SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to_______
Commission file number 1-12139
SEALED AIR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 65-0654331
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Park 80 East
Saddle Brook, New Jersey 07663-5291
- ------------------------------- ----------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code (201) 791-7600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
There were 83,516,970 shares of the registrant's common stock, par value $0.10
per share, and 35,758,334 shares of the registrant's Series A convertible
preferred stock, par value $0.10 per share, outstanding as of October 31, 1999.
<PAGE>
PART I
FINANCIAL INFORMATION
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Three and Nine Months Ended September 30, 1999 and 1998
(In thousands except per share data)
(Unaudited)
<TABLE>
For the For the
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $714,755 $684,302 $2,088,813 $1,785,342
Cost of sales 457,551 443,249 1,332,331 1,177,107
-------- -------- ---------- ----------
Gross profit 257,204 241,053 756,482 608,235
Marketing, administrative
and development expenses 130,721 130,994 391,304 349,531
Goodwill amortization 12,278 11,756 36,860 23,864
Restructuring and other charges -- 111,074 -- 111,074
-------- -------- ---------- ----------
Operating profit (loss) 114,205 (12,771) 328,318 123,766
Other income (expense):
Interest expense (14,631) (18,968) (44,088) (39,692)
Other, net 822 (3,342) (199) (5,290)
-------- -------- ---------- ----------
Other expense, net (13,809) (22,310) (44,287) (44,982)
-------- -------- ---------- ----------
Earnings (loss)before
income taxes 100,396 (35,081) 284,031 78,784
Income taxes 46,684 19,022 132,513 70,270
-------- -------- ---------- ----------
Net earnings (loss) $ 53,712 $(54,103) $ 151,518 $ 8,514
======== ======== ========== ==========
Less: Series A
Preferred stock dividends 17,879 17,999 53,668 36,010
Less: Retroactive
recognition of preferred
stock dividends -- -- -- 18,011
Add: Excess of book value
over repurchase price of
Series A preferred stock -- 816 39 816
-------- -------- ---------- ----------
Net earnings (loss) ascribed to
common shareholders $ 35,833 $(71,286) $ 97,889 $ (44,691)
======== ======== ========== ==========
Earnings (loss) per common share
(See Note 4):
Basic $ 0.43 $ (0.85) $ 1.17 $ (0.64)
======== ======== ========== ==========
Diluted $ 0.43 $ (0.85) $ 1.17 $ (0.64)
======== ======== ========== ==========
Weighted average number of
common shares outstanding:
Basic 83,648 83,637 83,552 69,504
======== ======== ========== ==========
Diluted 83,784 83,637 83,688 69,504
======== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(In thousands of dollars except share data)
September 30, December 31,
1999 1998
(Unaudited)
------------ ------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 74,403 $ 44,986
Notes and accounts receivable, net of allowances
for doubtful accounts of $20,639 in 1999 and
$17,945 in 1998 465,351 453,124
Inventories 263,415 275,312
Other current assets 70,311 71,192
---------- ----------
Total current assets 873,480 844,614
---------- ----------
Property and equipment:
Land and buildings 416,643 420,589
Machinery and equipment 1,347,402 1,349,716
Other property and equipment 114,927 121,252
Construction in progress 55,510 54,538
---------- ----------
1,934,482 1,946,095
Less accumulated depreciation and amortization 903,782 829,513
---------- -----------
Property and equipment, net 1,030,700 1,116,582
---------- -----------
Goodwill, less accumulated amortization of
$72,393 in 1999 and $36,083 in 1998 1,873,088 1,907,736
Other assets 178,978 170,998
---------- -----------
Total assets $3,956,246 $4,039,930
========== ===========
See accompanying notes to consolidated financial statements.
3
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 (Continued)
(In thousands of dollars except share data)
September 30, December 31,
1999 1998
(Unaudited)
------------ ------------
LIABILITIES, CONVERTIBLE PREFERRED STOCK & SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------
Current Liabilities:
Short-term borrowings and current portion
of long-term debt $ 238,115 $ 85,131
Accounts payable 168,841 176,594
Other current liabilities 229,493 230,332
Income taxes payable 42,016 42,933
---------- ----------
Total current liabilities 678,465 534,990
Long-term debt, less current portion 701,214 996,526
Deferred income taxes 206,561 200,699
Other liabilities 84,249 79,577
---------- ----------
Total liabilities 1,670,489 1,811,792
---------- ----------
Series A convertible preferred stock, $50
per share redemption value, authorized
and issued 36,016,254 shares in 1999 and
36,021,851 shares in 1998, including
257,500 shares in 1999 and 200,000 shares
in 1998 in treasury, mandatory redemption
in 2018 1,787,938 1,791,093
Shareholders' equity:
Common stock, $.10 par value. Authorized
400,000,000 shares, issued 84,054,890 shares
in 1999 and 83,806,361 shares in 1998 8,405 8,380
Additional paid-in capital 627,190 610,505
Retained earnings (deficit) 89,884 (7,966)
Accumulated translation adjustment (175,525) (124,843)
---------- -----------
549,954 486,076
---------- -----------
Less: Deferred compensation 24,747 28,683
Less: Cost of treasury common stock,
535,104 shares in 1999 and 494,550
shares in 1998 24,274 17,234
Less: Minimum pension liability 3,114 3,114
---------- ----------
Total shareholders' equity 497,819 437,045
---------- ----------
Total liabilities, preferred stock and
shareholders' equity $3,956,246 $4,039,930
========== ==========
See accompanying notes to consolidated financial statements.
4
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 151,518 $ 8,514
Adjustments to reconcile net earnings to
net cash provided by operating activities, net of
effect of businesses acquired:
Depreciation and amortization 167,871 139,277
Amortization of senior debt discount 92 --
Deferred tax benefit (2,217) (5,501)
Non-cash portion of restructuring and other
charges, net -- 67,785
Net loss on disposals of fixed assets 200 587
Changes in operating assets and liabilities,
net of assets and liabilities acquired and
transferred to/from Grace:
Notes and accounts receivable (24,130) (23,629)
Inventories 5,033 5,560
Other current assets 1,265 2,603
Other assets (727) (12,146)
Accounts payable (5,513) 4,807
Other current liabilities 11,125 81,807
Other liabilities 6,202 6,802
---------- ----------
Net cash provided by operating activities 310,719 276,466
---------- ----------
Cash flows from investing activities:
Capital expenditures for property and equipment (51,145) (55,866)
Proceeds from sales of property and equipment 2,371 2,421
Businesses acquired, net of cash acquired (10,430) 48,994
---------- ----------
Net cash used in investing activities (59,204) (4,451)
---------- ----------
Cash flows from financing activities:
Net advances to Grace -- (14,062)
Proceeds from long-term debt 500,855 1,258,807
Payment of long-term debt (808,440) (187,067)
Payment of senior debt issuance costs (3,123) --
Dividends paid on preferred stock (53,700) (18,011)
Purchase of treasury common stock (14,189) (10,195)
Purchase of treasury preferred stock (2,836) (3,184)
Proceeds from stock option exercises 1,924 --
Transfer of funds to New Grace -- (1,256,614)
Net proceeds from (payments of)
short-term borrowings 158,599 (2,144)
---------- ----------
Net cash used in financing activities (220,910) (232,470)
---------- ----------
Effect of exchange rate changes on cash and cash
equivalents (1,188) 369
---------- ----------
Cash and cash equivalents:
Increase during the period 29,417 39,914
Balance, beginning of period 44,986 --
---------- ----------
Balance, end of period $ 74,403 $ 39,914
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998 (Continued)
(In thousands of dollars)
(Unaudited)
<TABLE>
1999 1998
----------- ----------
<S> <C> <C>
Supplemental Cash Flow Items:
Interest payments, net of amounts capitalized $ 36,110 $ 33,639
=========== ===========
Income tax payments $ 133,473 $ 31,890
=========== ===========
Non-Cash Items:
Issuance of 36,021,851 shares of Series A
convertible preferred stock and
40,647,815 shares of common stock in
connection with the Recapitalization $ -- $ 1,801,093
=========== ===========
Net assets acquired in exchange for the
issuance of 42,624,246 shares of
common stock in connection with the Merger,
net of cash balance of $51,259 acquired $ -- $ 2,110,752
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30, 1999 and 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net Earnings (loss) $ 53,712 $ (54,103) $ 151,518 $ 8,514
Other comprehensive income:
Foreign currency translation
adjustments (2,641) 8,499 (50,682) (4,179)
--------- --------- --------- ---------
Comprehensive income (loss) $ 51,071 $ (45,604) $ 100,836 $ 4,335
========= ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(Amounts in thousands, except per share data)
(Unaudited)
(1) Reorganization, Recapitalization and Merger
On March 31, 1998, the Company (formerly known as W. R. Grace & Co.) and Sealed
Air Corporation ("old Sealed Air"), completed a series of transactions as a
result of which:
(a) The specialty chemicals business of the Company was separated from
its packaging business, the packaging business ("Cryovac") was
contributed to one group of wholly owned subsidiaries, and the
specialty chemicals business was contributed to another group of
wholly owned subsidiaries ("New Grace"); the Company and Cryovac
borrowed approximately $1.26 billion under two revolving credit
agreements (the "Credit Agreements") (which, as amended, are
discussed below) and transferred substantially all of those funds to
New Grace; and the Company distributed all of the outstanding shares
of common stock of New Grace to its shareholders. As a result, New
Grace became a separate publicly owned corporation that is unrelated
to the Company. These transactions are referred to below as the
"Reorganization."
