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 March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to_______
Commission file number 1-12139
SEALED AIR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 65-0654331
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Park 80 East
Saddle Brook, New Jersey 07663-5291
- ------------------------ ---------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code (201) 791-7600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
There were 83,500,810 shares of the registrant's common stock, par value $0.10
per share, and 35,761,616 shares of the registrant's Series A convertible
preferred stock, par value $0.10 per share, outstanding as of April 30, 1999.
PART I
FINANCIAL INFORMATION
---------------------
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Three Months Ended March 31, 1999 and 1998
(In thousands of dollars except per share data)
(Unaudited)
1999 1998
------ ------
Net sales $678,937 $431,035
Cost of sales 433,239 290,913
-------- --------
Gross profit 245,698 140,122
Marketing, administrative and
development expenses 128,614 94,453
Goodwill amortization 12,251 90
-------- --------
Operating profit 104,833 45,579
Other income (expense):
Interest expense (14,719) (82)
Other, net (2,164) (411)
-------- --------
Other expense, net (16,883) (493)
-------- --------
Earnings before income taxes 87,950 45,086
Income taxes 41,336 18,034
-------- --------
Net earnings $ 46,614 $ 27,052
======== ========
Less: Series A preferred stock dividends 17,910 18,011
Add: Excess of book value over repurchase
price of Series A preferred stock 10 --
-------- --------
Net earnings ascribed to common shareholders $ 28,714 $ 9,041
======== ========
Earnings per common share (See Note 4):
Basic $ 0.34 $ 0.22
======== ========
Diluted $ 0.34 $ 0.22
======== ========
Weighted average number of common shares outstanding:
Basic 83,364 40,648
======== ========
Diluted 83,496 40,859
======== ========
See accompanying notes to consolidated financial statements.
2
SEALED AIR CORPORATION
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(In thousands of dollars except share data)
March 31, December 31,
1999 1998
(Unaudited)
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 85,280 $ 44,986
Notes and accounts receivable, net of allowances
for doubtful accounts of $19,079 in 1999 and
$17,945 in 1998 449,204 453,124
Inventories 269,504 275,312
Other current assets 71,626 71,192
--------- ---------
Total current assets 875,614 844,614
--------- ---------
Property and equipment:
Land and buildings 413,251 420,589
Machinery and equipment 1,320,206 1,349,716
Other property and equipment 117,940 121,252
Construction in progress 55,415 54,538
--------- ---------
1,906,812 1,946,095
Less accumulated depreciation and amortization 836,003 829,513
--------- ---------
Property and equipment, net 1,070,809 1,116,582
Goodwill, less accumulated amortization of
$48,059 in 1999 and $36,083 in 1998 1,894,863 1,907,736
Other assets 177,334 170,998
--------- ---------
Total assets $4,018,620 $4,039,930
========= =========
See accompanying notes to consolidated financial statements.
3
SEALED AIR CORPORATION
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 (Continued)
(In thousands of dollars except share data)
March 31, December 31,
1999 1998
(Unaudited)
----------- ------------
LIABILITIES, CONVERTIBLE PREFERRED STOCK & EQUITY
Current Liabilities:
Short-term borrowings and current portion
of long-term debt $ 278,857 $ 85,131
Accounts payable 167,089 176,594
Other current liabilities 199,908 230,332
Income taxes payable 57,421 42,933
--------- ---------
Total current liabilities 703,275 534,990
Long-term debt, less current portion 805,827 996,526
Deferred income taxes 207,047 200,699
Other liabilities 74,749 79,577
--------- ---------
Total liabilities 1,790,898 1,811,792
--------- ---------
Series A convertible preferred stock, $50 per share
redemption value, authorized and issued 36,019,125
shares in 1999 and 36,021,851 shares in 1998,
including 225,000 shares in 1999 and 200,000
shares in 1998 in treasury, mandatory redemption
in 2018 1,789,707 1,791,093
Shareholders' equity:
Common stock, $.10 par value. Authorized
400,000,000 shares, issued 83,817,951 shares
in 1999 and 83,806,361 shares in 1998 8,380 8,380
Additional paid-in capital 613,717 610,505
Retained earnings (deficit) 20,738 (7,966)
Accumulated translation adjustment (165,522) (124,843)
--------- ---------
477,313 486,076
Less: Deferred compensation 24,377 28,683
Less: Cost of treasury common stock, 331,401
shares in 1999 and 494,550 shares
in 1998 11,807 17,234
Less: Minimum pension liability 3,114 3,114
--------- ---------
Total shareholders' equity 438,015 437,045
--------- ---------
Total liabilities, preferred stock and equity $ 4,018,620 $ 4,039,930
========= =========
See accompanying notes to consolidated financial statements.
