Exhibit 99.3
Management's Discussion and Analysis of Results of Operations and Financial
Condition
The following management's discussion and analysis relates to the
financial information contained in the Grace Packaging Special-Purpose
Combined Financial Statements (the "Special Purpose Combined Financial
Statements") appearing elsewhere in this Form 8-K. Except as otherwise
expressly noted herein, it does not give effect to the merger involving the
Registrant and Sealed Air Corporation discussed elsewhere in this Form 8-K
(the "Merger") or to the other transactions related to the Merger. As used
herein, the term "Cryovac" refers to the packaging business of W. R.
Grace & Co. ("Grace") prior to the Merger, which is the business covered
by the Special Purpose Combined Financial Statements.
Results of Operations
Net Sales
Cryovac's net sales increased 5% in 1997 compared with 1996 and 2% in
1996 compared with 1995. The increase in net sales in 1997 was primarily
due to increased unit volume partially offset by the negative effect of
foreign currency translation as the U.S. dollar strengthened against most
foreign currencies and, to a lesser extent, a change in product mix.
Excluding the negative effect of foreign currency translation, net sales
would have increased 9% compared with 1996. The increase in 1997 also
benefited from added net sales of recently acquired businesses discussed
below. The increase in net sales in 1996 was due primarily to increased
unit volume in certain products, partially offset by the effect of the
negative publicity surrounding bovine spongiform encephalopathy, commonly
referred to as "mad cow disease," which led to reduced consumption of beef
products and accordingly lower sales of certain of Cryovac's products,
particularly in Europe, and by changes in product mix.
In April 1997, the Registrant acquired Schurpack, Inc., a U.S.
manufacturer of plastic laminate packaging materials for use with
institutional and retail cook-in products. In August 1996, the Registrant
acquired Cypress Packaging, Inc., a leading supplier of plastic packaging
materials for retail pre-cut produce. These acquisitions, which were
effected for cash and accounted for as purchases, were not material to the
Registrant's consolidated financial statements.
Cost of sales increased 3% in 1997 compared with 1996 and 7% in 1996
compared with 1995. The increase in 1997 primarily reflects the increase
in net sales and higher levels of manufacturing-related depreciation
partially offset by cost savings realized as a result of the worldwide
restructuring program discussed below. The 1996 increase resulted
primarily from higher levels of manufacturing-related depreciation that
arose from the completion of certain major expansion projects begun in
1995, which were not offset by increased net sales. The 1996 increase was
also due to changes in product mix partially offset by certain lower raw
material costs. Cost of sales as a percentage of net sales was 64.8%,
66.1% and 63.2% in 1997, 1996 and 1995, respectively.
Marketing, administrative and development expenses increased 6% in 1997
compared with 1996 but decreased 5% in 1996 compared with 1995. The increase
in 1997 was primarily due to increased corporate allocations from Grace as
well as the increase in net sales, partially offset by cost savings realized
as part of the worldwide restructuring program discussed below. The decrease
in 1996 was primarily due to cost savings realized from the restructuring
program and a decrease in corporate allocations, partially offset by increased
research and development costs. Marketing, administrative and development
expenses as a percentage of net sales were 19.8%, 19.6% and 21.2% in 1997,
1996 and 1995, respectively.
Restructuring costs and asset impairments were $14.4 million, $74.9
million and $17.7 million in 1997, 1996 and 1995, respectively. In 1995,
Cryovac began to implement a worldwide restructuring program focused on
streamlining processes and reducing operating costs, and it continued to
implement additional cost reductions and efficiency improvements in 1996 and
1997. In connection with these programs, Cryovac recorded restructuring
charges of $3.6 million, $47.9 million and $11.1 million in 1997, 1996 and
1995, respectively. These charges primarily related to the restructuring of
European operations and consisted of costs related mainly to employee
termination benefits and lease termination costs. Also during these years,
certain long-lived assets and related goodwill were determined to be impaired,
which resulted in non-cash pre-tax charges of $10.8 million, $27.0 million and
$6.6 million in 1997, 1996 and 1995, respectively.
Operating profit increased 54% in 1997 compared with 1996 but decreased
30% in 1996 compared with 1995 primarily due to changes in the amount of
restructuring costs and asset impairments in each year and the other changes
in costs and expenses discussed above.
Cryovac's effective income tax rates were 34.1%, 41.2% and 40.2% in
1997, 1996 and 1995, respectively. The lower effective tax rate in 1997 and
the higher effective tax rates in 1996 and 1995 resulted primarily from
changes in U.S. and foreign taxes on foreign operations in each period.
Net earnings increased 74% in 1997 compared with 1996 but decreased 29%
in 1996 compared with 1995 primarily due to the changes in operating profit
and, in 1997, to a lesser extent, a decrease in the effective income tax rate
compared to 1996 discussed above.