(b) The Company recapitalized its outstanding shares of common stock, par
value $0.01 per share ("Grace Common Stock"), into a new common stock
and Series A convertible preferred stock, each with a par value of
$0.10 per share (the "Recapitalization").
(c) A subsidiary of the Company merged into old Sealed Air (the
"Merger"), with old Sealed Air being the surviving corporation. As a
result of the Merger, old Sealed Air became a subsidiary of the
Company, and the Company was renamed Sealed Air Corporation.
References to "Grace" in these notes refer to the Company before the
Reorganization, the Recapitalization and the Merger.
(2) Basis of Presentation
The Merger was accounted for as a purchase of old Sealed Air by the Company as
of March 31, 1998. Accordingly, the financial statements include the operating
results and cash flows as well as the assets and liabilities of Cryovac for all
periods presented. The operating results, cash flows, assets and liabilities of
old Sealed Air are included from March 31, 1998. See Note 8 for unaudited
selected pro forma statement of earnings information for the quarter and nine
months ended September 30, 1998. For periods prior to the Merger, the financial
statements exclude all of the assets, liabilities (including contingent
liabilities), revenues and expenses of Grace other than the assets,
liabilities, revenues and expenses of Cryovac.
Subsequent to the Merger, the consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. In
management's opinion, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
position and results of operations for the quarter and nine months ended
September 30, 1999 have been made. The consolidated statements of earnings for
the three and nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the full year.
8
<PAGE>
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
(3) Equity
In connection with the Recapitalization, the Company, among other things,
recapitalized the outstanding shares of Grace Common Stock into 40,647,815
shares of the Company's common stock and 36,021,851 shares of Series A
convertible preferred stock (convertible into approximately 31,900,000 shares
of the Company's common stock), each with a par value of $0.10 per share. In
the Merger, the Company issued 42,624,246 shares of common stock to the
shareholders of old Sealed Air.
The outstanding Series A preferred stock is convertible at any time into
approximately 0.885 share of common stock for each share of preferred stock,
votes with the common stock on an as-converted basis, pays a cash dividend, as
declared by the Board of Directors, at an annual rate of $2.00 per share,
payable quarterly in arrears, becomes redeemable at the option of the Company
beginning March 31, 2001, subject to certain conditions, and is subject to
mandatory redemption on March 31, 2018 at $50 per share, plus any accrued and
unpaid dividends. Because it is subject to mandatory redemption, the Series A
convertible preferred stock is classified outside of the shareholders' equity
section of the balance sheet. At its date of issuance, the fair value of the
Series A convertible preferred stock exceeded its mandatory redemption amount
primarily due to the common stock conversion feature of such preferred stock.
Accordingly, the carrying amount of the Series A convertible preferred stock is
reflected in the consolidated balance sheet at its mandatory redemption value.
The Company has authority to issue a total of 50,000,000 shares of preferred
stock, par value $0.10 per share.
(4) Earnings Per Common Share
In calculating basic and diluted earnings per common share for the first nine
months of 1998, retroactive recognition was given to the Recapitalization as if
it had occurred on January 1, 1998 in accordance with SAB No. 98. Accordingly,
net earnings were reduced for preferred stock dividends for the first quarter
of 1998 (as if such shares had been outstanding during the period) to arrive at
net earnings ascribed to common shareholders. The weighted average number of
outstanding common shares used for the first nine months of 1998 to calculate
basic earnings per common share was calculated on an equivalent share basis
using the weighted average number of shares of common stock outstanding for the
first quarter of 1998, adjusted to reflect the terms of the Recapitalization.
The weighted average number of common shares used to calculate diluted earnings
per common share also considers the exercise of dilutive stock options in each
period. The outstanding preferred stock is not assumed to be converted in the
calculation of diluted earnings per common share for all periods presented
because the treatment of the preferred stock as the common stock into which it
is convertible would be antidilutive (i.e., would increase earnings per common
share) in those periods.
The following table sets forth the reconciliation of the computations of basic
and diluted earnings per common share for the three and nine months ended
September 30, 1999 and 1998 (amounts other than per share amounts in
thousands).
9
<PAGE>
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS:
Numerator
Net earnings (loss) $ 53,712 $ (54,103) $ 151,518 $ 8,514
Add: Excess of book value over
repurchase price of preferred stock -- 816 39 816
Less: Preferred stock dividends 17,879 17,999 53,668 36,010
Less: Retroactive recognition of
preferred stock dividends -- -- -- 18,011
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) ascribed to common
shareholders $ 35,833 $ (71,286) $ 97,889 $ (44,691)
- ----------------------------------------------------------------------------------------------------------
Denominator
Weighted average common shares
outstanding - basic 83,648 83,637 83,552 69,504
- ----------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ 0.43 $ (0.85) $ 1.17 $ (0.64)
- ----------------------------------------------------------------------------------------------------------
Diluted EPS:
Numerator
Net earnings (loss) ascribed to common
shareholders $ 35,833 $ (71,286) $ 97,889 $(44,691)
- ----------------------------------------------------------------------------------------------------------
Denominator
Weighted average common shares
outstanding - basic 83,648 83,637 83,552 69,504
Effect of assumed exercise of stock
options 136 -- 136 --
Weighted average common shares
outstanding - diluted 83,784 83,637 83,688 69,504
- ----------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common
share $ 0.43 $ (0.85) $ 1.17 $ (0.64)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(5) Inventories
At September 30, 1999 and December 31, 1998, the components of inventories by
major classification (raw materials, work in process and finished goods) were
as follows:
September 30, December 31,
1999 1998
------------- ------------
Raw materials $ 61,292 $ 63,805
Work in process 46,637 50,714
Finished goods 169,006 176,965
---------- -----------
Subtotal 276,935 291,484
Reduction of certain
inventories to LIFO basis (13,520) (16,172)
---------- -----------
Total inventories $ 263,415 $ 275,312
========== ===========
10
<PAGE>
(6) Income Taxes
The Company's effective income tax rates were 46.5% and 46.0% for the third
quarters of 1999 and 1998, respectively. This effective tax rate for the third
quarter of 1998 is before giving effect to the restructuring and related
charges amounting to $111,074 that the Company incurred following the Merger
and the special income tax charge of $26 million for the assumed repatriation
to the U.S. of the accumulated earnings of the Company's foreign subsidiaries
that are not considered to be permanently invested in their businesses. Such
rates were higher than the statutory U.S. federal income tax rate primarily due
to the non-deductibility of the goodwill amortization resulting from the Merger
and to state income taxes.
