================================================================================
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, 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 83,659,240 shares of the registrant's common stock, par value $0.10
per share, and 30,297,409 shares of the registrant's Series A convertible
preferred stock, par value $0.10 per share, outstanding as of October 31, 2000.
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Three and Nine Months Ended September 30, 2000 and 1999
(In thousands of dollars except share data)
(Unaudited)
<TABLE>
For the For the
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- ----------------------
2000 1999 2000 1999
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $746,860 $714,755 $2,194,990 $2,088,813
Cost of sales 493,426 457,551 1,429,594 1,332,331
-------- -------- ---------- ----------
Gross profit 253,434 257,204 765,396 756,482
Marketing, administrative
and development expenses 129,790 130,721 388,774 391,304
Goodwill amortization 13,438 12,278 38,129 36,860
-------- -------- ---------- --------
Operating profit 110,206 114,205 338,493 328,318
Other income (expense):
Interest expense (17,082) (14,631) (44,093) (44,088)
Other, net 7,269 822 5,652 (199)
-------- -------- ---------- --------
Other expense, net (9,813) (13,809) (38,441) (44,287)
-------- -------- ---------- --------
Earnings before
income taxes 100,393 100,396 300,052 284,031
Income taxes 45,679 46,684 136,524 132,513
-------- -------- ---------- --------
Net earnings $ 54,714 $ 53,712 $ 163,528 $151,518
======== ======== ========== ========
Less: Series A
preferred stock dividends 15,991 17,879 50,090 53,668
Add: Excess of redemption value
over repurchase price of
Series A preferred stock 8,914 -- 11,725 39
-------- -------- ---------- --------
Net earnings ascribed to
common shareholders $ 47,637 $ 35,833 $ 125,163 $ 97,889
======== ======== ========== ========
Earnings per common share
(See Note 3):
Basic $ 0.57 $ 0.43 $ 1.50 $ 1.17
======== ======== ========== ========
Diluted $ 0.46 $ 0.43 $ 1.36 $ 1.17
======== ======== ========== ========
Weighted average number of common
shares outstanding (000's):
Basic 83,723 83,648 83,675 83,552
======== ======== ========== ========
Diluted 85,116 83,784 86,367 83,688
======== ======== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(In thousands of dollars except share data)
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 6,251 $ 13,672
Notes and accounts receivable, net of
allowances for doubtful accounts of
$20,817 in 2000 and $21,396 in 1999 491,335 470,046
Inventories 298,629 245,934
Other current assets 75,499 73,572
---------- ----------
Total current assets 871,714 803,224
---------- ----------
Property and equipment:
Land and buildings 434,103 426,460
Machinery and equipment 1,357,213 1,364,454
Other property and equipment 111,553 115,111
Construction in progress 80,702 40,106
---------- ----------
1,983,571 1,946,131
Less accumulated depreciation and
amortization 965,293 922,722
---------- ----------
Property and equipment, net 1,018,278 1,023,409
---------- ----------
Goodwill, less accumulated amortization of
$121,427 in 2000 and $84,699 in 1999 1,919,375 1,859,958
Other assets 180,234 168,642
---------- ----------
Total assets $3,989,601 $3,855,233
========== ==========
See accompanying notes to consolidated financial statements.