4
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
(In thousands of dollars)
(Unaudited)
1999 1998
---------- ----------
Cash flows from operating activities:
Net earnings $ 46,614 $ 27,052
Adjustments to reconcile net earnings to
net cash provided by operating activities, net
of effect of businesses acquired:
Depreciation and amortization 55,787 29,296
Deferred taxes (1,401) 19,022
Net (gain) loss on disposals of fixed assets (292) 4,305
Changes in operating assets and liabilities, net
of assets and liabilities acquired and
transferred to/from Grace.
Notes and accounts receivable (11,368) (5,210)
Inventories (2,511) (8,080)
Other current assets 33 4,427
Other assets (1,451) (5,142)
Accounts payable (6,608) (12,722)
Other current liabilities (2,461) 5,271
Other liabilities (3,351) 5,656
---------- ----------
Net cash provided by operating activities 72,991 63,875
---------- ----------
Cash flows from investing activities:
Capital expenditures for property and equipment (16,943) (16,963)
Proceeds from sales of property and equipment 861 2,701
Businesses acquired, net of cash acquired -- 51,259
---------- ----------
Net cash(used)provided by investing activities (16,082) 36,997
---------- ----------
Cash flows from financing activities:
Net advances to Grace -- (43,779)
Proceeds from long-term debt 2,753 1,258,807
Payment of long-term debt (191,517) --
Dividends paid on preferred stock (17,911) --
Purchase of treasury preferred stock (1,240) --
Transfer of funds to New Grace -- (1,256,614)
Net proceeds from short-term borrowings 193,181 986
---------- ----------
Net cash used in financing activities (14,734) (40,600)
---------- ----------
Effect of exchange rate changes on cash and cash
equivalents (1,881) (760)
---------- ----------
Cash and cash equivalents:
Increase during the period 40,294 59,512
Balance, beginning of period 44,986 --
---------- ----------
Balance, end of period $ 85,280 $ 59,512
========== ==========
See accompanying notes to consolidated financial statements.
5
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements (abbreviated) of Cash Flows
For the Three Months Ended March 31, 1999 and 1998 (Continued)
(In thousands of dollars)
(Unaudited)
1999 1998
---------- ----------
Supplemental Non-Cash Items:
Interest payments, net of amounts capitalized $ 17,303 $ --
========== =========
Income tax payments $ 2,626 $ --
========== =========
Issuance of 36,021,851 shares of Series A
convertible preferred stock and 40,647,815
shares of common stock in connection with
the Recapitalization $ -- $1,801,093
========== =========
Net assets acquired in exchange for the issuance
of 42,624,246 shares of common stock in
connection with the Merger, net of
cash balance of $51,259 acquired $ -- $2,110,752
========== =========
See accompanying notes to consolidated financial statements.
6
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 1999 and 1998
(In thousands of dollars)
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
---- ----
Net Earnings $ 46,614 $ 27,052
Other comprehensive income:
Foreign currency translation adjustments (40,679) (10,117)
-------- --------
Comprehensive income $ 5,935 $ 16,935
======== ========
See accompanying notes to consolidated financial statements.