(7) Long-Term Debt
On July 19, 1999, the Company issued euro 200 million (approximately $205
million, at the then current exchange rate) aggregate principal amount of
7-year 5.625% notes in the European market ("Euro Notes") under Regulation S of
the Securities Act of 1933, as amended (the "Securities Act"). Accrued interest
on the Euro Notes is payable annually in cash on July 19 of each year,
commencing on July 19, 2000. The net proceeds of euro 198,624 (approximately
$203 million) were used to reduce outstanding borrowings under the Credit
Agreements, described below. At September 30, 1999, the outstanding borrowings
under the Euro Notes were $208,467 net of unamortized bond discount of $1,410.
On May 18, 1999, the Company issued $300 million aggregate principal amount of
10-year 6.95% senior notes ("Senior Notes") under Rule 144A and Regulation S of
the Securities Act. Accrued interest on the Senior Notes is payable
semi-annually in cash on May 15 and November 15 of each year, commencing on
November 15, 1999. The net proceeds of $297,834 from the issuance of the Senior
Notes were used to reduce outstanding borrowings under the Credit Agreements.
At September 30, 1999, the outstanding borrowings under the Senior Notes were
$297,891 net of unamortized bond discount of $2,109.
At September 30, 1999, the Company's outstanding debt consisted primarily of
borrowings made under the Credit Agreements, the Senior Notes, the Euro Notes
and certain other loans incurred by the Company's subsidiaries. The Company's
outstanding debt as of December 31, 1998 primarily included borrowings under
the Credit Agreements and certain other loans incurred by the Company's
subsidiaries.
The Company's two principal Credit Agreements are a 5-year revolving credit
facility that expires on March 30, 2003 and a 364-day revolving credit facility
that expires on March 27, 2000. During 1999, the Company has voluntarily
reduced the amounts available under the Credit Agreements from $1 billion to
$650 million under the 5-year revolving credit facility and from $600 million
to $475 million under the 364-day revolving credit facility. As of September
30, 1999, outstanding borrowings under the 5-year and 364-day revolving credit
facilities were approximately $184 million (included in long-term debt) and
$139 million (included in short-term borrowings), respectively. The Credit
Agreements provide that the Company and certain of its subsidiaries may borrow
for various purposes, including the refinancing of existing debt, the provision
of working capital and other general corporate needs including acquisitions and
other capital expenditures. Amounts repaid under the Credit Agreements may be
reborrowed from time to time, up to the maximum $1.125 billion commitment
amount under the Credit Agreements.
The Company's obligations under the Credit Agreements bear interest at
floating rates. The weighted average interest rate under the Credit Agreements
was approximately 5.6% at September 30, 1999 and 5.8% at December 31, 1998. The
Company had certain interest rate swap agreements outstanding at December 31,
1998, that had the effect of fixing the interest rates on a portion of such
debt. The weighted average interest rate at December 31, 1998 did not change
significantly as a result of these derivative financial instruments.
11
<PAGE>
The Credit Agreements provide for changes in borrowing margins based on
financial criteria and the Company's senior unsecured debt ratings, and impose
certain limitations on the operations of the Company and certain of its
subsidiaries. The limitations include financial covenants relating to interest
coverage and debt leverage as well as certain restrictions on the incurrence of
additional indebtedness, the creation of liens, mergers and acquisitions, and
certain dispositions of property and assets. The Company was in compliance with
these requirements as of September 30, 1999.
The Senior Notes and Euro Notes also impose certain limitations on the
operations of the Company and certain of its subsidiaries. The limitations
include restrictions on the creation of liens, merger or consolidation of the
Company and disposition of substantially all of the Company's assets. In
addition, the Senior Notes include restrictions on sale-leaseback transactions.
The Company was in compliance with these requirements as of September 30, 1999.
(8) Pro Forma Information
The following table presents selected unaudited pro forma statement of earnings
(loss) information for the quarter and nine months ended September 30, 1998 as
a result of the Reorganization, the Recapitalization and the Merger. Such
information reflects pro forma adjustments made in combining the historical
results of old Sealed Air and Cryovac as a result of such transactions for the
three and nine months ended September 30, 1998. Such amounts include for the
first quarter of 1998, among others, incremental goodwill amortization of
approximately $10 million and incremental interest expense of approximately $20
million. This pro forma information is not intended to represent what the
Company's actual results of operations would have been for such periods.
<TABLE>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
Reported Pro Forma Reported Pro Forma
1999 1998(1) 1999 1998(1)
-------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Net sales by business segment:
Food and specialty packaging $439,922 $430,928 $1,297,708 $1,251,730
Protective packaging 274,833 253,374 791,105 746,364
- -------------------------------------------------------------------------------------------------
Total net sales 714,755 684,302 2,088,813 1,998,094
Cost of sales 457,551 443,249 1,332,331 1,302,044
- -------------------------------------------------------------------------------------------------
Gross profit 257,204 241,053 756,482 696,050
Marketing, administrative and
development expenses 130,721 130,994 391,304 379,640
Goodwill amortization 12,278 11,756 36,860 35,695
Restructuring and other charges -- 111,074 -- 111,074
- -------------------------------------------------------------------------------------------------
Operating profit (loss) 114,205 (12,771) 328,318 169,641
Other income (expense):
Interest expense (14,631) (18,968) (44,088) (62,063)
Other, net 822 (3,342) (199) (4,675)
- -------------------------------------------------------------------------------------------------
Other expense, net (13,809) (22,310) (44,287) (66,738)
Earnings (loss) before income taxes 100,396 (35,081) 284,031 102,903
12
<PAGE>
Income taxes 46,684 21,717 132,513 85,904
- -------------------------------------------------------------------------------------------------
Net earnings (loss) 53,712 (56,798) 151,518 16,999
- -------------------------------------------------------------------------------------------------
Less: Preferred stock dividends 17,879 17,999 53,668 36,010
Less: Retroactive recognition of
preferred stock dividends -- -- -- 18,011
Add: Excess of book value over
repurchase price of preferred stock -- 816 39 816
- -------------------------------------------------------------------------------------------------
Net earnings (loss) ascribed to common
shareholders 35,833 (73,981) 97,889 (36,206)
Earnings (loss) per common share (2)
Basic 0.43 (0.88) 1.17 (0.43)
Diluted 0.43 (0.88) 1.17 (0.43)
- -------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding:
Basic 83,648 83,637 83,552 83,504
Diluted 83,784 83,637 83,688 83,504
- -------------------------------------------------------------------------------------------------
(1) The third quarter of 1998 represents the actual operating results
resulting from the Merger of old Sealed Air and Cryovac and the nine
months ended September 30, 1998 excludes a second quarter non-cash
inventory charge of approximately $8 million resulting from the turnover
of certain of the Company's inventories previously stepped-up to fair
value in connection with the Merger.
