================================================================================
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 June 30, 2000
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 83,760,124 shares of the registrant's common stock, par value $0.10
per share, and 32,213,335 shares of the registrant's Series A convertible
preferred stock, par value $0.10 per share, outstanding as of July 31, 2000.
================================================================================
<PAGE>
<TABLE>
PART I
FINANCIAL INFORMATION
---------------------
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Three and Six Months Ended June 30, 2000 and 1999
(In thousands of dollars except per share data)
(Unaudited)
For the For the
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $731,542 $695,121 $1,448,130 $1,374,058
Cost of sales 477,569 441,541 936,168 874,780
--------- --------- ---------- ---------
Gross profit 253,973 253,580 511,962 499,278
Marketing, administrative
and development expenses 129,226 131,969 258,984 260,583
Goodwill amortization 12,381 12,331 24,691 24,582
--------- --------- ---------- --------
Operating profit 112,366 109,280 228,287 214,113
Other income (expense):
Interest expense (13,923) (14,738) (27,011) (29,457)
Other, net 329 1,143 (1,617) (1,021)
--------- --------- ---------- ---------
Other expense, net (13,594) (13,595) (28,628) (30,478)
--------- --------- ---------- ---------
Earnings before
income taxes 98,772 95,685 199,659 183,635
Income taxes 44,941 44,493 90,845 85,829
--------- --------- ---------- --------
Net earnings $ 53,831 $ 51,192 $ 108,814 $ 97,806
========= ========= ========== ========
Less: Series A
preferred stock dividends 17,002 17,879 34,099 35,789
Add: Excess of book value
over repurchase price of
Series A preferred stock 32 29 2,811 39
--------- --------- ---------- --------
Net earnings ascribed to
common shareholders $ 36,861 $ 33,342 $ 77,526 $ 62,056
========= ========= ========= =======
Earnings per common share
(See Note 3):
Basic $ 0.44 $ 0.40 $ 0.93 $ 0.74
========= ========= ========= =======
Diluted $ 0.44 $ 0.40 $ 0.89 $ 0.74
========= ========= ========= =======
Weighted average number of
common shares outstanding(000):
Basic 83,674 83,626 83,651 83,505
========= ========= ========== ========
Diluted 83,831 83,758 84,134 83,637
========= ========= ========== ========
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
(In thousands of dollars except share data)
June 30, December 31,
2000 1999
(Unaudited)
----------- -----------
ASSETS
------
Current assets:
Cash and cash equivalents $ 18,766 $ 13,672
Notes and accounts receivable, net of allowances
for doubtful accounts of $19,838 in 2000 and
$21,396 in 1999 483,415 470,046
Inventories 272,291 245,934
Other current assets 74,358 73,572
----------- ----------
Total current assets 848,830 803,224
----------- ----------
Property and equipment:
Land and buildings 423,446 426,460
Machinery and equipment 1,350,264 1,364,454
Other property and equipment 109,914 115,111
Construction in progress 69,263 40,106
----------- ----------
1,952,887 1,946,131
Less accumulated depreciation and amortization 957,297 922,722
----------- ----------
Property and equipment, net 995,590 1,023,409
----------- ----------
Goodwill, less accumulated amortization of
$108,144 in 2000 and $84,699 in 1999 1,843,946 1,859,958
Other assets 176,712 168,642
----------- ----------
Total assets $3,865,078 $3,855,233
=========== ==========
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 (Continued)
(In thousands of dollars except share data)
June 30, December 31,
2000 1999
(Unaudited)
----------- -----------
LIABILITIES, CONVERTIBLE PREFERRED STOCK
----------------------------------------
& SHAREHOLDERS' EQUITY
----------------------
<S> <C> <C>
Current Liabilities:
Short-term borrowings $ 143,360 $ 152,653
Current portion of long-term debt 6,083 6,908
Accounts payable 159,305 175,166
Other current liabilities 198,858 216,487
Income taxes payable 43,252 30,880
----------- ----------
Total current liabilities 550,858 582,094
Long-term debt, less current portion 690,275 665,116
Deferred income taxes 209,610 214,906
Other liabilities 79,138 80,425
----------- ----------
Total liabilities 1,529,881 1,542,541
----------- ----------
Authorized 50,000,000 preferred shares.