7
SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(Amounts in thousands, except per share data)
(Unaudited)
(1) Reorganization, Recapitalization and Merger
On March 31, 1998, the Company (formerly known as W. R. Grace & Co.) and Sealed
Air Corporation ("old Sealed Air"), completed a series of transactions as a
result of which:
(a) The specialty chemicals business of the Company was separated from its
packaging business, the packaging business ("Cryovac") was contributed
to one group of wholly owned subsidiaries, and the specialty chemicals
business was contributed to another group of wholly owned subsidiaries
("New Grace"); the Company and Cryovac borrowed approximately $1.26
billion under two revolving credit agreements (the "Credit
Agreements") (which, as amended, are discussed below) and transferred
substantially all of those funds to New Grace; and the Company
distributed all of the outstanding shares of common stock of New Grace
to its shareholders. As a result, New Grace became a separate publicly
owned corporation that is unrelated to the Company. These transactions
are referred to below as the "Reorganization."
(b) The Company recapitalized its outstanding shares of common stock, par
value $0.01 per share ("Grace Common Stock"), into a new common stock
and Series A convertible preferred stock, each with a par value of
$0.10 per share (the "Recapitalization").
(c) A subsidiary of the Company merged into old Sealed Air (the "Merger"),
with old Sealed Air being the surviving corporation. As a result of
the Merger, old Sealed Air became a subsidiary of the Company, and the
Company was renamed Sealed Air Corporation.
References to "Grace" in these notes refer to the Company before the
Reorganization, the Recapitalization and the Merger.
(2) Basis of Presentation
The Merger was accounted for as a purchase of old Sealed Air by the Company as
of March 31, 1998. Accordingly, the financial statements include the operating
results and cash flows as well as the assets and liabilities of Cryovac for all
periods presented. The operating results, cash flows, assets and liabilities of
old Sealed Air are included from March 31, 1998. See Note 8 for unaudited
selected pro forma statement of earnings information for the quarter ended March
31, 1998. For periods prior to the Merger, the financial statements exclude all
of the assets, liabilities (including contingent liabilities), revenues and
expenses of Grace other than the assets, liabilities, revenues and expenses of
Cryovac.
Subsequent to the Merger, the consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. In management's
opinion, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position and
results of operations for the quarter ended March 31, 1999 have been made.
8
(3) Equity
In connection with the Recapitalization, the Company, among other things,
recapitalized the outstanding shares of Grace Common Stock into 40,647,815
shares of the Company's common stock and 36,021,851 shares of Series A
convertible preferred stock (convertible into approximately 31,900,000 shares of
the Company's common stock), each with a par value of $0.10 per share. In the
Merger, the Company issued 42,624,246 shares of common stock to the shareholders
of old Sealed Air.
The outstanding Series A preferred stock is convertible at any time into
approximately 0.885 share of common stock for each share of preferred stock,
votes with the common stock on an as-converted basis, pays a cash dividend, as
declared by the Board of Directors, at an annual rate of $2.00 per share,
payable quarterly in arrears, becomes redeemable at the option of the Company
beginning March 31, 2001, subject to certain conditions, and is subject to
mandatory redemption on March 31, 2018 at $50 per share, plus any accrued and
unpaid dividends. Because it is subject to mandatory redemption, the Series A
convertible preferred stock is classified outside of the shareholders' equity
section of the balance sheet. At its date of issuance, the fair value of the
Series A convertible preferred stock exceeded its mandatory redemption amount
primarily due to the common stock conversion feature of such preferred stock.
Accordingly, the carrying amount of the Series A convertible preferred stock is
reflected in the consolidated balance sheet at its mandatory redemption value.
The Company has authority to issue a total of 50,000,000 shares of preferred
stock, par value $0.10 per share.
(4) Earnings Per Common Share
In calculating basic and diluted earnings per common share for the first quarter
1998, retroactive recognition was given to the Recapitalization as if it had
occurred on January 1, 1998 in accordance with SAB No. 98. Accordingly, net
earnings were reduced for preferred stock dividends (as if such shares had been
outstanding during each period) to arrive at earnings ascribed to common
shareholders. The weighted average number of outstanding common shares used for
the first quarter of 1998 to calculate basic earnings per common share was
calculated on an equivalent share basis using the weighted average number of
shares of common stock outstanding for the first quarter of 1998, adjusted to
reflect the terms of the Recapitalization. The weighted average number of common
shares used to calculate diluted earnings per common share also considers the
exercise of dilutive stock options in each period. The outstanding preferred
stock is not assumed to be converted in the calculation of diluted earnings per
common share for the first quarter of 1999 and 1998 because the treatment of the
preferred stock as the common stock into which it is convertible would be
antidilutive (i.e., would increase earnings per common share) in those periods.
