Sealed Air announced financial results for third quarter 2016.
Commenting on these results, Jerome A. Peribere, President and Chief Executive Officer, said, “In the third quarter, we delivered strong margin performance and cash flow generation as a result of our operating discipline and focus on working capital management. As we were expecting, we experienced notable increasing demand for our protein packaging, e-Commerce and advanced hygiene solutions in North America and targeted countries throughout Europe and Asia.
These positive trends were offset by macro headwinds in emerging countries, Australia and the industrial market. Despite softer sales growth in the quarter and for the full year 2016, we continue to expect performance to improve on both the top and bottom line in Q4 and throughout 2017 as we continue building a robust pipeline for our innovative solutions and capitalize on end market growth opportunities.”
Peribere continued, “Since 2013, we have made significant progress improving the quality of earnings, delivering leading innovations to our customers, and building a performance-based winning culture. As we look beyond 2016, we believe pursuing a tax-free spin-off of Diversey Care and our related hygiene business is the next step in our strategic transformation and will enable us to unlock meaningful value for customers and shareholders.
This transaction would create two industry-leading, publicly-traded companies with unique and compelling investment opportunities, accelerated growth strategies and disciplined, returns-based approaches to capital allocation.”
Unless otherwise stated, all results compare third quarter 2016 results to third quarter 2015 results. Year-over-year financial discussions present operating results as reported, and on an organic or constant dollar basis. Constant dollar refers to unit volume and price/mix performance and excludes the impact of currency translation from all periods referenced.
Organic refers to unit volume and price/mix performance and excludes the impact of currency translation and the results from the divestiture of the North American foam trays and absorbent pads business, which was divested on April 1, 2015, and the divestiture of the European food trays business in November 2015 (together “divestitures”), from all periods referenced.
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 special items, such as restructuring charges, charges related to ceasing operations in Venezuela, cash-settled stock appreciation rights (“SARs”) granted as part of the Diversey acquisition and certain other infrequent or one-time items.
Third Quarter 2016 Highlights
Food Care net sales of $815 million decreased 2.6% as reported. Currency had a negative impact on Food Care net sales of 2.0%, or $17 million, and the divestiture had a negative impact of 1.8%, or $15 million. On an organic basis, net sales increased 1.2% due to favorable price/mix of 1.3% and relatively flat volume growth. Volume growth of more than 3% in North America and positive trends in EMEA were offset by weakness in Latin America, and Asia Pacific. Adjusted EBITDA of $173 million or 21.2% of net sales was attributable to favorable price/cost spread and restructuring savings, which were partially offset by higher non-material manufacturing expenses, unfavorable currency translation and divestitures of non-core assets.Diversey Care net sales of $497 million decreased 0.8% as reported and increased 1.5% on a constant dollar basis. Currency had a negative impact on Diversey Care net sales of 2.3%, or $12 million in the quarter. Price/mix of 2.8%, which was favorable across all the regions, was partially offset by lower volumes of 1.3%. North America, Europe and Asia Pacific delivered positive volume trends that were offset by declines in MEA and Latin America. Diversey Care’s Adjusted EBITDA was $65 million or 13.0% of net sales. Adjusted EBITDA performance was attributable to favorable price/cost spread and restructuring savings, which were offset by targeted investments in marketing and research and development, salary and wage inflation and lower volumes.Product Care net sales of $389 million in the third quarter were relatively flat as reported and on a constant dollar basis. Currency had a negative impact on Product Care net sales of 0.5%, or $2 million. Sales volume increased 2.6%, which was offset by unfavorable price/mix of 2.3%. North America volumes were up 6% as a result of continued strength in e-Commerce offset by rationalization efforts and ongoing weakness in the industrial market. Adjusted EBITDA was $88 million or 22.7% of net sales. Adjusted EBITDA performance was primarily related to higher volumes.
Tax-Free Spin-Off of Diversey Care and Related Hygiene Business
On October 17, 2016, Sealed Air announced a plan to pursue the tax-free spin-off of its Diversey Care division and the food hygiene and cleaning business within its Food Care division (together “New Diversey”). The tax-free spin-off would create two independent companies, New Sealed Air (the remaining Sealed Air business) and New Diversey, each with an enhanced strategic focus, simplified operating structure, distinct investment identity and strong financial profile.