Series A convertible preferred stock,
$50.00 per share redemption value,
authorized 36,021,851 shares in 2000 and
1999, issued 36,014,699 shares in 2000
and 36,015,645 shares in 1999, including
2,046,364 shares in 2000 and 782,400
shares in 1999 in treasury, mandatory
redemption in 2018 1,698,417 1,761,662
Shareholders' equity:
Common stock, $.10 par value. Authorized
400,000,000 shares, issued 84,196,613 shares in
2000 and 84,135,255 shares in 1999 8,419 8,413
Additional paid-in capital 638,864 632,230
Retained earnings 206,788 132,073
Accumulated translation adjustment (175,102) (171,521)
----------- -----------
678,969 601,195
----------- -----------
Less: Deferred compensation 16,690 24,511
Less: Cost of treasury common stock, 517,396
shares in 2000 and 535,356 shares in 1999 23,497 23,652
Less: Minimum pension liability 2,002 2,002
----------- ----------
Total shareholders' equity 636,780 551,030
----------- ----------
Total liabilities, preferred stock and
shareholders' equity $ 3,865,078 $ 3,855,233
=========== ===========
See accompanying notes to consolidated financial statements.
4
</TABLE>
<PAGE>
<TABLE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999
(In thousands of dollars)
(Unaudited)
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 108,814 $ 97,806
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 109,289 111,946
Amortization of bond discount 161 19
Deferred tax benefit (175) (2,162)
Net loss on disposals of fixed assets 113 105
Changes in operating assets and liabilities,
net of businesses acquired:
Notes and accounts receivable (28,177) (11,253)
Inventories (30,708) (1,031)
Other current assets (1,746) (422)
Other assets (4,348) (1,542)
Accounts payable (10,275) (9,753)
Other current liabilities 10,837 (7,563)
Other liabilities 835 4,317
---------- -----------
Net cash provided by operating activities 154,620 180,467
---------- -----------
Cash flows from investing activities:
Capital expenditures for property and equipment (55,814) (31,843)
Proceeds from sales of property and equipment 662 2,155
Businesses acquired in purchase transactions,
net of cash acquired (28,342) (8,905)
---------- ------------
Net cash used in investing activities (83,494) (38,593)
---------- ------------
Cash flows from financing activities:
Proceeds from long-term debt 182,901 298,175
Payment of long-term debt (141,426) (455,053)
Payment of senior debt issuance costs 0 (1,950)
Dividends paid on preferred stock (34,887) (35,821)
Purchase of treasury common stock (15,239) 0
Purchase of treasury preferred stock (60,387) (2,836)
Proceeds from stock option exercises 524 1,663
Net (payment of) proceeds from short-term borrowings (3,511) 69,352
---------- -----------
Net cash used in financing activities (72,025) (126,470)
---------- ------------
Effect of exchange rate changes on cash and cash
equivalents 5,993 (363)
---------- ------------
Cash and cash equivalents:
Increase during the period 5,094 15,041
Balance, beginning of period 13,672 44,986
---------- -----------
Balance, end of period $ 18,766 $ 60,027
========== ===========
See accompanying notes to consolidated financial statements.
5
</TABLE>
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999 (Continued)
(In thousands of dollars)
(Unaudited)
2000 1999
------- -------
Supplemental Cash Flow Items:
Interest payments, net of amounts capitalized $22,911 $30,135
======= =======
Income tax payments $89,016 $85,275
======= =======
Non-Cash Items:
Issuance of shares of common stock to the
profit-sharing plan $13,877 $ 8,823
======= =======
See accompanying notes to consolidated financial statements.
6
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2000 and 1999
(In thousands of dollars)
(Unaudited)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net Earnings $ 53,831 $ 51,192 $ 108,814 $ 97,806
Other comprehensive loss:
Foreign currency translation
adjustments (6,186) (7,362) (3,581) (48,041)
--------- --------- --------- ---------
Comprehensive income $ 47,645 $ 43,830 $ 105,233 $ 49,765
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
7
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Amounts in thousands, except per share data)
(Unaudited)
(1) Basis of Consolidation
The consolidated financial statements include the accounts of Sealed Air
Corporation and its subsidiaries (the "Company"). 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 three and six months ended June 30, 2000 have been
made. The consolidated statement of earnings for the three and six months ended
June 30, 2000 is not necessarily indicative of the results to be expected for
the full year.
Certain prior period amounts, including segment information, have been
reclassified to conform to the current year's presentation.
(2) Equity
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 consolidated balance sheets.
(3) Earnings Per Common Share
The following table sets forth the reconciliation of the basic and diluted
earnings per common share computations for the three and six months ended June
30, 2000 and 1999.