(2) For purposes of calculating basic and diluted earnings per common share in
the first nine months of 1998, net earnings have been reduced by the
dividends that would have been payable on the Company's Series A
convertible preferred stock for the first quarter of 1998 if such shares
had been outstanding during such period to arrive at net earnings ascribed
to common shareholders. The weighted average number of outstanding common
shares used to calculate basic earnings per common share is calculated on
an equivalent share basis using the weighted average number of shares
outstanding of the Company's common stock for the first quarter of 1998,
adjusted to reflect the terms of the Recapitalization. The assumed
conversion of the convertible preferred stock is not considered in the
calculation of diluted earnings per common share for all periods presented
as the effect is antidilutive (i.e. would increase the earnings per common
share for each period presented).
</TABLE>
(9) Restructuring and Other Charges
The Company's restructuring reserve, which arose primarily out of a
restructuring undertaken by the Company during the third quarter of 1998,
amounted to $7,700 at September 30, 1999 and $26,924 at December 31, 1998. The
components of the restructuring charges, spending and other activity through
September 30, 1999 and the remaining reserve balance at September 30, 1999 were
as follows:
<TABLE>
Employee Contract
Termination Plant/Office Termination
Costs Closures Costs Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restructuring reserve at December 31, 1998 25,362 1,562 -- 26,924
Cash payments during 1999 (18,827) (397) -- (19,224)
- ----------------------------------------------------------------------------------------------
Restructuring reserve at September 30, 1999 6,535 1,165 -- 7,700
- ----------------------------------------------------------------------------------------------
</TABLE>
The Company expects to incur approximately $43,289 of cash outlays to carry out
this restructuring program, of which approximately $35,589 was incurred through
September 30, 1999. These cash outlays include primarily severance and other
personnel related costs, costs of terminating leases and facilities and
equipment disposition costs. In connection with the restructuring, the Company
is eliminating 750 positions, or approximately 5% of its workforce as of
September 30, 1998, across all functional areas. Through September 30, 1999,
approximately 708 positions had been eliminated, and all restructuring actions,
including remaining asset dispositions, are expected to be completed by the end
of 1999 although certain cash outlays will continue into future years.
13
<PAGE>
(10) Business Segment Information
The Company operates in two reportable business segments: (i) Food and
Specialty Packaging and (ii) Protective Packaging. The Food and Specialty
Packaging segment comprises the Company's Cryovac(R) food and specialty
products. The Protective Packaging segment includes the aggregation of the
Company's packaging products, engineered products and specialty products, all
of which products are for non-food applications.
The Food and Specialty Packaging segment includes flexible materials and
related systems (shrink film products, laminated films and specialty packaging
systems marketed primarily under the Cryovac(R) trademark for a broad range of
perishable foods). This segment also includes rigid packaging and absorbent
pads (absorbent pads used for the packaging of meat, fish and poultry, foam
trays for supermarkets and food processors, and rigid plastic containers for
dairy and other food products).
The Protective Packaging segment includes cushioning and surface protection
products (including air cellular cushioning materials, films for non-food
applications, polyurethane foam packaging systems sold under the Instapak(R)
trademark, polyethylene foam sheets and planks, a comprehensive line of
protective and durable mailers and bags, certain paper-based protective
packaging materials, suspension and retention packaging, and packaging systems)
and other products (principally specialty adhesive products).
<TABLE>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales
Food and Specialty Packaging $ 439,922 $ 430,928 $ 1,297,708 $ 1,226,382
Protective Packaging 274,833 253,374 791,105 558,960
- ----------------------------------------------------------------------------------------------------------------
Total segments $ 714,755 $ 684,302 $ 2,088,813 $ 1,785,342
- ----------------------------------------------------------------------------------------------------------------
Operating profit (loss)
Food and Specialty Packaging $ 69,828 $ 58,279 $ 210,080 $ 159,103
Protective Packaging 61,950 55,721 172,461 106,003
- ----------------------------------------------------------------------------------------------------------------
Total segments 131,778 114,000 382,541 265,106
Restructuring and other
charges, net (1) -- (111,074) -- (111,074)
Corporate operating expenses(2) (17,573) (15,697) (54,223) (30,266)
- ----------------------------------------------------------------------------------------------------------------
Total $ 114,205 $ (12,771) $ 328,318 $ 123,766
- ----------------------------------------------------------------------------------------------------------------
Depreciation and amortization
Food and Specialty Packaging $ 27,845 $ 26,246 $ 83,463 $ 79,971
Protective Packaging 15,738 15,011 45,870 34,903
- ----------------------------------------------------------------------------------------------------------------
Total segments 43,583 41,257 129,333 114,874
Corporate (including goodwill
amortization) 12,342 12,014 38,538 24,403
- ----------------------------------------------------------------------------------------------------------------
Total $ 55,925 $ 53,271 $ 167,871 $ 139,277
- ----------------------------------------------------------------------------------------------------------------
(1) Restructuring and Other Charges, net was $97,064 for Food and Specialty
Packaging (including a net non-cash charge of $65,381) and $14,010 for
Protective Packaging (including a net non-cash charge of $2,404).
(2) Includes goodwill amortization of $12,278 and $11,756 in the third
quarters of 1999 and 1998, respectively and $36,860 and $23,864 in the
first nine months of 1999 and 1998, respectively.
</TABLE>
(11) Acquisitions
During the first nine months of 1999, the Company made several small
acquisitions. These transactions, which were effected in exchange for cash,
were accounted for as purchases and were not material to the Company's
consolidated financial statements.
14
<PAGE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
- ---------------------------------------------------------------------------
On March 31, 1998, the Company (formerly known as W. R. Grace & Co.) and
Sealed Air Corporation ("old Sealed Air") completed a series of transactions as
a result of which:
(a) The specialty chemicals business of the Company was separated from its
packaging business, the packaging business ("Cryovac") was contributed to
one group of wholly owned subsidiaries, and the specialty chemicals
business was contributed to another group of wholly owned subsidiaries
("New Grace"); the Company and Cryovac borrowed approximately $1.26
billion under two revolving credit agreements (the "Credit Agreements")
(which, as amended, are discussed below) and transferred substantially all
of those funds to New Grace; and the Company distributed all of the
outstanding shares of common stock of New Grace to its stockholders. As a
result, New Grace became a separate publicly owned corporation that is
unrelated to the Company. These transactions are referred to below as the
"Reorganization."
(b) The Company recapitalized its outstanding shares of common stock, par
value $0.01 per share ("Grace Common Stock"), into a new common stock and
Series A convertible preferred stock (the "Series A Preferred Stock"),
each with a par value of $0.10 per share (the "Recapitalization").
(c) A subsidiary of the Company merged into old Sealed Air (the "Merger"),
with old Sealed Air being the surviving corporation. As a result of the
Merger, old Sealed Air became a subsidiary of the Company, and the Company
was renamed Sealed Air Corporation.
References to "Grace" in this Management's Discussion and Analysis refer
to the Company before the Reorganization, the Recapitalization and the Merger.
The Merger was accounted for as a purchase of old Sealed Air by the
Company as of March 31, 1998. Accordingly, the financial statements include the
operating results and cash flows as well as the assets and liabilities of
Cryovac for all periods presented. The operating results, cash flows, assets
and liabilities of old Sealed Air are included from March 31, 1998. For periods
prior to the Merger, the financial statements exclude all of the assets,
liabilities (including contingent liabilities), revenues and expenses of Grace
other than the assets, liabilities, revenues and expenses of Cryovac.
In order to facilitate a review of the factors that affected the Company's
operating results for the third quarter and first nine months of 1999, the
Company has included selected unaudited pro forma financial information in Note
8 to the consolidated financial statements included in this Form 10-Q.
References to this information are included below in the discussion of results
of operations to assist in understanding the factors other
15
<PAGE>
than the Merger and its related transactions that affected the Company's
operating results in the periods covered by the Company's Management Discussion
and Analysis.