3
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 (Continued)
(In thousands of dollars except share data)
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
LIABILITIES, CONVERTIBLE PREFERRED STOCK
----------------------------------------
& SHAREHOLDERS' EQUITY
----------------------
Current liabilities:
Short-term borrowings $ 174,488 $ 152,653
Current portion of long-term debt 1,801 6,908
Accounts payable 160,648 175,166
Other current liabilities 213,597 216,487
Income taxes payable 57,847 30,880
----------- -----------
Total current liabilities 608,381 582,094
Long-term debt, less current portion 884,695 665,116
Deferred income taxes 210,540 214,906
Other liabilities 73,053 80,425
----------- -----------
Total liabilities 1,776,669 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, outstanding 30,716,182 shares
in 2000 and 35,233,245 shares in 1999,
mandatory redemption in 2018 1,535,809 1,761,662
Shareholders' equity:
Common stock, $.10 par value. Authorized
400,000,000 shares, issued 84,279,505
shares in 2000 and 84,135,255 shares
in 1999 8,427 8,413
Additional paid-in capital 651,620 632,230
Retained earnings 245,511 132,073
Accumulated translation adjustment (182,008) (171,521)
----------- -----------
723,550 601,195
----------- -----------
Less: Deferred compensation 16,691 24,511
Less: Cost of treasury common stock,
617,646 shares in 2000 and 535,356
shares in 1999 27,734 23,652
Less: Minimum pension liability 2,002 2,002
----------- -----------
Total shareholders' equity 677,123 551,030
----------- -----------
Total liabilities, preferred stock and
shareholders' equity $ 3,989,601 $ 3,855,233
=========== ===========
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, 2000 and 1999
(In thousands of dollars)
(Unaudited)
<TABLE>
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 163,528 $ 151,518
Adjustments to reconcile net earnings to
net cash provided by operating activities, net
of effect of businesses acquired:
Depreciation and amortization 164,574 167,871
Amortization of bond discount 242 92
Deferred tax provision (benefit) 80 (2,217)
Net loss on disposals of fixed assets 100 200
Changes in operating assets and liabilities, net
of businesses acquired:
Notes and accounts receivable (27,730) (24,130)
Inventories (51,191) 5,033
Other current assets (1,851) 1,265
Other assets (7,702) (727)
Accounts payable (12,239) (5,513)
Other current liabilities 36,536 11,125
Other liabilities (3,619) 6,202
---------- ----------
Net cash provided by operating activities 260,728 310,719
---------- ----------
Cash flows from investing activities:
Capital expenditures for property and equipment (81,262) (51,145)
Proceeds from sales of property and equipment 957 2,371
Businesses acquired in purchase transactions, net
of cash acquired (176,502) (10,430)
---------- ----------
Net cash used in investing activities (256,807) (59,204)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 499,390 500,855
Payment of long-term debt (256,223) (808,440)
Payment of senior debt issuance costs 0 (3,123)
Dividends paid on preferred stock (51,890) (53,700)
Purchase of treasury common stock (19,468) (14,189)
Purchase of treasury preferred stock (214,073) (2,836)
Proceeds from stock option exercises 677 1,924
Net proceeds from
short-term borrowings 21,074 158,599
---------- ----------
Net cash used in financing activities (20,513) (220,910)
---------- ----------
Effect of exchange rate changes on cash and cash
equivalents 9,171 (1,188)
---------- ----------
Cash and cash equivalents:
(Decrease) Increase during the period (7,421) 29,417
Balance, beginning of period 13,672 44,986
---------- ----------
Balance, end of period $ 6,251 $ 74,403
========== ==========
</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, 2000 and 1999 (Continued)
(In thousands of dollars)
(Unaudited)
<TABLE>
2000 1999
----------- ----------
<S> <C> <C>
Supplemental Cash Flow Items:
Interest payments, net of amounts capitalized $ 34,560 $ 36,110
=========== ==========
Income tax payments $ 119,618 $ 133,473
=========== ==========
Non-Cash Items:
Issuance of shares of common stock to the
profit-sharing plan $ 13,877 $ 8,823
=========== ==========
</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, 2000 and 1999
(In thousands of dollars)
(Unaudited)
<TABLE>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings $ 54,714 $ 53,712 $ 163,528 $ 151,518
Other comprehensive loss:
Foreign currency translation
adjustments (6,906) (2,641) (10,487) (50,682)
---------- -------- -------- ---------
Comprehensive income $ 47,808 $ 51,071 $153,041 $ 100,836
========== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 all periods presented have been made.
The consolidated statements of earnings for the three and nine months ended
September 30, 2000 are 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) Series A Convertible Preferred Stock
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. During the first nine months of
2000 the Company repurchased approximately 4,516 shares of the Company's series
A convertible preferred stock at a cost of approximately $214,073, which
represents a cost that is $11,725 below its book value. This excess of book
value over the repurchase price of the preferred stock is recorded as an
increase to additional paid-in-capital.