The following table sets forth the reconciliation of the basic and diluted
earnings per common share computations for the quarters ended March 31, 1999 and
1998 (amounts other than per share amounts in thousands).
1999 1998
- --------------------------------------------------------------------------------
Basic EPS:
Numerator
Net earnings $ 46,614 $ 27,052
Add: Excess of book value over repurchase price of
preferred stock 10 --
Less: Preferred stock dividends 17,910 --
Less: Retroactive recognition of preferred stock -- 18,011
- --------------------------------------------------------------------------------
Earnings ascribed to common shareholders $ 28,714 $ 9,041
- --------------------------------------------------------------------------------
Denominator
Weighted average common shares outstanding - basic 83,364 40,648
9
- --------------------------------------------------------------------------------
Basic earnings per common share $ 0.34 $ 0.22
- --------------------------------------------------------------------------------
Diluted EPS:
Numerator
Earnings ascribed to common shareholders $ 28,714 $ 9,041
- --------------------------------------------------------------------------------
Denominator
Weighted average common shares outstanding - basic 83,364 40,648
Effect of assumed exercise of options 132 211
Weighted average common shares outstanding - diluted 83,496 40,859
- --------------------------------------------------------------------------------
Diluted earnings per common share $ 0.34 $ 0.22
- --------------------------------------------------------------------------------
(5) Inventories
At March 31, 1999 and December 31, 1998, the components of inventories by major
classification (raw materials, work in process and finished goods) were as
follows:
March 31, December 31,
1999 1998
--------- ------------
Raw materials $ 62,649 $ 63,805
Work in process 51,142 50,714
Finished goods 171,033 176,965
------- -------
Subtotal 284,824 291,484
Reduction of certain
inventories to LIFO basis (15,320) (16,172)
------- -------
Total inventories $ 269,504 $ 275,312
======= =======
(6) Income Taxes
The Company's effective income tax rates were 47.0% and 40.0% for the first
quarters of 1999 and 1998, respectively. The effective tax rate for the 1999
period is higher than that for the first quarter of 1998 primarily due to the
non-deductibility of the goodwill amortization resulting from the Merger. In the
first quarter of 1998, such rates were higher than the statutory U.S. federal
income tax rate primarily due to state income taxes.
(7) Long-Term Debt
At March 31, 1999 and December 31, 1998, debt consisted primarily of borrowings
that were made under the Credit Agreements described below. Debt also included
certain other loans incurred by the Company's subsidiaries.
The Company's two principal Credit Agreements are a 5-year revolving credit
facility that expires on March 30, 2003 and a $600 million 364-day revolving
credit facility that was renewed effective March 29, 1999 for an additional
364-day period. At that time, the Company voluntarily reduced the aggregate
amount available under the 5-year revolving credit facility from $1 billion to
$800 million. As of March 31, 1999, outstanding borrowings under the 5-year and
364-day revolving credit facilities were $800 million (included in long-term
debt) and $175 million (included in short-term borrowings), respectively. The
Credit Agreements provide that the Company and certain of its
10
subsidiaries may borrow for various purposes, including the refinancing of
existing debt, the provision of working capital and other general corporate
needs.
The Company's obligations under the Credit Agreements bear interest at floating
rates. The weighted average interest rate under the Credit Agreements was
approximately 5.4% at March 31, 1999. The Company has entered into certain
interest rate swap agreements that have the effect of fixing the interest rates
on a portion of such debt. The weighted average interest rate at March 31, 1999
did not change significantly as a result of these derivative financial
instruments.