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS:
Numerator
---------
Net earnings $53,831 $51,192 $108,814 $97,806
Add: Excess of book value over
repurchase price of preferred stock 32 29 2,811 39
Less: Preferred stock dividends 17,002 17,879 34,099 35,789
==============================================================================================
Net earnings ascribed to common
shareholders $36,861 $33,342 $ 77,526 $62,056
==============================================================================================
Denominator
-----------
Weighted average common shares
outstanding - basic 83,674 83,626 83,651 83,505
----------------------------------------------------------------------------------------------
Basic earnings per common share (1) $ 0.44 $ 0.40 $ 0.93 $ 0.74
==============================================================================================
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Diluted EPS:
Numerator
---------
Net earnings ascribed to common
shareholders $36,861 $33,342 $ 77,526 $62,056
Less: Excess of book value over
repurchase price of preferred stock 32 29 2,811 39
Add: Dividends associated with
repurchased preferred stock 46 0 117 12
==============================================================================================
Net earnings ascribed to common
shareholders $36,875 $33,313 $ 74,832 $62,029
==============================================================================================
Denominator
-----------
Weighted average common shares
outstanding - basic 83,674 83,626 83,651 83,505
Effect of assumed exercise of stock
options 123 132 123 132
Effect of conversion of repurchased
preferred stock 34 0 360 0
----------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 83,831 83,758 84,134 83,637
----------------------------------------------------------------------------------------------
Diluted earnings per common share (2) $ 0.44 $ 0.40 $ 0.89 $ 0.74
==============================================================================================
</TABLE>
(1) The basic earnings per common share calculation for the six months ended
June 30, 2000 includes a $0.03 per share gain (excess of book value over
repurchase price of preferred stock) attributable to the repurchase of
preferred stock. Such gain is not included in the calculation of diluted
earnings per common share for the three and six months ended June 30,
2000. The gain attributable to the repurchase of preferred stock was not
significant in the three months ended June 30, 2000 and the 1999 periods.
(2) For the purpose of calculating diluted earnings per common share, net
earnings ascribed to common shareholders have been adjusted to exclude
the gain attributable to the repurchase of preferred stock and to add
back dividends attributable to such repurchased preferred stock in each
period, and the weighted average common shares outstanding have been
adjusted to assume conversion of the shares of preferred stock
repurchased during each period in accordance with the Financial
Accounting Standards Board's Emerging Issues Task Force Topic D-53
guidance.
(4) Inventories
At June 30, 2000 and December 31, 1999, the components of inventories by major
classification were as follows:
June 30, December 31,
2000 1999
----------- ----------
Raw materials $ 64,433 $ 60,596
Work in process 51,378 43,021
Finished goods 174,748 157,341
----------- ----------
Subtotal 290,559 260,958
Reduction of certain
inventories to LIFO basis (18,268) (15,024)
----------- -----------
Total inventories $ 272,291 $ 245,934
=========== ==========
9
<PAGE>
(5) Income Taxes
The Company's effective income tax rates were 45.5% and 46.5% for the second
quarters of 2000 and 1999, respectively, and 45.5% and 46.7% for the first six
months of 2000 and 1999, respectively. Such rates were higher than the statutory
U.S. federal income tax rate primarily due to the non-deductibility for tax
purposes of goodwill amortization and state income taxes.
(6) Long-Term Debt
At June 30, 2000 and December 31, 1999, debt consisted primarily of borrowings
that were made under the Credit Agreements described below, the 10-year 6.95%
senior notes due May 2009 (the "Senior Notes"), the 7-year 5.625% euro notes due
July 2006 (the "Euro Notes") and certain other loans.
The Company's two principal credit agreements (as amended, the "Credit
Agreements") are a 5-year revolving credit facility that expires on March 30,
2003 (included in long-term debt) and a 364-day revolving credit facility that
expires on March 26, 2001 (included in short-term borrowings). The Company can
borrow up to $900,000 in the aggregate under the Credit Agreements. As of June
30, 2000 and December 31, 1999, outstanding borrowings were $200,432 and
$160,978, respectively, under the 5-year revolving credit facility and $12,953
and $38,342, respectively, under the 364-day revolving credit facility. 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 capital expenditures. Amounts repaid under the Credit
Agreements may be reborrowed from time to time. As of June 30, 2000, facility
fees were payable on the total amounts available under the Credit Agreements and
amounted to 0.095% and 0.100% per annum under the 5-year revolving credit
facility and the 364-day revolving credit facility, respectively.
The Company's obligations under the Credit Agreements bear interest at floating
rates. The weighted average interest rate under the Credit Agreements was
approximately 6.5% at June 30, 2000 and 6.0% at December 31, 1999. The Company
had certain interest rate and currency swaps outstanding at June 30, 2000 and
December 31, 1999, related to its obligations under the Credit Agreements. These
agreements had the effect of adjusting the interest rates on a portion of such
debt. The weighted average interest rate at June 30, 2000 and December 31, 1999
did not change significantly as a result of these derivative financial
instruments.