Results of Operations
- ---------------------
Discussion and Analysis of Reported Operating Results
- -----------------------------------------------------
The reported results for the third quarter of 1999 compared to the third
quarter of 1998 are discussed in the Discussion and Analysis of Pro Forma
Operating Results below since reported third quarter 1998 is on a basis
comparable to pro forma third quarter 1998. The following will be a discussion
of the reported nine month period of 1999 compared to the reported nine month
period of 1998.
For the nine month period, the Company's net sales increased 17% to
$2,088,813,000 in 1999 from $1,785,342,000 in 1998. Gross profit for the first
nine months of 1999 was 36.2% of net sales compared to 34.1% in the nine month
1998 period. Marketing, administrative and development expenses increased 12%
in the first nine months of 1999 compared to the 1998 period. The Company
recorded goodwill amortization, primarily as a result of the Merger, of
$36,860,000 in the first nine months of 1999 compared to $23,864,000 in the
first nine months of 1998.
This increase in net sales as well as most of the increase in cost of
sales, marketing, administrative and development expenses, and the substantial
increase in goodwill amortization, that the Company experienced in the nine
month period were due primarily to the inclusion of the protective packaging
business of old Sealed Air in the entire 1999 period, but not in the first
quarter of 1998, and adjustments arising from the Merger, the Reorganization and
the Recapitalization.
For the first nine months of 1999, gross profit as a percentage of net
sales was 36.2% compared to 34.1% in the 1998 period. During the second quarter
of 1998, the Company incurred a non-cash inventory charge of approximately
$8,000,000 resulting from the turnover of certain of the Company's inventories
previously stepped-up to fair value in connection with the Merger (the
"Inventory Charge"). Excluding the Inventory Charge, gross profit as a
percentage of net sales would have been 34.5% for the first nine months of
1998. These increases resulted primarily from the inclusion of old Sealed Air
in the entire 1999 period as noted above, the higher level of net sales and
cost reductions arising out of certain improvements in the Company's operations
partially offset, beginning in the third quarter of 1999, by certain higher raw
material prices for certain of the Company's products. The first nine months of
1998 also included certain inventory-related provisions made in the third
quarter of 1998 that were not present in the third quarter of 1999.
The higher level of marketing, administrative and development expenses is
due primarily to the inclusion of old Sealed Air in the entire 1999 period as
noted above partially offset by the inclusion in the 1998 period of $18,044,000
of corporate expenses that were allocated to Cryovac by Grace in the first
quarter of 1998 prior to the Merger.
16
<PAGE>
Such allocations ceased upon the Merger. In addition, the change in the first
nine months of 1999 compared to the 1998 period also reflects continuing
improvements in the Company's operations, including lower provisions for
doubtful receivables, partially offset by integration expenses and increases in
information systems costs.
Operating results for the first nine months of 1999, were favorably
affected by the absence of the restructuring and related charges that the
Company incurred in the third quarter of 1998 amounting to $111,074,000,
following the Merger.
Other expense, net, which primarily reflects interest expense on the
Company's indebtedness, decreased modestly for the first nine months of 1999.
The decrease was due to reduced losses related to foreign exchange
transactions. This decrease was offset in part by an increase in interest
expense for the first nine months of 1999 due to the timing of indebtedness
entered into under the Credit Agreements, whereby the debt under the Credit
Agreements was outstanding for the full nine month period of 1999 but only from
April 1 for the 1998 period.
Income taxes in the first nine months of 1998 included a special income
tax charge of $26,000,000 for the assumed repatriation to the U.S. of the
accumulated earnings of the Company's foreign subsidiaries that were not
considered to be permanently invested in their businesses. The effective tax
rate for the first nine months of 1999 was 46.7% compared to 45.2% in the 1998
period, before giving effect to the restructuring and related charges and the
special income tax charge. Such rates were higher than the statutory U.S.
federal income tax rate primarily due to the non-deductibility of the goodwill
amortization resulting from the Merger and to state income taxes.
As a result of the factors discussed above, the Company's net earnings
increased to $151,518,000 for the first nine months of 1999 from $8,514,000 for
the first nine months of 1998.
Basic and diluted earnings per common share for the first nine months of
1999 were $1.17 compared to a loss of ($0.64)in the 1998 period.
Discussion and Analysis of Pro Forma Operating Results
- ------------------------------------------------------
The following discussion relates to the unaudited selected pro forma
financial information that appears in Note 8 to the consolidated financial
statements included in this Form 10-Q.
Reported net sales for the third quarter of 1999 increased 4% to
$714,755,000 compared with $684,302,000 for the third quarter of 1998. For the
nine month period, the Company's reported net sales increased 5% to
$2,088,813,000 compared with pro forma net sales of $1,998,094,000 in the 1998
period. The increases in net sales in both periods were primarily due to higher
unit volume, partially offset by the negative effect of foreign currency
translation.
The Company's net sales continued to be affected in the third quarter
and first nine months of 1999 by the continued weakness of foreign currencies
compared with the U.S. dollar in Latin America and Europe. Excluding the
negative effect of foreign currency
17
<PAGE>
translation, net sales would have increased 6% for both the third quarter and,
on a pro forma basis, the first nine months of 1999 compared to the respective
1998 periods.
Net sales from domestic operations increased approximately 5% compared
with the third quarter of 1998 and, on a pro forma basis, the first nine months
of 1998, primarily due to increased unit volume in both periods.
Net sales from foreign operations represented approximately 45% of the
Company's total net sales in the third quarter of 1999 and 1998 and 46% in the
first nine months of 1999 and 1998, on a pro forma basis. The increase in net
sales from foreign operations was approximately 3% compared with the third
quarter of 1998 and, on a pro forma basis, 4% compared with the first nine
months of 1998, primarily due to increased unit volume and, to a lesser extent,
small acquisitions in both 1999 periods, which more than offset the negative
effect of foreign currency translation.
Net sales of the Company's food and specialty packaging products segment,
which consists primarily of the Company's Cryovac(R) food packaging products
and Dri-Loc(R) absorbent pads, increased approximately 2% for the third quarter
and, on a pro forma basis, 4% compared to the first nine months of 1998. These
increases were due primarily to higher unit volume partially offset by the
negative effect of foreign currency translation. Excluding the negative effect
of foreign currency translation, net sales of this segment would have increased
by 4% for the third quarter and, on a pro forma basis, 6% for the first nine
months of 1999 compared to the respective 1998 periods.
Net sales of the Company's protective packaging segment, which consists
primarily of Cryovac(R) performance shrink films, Instapak(R) chemicals and
equipment, air cellular and polyethylene foam surface protection and cushioning
materials and protective and durable mailers and bags, increased 8% for the
third quarter and, on a pro forma basis, 6% for the first nine months of 1999
compared to the respective 1998 periods. These increases in both periods were
due primarily to higher unit volume and, to a lesser extent, small
acquisitions. Foreign currency translation had a minimal negative effect on the
increase in net sales of this segment in both the third quarter and first nine
months of 1999 compared to the respective 1998 periods.
Gross profit as a percentage of net sales was 36.0% for the third quarter
and 36.2% for the first nine months of 1999 compared to 35.2% for the third
quarter of 1998 and 34.8% on a pro forma basis for the first nine months of
1998 (which excludes the effect of the Inventory Charge in the first nine
months of 1998). These increases resulted primarily from the higher level of
net sales and cost reductions arising out of certain improvements in the
Company's operations partially offset, beginning in the third quarter of 1999,
by certain higher raw material prices for certain of the Company's products.
The 1999 periods also reflected the absence of certain inventory related
provisions that were made in the third quarter of 1998.