The Credit Agreements provide for changes in borrowing margins based on
financial criteria and the Company's senior unsecured debt ratings, and impose
certain limitations on the operations of the Company and certain of its
subsidiaries. The limitations include financial covenants relating to interest
coverage and debt leverage as well as certain restrictions on the incurrence of
additional indebtedness, the creation of liens, mergers and acquisitions, and
certain dispositions of property and assets. The Company was in compliance with
these requirements as of March 31, 1999.
(8) Pro Forma Information
The following table presents selected unaudited pro forma statement of earnings
information for the quarter ended March 31, 1998 as a result of the
Reorganization, the Recapitalization and the Merger. Such information reflects
pro forma adjustments made in combining the historical results of old Sealed Air
and Cryovac as a result of such transactions for the quarter presented. Such
amounts include for the first quarter of 1998, among others, incremental
goodwill amortization of approximately $10 million and incremental interest
expense of approximately $20 million. This pro forma information is not intended
to represent what the Company's actual results of operations would have been for
such period.
Quarter Ended
March 31,
-------------------------
Reported Pro Forma
1999 1998
-------- ---------
Net sales by business segment:
Food and specialty packaging $425,979 $400,870
Protective packaging 252,958 242,917
- --------------------------------------------------------------------------------
Total net sales 678,937 643,787
Cost of sales 433,239 423,850
- --------------------------------------------------------------------------------
Gross profit 245,698 219,937
Marketing, administrative and
development expenses 128,614 124,562
Goodwill amortization 12,251 11,921
- --------------------------------------------------------------------------------
Operating profit 104,833 83,454
Other income(expense), net (16,883) (22,249)
- --------------------------------------------------------------------------------
Earnings before income taxes 87,950 61,205
Income taxes 41,336 28,400
- --------------------------------------------------------------------------------
Net earnings 46,614 32,805
- --------------------------------------------------------------------------------
11
Less: Preferred stock dividends (17,910) (18,011)
Add: Excess of book value over
repurchase price of preferred stock 10 --
- --------------------------------------------------------------------------------
Net earnings ascribed to common shareholders 28,714 14,794
Earnings per common share (1)
Basic 0.34 0.18
Diluted 0.34 0.18
- --------------------------------------------------------------------------------
Weighted average number of common shares outstanding:
Basic 83,364 83,272
Diluted 83,496 83,483
- --------------------------------------------------------------------------------
(1) For purposes of calculating basic and diluted earnings per common share in
the 1998 period, net earnings have been reduced by the dividends that would
have been payable on the Company's Series A convertible preferred stock if
such shares had been outstanding during such period to arrive at earnings
ascribed to common shareholders. The weighted average number of outstanding
common shares used to calculate basic earnings per common share is
calculated on an equivalent share basis using the weighted average number
of shares outstanding of the Company's common stock, adjusted to reflect
the terms of the Recapitalization. The assumed conversion of the
convertible preferred stock is not considered in the calculation of diluted
earnings per common share for either of the periods presented as the effect
is antidilutive (i.e. would increase the earnings per common share for each
period presented).
(9) Restructuring and Other Charges
The Company's restructuring reserve, which arose primarily out of a
restructuring undertaken by the Company during the third quarter of 1998,
amounted to $19,056 at March 31, 1999 and $26,924 at December 31, 1998. The
components of the restructuring charges, spending and other activity through
March 31, 1999 and the remaining reserve balance at March 31, 1999 were as
follows:
Employee Contract
Termination Plant/Office Termination
Costs Closures Costs Total
- -----------------------------------------------------------------------------------------
Restructuring provision recorded in 1998 $ 39,848 $ 2,291 $ 1,150 $ 43,289
Cash payments during 1998 (14,486) (729) (1,150) (16,365)
- -----------------------------------------------------------------------------------------
Restructuring reserve at December 31, 1998 25,362 1,562 - 26,924
Cash payments during 1999 (7,633) (235) - (7,868)
- -----------------------------------------------------------------------------------------
Restructuring reserve at March 31, 1999 17,729 1,327 - 19,056
- -----------------------------------------------------------------------------------------
The Company's third quarter 1998 restructuring charge of $111,074, included
$39,848 of employee termination costs, $3,441 of exit costs and $67,785 of asset
impairments related to long-lived assets either held for use or held for
disposition. The asset impairment amount of $67,785 includes write-downs or
write-offs of $47,083 for property, plant and equipment, $13,008 for goodwill,
and $7,694 for certain other long-lived intangible assets. The Company expects
to incur approximately $43,289 of cash outlays to carry out this restructuring
program, of which approximately $24,233 was paid through March 31, 1999. These
cash outlays include primarily severance and other personnel related costs,
costs of terminating leases and facilities and equipment disposition costs. In
connection with the restructuring, the Company is eliminating 750 positions, or
approximately 5% of its workforce, across all functional areas. Through March
31, 1999, approximately 569 positions had been eliminated, and all restructuring
actions, including remaining asset dispositions, are expected to be completed by
the end of 1999 although certain cash outlays will continue into future years.