At June 30, 2000, the Company was party to interest rate swaps with an aggregate
notional amount of approximately $147,250 with various expiration dates through
November 2004 compared to forward-starting interest rate swaps with an aggregate
notional amount of approximately $151,000 with various expiration dates through
November 2004 at December 31, 1999. The interest rate swaps outstanding as of
June 30, 2000 and December 31, 1999 had the effect of converting a portion of
the Company's fixed rate debt to variable rate debt at U.S. dollar-denominated
rates which ranged from 7.0% to 7.3% at June 30, 2000 and 6.2% to 6.5% at
December 31, 1999, and euro-denominated rates which ranged from 4.3% to 5.0% at
June 30, 2000 and 3.8% to 4.4% at December 31, 1999.
The Credit Agreements provide for changes in borrowing margins based on
financial criteria and the Company's senior unsecured debt ratings. The Credit
Agreements, Senior Notes and Euro Notes impose certain limitations on the
operations of the Company and certain of its subsidiaries. The Company was in
compliance with these requirements as of June 30, 2000.
10
<PAGE>
(7) 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 $2,601 at June 30, 2000 and $4,996 at December 31, 1999. The
components of the restructuring charges, spending and other activity through
June 30, 2000 and the remaining reserve balance at June 30, 2000 were as
follows:
<TABLE>
Employee Contract
Termination Plant/Office Termination
Costs Closures Costs Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restructuring provision recorded in 1998 $ 39,848 $ 2,291 $ 1,150 $ 43,289
Payments during 1998 (14,486) (729) (1,150) (16,365)
----------------------------------------------------------------------------------------------
Restructuring reserve at December 31, 1998 25,362 1,562 - 26,924
Payments during 1999 (21,392) (536) - (21,928)
----------------------------------------------------------------------------------------------
Restructuring reserve at December 31, 1999 3,970 1,026 - 4,996
Payments during 2000 (2,121) (274) - (2,395)
----------------------------------------------------------------------------------------------
Restructuring reserve at June 30, 2000 $ 1,849 $ 752 $ - $ 2,601
----------------------------------------------------------------------------------------------
</TABLE>
The cash outlays include primarily severance and other personnel-related costs,
costs of terminating leases, and facilities and equipment disposition costs. As
of September 30, 1998, in connection with the restructuring, the Company planned
to eliminate approximately 750 positions or approximately 5% of its workforce,
of which 746 positions had been eliminated as of June 30, 2000. All
restructuring actions were substantially completed as of June 30, 2000. The
remaining reserves of $2,601 are related principally to outstanding employee
severances and lease termination costs that are expected to be completed during
2000 and to a limited extent in later years.
(8) Business Segment Information
The Company operates in two reportable business segments: (i) Food Packaging and
(ii) Protective and Specialty Packaging. The Food Packaging segment comprises
primarily the Company's Cryovac(R) food products. The Protective and Specialty
Packaging segment includes the aggregation of the Company's packaging products,
engineered products and specialty products, all of which products are
principally for non-food applications.
The Food Packaging segment includes flexible materials and related systems
(shrink film products, laminated films and 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 and Specialty 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).
11
<PAGE>
<TABLE>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales
Food Packaging $ 439,298 $ 425,868 $ 868,699 $ 845,561
Protective and Specialty
Packaging 292,244 269,253 579,431 528,497
-------------------------------------------- --------- --------- ----------- -----------
Total segments $ 731,542 $ 695,121 $ 1,448,130 $ 1,374,058
============================================ ========= ========= =========== ===========
Operating profit
Food Packaging $ 71,176 $ 72,146 $ 140,561 $ 139,028
Protective and Specialty
Packaging 58,991 57,275 122,073 111,285
-------------------------------------------- --------- --------- ----------- -----------
Total segments 130,167 129,421 262,634 250,313
Corporate operating expenses(1) (17,801) (20,141) (34,347) (36,200)
-------------------------------------------- --------- --------- ----------- -----------
Total $ 112,366 $ 109,280 $ 228,287 $ 214,113
============================================ ========= ========= =========== ===========
Depreciation and amortization
Food Packaging $ 26,884 $ 26,843 $ 54,501 $ 54,743
Protective and Specialty
Packaging 14,736 15,869 29,677 31,457
-------------------------------------------- --------- --------- ----------- -----------
Total segments 41,620 42,712 84,178 86,200
Corporate (including goodwill
amortization) 12,578 13,447 25,111 25,746
-------------------------------------------- --------- --------- ----------- -----------
Total $ 54,198 $ 56,159 $ 109,289 $ 111,946
============================================ ========= ========= =========== ===========
(1) Includes goodwill amortization of $12,381 and $12,331 for the three months
ended June 30, 2000 and 1999, respectively, and $24,691 and $24,582 for the six
months ended June 30, 2000 and 1999, respectively.