Marketing, administrative and development expenses and goodwill
amortization as a percentage of net sales were 20.0% for the third quarter of
1999 compared to 20.9% for the 1998 period and were 20.5% for the first nine
months of 1999 compared to, on a pro forma
18
<PAGE>
basis, 20.8% for the 1998 period. These decreases as a percentage of net sales
reflect continuing improvements in the Company's operations, including lower
provisions for doubtful receivables, partially offset by integration expenses
and increases in information systems costs.
Operating results for the third quarter and first nine months of 1999 were
favorably affected by the absence of the restructuring and related charges that
the Company incurred in the third quarter of 1998, amounting to $111,074,000,
following the Merger.
On a pro forma basis, other expense, net, which primarily reflects
interest expense on the Company's indebtedness, decreased compared to the third
quarter and, on a pro forma basis, the first nine months of 1998 primarily due
to the lower level of debt outstanding during the 1999 periods. The decrease in
other expense, net in the third quarter and first nine months of 1999, was also
due to reduced losses related to foreign exchange transactions.
The Company's effective income tax rates were 46.5% and 46.7% in the third
quarter and first nine months of 1999, respectively, and 47.0% and 47.6% on a
pro forma basis, in the third quarter and for the first nine months of 1998,
respectively, excluding in both 1998 periods the restructuring and related
charges and the special income tax charge of $26,000,000 for the assumed
repatriation to the U.S. of the accumulated earnings of the Company's foreign
subsidiaries that were not considered to be permanently invested in their
businesses. These rates are higher than the applicable statutory rates
primarily due to the non-deductibility for tax purposes of the goodwill
amortization resulting from the Merger and to state income taxes. The Company
expects that its effective tax rate will remain higher than statutory rates for
1999.
As a result of the above, the Company recorded net earnings of $53,712,000
for the third quarter of 1999 and $151,518,000 for the first nine months of 1999
compared to a pro forma net loss of $56,798,000 and net earnings of $16,999,000
for the respective 1998 periods. Excluding the restructuring and related charges
and the special income tax charge, net earnings on a pro forma basis were
$41,036,000 and $115,548,000 for the third quarter and first nine months of
1998, respectively.
Basic and diluted earnings (loss) per common share were $0.43 for the
third quarter of 1999 and, on a pro forma basis, ($0.88) for the third quarter
of 1998. Basic and diluted earnings (loss) per common share were $1.17 for the
first nine months of 1999 and, on a pro forma basis, ($0.43) for the first nine
months of 1998. The effect of the conversion of the Company's outstanding
convertible preferred stock is not considered in the calculation of diluted
earnings per common share because it would be anti-dilutive (i.e., would
increase (decrease) earnings per common share for the quarter ended September
30, 1999 and pro forma earnings (loss) per common share for the quarter ended
September 30, 1998 to $0.47 and ($0.49), respectively, and for the nine months
ended September 30, 1999 and pro forma earnings per common share for the nine
months ended September 30, 1998 to $1.31 and $0.15, respectively).
19
<PAGE>
Basic and diluted earnings per common share were $0.29 for the third
quarter of 1998, excluding the restructuring and related charges and a special
income tax charge. For the 1998 periods, the effect of the conversion of the
Company's outstanding convertible preferred stock is not considered in the
calculation of diluted earnings per common share because it would be
anti-dilutive (i.e., would increase earnings per common share for the quarter
ended September 30, 1998, on a pro forma basis, to $0.36 and pro forma earnings
per common share for the nine months ended September 30, 1998 to $1.00,
excluding the restructuring and related charges and a special income tax
charge).
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of liquidity are cash flows from
operations and amounts available under the Company's existing lines of credit,
including principally the Credit Agreements mentioned above. In connection with
the Reorganization, most of the Company's net cash at March 31, 1998 (other
than $51,259,000 of cash recorded on the balance sheet of old Sealed Air
immediately before the Merger) was transferred to New Grace.
Net cash provided by operating activities amounted to $310,719,000 and
$276,466,000 in the first nine months of 1999 and 1998, respectively. The
increase in operating cash flows for the first nine months of 1999 was
primarily due to the inclusion of the operations of old Sealed Air for the full
nine month period and increased net earnings. This increase was partially
offset by the absence in the 1999 period of the non-cash portion of the
restructuring and related charges, the timing of cash payments related to the
restructuring and related charges, and changes in operating assets and
liabilities in the ordinary course of business.
Net cash used in investing activities amounted to $59,204,000 in the first
nine months of 1999 compared to $4,451,000 in the 1998 period. The change in
the first nine months of 1999 compared to the 1998 period was primarily due to
the cash acquired from old Sealed Air in the Merger in 1998 and the use of
$10,430,000 of cash to make various small acquisitions in 1999. Capital
expenditures were $51,145,000 in the 1999 period and $55,866,000 in the 1998
period.
Net cash used in financing activities amounted to $220,910,000 in the
first nine months of 1999 and $232,470,000 in the first nine months of 1998.
After giving effect to the net proceeds of the issuance of the Senior Notes and
the Euro Notes discussed below and additional short-term borrowings, the net
cash used in financing activities in the first nine months of 1999 was used
primarily to repay outstanding debt, principally under the Credit Agreements,
to pay dividends on the Company's Series A Preferred Stock, and to purchase
treasury stock. In the 1998 period, net cash used in financing activities
primarily reflected the proceeds from borrowings under the Credit Agreements,
offset by the contribution of funds to New Grace in connection with the
Reorganization and the repayment of debt, principally relating to the Credit
Agreements, the payment of dividends on the Company's Series A Preferred Stock
and the purchase of treasury stock.
20
<PAGE>
At September 30, 1999, the Company had working capital of $195,015,000 or
5% of total assets, compared to working capital of $309,624,000, or 8% of total
assets, at December 31, 1998. The decrease in working capital was primarily due
to an increase in short-term borrowings, primarily under the Credit Agreements,
partially offset by an increase in current assets.
The Company's ratio of current assets to current liabilities (current
ratio) was 1.3 at September 30, 1999 and 1.6 at December 31, 1998. The
Company's ratio of current assets less inventory to current liabilities (quick
ratio) was 0.9 at September 30, 1999 and 1.1 at December 31, 1998. The decrease
in these ratios in 1999 was primarily due to the changes in working capital
discussed above.
On July 19, 1999, the Company issued euro 200 million (approximately $205
million, at the then current exchange rate) aggregate principal amount of
7-year 5.625% notes in the European market ("Euro Notes") under Regulation S of
the Securities Act of 1933, as amended (the "Securities Act"). Accrued interest
on the Euro Notes is payable annually in cash on July 19 of each year,
commencing on July 19, 2000. The net proceeds of euro 198,624,000
(approximately $203 million) were used to reduce outstanding borrowings under
the Credit Agreements described below. At September 30, 1999, the outstanding
borrowings under the Euro Notes were $208,467,000 net of unamortized bond
discount of $1,410,000.
On May 18, 1999, the Company issued $300 million aggregate principal
amount of 10-year 6.95% senior notes ("Senior Notes") under Rule 144A and
Regulation S of the Securities Act. Accrued interest on the Senior Notes is
payable semi-annually in cash on May 15 and November 15 of each year,
commencing on November 15, 1999. The net proceeds of $297,834,000 from the
issuance of the Senior Notes were used to reduce outstanding borrowings under
the Credit Agreements. At September 30, 1999, the outstanding borrowings under
the Senior Notes were $297,891,000 net of unamortized bond discount of
$2,109,000.
At September 30, 1999, the Company's outstanding debt consisted primarily
of borrowings made under the Credit Agreements, the Senior Notes, the Euro
Notes and certain other loans incurred by the Company's subsidiaries. The
Company's outstanding debt as of December 31, 1998 primarily included
borrowings under the Credit Agreements and certain other loans incurred by the
Company's subsidiaries.