Liquidity and Capital Resources
Cryovac's principal sources of liquidity are cash flows from
operations and, prior to the Merger, funding through the centralized cash
management services of Grace , whereby cash received from operations was
transferred to, and disbursements were funded from, Grace's centralized
accounts. As a result, any cash needs of Cryovac in excess of cash flows
from operations were funded by Grace, and any cash flows from operations in
excess of cash needs were transferred to Grace and used for other corporate
purposes. As shown in the Special-Purpose Combined Statement of Cash Flows
included in the Special Purpose Combined Financial Statements, $120 million
of net cash was transferred to Grace in 1997 while, in 1996 and 1995
respectively, Cryovac received $101.5 million and $136.3 million of net
advances from Grace.
Cryovac's participation in Grace's centralized cash management
services terminated effective upon the Merger. Following the Merger, the
Registrant's principal sources of liquidity are cash flows from the
operations of Sealed Air and Cryovac and borrowings under available lines
of credit, including the New Credit Agreements discussed below.
Net cash provided by Cryovac's operating activities amounted to
$235.3 million, $207.6 million and $156.7 million in 1997, 1996 and 1995,
respectively. The increase in operating cash flows in 1997 was primarily
due to increased net earnings (excluding the non-cash portion of
restructuring and asset impairments) and higher levels of depreciation and
amortization partially offset by changes in working capital items discussed
below. The increase in operating cash flows in 1996 was primarily due to
increased net earnings (excluding the non-cash portion of restructuring
costs and asset impairments), higher levels of depreciation and
amortization, and improved inventory management, partially offset by higher
investments in leased equipment.
Net cash used by Cryovac for investing activities amounted to
approximately $115.3 million, $309.1 million and $293 million in 1997,
1996 and 1995, respectively. Capital expenditures in 1997, 1996 and 1995
were $102 million, $294.5 million, and $293.3 million, respectively,
reflecting a decrease in 1997 as Cryovac neared completion of several major
manufacturing expansion programs. The increase in 1996 compared with 1995
primarily reflected a global expansion program that began in 1995 and the
cash used in connection with the Cypress Packaging acquisition.
At December 31, 1997, the Registrant had working capital of
$343.7 million, or 21% of total assets, compared to working capital of
$277.6 million, or 16% of total assets, at December 31, 1996. The increase
in working capital was due primarily to the decreases in accounts payable
due to timing of cash payments and other current liabilities due to the
decrease in accrued restructuring costs.
The Registrant's ratio of current assets to current liabilities (current
ratio) was 2.9 at December 31, 1997 and 2.2 at December 31, 1996. The
Registrant's ratio of current assets less inventory to current liabilities
(quick ratio) was 1.6 at December 31, 1997 and 1.2 at December 31, 1996. The
increases in these ratios in 1997 resulted primarily from the increases in
working capital discussed above.
Prior to the Merger, Cryovac had no capital structure since it was
operated as a division of Grace, and there was no allocation of Grace's
borrowings and related interest expense, except for interest capitalized as
a component of Cryovac's properties and equipment. Therefore, the
financial position of Cryovac is not indicative of the financial position
that would exist if it had been an independent stand-alone entity during
the years covered by the Special Purpose Combined Financial Statements.
Prior to the Merger, the Registrant entered into two Credit Agreements
(the "New Credit Agreements"), the first of which is a $1.0 billion 5-year
revolving credit facility that expires on March 30, 2003 and the second of
which is a $600 million 364-day revolving credit facility that expires on
March 30, 1999. The New Credit Agreements provide that the Registrant and
certain of its subsidiaries, including Cryovac and Sealed Air, may borrow
for various purposes, including the refinancing of existing debt, the
provision of working capital and for other general corporate needs. An
initial borrowing of $1.259 billion was made on March 30, 1998 in
connection with the transactions associated with the Merger.
The Registrant's obligations under the New Credit Agreements bear
interest at floating rates. The New Credit Agreements provide for changes in
borrowing margins based on financial criteria and impose certain limitations
on the operations of the Registrant and certain of its subsidiaries. These
limitations include financial covenants relating to interest coverage and debt
leverage as well as certain restrictions on the incurrence of additional
indebtedness, the creation of liens, the making of acquisitions, and the
carrying out of certain dispositions of property or assets.
Other Matters
Environmental Matters
Cryovac 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 investigation at each site, the current
status of discussions with regulatory authorities regarding the methods and
extent of remediation and the apportionment of costs among potentially
responsible parties. As some of these issues are decided (the outcomes of
which are subject to uncertainties) and/or new sites are assessed and costs
can be reasonably estimated, Cryovac adjusts the recorded accruals, as
necessary. However, Cryovac believes that it has adequately reserved for
all probable and estimable environmental exposures.
Year 2000 Computer System Compliance
Cryovac has conducted a comprehensive review of its computer systems
to identify systems that could be affected by the "Year 2000" issue and is
implementing a plan to resolve the issue. Cryovac currently believes that,
with modifications to existing software and by converting to new software,
the Year 2000 issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not
completed timely, the Year 2000 issue may have a material impact on the
operations of Cryovac. It is anticipated that costs associated with
modifying the existing systems will not be material to the Registrant's
consolidated financial position. The modification costs incurred in
connection with Year 2000 compliance are expensed as incurred.