</TABLE>
(9) Acquisitions
During the first six months of 2000, the Company made several small
acquisitions. These transactions, which were effected in exchange for cash in
the aggregate amount of approximately $28,000, were accounted for as purchases
and were not material to the Company's consolidated financial statements.
On June 28, 2000, the Company and Dolphin Packaging PLC ("Dolphin"), a publicly
traded U.K. company, announced a cash takeover offer by the Company's U.K.
subsidiary for all of the outstanding shares of Dolphin at a price of
(pound)3.30 per share, amounting to approximately $118,000 in the aggregate at
the then current exchange rates. On August 2, 2000, the Company acquired more
than 96% of Dolphin's outstanding shares pursuant to this offer. The Company
expects to acquire the balance of the shares prior to the end of the third
quarter of 2000 on the same terms. This transaction is not material to the
Company's consolidated financial statements.
12
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition
-----------------------------------------------------------------
Net sales for the second quarter of 2000 increased 5% to $731,542,000
compared with $695,121,000 for the second quarter of 1999. For the six-month
period, the Company's net sales increased 5% to $1,448,130,000 compared with net
sales of $1,374,058,000 in the 1999 period. The increases in net sales in both
periods were primarily due to higher unit volume and, to a lesser extent, higher
average selling prices for certain of the Company's products and the added net
sales of several small acquired businesses, partially offset by the negative
effect of foreign currency translation.
The Company's net sales were affected in the second quarter and first six
months of 2000 by the continued weakness of foreign currencies in Europe, Latin
America and the Asia Pacific region compared with the U.S. dollar. Excluding the
negative effect of foreign currency translation, net sales would have increased
9% for both the second quarter and the first six months of 2000 compared to the
respective 1999 periods.
Net sales from domestic operations increased approximately 8% for the
second quarter and first six months of 2000 compared with the respective 1999
periods, primarily due to increased unit volume and, to a lesser extent, higher
average selling prices for certain of the Company's products. Net sales from
foreign operations increased approximately 2% for the second quarter and first
six months of 2000 compared with the respective 1999 periods, primarily due to
increased unit volume and, to a lesser extent, the added net sales of several
small acquired businesses, partially offset by the negative effect of foreign
currency translation. As a percentage of total net sales, net sales from foreign
operations represented approximately 44% and 46% in the second quarter of 2000
and 1999, respectively, and 45% and 46% in the first six months of 2000 and
1999, respectively, of the Company's total net sales.
Net sales of the Company's food packaging products segment, which consists
primarily of the Company's Cryovac(R) food packaging products and Dri-Loc(R)
absorbent pads, increased approximately 3% for the second quarter and first six
months of 2000 compared with the respective 1999 periods. These increases were
due primarily to higher unit volume partially offset by the negative effect of
foreign currency translation. For the second quarter, net sales for this segment
also benefited from certain higher average selling prices. Excluding the
negative effect of foreign currency translation, net sales of this segment would
have increased by 7% for the second quarter and 6% for the first six months of
2000 compared with the respective 1999 periods.
Net sales of the Company's protective and specialty packaging segment,
which consists primarily of Instapak(R) chemicals and equipment, Cryovac(R)
industrial and consumer packaging, air cellular and polyethylene foam surface
protection and cushioning materials and protective and durable mailers and bags,
increased 9% for the second quarter and 10% for the first six months of 2000
compared to the respective 1999 periods. These increases were due primarily to
higher unit volume and, to a lesser extent, certain higher average selling
prices and the added net sales of several small acquired businesses. Excluding
the negative
13
<PAGE>
effect of foreign currency translation, net sales of this segment would have
increased 11% for the second quarter and 13% for the first six months of 2000
compared to the respective 1999 periods.
Gross profit as a percentage of net sales was 34.7% for the second quarter
and 35.4% for the first six months of 2000 compared to 36.5% and 36.3% for the
respective 1999 periods. The decrease in gross profit as a percentage of net
sales in both periods was due primarily to higher raw material costs in the 2000
periods.
Marketing, administrative and development expenses and goodwill
amortization declined modestly as a percentage of net sales for the second
quarter and first six months of 2000 compared with the respective 1999 periods.