The Company's two principal Credit Agreements are a 5-year revolving
credit facility that expires on March 30, 2003 and a 364-day revolving credit
facility that expires on March 27, 2000. During 1999, the Company has
voluntarily reduced the amounts available under the Credit Agreements from $1
billion to $650 million under the 5-year revolving credit facility and from
$600 million to $475 million under the 364-day revolving credit facility.
Borrowings outstanding under the 5-year revolving credit facility are recorded
as long-term debt, and borrowings outstanding under the 364-day revolving
credit facility are recorded as short-term borrowings. The Credit Agreements
provide that the Company and certain of its subsidiaries may borrow for various
purposes, including the refinancing of existing debt, the provision of working
capital and other general corporate needs, including acquisitions and other
capital expenditures. Amounts repaid under the Credit
21
<PAGE>
Agreements may be reborrowed from time to time, up to the maximum $1.125
billion commitment amount under the Credit Agreements.
The Company's obligations under the Credit Agreements bear interest at
floating rates. The weighted average interest rate under the Credit Agreements
was approximately 5.6% at September 30, 1999 and 5.8% at December 31, 1998. The
Company had certain interest rate swap agreements outstanding at December 31,
1998 that had the effect of fixing the interest rates on a portion of such
debt. The weighted average interest rate at December 31, 1998 did not change
significantly as a result of these derivative financial instruments.
The Credit Agreements provide for changes in borrowing margins based on
financial criteria and the Company's senior unsecured debt ratings, and impose
certain limitations on the operations of the Company and certain of its
subsidiaries. The limitations include financial covenants relating to interest
coverage and debt leverage as well as certain restrictions on the incurrence of
additional indebtedness, the creation of liens, mergers and acquisitions, and
certain dispositions of property and assets. The Company was in compliance with
these requirements as of September 30, 1999.
The Senior Notes and Euro Notes also impose certain limitations on the
operations of the Company and certain of its subsidiaries. The limitations
include restrictions on the creation of liens, merger or consolidation of the
Company and disposition of substantially all of the Company's assets. In
addition, the Senior Notes include restrictions on sale-leaseback transactions.
The Company was in compliance with these requirements as of September 30, 1999.
At September 30, 1999, the Company had available lines of credit,
including those available under the Credit Agreements, of approximately $1.4
billion of which approximately $1.0 billion were unused.
The Company's shareholders' equity was $497,819,000 at September 30, 1999
compared to $437,045,000 at December 31, 1998. Shareholders' equity increased in
1999 due to the Company's net earnings of $151,518,000, which were partially
offset by the payment of the preferred stock dividends of $53,700,000 and by an
additional foreign currency translation adjustment of $50,682,000.
Other Matters
- -------------
Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------
For a discussion of market risks at December 31, 1998, refer to Item 7A of
the Company's Form 10-K for the year ended December 31, 1998.
22
<PAGE>
Interest Rates
The Company uses interest rate swaps to reduce exposure to fluctuations in
interest rates by fixing the rate of interest the Company pays on a portion of
the Company's debt. Interest rate collars are used to reduce the Company's
exposure to fluctuations in the rate of interest by limiting interest rates to
a given range. At September 30, 1999, the Company had an interest rate collar
agreement, maturing in June 2001, with a notional amount of approximately
$8,000,000 compared with a notional amount of $265,000,000 at December 31,
1998, which included interest rate swap and collar agreements. On May 18, 1999,
the Company issued $300 million aggregate principal amount of 10-year 6.95%
senior notes. The net proceeds of $297,834,000 were used to reduce outstanding
borrowings under the Credit Agreements. On July 19, 1999, the Company issued
euro 200 million (approximately $205 million, at the then current exchange
rate) aggregate principal amount of 7-year 5.625% notes in the European market.
The net proceeds of euro 198,624,000 (approximately $203 million) were used to
reduce outstanding borrowings under the Credit Agreements.
Foreign Exchange Contracts
The Company uses interest rate and currency swaps to limit foreign
exchange exposure and limit or adjust interest rate exposure by swapping
certain borrowings in U.S. dollars for borrowings denominated in foreign
currencies. At September 30, 1999 the Company had interest rate and currency
swap agreements, maturing through March 2002, with an aggregate notional amount
of approximately $5,000,000.
The Company uses foreign currency forwards to fix the amount payable on
certain transactions denominated in foreign currencies. At September 30, 1999
the Company had foreign currency forward contracts, maturing at various dates
through October 1999, with an aggregate notional amount of approximately
$6,000,000.
Environmental Matters
- ---------------------
The Company is subject to loss contingencies resulting from environmental
laws and regulations, and it accrues for anticipated costs associated with
investigatory and remediation efforts when an assessment has indicated that a
loss is probable and can be reasonably estimated. These accruals do not take
into account any discounting for the time value of money and are not reduced by
potential insurance recoveries, if any. Environmental liabilities are
reassessed whenever circumstances become better defined and/or remediation
efforts and their costs can be better estimated. These liabilities are
evaluated periodically based on available information, including the progress
of remedial investigations at each site, the current status of discussions with
regulatory authorities regarding the methods and extent of remediation and the
apportionment of costs among potentially responsible parties. As some of these
issues are decided (the outcomes of which are subject to uncertainties) and/or
new sites are assessed and costs can be
23
<PAGE>
reasonably estimated, the Company adjusts the recorded accruals, as necessary.
However, the Company believes that it has adequately reserved for all probable
and estimable environmental exposures.
Year 2000 Computer System Compliance
- ------------------------------------
The Company has substantially completed addressing its Year 2000 issues.
Year 2000 issues arise from computer programs that utilize only the last two
digits of a year to define a particular year rather than the complete
four-digit year. As a result, certain computer programs may not properly
process certain dates, particularly those that fall into the year 2000 or
subsequent years. Year 2000 issues affect both computer-based information
systems and systems with embedded microcontrollers or microcomputers.
In addressing these issues, the Company has considered the following four
areas: (a) computer-based information technology systems, (b) other systems not
directly involving information technology, including embedded systems, (c)
packaging and dispensing equipment used by the Company's customers, and (d)
Year 2000 readiness of the Company's key suppliers and customers. The Company's
action plan for dealing with these issues consists of the following four
phases: (1) identifying the potentially affected items, (2) assessing the
effect of Year 2000 issues on these items, (3) remediating the deficiencies of
these items with updates, repairs or replacements, and (4) testing these items.
State of Readiness
The Company has examined the hardware and software of its computer-based
information technology systems, including mainline systems, personal computers
and telephone systems. The Company has also examined other devices
incorporating electronic microchips that might fail as a result of the Year
2000 issue. These include security and control systems in Company facilities
and programmable logic controllers and microcomputers embedded into production
and other equipment in the Company's plants and warehouses. The Company has
finished the identification and assessment phases of its Year 2000 action plan
in these two areas. The Company has also substantially completed the
remediation and testing phases of the plan for these areas. The Company
continues to test new equipment and software before placing it into service.
The Company has examined certain packaging and dispensing equipment that
it has sold or leased to customers in order to identify Year 2000 issues. This
equipment often incorporates microprocessors as controllers. The Company
believes that no further remediation is necessary for these devices.
The Company has completed a Year 2000 issue survey of key suppliers.
Remedial action is being requested as required. The Company has also contacted
certain customers to assess their overall Year 2000 readiness.
24
<PAGE>
Costs
The Company estimates that the total costs to address the Company's Year
2000 issues will be approximately $6 million. No significant information
technology projects have been deferred by the Company due to Year 2000 issues.
Risks
While the Company believes that it is taking all steps reasonably
necessary to assure its ability to conduct business and to safeguard its assets
during the period affected by Year 2000 issues, risks cannot in every case be
eliminated. Transportation companies, utilities and other key suppliers may
disrupt one or more of the Company's operations if they are unable to conduct
business during this period. Significant disruptions caused by Year 2000 issues
in the industries which the Company serves could impact its operations. Year
2000 issues in other industries could have a ripple effect on the Company's
business.