(3) Earnings Per Common Share
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, 2000 and 1999.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS:
Numerator
---------
Net earnings $ 54,714 $ 53,712 $ 163,528 $ 151,518
Add: Excess of book value over repurchase
price of preferred stock 8,914 -- 11,725 39
Less: Preferred stock dividends 15,991 17,879 50,090 53,668
---------------------------------------------------------------------------------------------------------------------------------
Net earnings ascribed to common
shareholders $ 47,637 $ 35,833 $ 125,163 $ 97,889
---------------------------------------------------------------------------------------------------------------------------------
Denominator
-----------
Weighted average common shares
outstanding - basic 83,723 83,648 83,675 83,552
8
<PAGE>
---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share(1) $ 0.57 $ 0.43 $ 1.50 $ 1.17
---------------------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Numerator
---------
Earnings ascribed to common shareholders $ 47,637 $ 35,833 $ 125,163 $ 97,889
Less: Excess of book value over repurchase
price of preferred stock 8,914 -- 11,725 --
Add: Dividends associated with repurchased
preferred stock 633 -- 4,002 --
---------------------------------------------------------------------------------------------------------------------------------
Earnings ascribed to common
shareholders - diluted $ 39,356 $ 35,833 $ 117,440 $ 97,889
---------------------------------------------------------------------------------------------------------------------------------
Denominator
-----------
Weighted average common shares
outstanding - basic 83,723 83,648 83,675 83,552
Effect of assumed exercise of stock options 112 136 112 136
Effect of conversion of repurchased
preferred stock 1,281 -- 2,580 --
---------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 85,116 83,784 86,367 83,688
---------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share(2) $ 0.46 $ 0.43 $ 1.36 $ 1.17
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The basic earnings per common share calculation for the three and nine
months ended September 30, 2000 includes a $0.11 and $0.14 per share gain
(excess of book value over repurchase price of preferred stock),
respectively, 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 nine months ended September 30, 2000. The gain
attributable to the repurchase of preferred stock was not significant in
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 the 2000
periods, and the weighted average common shares outstanding have been
adjusted to assume conversion of the shares of preferred stock repurchased
during the 2000 periods in accordance with the Financial Accounting
Standards Board's Emerging Issues Task Force Topic D-53 guidance. The
assumed conversion of the outstanding preferred stock is not considered in
the calculation of diluted earnings per common share for all periods as
the effect is antidilutive.
(4) Inventories
At September 30, 2000 and December 31, 1999, the components of inventories by
major classification were as follows:
September 30, December 31,
2000 1999
------------- ------------
Raw materials $ 71,690 $ 60,596
Work in process 59,907 43,021
Finished goods 185,300 157,341
----------- ----------
Subtotal 316,897 260,958
Reduction of certain
inventories to LIFO basis (18,268) (15,024)
----------- ----------
Total inventories $ 298,629 $ 245,934
=========== ==========
9
<PAGE>
(5) Income Taxes
The Company's effective income tax rates were 45.5% and 46.5% for the third
quarters of 2000 and 1999, respectively, and 45.5% and 46.7% for the first nine
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 September 30, 2000 and December 31, 1999, the Company's outstanding 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").
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
September 30, 2000 and December 31, 1999, outstanding borrowings were $404,436
and $160,978, respectively, under the 5-year revolving credit facility and
$26,258 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 September 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 6.7% at September 30, 2000 and 6.0% at December 31, 1999. The
Company had certain interest rate and currency swaps outstanding at September
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 September 30, 2000
and December 31, 1999 did not change significantly as a result of these
derivative financial instruments.
At September 30, 2000, the Company was party to interest rate swaps with an
aggregate notional amount of approximately $144,000 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 September 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 September 30,
2000 and 6.2% to 6.5% at December 31, 1999, and euro-denominated rates which
ranged from 5.0% to 5.6% at September 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 September 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 $2,241 at September 30, 2000 and $4,996 at December 31, 1999. The
components of the restructuring charges, spending and other activity through
September 30, 2000 and the remaining reserve balance at September 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 (2,393) (362) - (2,755)
-------------------------------------------------------------------------------------------------------
Restructuring reserve at September 30, 2000 $ 1,577 $ 664 $ - $ 2,241
-------------------------------------------------------------------------------------------------------
</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 September 30, 2000. All
restructuring actions were substantially completed as of September 30, 2000. The
remaining reserves of $2,241 are related principally to outstanding employee
severance obligations 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 Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2000 1999(1) 2000 1999(1)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales
Food Packaging $ 452,215 $ 434,486 $ 1,320,914 $ 1,280,047
Protective and Specialty Packaging 294,645 280,269 874,076 808,766
---------------------------------------------------------------------------------------------------------------
Total $ 746,860 $ 714,755 $ 2,194,990 $ 2,088,813
---------------------------------------------------------------------------------------------------------------
Operating profit
Food Packaging $ 66,387 $ 68,625 $ 206,948 $ 207,653
Protective and Specialty
Packaging 61,983 62,928 184,056 174,213
---------------------------------------------------------------------------------------------------------------
Total segments 128,370 131,553 391,004 381,866
Corporate operating expenses(2) (18,164) (17,348) (52,511) (53,548)
---------------------------------------------------------------------------------------------------------------
Total $ 110,206 $ 114,205 $ 338,493 $ 328,318
---------------------------------------------------------------------------------------------------------------
Depreciation and amortization
Food Packaging $ 27,562 $ 27,432 $ 82,063 $ 82,175
Protective and Specialty
Packaging 14,599 16,376 44,276 47,833
---------------------------------------------------------------------------------------------------------------
Total segments 42,161 43,808 126,339 130,008
Corporate (including goodwill amortization) 13,124 12,117 38,235 37,863
---------------------------------------------------------------------------------------------------------------
Total $ 55,285 $ 55,925 $ 164,574 $ 167,871
---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Certain prior period amounts have been reclassified to conform to the
current year's presentation.