These expenses declined to 19.4% of net sales for the second quarter of 2000
compared to 20.8% for the 1999 period and were 19.6% of net sales for the first
six months of 2000 compared to 20.8% for the 1999 period. As in the second
quarter and first six months of 1999, the Company continued to incur information
system costs related to implementation of its enterprise resource planning
system.
Other expense, net, which consists primarily of interest expense, was
essentially unchanged for the second quarter and declined modestly for the first
six months of 2000 compared with the respective 1999 periods. The decrease in
interest expense for these periods was primarily due to the lower level of debt
outstanding during the 2000 periods compared with the respective 1999 periods.
Debt outstanding at June 30, 2000 was modestly higher than debt outstanding at
December 31, 1999.
The Company's effective income tax rates were 45.5% and 46.5% in the
second quarters of 2000 and 1999, respectively, and 45.5% and 46.7% for the
first six months of 2000 and 1999, respectively. These rates are higher than the
statutory U.S. federal income tax rate primarily due to the non-deductibility
for tax purposes of goodwill amortization and state income taxes. The Company
expects that its effective tax rate will remain higher than statutory rates for
2000.
As a result of the above, the Company's net earnings were $53,831,000 for
the second quarter of 2000 and $108,814,000 for the first six months of 2000
compared to net earnings of $51,192,000 and $97,806,000 for the respective 1999
periods.
Basic and diluted earnings per common share were $0.44 for the second
quarter of 2000 and $0.40 for the second quarter of 1999. Basic earnings per
common share were $0.93 and diluted earnings per common share were $0.89 for the
first six months of 2000 and basic and diluted earnings per common share were
$0.74 for the first six months of 1999. The basic earnings per common share
calculation for the six months ended June 30, 2000 includes a $0.03 per share
gain attributable to the repurchase of preferred stock. Such gain is not
included in the calculation of diluted earnings per common share. The gain
attributable to the repurchase of preferred stock was not significant in the
second quarter of 2000 and the respective 1999 periods. The diluted earnings per
common share for the second quarter and first six months of 2000 is calculated
assuming the conversion of the shares of preferred stock repurchased during the
period in accordance with the Financial Accounting Standards Board's Emerging
Issues Task Force Topic D-53 guidance. The effect of the conversion of the
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Company's outstanding convertible preferred stock is not considered in the
calculation of diluted earnings per common share in the second quarter and first
six months of 2000 and the respective 1999 periods because it would be
antidilutive.
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 below.
Net cash provided by operating activities amounted to $154,620,000 and
$180,467,000 in the first six months of 2000 and 1999, respectively. The
decrease in operating cash flows for the first six months of 2000 was primarily
due to changes in operating assets and liabilities in the ordinary course of
business, including primarily higher levels of notes and accounts receivable and
inventory that more than offset the increase in net earnings.
Net cash used in investing activities amounted to $83,494,000 in the first
six months of 2000 compared to $38,593,000 in the 1999 period. The increase in
net cash used in the first six months of 2000 was primarily due to a higher
level of capital expenditures and several small acquisitions in the 2000 period.
Capital expenditures were $55,814,000 in the 2000 period and $31,843,000 in the
1999 period.
Net cash used in financing activities amounted to $72,025,000 in the first
six months of 2000 and $126,470,000 in the first six months of 1999. The
decrease in net cash used in the first six months of 2000 was due to a greater
amount of net borrowings during the 2000 period, partially offset by an increase
in the purchase of treasury stock.
At June 30, 2000, the Company had working capital of $297,972,000, or 8%
of total assets, compared to working capital of $221,130,000, or 6% of total
assets, at December 31, 1999. The increase in working capital was primarily due
to an increase in notes and accounts receivable and inventories offset by a
decrease in short-term borrowings, accounts payable and other current
liabilities due to the timing of cash payments which were partially offset by an
increase in income taxes payable.
The Company's ratio of current assets to current liabilities (current
ratio) was 1.5 at June 30, 2000 and 1.4 at December 31, 1999. The Company's
ratio of current assets less inventory to current liabilities (quick ratio) was
1.0 at June 30, 2000 and December 31, 1999.
At June 30, 2000 and December 31, 1999, debt consisted primarily of
borrowings that were made under the Credit Agreements described below, the
10-year 6.95% senior notes due May 2009 (the "Senior Notes"), the 7-year 5.625%
euro notes due July 2006 (the "Euro Notes") and certain other loans.