Under the spin-off plan, if effectuated, Sealed Air’s shareholders would own 100% of the common stock of New Diversey following completion of the spin-off. The spin-off company would be led by Dr. Ilham Kadri, currently President of Diversey Care. T
he transaction is expected to be completed in the second half of 2017, subject to final approval by Sealed Air’s Board of Directors, as well as satisfaction of customary conditions, including the effectiveness of appropriate filings with the U.S. Securities and Exchange Commission (“SEC”), and it is intended to qualify as a tax-free distribution to Sealed Air shareholders for U.S. federal income tax purposes. Sealed Air anticipates filing a Form 10 relating to the transaction with the SEC as early as the first quarter of 2017.
Third Quarter 2016 U.S. GAAP Summary
Net sales of $1.7 billion decreased 1.7% on an as reported basis. Currency had a negative impact on total net sales of 1.8%, or $31 million, and the Food Care divestitures had a negative impact on total sales of 0.8%, or $15 million, in the third quarter 2016. As reported, net sales in North America increased 1.6%, EMEA declined 5.8% and Latin America and Asia Pacific also declined 2.9% and 0.6%, respectively.
Net income on a reported basis was $163 million, or $0.83 per diluted share as compared to $87 million, or $0.42 per diluted share in the third quarter 2015. Net earnings in the third quarter 2016 were favorably impacted by $24 million of special items, primarily related to the release of certain tax reserves, as described more fully below, partially offset by restructuring charges and other restructuring associated costs.
Net earnings in the third quarter 2015 included $57 million of special items, primarily consisting of restructuring and other restructuring associated costs, as well as a tax reserve recorded in relation to the tax refund received on the Settlement agreement (as defined in our 2015 Annual Report on Form 10-K), partially offset by the release of certain tax reserves recorded at the time of the Diversey Holdings, Inc. acquisition, for which the statute of limitations had expired.
The effective tax rate in the third quarter of 2016 was 5.5%, compared to the effective tax rate of 31.3% in the third quarter of 2015. The effective tax rate was favorably impacted by $32 million related to the release of certain tax reserves recorded at the time of the Diversey Holdings, Inc. acquisition, for which the statute of limitations had expired.
Third Quarter 2016 Non-U.S. GAAP Summary
Net sales on an organic basis increased 0.9%. On a constant dollar basis, Latin America was up 8.7% followed by North America, which delivered constant dollar sales growth of 1.6%. Volume growth in North America and Europe were offset by declines in MEA and Asia Pacific. Organic sales in EMEA and Asia Pacific declined 0.5% and 3.1%, respectively.
Adjusted EBITDA for the third quarter 2016 was $304 million, or 17.7% of net sales. This margin performance was attributable to a favorable price/cost spread and restructuring savings, partially offset by $4 million of unfavorable currency translation, divestitures of $3 million as well as salary and wage inflation and higher non-material manufacturing expenses.
Adjusted EPS was $0.71 for the third quarter 2016. This compares to Adjusted EPS of $0.70 in the third quarter 2015. The Adjusted Tax Rate was 23.1% in the third quarter 2016, compared to 18.8% in the third quarter 2015. The Adjusted Tax Rate in the third quarter of 2016 was negatively impacted by an increase in valuation allowances on foreign tax credits.
Cash Flow and Net Debt
Cash flow provided by operating activities in the nine months ended September 30, 2016 was $470 million, which is net of $51 million of restructuring payments. This compares with cash provided by operating activities of $701 million in the nine months ended September 30, 2015. In March 2015, the Company received a tax refund of $235 million related to the payment of funds in connection with the Settlement agreement. Excluding the tax refund, cash flow provided by operating activities in the first nine months of 2015 was $466 million, which is net of $72 million of restructuring and $20 million of SARs payments.
Capital expenditures increased to $190 million, as planned, in the nine months ended September 30, 2016 and compared to $112 million in the nine months ended September 30, 2015. Free Cash Flow, defined as net cash provided by (used in) operating less capital expenditures, was an inflow of $280 million in the nine months ended September 30, 2016. This compares to an inflow of $353 million in the nine months ended September 30, 2015, excluding the tax refund related to the payment of funds in connection with the Settlement agreement.
Compared to December 31, 2015, the Company’s net debt increased $132 million to $4.3 billion as of September 30, 2016. This increase in borrowings primarily resulted from a use of working capital, higher capital expenditures, and amounts paid for share repurchases and dividends.
During the third quarter 2016, the Company repurchased approximately 3.5 million shares for approximately $165 million, and paid cash dividends of $31 million. In the nine month ended September 30, 2016, the Company repurchased 4.7 million shares for approximately $217 million, and paid cash dividends of $90 million.