If the Company is unable to complete its remediation efforts
satisfactorily, substantial business interruptions may occur in its operations.
These could include disruptions to manufacturing operations, logistics,
invoicing, collections and vendor payments. The Company's efforts described
herein are expected to reduce the Company's uncertainty about Year 2000 issues.
The Company believes that its efforts to date in this regard have contributed
to reducing the risk of significant interruptions of its operations.
Contingency Plans
The Company has certain contingency measures in place, including in some
cases dual utility services, backup power equipment, backup data centers,
manual backup procedures and alternate suppliers. The Company has developed a
Year 2000 contingency plan to implement additional protection measures. The
Company is in the process of implementing this plan on a timely basis.
Euro Conversion
- ---------------
On January 1, 1999, eleven of the fifteen members of the European Union
(the "participating countries") established fixed conversion rates between
their existing currencies (the "legacy currencies") and introduced the euro, a
single common non-cash currency. The euro is now traded on currency exchanges
and is being used in business transactions.
At the beginning of 2002, new euro-denominated bills and coins will be
issued to replace the legacy currencies, and the legacy currencies will be
withdrawn from circulation. By 2002, all companies operating in the
participating countries are required to restate their statutory accounting data
into euros as their base currency.
25
<PAGE>
In 1998, the Company established plans to address the systems and business
issues raised by the euro currency conversion. These issues include, among
others, (1) the need to adapt computer, accounting and other business systems
and equipment to accommodate euro-denominated transactions, (2) the need to
modify banking and cash management systems in order to be able to handle
payments between customers and suppliers in legacy currencies and euros between
1999 and 2002, (3) the requirement to change the base statutory and reporting
currency of each subsidiary in the participating countries into euros during
the transition period, (4) the foreign currency exposure changes resulting from
the alignment of the legacy currencies into the euro, and (5) the
identification of material contracts and sales agreements whose contractual
stated currency will need to be converted into euros.
The Company believes that it will be euro compliant by January 1, 2002. The
Company has implemented plans to accommodate euro-denominated transactions and
to handle euro payments with third party customers and suppliers in the
participating countries. The Company plans to meet the requirement to convert
statutory and reporting currencies to the euro by acquiring and installing new
financial software systems. If there are delays in such installation, the
Company plans to pursue alternate means to convert statutory and reporting
currencies to the euro by 2002. The Company expects that its foreign currency
exposures will be reduced as a result of the alignment of legacy currencies, and
the Company believes that all material contracts and sales agreements requiring
conversion will be converted to euros prior to January 1, 2002.
Although additional costs are expected to result from the implementation
of the Company's plans, the Company also expects to achieve benefits in its
treasury and procurement areas as a result of the elimination of the legacy
currencies. Since the Company has operations in each of its business segments
in the participating countries, each of its business segments will be affected
by the conversion process. However, the Company expects that the total impact
of all strategic and operational issues related to the euro conversion and the
cost of implementing its plans for the euro conversion will not have a material
adverse impact on its consolidated financial condition or results of
operations.
Recently Issued Statements of Financial Accounting Standards
- ------------------------------------------------------------
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective date
of FASB Statement No. 133." This Statement defers the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement, which the Company expects to adopt beginning January 1, 2001,
establishes accounting and operating standards for hedging activities and
derivative instruments, including certain derivative instruments embedded in
other contracts. The Company is reviewing the potential impact, if any, of SFAS
No. 133 on its Consolidated Financial Statements.
26
<PAGE>
Forward-Looking Statements
- --------------------------
Certain statements made by the Company in this Form 10-Q and in future
oral and written statements by management of the Company may be
forward-looking. These statements include comments as to the Company's beliefs
and expectations as to future events and trends affecting the Company's
business, its results of operations and its financial condition. These
forward-looking statements are based upon management's current expectations
concerning future events and discuss, among other things, anticipated future
performance and future business plans. Forward-looking statements are
identified by such words and phrases as "expects," "intends," "believes," "will
continue," "plans to," "could be" and similar expressions. Forward-looking
statements are necessarily subject to uncertainties, many of which are outside
the control of the Company, that could cause actual results to differ
materially from such statements.
While the Company is not aware that any of the factors listed below will
adversely affect the future performance of the Company, the Company recognizes
that it is subject to a number of uncertainties, such as business and market
conditions in Asia, Latin America and other geographic areas around the world,
changes in the value of foreign currencies against the U.S. dollar, the ability
of the Company to complete integration and restructuring activities relating to
the merger of old Sealed Air and Cryovac and the success of those efforts as
well as certain information systems projects, general economic, business and
market conditions, conditions in the industries and markets that use the
Company's packaging materials and systems, the development and success of new
products, the Company's success in entering new markets, competitive factors,
raw material availability and pricing, changes in the Company's relationship
with customers and suppliers, future litigation and claims (including
environmental matters) involving the Company, changes in domestic or foreign
laws or regulations, or difficulties related to the Year 2000 issue or the euro
conversion.
27
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(b) On July 19, 1999, the Company issued euro 200 million (approximately
$205 million, at the then current exchange rate) aggregate principal amount of
7-year 5.625% notes ("Euro Notes") under Regulation S of the Securities Act of
1933, as amended (the "Securities Act"). Accrued interest on the Euro Notes is
payable annually in cash on July 19 of each year, commencing on July 19, 2000.
The net proceeds of euro 198,624,000 (approximately $203 million) from the
issuance of the Euro Notes were used to reduce outstanding borrowings under the
credit agreements described under Liquidity and Capital Resources in the
Management's Discussion and Analysis of Results of Operations and Financial
Condition in Part I of this Form 10-Q. The Euro Notes impose certain
limitations on the operations of the Company and certain of its subsidiaries.
The limitations include restrictions on the creation of liens, merger or
consolidation of the Company and disposition of substantially all of the
Company's assets. The Company was in compliance with these requirements as of
September 30, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following Report on Form 8-K during the third quarter of
1999:
Date of Report Disclosures
July 19, 1999 Offering of euro 200 million (approximately $205
million, at the then current exchange rate) aggregate
principal amount of 7-year 5.625% notes due 2006
pursuant to Regulation S under the Securities Act.
28
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEALED AIR CORPORATION
Date: November 12, 1999 By s/Jeffrey S. Warren
---------------------
Jeffrey S. Warren
Controller
(Authorized Executive Officer
and Chief Accounting Officer)
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the consolidated
statement of earnings for the nine months ended September 30, 1999 and the
consolidated balance sheet at September 30, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 74,403,000
<SECURITIES> 0
<RECEIVABLES> 465,351,000
<ALLOWANCES> 20,639,000
<INVENTORY> 263,415,000
<CURRENT-ASSETS> 873,480,000
<PP&E> 1,934,482,000
<DEPRECIATION> 903,782,000
<TOTAL-ASSETS> 3,956,246,000
<CURRENT-LIABILITIES> 678,465,000
<BONDS> 701,214,000
1,787,938,000
0
<COMMON> 8,405,000
<OTHER-SE> 489,414,000
<TOTAL-LIABILITY-AND-EQUITY> 3,956,246,000
<SALES> 2,088,813,000
<TOTAL-REVENUES> 2,088,813,000
<CGS> 1,332,331,000
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<OTHER-EXPENSES> 428,164,000
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<INTEREST-EXPENSE> 44,088,000
<INCOME-PRETAX> 284,031,000
<INCOME-TAX> 132,513,000
<INCOME-CONTINUING> 151,518,000
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<NET-INCOME> 151,518,000
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.17
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