(2) Includes goodwill amortization of $12,900 and $12,278 for the three months
ended September 2000 and 1999, respectively, and $37,591 and $36,860 for
the nine months ended September 2000 and 1999, respectively.
(9) Acquisitions
During the first nine months of 2000, the Company made several small
acquisitions, including the acquisition of Dolphin Packaging plc during the
third quarter 2000. These transactions, which were carried out in exchange for
cash in the aggregate amount of approximately $177,000 were accounted for as
purchases and resulted in goodwill of approximately $100,000. Such transactions
did not have a significant impact on the Company's net earnings for the periods
presented.
12
<PAGE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Net sales for the third quarter of 2000 increased 4% to $746,860,000
compared with $714,755,000 for the third quarter of 1999. For the nine-month
period, the Company's net sales increased 5% to $2,194,990,000 compared with
net sales of $2,088,813,000 in the 1999 period. The increase in net sales for
the third quarter was primarily due to higher unit volume, the added net sales
of several acquired businesses and, to a lesser extent, higher average selling
prices for certain of the Company's products. Excluding the negative effect of
foreign currency translation, net sales would have increased 8% compared with
the third quarter of 1999. Excluding both the negative effect of foreign
currency translation and the impact of acquisitions, net sales would have
increased 4% compared with the third quarter of 1999. The increase in net sales
for the first nine months of 2000 was due primarily to higher unit volume and,
to a lesser extent, the added net sales of several acquired businesses and
higher average selling prices for certain of the Company's products. Excluding
the negative impact of foreign currency translation, net sales would have
increased by 8% compared with the first nine months of 1999.
Net sales from domestic operations increased approximately 5% and 7%
compared with the third quarter and first nine months of 1999, respectively,
primarily due to increased unit volume and, to a lesser extent, higher average
selling prices for certain of the Company's products in both periods.
Net sales from foreign operations represented approximately 45% of the
Company's total net sales in both the third quarter of 2000 and the third
quarter of 1999, and 45% and 46% in the first nine months of 2000 and 1999,
respectively. Net sales from foreign operations in the third quarter of 2000
increased approximately 4% compared with the third quarter of 1999, primarily
due to increased unit volume and the added net sales of several acquired
businesses, partially offset by the negative impact of foreign currency
translation. Net sales from foreign operations in the first nine months of 2000
increased approximately 3% compared with the first nine months of 1999,
primarily due to increased unit volume, and, to a lesser extent, the added net
sales of several acquired businesses, partially offset by the negative impact
of foreign currency translation.
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 4% for the third quarter and 3% for the
first nine months of 2000 compared with the respective 1999 periods. The
increase in the third quarter of 2000 was primarily due to the added net sales
of several acquired businesses and, to a lesser extent, higher unit volume and
higher average selling prices for certain of the segment's products. The
increase in the first nine months of 2000 was due to higher unit volume and, to
a lesser extent, the added net sales of several acquired businesses and higher
average selling prices for certain of the segment's products. Excluding the
negative effect of foreign currency translation, net sales of this segment
would have increased by 8% for the third quarter and 7% for the first nine
months of 2000 compared with the respective 1999
13
<PAGE>
periods. Excluding both the negative effect of foreign currency and the impact
of acquisitions, net sales would have increased by 4% and 5% for the third
quarter and the first nine months of 2000, respectively, compared to 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)
performance shrink films, air cellular and polyethylene foam surface protection
and cushioning materials and protective and durable mailers and bags, increased
approximately 5% for the third quarter and 8% for the first nine months of 2000
compared to the respective 1999 periods. The increases in both periods were due
primarily to higher unit volume and, to a lesser extent, the added net sales of
several small acquired businesses. Excluding the negative effect of foreign
currency translation, net sales of this segment would have increased by 8% for
the third quarter and 11% for the first nine months of 2000 compared with the
respective 1999 periods.