12
(10) Business Segment Information
The Company operates in two reportable business segments: (i) Food and Specialty
Packaging and (ii) Protective Packaging. The Food and Specialty Packaging
segment comprises the Company's Cryovac(R) food and specialty products. The
Protective Packaging segment includes the aggregation of the Company's packaging
products, engineered products and specialty products, all of which products are
for non-food applications.
The Food and Specialty Packaging segment includes flexible materials and related
systems (shrink film products, laminated films and specialty packaging systems
marketed primarily under the Cryovac(R) trademark for a broad range of
perishable foods). This segment also includes rigid packaging and absorbent pads
(absorbent pads used for the packaging of meat, fish and poultry, foam trays for
supermarkets and food processors, and rigid plastic containers for dairy and
other food products).
The Protective Packaging segment includes cushioning and surface protection
products (including air cellular cushioning materials, films for non-food
applications, polyurethane foam packaging systems sold under the Instapak(R)
trademark, polyethylene foam sheets and planks, a comprehensive line of
protective and durable mailers and bags, certain paper-based protective
packaging materials, suspension and retention packaging, and packaging systems)
and other products (principally specialty adhesive products).
Quarter Ended
March 31,
--------------------------
1999 1998
- --------------------------------------------------------------------------------
Net Sales
Food and Specialty Packaging $ 425,979 $ 378,752
Protective Packaging 252,958 52,283
- --------------------------------------------------------------------------------
Total segments $ 678,937 $ 431,035
- --------------------------------------------------------------------------------
Operating profit
Food and Specialty Packaging $ 67,564 $ 39,844
Protective Packaging 53,553 5,825
- --------------------------------------------------------------------------------
Total segments 121,117 45,669
Corporate operating expenses (including goodwill
amortization of $12,251 and $90 in 1999
and 1998, respectively) (16,284) (90)
- --------------------------------------------------------------------------------
Total $ 104,833 $ 45,579
- --------------------------------------------------------------------------------
Depreciation and amortization
Food and Specialty Packaging $ 28,349 $ 22,613
Protective Packaging 14,914 6,593
- --------------------------------------------------------------------------------
Total segments 43,263 29,206
Corporate (including goodwill amortization) 12,524 90
- --------------------------------------------------------------------------------
Total $ 55,787 $ 29,296
- --------------------------------------------------------------------------------
13
Management's Discussion and Analysis of Results of Operations and Financial
Condition
On March 31, 1998, the Company (formerly known as W. R. Grace & Co.)
and Sealed Air Corporation ("old Sealed Air") completed a series of transactions
as a result of which:
(a) The specialty chemicals business of the Company was separated from
its packaging business, the packaging business ("Cryovac") was
contributed to one group of wholly owned subsidiaries, and the
specialty chemicals business was contributed to another group of wholly
owned subsidiaries ("New Grace"); the Company and Cryovac borrowed
approximately $1.26 billion under two revolving credit agreements (the
"Credit Agreements") (which, as amended, are discussed below) and
transferred substantially all of those funds to New Grace; and the
Company distributed all of the outstanding shares of common stock of
New Grace to its stockholders. As a result, New Grace became a separate
publicly owned corporation that is unrelated to the Company. These
transactions are referred to below as the "Reorganization."
