation allowances associated with tax initiatives. The tax benefit was offset by $39 million of restructuring charges and other associated costs. Net earnings in the fourth quarter 2017 was unfavorably impacted by $78 million of special items, including $42 million of tax related items, $21 million related to the sale of Diversey, $11 million primarily related to acquisition activity and $5 million of restructuring and other restructuring associated costs.
Full year 2018 net earnings from continuing operations on a reported basis was $150 million, or $0.94 per diluted share, compared to net earnings from continuing operations of $63 million, or $0.33 per diluted share, in the full year 2017. Net earnings for the full year 2018 was unfavorably impacted by $251 million of special items, including $222 million for tax special items such as the transition tax. In addition, net earnings was unfavorably impacted by special items expenses primarily related to restructuring and other restructuring associated costs of $64 million, charges related to the sale of Diversey of $21 million and charges related to acquisition and divestiture activities of $13 million, partially offset by gain on class-action litigation proceeds of $15 million. Net earnings for full year 2017 was unfavorably impacted by $280 million of special items, including $152 million of tax expense related to the sale of Diversey, as well as $55 million of charges related to the sale of Diversey, $26 million of restructuring and other restructuring associated costs and $16 million primarily related to acquisition activity.
The effective tax rate in the fourth quarter of 2018 was (68.3)%, compared to 79.0% in the fourth quarter of 2017. The effective tax rate in the fourth quarter of 2018 was favorably impacted by the finalization of the transition tax calculation associated with U.S. Tax Reform. The effective tax rate in the fourth quarter of 2018 was also favorably impacted by the release of valuation allowances associated with tax initiatives. The effective tax rate in the fourth quarter of 2017 was negatively impacted primarily by the revaluation of deferred tax assets as a result of U.S. Tax Reform.
The effective tax rate for full year 2018 was 67.2%, compared to 84.0% for full year 2017. The 2018 rate was negatively impacted by the transition tax associated with U.S. Tax Reform. The 2017 rate was negatively impacted primarily by additional tax expenses related to the sale of Diversey and the revaluation of deferred tax assets as a result of U.S. Tax Reform.
Fourth Quarter and Full Year 2018 Non-U.S. GAAP Summary
In the fourth quarter 2018, on a constant dollar basis, net sales increased 7% reflecting favorable price/mix of 3%, volume growth of 2% and contributions from acquisition activity of 2%. By region, constant dollar sales increased 17% in Latin America, 7% in North America, 4% in Asia Pacific and 2% in EMEA. Adjusted EBITDA was $248 million, or 19.7% of net sales, compared to $238 million, or 19.4% of net sales for the fourth quarter 2017. Adjusted EPS was $0.75 for the fourth quarter 2018. This compares to Adjusted EPS of $0.58 in the fourth quarter 2017. The Adjusted Tax Rate was 28.9% in the fourth quarter 2018, compared to 33.7% in the fourth quarter 2017.
For the full year 2018, on a constant dollar basis, net sales increased 7% reflecting favorable price/mix of 3%, contributions from acquisitions of 3% and volume growth of more than 1%. By region, constant dollar sales increased 17% in Latin America, 12% in Asia Pacific, 6% in North America and 3% in EMEA. Adjusted EBITDA was $890 million, or 18.8% of net sales, compared to $833 million, or 18.7% of net sales for full year 2017. Adjusted EPS was $2.50 for full year 2018 based on 160.2 million diluted shares outstanding. This compares to Adjusted EPS of $1.81 for full year 2017 based on 188.9 million diluted shares outstanding. The Adjusted Tax Rate was 27.5% for full year 2018, compared to 30.2% for full year 2017.
Cash Flow and Net Debt
Cash flow provided by operating activities in the year ended December 31, 2018 was $428 million, which is net of $52 million of payments related to the sale of Diversey and $12 million of restructuring payments.
Free cash flow, defined as net cash provided by operating activities less capital expenditures and payments related to the sale of Diversey, for the year ended December 31, 2018 was an inflow of $311 million. Interest payments, net of amounts capitalized and interest income, were $176 million. Capital expenditures were $169 million. Income tax payments, net of cash refunds, were $155 million. Working capital was an outflow of $10 million in 2018 comprised of an inflow of $43 million in accounts payable and an outflow of $52 million in inventory.
The Company repurchased 14.9 million shares for net cash outflow of $583 million during the year ended December 31, 2018. The Company has $775 million remaining under the current authorized share repurchase program. The Company paid cash dividends of $104 million.
Net Debt, defined as total debt less cash and cash equivalents, increased to $3.2 billion as of December 31, 2018 from $2.7 billion as of December 31, 2017. The increase in Net Debt resulted from a use of cash related to working capital, acquisition activity and share repurchases.
Outlook for Full Year 2019
For the FY 2019, the Company anticipates net sales growth to be approximately 2% on as reported basis and 5% in constant dollars. Adjusted EBITDA from continuing operations is expected to be in the range of $925 to $945 million. Currency is expected to have an unfavorable impact of approximately $130 million on net sales and $25 million on Adjusted EBITDA. The Company forecasts Adjusted EPS to be in the range of $2.65 to $2.75, which is based on 156 million shares outstanding and an anticipated Adjusted Tax Rate of 26%.
Free Cash Flow in FY 2019 is expected to be approximately $250 million, assuming capital expenditures of approximately $200 million and cash restructuring payments of approximately $115 million. The remaining cash restructuring payments of $110 to $140 million to complete the Company’s restructuring programs will be incurred primarily in 2020.
Source: Company Press Release.