Gross profit as a percentage of net sales was 33.9% for the third quarter
and 34.9% for the first nine months of 2000 compared to 36.0% for the third
quarter of 1999 and 36.2% for the first nine months of 1999. The decrease in
gross profit as a percentage of net sales for the third quarter of 2000 was
primarily due to certain higher raw material costs and, to a limited extent,
charges in the U.K. related to a factory realignment and rationalization and
inclusion of the operating results of the newly acquired Dolphin Packaging plc
business, which was acquired in early August 2000. The decrease in gross profit
as a percentage of net sales for the first nine months of 2000 was primarily
due to higher raw material costs.
Marketing, administrative and development expenses and goodwill
amortization as a percentage of net sales were 19.2% for the third quarter of
2000 compared to 20.0% for the 1999 period and were 19.4% for the first nine
months of 2000 compared to 20.5% for the 1999 period. As in the third quarter
and first nine months of 1999, the Company continued to incur information
system costs related to implementation of its enterprise resource planning
system.
Other expense, net, declined compared to the third quarter and first nine
months of 1999. Interest expense increased to $17,082,000 and $44,093,000 for
the third quarter and first nine months of 2000, respectively, compared to
$14,631,000 and $44,088,000 for the comparable 1999 periods. The increase in
interest expense was primarily due to additional borrowings made in connection
with business acquisitions and stock repurchases made under the Company's stock
repurchase program. The increased interest expense was more than offset by the
receipt of a $10,000,000 fee from a third party for the assignment of a
pre-existing contract during the third quarter of 2000. The remaining amount in
other expense, net, primarily represents foreign currency exchange losses
attributable to the weakness of foreign currencies, particularly the euro,
relative to the U.S. dollar.
The Company's effective income tax rate was 45.5% in the third quarter and
first nine months of 2000 and 46.5% and 46.7% in the third quarter and the
first nine months of 1999, respectively. These rates are higher than the
applicable statutory U.S. Federal
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income tax rate primarily due to the non-deductibility for tax purposes of
goodwill amortization and to 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 recorded net earnings of $54,714,000
for the third quarter of 2000 and $163,528,000 for the first nine months of
2000 compared to net earnings of $53,712,000 and $151,518,000 for the
respective 1999 periods.
Basic earnings per common share were $0.57 and diluted earnings per common
share were $0.46 for the third quarter of 2000, and basic and diluted earnings
per common share were $0.43 for the third quarter of 1999. Basic earnings per
common share were $1.50 and diluted earnings per common share were $1.36 for the
first nine months of 2000, and basic and diluted earnings per common share were
$1.17 for the first nine months of 1999. The basic earnings per common share
calculation for the quarter and nine months ended September 30, 2000 includes an
$0.11 and $0.14 per share gain, respectively, attributable to the repurchase of
preferred stock. Such gain is not included in the calculation of diluted
earnings per common share. Gains attributable to the repurchase of preferred
stock were not significant in the respective 1999 periods. The diluted earnings
per common share for the third quarter and first nine 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 Company's preferred stock is
convertible into shares of its common stock at a rate of approximately 0.885
share of common stock for each share of preferred stock. 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 in the third
quarter and first nine 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 described below.
Net cash provided by operating activities amounted to $260,728,000 and
$310,719,000 in the first nine months of 2000 and 1999, respectively. The
decrease in operating cash flows for the first nine months of 2000 was primarily
due to changes in operating assets and liabilities in the ordinary course of
business.
Net cash used in investing activities amounted to $256,807,000 in the
first nine months of 2000 compared to $59,204,000 in the 1999 period. The
change in the first nine months of 2000 compared to the 1999 period was
primarily due to the higher level of capital expenditures and several small
acquisitions in 2000, including the acquisition of Dolphin Packaging plc during
the third quarter of 2000. Capital expenditures were $81,262,000 in the 2000
period and $51,145,000 in the 1999 period. The Company currently
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anticipates that capital expenditures for the full year of 2000 will be in the
range of $110,000,000 to $125,000,000.