The Company's two principal credit agreements (as amended, the "Credit
Agreements") are a 5-year revolving credit facility that expires on March 30,
2003 (included in long-term debt) and a 364-day revolving credit facility that
expires on March 26, 2001 (included in short-term borrowings). The Company can
borrow up to $900,000,000 in the aggregate under
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<PAGE>
the Credit Agreements. As of June 30, 2000 and December 31, 1999, outstanding
borrowings were $200,432,000 and $160,978,000, respectively, under the 5-year
revolving credit facility and $12,953,000 and $38,342,000, respectively, under
the 364-day revolving credit facility. 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 capital expenditures.
Amounts repaid under the Credit Agreements may be reborrowed from time to time.
As of June 30, 2000, facility fees were payable on the total amounts available
under the Credit Agreements and amounted to 0.095% and 0.100% per annum under
the 5-year revolving credit facility and the 364-day revolving credit facility,
respectively.
The Company's obligations under the Credit Agreements bear interest at
floating rates. The weighted average interest rate under the Credit Agreements
was approximately 6.5% at June 30, 2000 and 6.0% at December 31, 1999. The
Company had certain interest rate and currency swaps outstanding at June 30,
2000 and December 31, 1999, related to its obligations under the Credit
Agreements. These agreements had the effect of adjusting the interest rates on a
portion of such debt. The weighted average interest rate at June 30, 2000 and
December 31, 1999 did not change significantly as a result of these derivative
financial instruments.
At June 30, 2000, the Company was party to interest rate swaps with an
aggregate notional amount of approximately $147,250,000 with various expiration
dates through November 2004 compared to forward-starting interest rate swaps
with an aggregate notional amount of approximately $151,000,000 with various
expiration dates through November 2004 at December 31, 1999. The interest rate
swaps outstanding as of June 30, 2000 and December 31, 1999 had the effect of
converting a portion of the Company's fixed rate debt to variable rate debt at
U.S. dollar-denominated rates which ranged from 7.0% to 7.3% at June 30, 2000
and 6.2% to 6.5% at December 31, 1999, and euro-denominated rates which ranged
from 4.3% to 5.0% at June 30, 2000 and 3.8% to 4.4% at December 31, 1999.
The Credit Agreements provide for changes in borrowing margins based on
financial criteria and the Company's senior unsecured debt ratings. The Credit
Agreements, Senior Notes and Euro Notes impose certain limitations on the
operations of the Company and certain of its subsidiaries. The Company was in
compliance with these requirements as of June 30, 2000.
At June 30, 2000, the Company had available lines of credit, including
those available under the Credit Agreements, of approximately $1.2 billion of
which approximately $900 million were unused.
The Company's shareholders' equity was $636,780,000 at June 30, 2000
compared to $551,030,000 at December 31, 1999. Shareholders' equity increased in
2000 due to the Company's net earnings of $108,814,000, which were partially
offset by the payment of preferred stock dividends of $34,099,000 and by an
additional foreign currency translation adjustment of $3,581,000.
16
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On June 28, 2000, the Company and Dolphin Packaging PLC ("Dolphin"), a
publicly traded U.K. company, announced a cash takeover offer by the Company's
U.K. subsidiary for all of the outstanding shares of Dolphin at a price of
(pound)3.30 per share, amounting to approximately $118,000,000 in the aggregate
at the then current exchange rates. On August 2, 2000, the Company acquired more
than 96% of Dolphin's outstanding shares pursuant to this offer. The Company
expects to acquire the balance of the shares prior to the end of the third
quarter of 2000 on the same terms. This transaction is not material to the
Company's consolidated financial statements.
Since June 30, 2000, the Company has made certain other small
acquisitions, which were effected in exchange for cash in the aggregate amount
of approximately $9,000,000, were accounted for as purchases and were not
material to the Company's consolidated financial statements.
Other Matters
-------------
Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
For a discussion of market risks at December 31, 1999, refer to
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Quantitative and Qualitative Disclosures about Market Risk" in the
Company's 1999 Annual Report to Stockholders.
The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates, which may adversely affect its results of
operations and financial condition. The Company seeks to minimize these risks
through regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. The Company does not
purchase, hold or sell derivative financial instruments for trading purposes.
Interest Rates
The Company uses interest rate swaps to manage its exposure to
fluctuations in interest rates. The Company also uses interest rate collars to
reduce its exposure to fluctuations in the rate of interest by limiting interest
rates to a given range. At June 30, 2000, the Company had interest rate swaps
that had the effect of converting a portion of the Company's fixed rate debt to
variable rate debt, and an interest rate collar agreement, maturing at various
dates through November 2004, with a combined aggregate notional amount of
approximately $155,000,000 compared with forward-starting interest rate swaps
and an interest rate collar agreement with a combined aggregate notional amount
of approximately $159,000,000 at December 31, 1999.