Net cash used in financing activities declined to $20,513,000 in the first
nine months of 2000 compared with $220,910,000 in the first nine months of
1999. In the 2000 period, the Company incurred net borrowings of $264,241,000,
while in the first nine months of 1999, the Company made net debt repayments of
$148,986,000. The borrowings made in the 2000 period were incurred to finance a
portion of the cost of the acquisitions made in the first nine months of the
year as well as repurchases of the Company's outstanding convertible preferred
stock and common stock. During the first nine months of 2000, the Company
repurchased approximately 4,516,000 shares of its preferred stock and 409,000
shares of its common stock at a cost of approximately $214,073,000 and
$19,468,000, respectively. These repurchases were made under the Company's
share repurchase program, as authorized by its Board of Directors. As of
November 2, 2000, the total number of shares of preferred stock and common
stock authorized to be repurchased under this program was the equivalent of
approximately 16,977,000 shares of common stock on an as-converted basis, of
which approximately 6,234,000 had been repurchased, leaving the equivalent of
approximately 10,744,000 shares of common stock on an as-converted basis
available for repurchase under this program. During the first nine months of
2000, the Company made several acquisitions, including the acquisition of
Dolphin Packaging plc during the third quarter of 2000. These transactions,
which were affected in exchange for cash in the aggregate amount of
approximately $177,000,000, were accounted for as purchases.
At September 30, 2000, the Company had working capital of $263,333,000 or
7% 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 increases in accounts receivable and inventory and decreases in accounts
payable, partially offset by increases in short-term borrowings, primarily
under the Credit Agreements, and increases in income taxes payable.
The Company's ratio of current assets to current liabilities (current
ratio) was 1.4 at September 30, 2000 and December 31, 1999. The Company's ratio
of current assets less inventory to current liabilities (quick ratio) was 0.9
at September 30, 2000 and 1.0 at December 31, 1999.
At September 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") and the 7-year
5.625% euro notes due July 2006 (the "Euro Notes").
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 the Credit Agreements. As of
September 30, 2000 and December 31, 1999, outstanding borrowings were
$404,436,000 and $160,978,000, respectively, under the 5-year revolving
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credit facility and $26,258,000 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 September
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 6.7% at September 30, 2000 and 6.0% at December 31, 1999. The
Company had certain interest rate and currency swaps outstanding at September
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 September 30,
2000 and December 31, 1999 did not change significantly as a result of these
derivative financial instruments.
At September 30, 2000, the Company was party to interest rate swaps with
an aggregate notional amount of approximately $144,000,000 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 September 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 September 30, 2000 and 6.2% to 6.5% at December 31, 1999, and
euro-denominated rates which ranged from 5.0% to 5.6% at September 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 September 30, 2000.
At September 30, 2000, the Company had available lines of credit,
including those available under the Credit Agreements, of approximately $1.2
billion of which approximately $650 million were unused.
The Company's shareholders' equity was $677,123,000 at September 30, 2000
compared to $551,030,000 at December 31, 1999. Shareholders' equity increased
in the first nine months of 2000 due to the Company's net earnings of
$163,528,000 and the excess of book value over repurchase price of $11,725,000
recognized in connection with the preferred stock repurchases, which were
partially offset by preferred stock dividends of $50,090,000 and by an
additional foreign currency translation adjustment of $10,487,000.
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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, which was included as a portion of
Exhibit 13 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
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 September 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 $152,000,000 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.
At September 30, 2000, the carrying value of the Company's total debt was
$1,060,984,000 of which approximately $477,465,000 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 September 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 $6,874,000 and $5,000,000,
respectively.
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The Company uses foreign currency forwards to fix the amount payable on
certain transactions denominated in foreign currencies. At September 30, 2000,
the Company had foreign currency forward agreements, maturing through June
2001, with an aggregate notional amount of approximately $25,000,000. 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 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
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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 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 or results of
operations.
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 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 potential impact, if any, of SFAS
Nos. 138 and 133 on the Company's Consolidated Financial Statements is
contingent on the financial market conditions at January 1, 2001 and actions
taken by the Company regarding its derivative instruments through December 31,
2000. Based on current financial market conditions, the impact of implementing
SFAS Nos. 138 and 133 is not expected to be material to the Company's
Consolidated Financial Statements.
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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 the euro and other 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.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.1 Contingent Stock Plan of the Company, as amended.
10.2 Form of Contingent Stock Purchase Agreement - Officer.
10.3 Form of Compensation Deferral Agreement.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the third quarter
of 2000.
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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 13, 2000 By s/ Jeffrey S. Warren
-----------------------------
Jeffrey S. Warren
Controller
(Authorized Executive Officer
and Chief Accounting Officer)
23