17
<PAGE>
At June 30, 2000, the carrying value of the Company's total debt was
$839,718,000, of which approximately $489,314,000 was fixed rate debt. At
December 31, 1999, the carrying value of the Company's total debt was
$824,677,000 of which $502,244,000 was fixed rate debt.
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
June 30, 2000 and December 31, 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 June 30, 2000, the
Company had foreign currency forward agreements, maturing through December 2000,
with an aggregate notional amount of approximately $9,000,000. At December 31,
1999, the Company did not have any material foreign currency forward contracts
outstanding.
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 various uncertainties)
and/or new sites are assessed and costs can be 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.
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
18
<PAGE>
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.
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 until
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 believes that its foreign currency
exposures have been reduced as a result of the alignment of legacy currencies.
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, results of operations or
reportable segments.
Recently Issued Statements of Financial Accounting Standards
------------------------------------------------------------
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amendment of
FASB Statement No. 133." In
19
<PAGE>
June 1999, the FASB issued 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." SFAS No. 133, as amended, 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 Nos. 138 and 133 on
its Consolidated Financial Statements.
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 economic, business and
market conditions in the geographic areas in which it conducts business, changes
in the value of foreign currencies against the U.S. dollar, the success of
certain information systems projects, factors affecting the customers,
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 and acquiring and integrating new businesses, the timing of capital
expenditures, competitive factors, raw material availability and pricing,
changes in the Company's relationship with customers and suppliers, litigation
and claims (including environmental matters) involving the Company, changes in
domestic or foreign laws or regulations, or difficulties related to the euro
conversion.
20
<PAGE>
PART II
OTHER INFORMATION
-----------------
Item 4. Submission of Matters to a Vote of Security Holders.
------ ---------------------------------------------------
On May 19, 2000, the Company held its annual meeting of stockholders (the
"Annual Meeting"). At the Annual Meeting the stockholders voted: (i) to elect
the entire Board of Directors of the Company; (ii) to approve the Company's
Performance-Based Compensation Program (as described below); and (iii) to ratify
the selection of KPMG LLP as the Company's independent accountants for the
fiscal year ending December 31, 2000.
A total of 73,949,347 shares of common stock and 27,852,232 shares of
Series A convertible preferred stock ("preferred stock") were present in person
or by proxy at the Annual Meeting, representing approximately 98,598,572 votes,
or approximately 86% of the voting power of the Company entitled to vote at the
Annual Meeting. Each share of common stock was entitled to one vote on each
matter before the meeting, and each share of preferred stock was entitled to
0.885 votes on each matter before the meeting.
The stockholders voted to approve the Company's Performance-Based
Compensation Program. The Performance-Based Compensation Program was adopted in
order to provide the Company's eligible employees with incentive compensation
that meets the requirements of performance-based compensation under Section
162(m) of the Internal Revenue Code, as amended, and thus is fully deductible
for U.S. income tax purposes. The Performance-Based Compensation Program
provides for cash awards in the form of annual cash bonuses and awards of the
Company's common stock under the Company's Contingent Stock Plan.
Performance-based awards under the program require attainment of objective,
pre-established goals based upon financial or strategic criteria.
The votes cast on the matters before the Annual Meeting were as set forth
below:
I. Nominees for Election Number of Votes
to Board of Directors: In Favor Withheld
Hank Brown 98,160,736 437,837
John K. Castle 98,167,948 430,624
Lawrence R. Codey 98,173,990 424,582
T. J. Dermot Dunphy 98,171,365 427,208
Charles F. Farrell, Jr. 98,162,917 435,655
William V. Hickey 98,177,910 420,662
Shirley Ann Jackson 98,156,475 442,097
Virginia A. Kamsky 98,113,966 484,606
Alan H. Miller 98,151,419 447,153
John E. Phipps 78,033,675 20,564,897
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<PAGE>
II. Approval of the Corporation's For 91,392,449
Performance-Based Against 6,695,937
Compensation Program: Abstentions 510,186
III. Ratification of KPMG For 98,242,370
LLP as Independent Against 76,440
Accountants: Abstentions 279,762
Item 6. Exhibits and Reports on Form 8-K.
------ --------------------------------
(a) Exhibits
Exhibit Number Description
10 Sealed Air Corporation Performance-Based Compensation
Program, as approved by the Company's stockholders. [Annex
A to the Company's Proxy Statement for the 2000 Annual
Meeting of Stockholders is incorporated herein by
reference.]
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the
second quarter of 2000.
22
<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: August 11, 2000 By /s/ Jeffrey S. Warren
-----------------------
Jeffrey S. Warren
Controller
(Authorized Executive Officer
and Chief Accounting Officer)