(b) The Company recapitalized its outstanding shares of common stock,
par value $0.01 per share ("Grace Common Stock"), into a new common
stock and Series A convertible preferred stock (the "Series A Preferred
Stock"), each with a par value of $0.10 per share (the
"Recapitalization").
(c) A subsidiary of the Company merged into old Sealed Air (the
"Merger"), with old Sealed Air being the surviving corporation. As a
result of the Merger, old Sealed Air became a subsidiary of the
Company, and the Company was renamed Sealed Air Corporation.
References to "Grace" in this Management's Discussion and Analysis
refer to the Company before the Reorganization, the Recapitalization and the
Merger.
The Merger was accounted for as a purchase of old Sealed Air by the
Company as of March 31, 1998. Accordingly, the financial statements include the
operating results and cash flows as well as the assets and liabilities of
Cryovac for all periods presented. The operating results, cash flows, assets and
liabilities of old Sealed Air are included from March 31, 1998. For periods
prior to the Merger, the financial statements exclude all of the assets,
liabilities (including contingent liabilities), revenues and expenses of Grace
other than the assets, liabilities, revenues and expenses of Cryovac.
In order to facilitate a review of the factors that affected the
Company's operating results for the first quarter of 1999, the Company has
included selected unaudited pro forma financial information for the first
quarter of 1998 in Note 8 to the consolidated financial statements included in
this Form 10-Q.
14
Results of Operations
Discussion and Analysis of Reported Operating Results
The Company's net sales increased 58% to $678,937,000 in the first
quarter of 1999 from $431,035,000 in the first quarter of 1998. The increase in
net sales as well as most of the increases in cost of sales, marketing,
administrative and development expenses and other costs and expenses, including
the substantial increases in interest expense and goodwill amortization, that
the Company experienced in the first quarter of 1999 were due to the inclusion
of the protective packaging business of old Sealed Air's operations in this
period and adjustments arising from the Merger, the Reorganization and the
Recapitalization.
Gross profit increased as a percentage of net sales to 36.2% for the
first quarter of 1999 from 32.5% for the first quarter of 1998. This increase in
gross profit as a percentage of net sales resulted from the higher level of net
sales, certain lower raw material costs and cost reductions arising out of
certain improvements in the Company's operations.
Marketing, administrative and development expenses in the first quarter
of 1998 included $18,044,000 of corporate expenses that were allocated to
Cryovac by Grace prior to the Merger. Such allocations ceased upon the Merger.
However, following the Merger, the Company has incurred and expects that it will
continue to incur marketing, administrative and development expenses that
partially offset the savings derived from the elimination of these allocated
expenses. Primarily as a result of the Merger, the Company recorded goodwill
amortization of $12,251,000 in the first quarter of 1999 compared to $90,000 in
the first quarter of 1998.
The increase in other expense, net for the first quarter of 1999 from
the 1998 period was due primarily to interest expense on the Company's
outstanding debt under the Credit Agreements.
The Company's effective income tax rate for the quarter ended March 31,
1999 was 47.0% compared to 40.0% for the quarter ended March 31, 1998. The
effective tax rate in 1999 is higher than the first quarter of 1998 primarily
due to the non-deductibility of goodwill resulting from the Merger.
As a result of the factors discussed above, the Company reported net
earnings of $46,614,000 for the first quarter of 1999 compared with net earnings
of $27,052,000 for the first quarter of 1998.
For the first quarter of 1999, the Company reported basic and diluted
earnings per common share of $0.34. For the first quarter of 1998, the Company
reported basic and diluted earnings per common share of $0.22.
15
Discussion and Analysis of Pro Forma Operating Results
The following discussion relates to the unaudited selected pro forma
financial information that appears in Note 8 to the consolidated financial
statements included in this Form 10-Q.
Net sales for the first quarter of 1999 increased 5% to $678,937,000,
compared with pro forma net sales of $643,787,000 for the first quarter of 1998,
primarily due to higher unit volume, partially offset by the negative effect of
foreign currency translation.
The Company's net sales were affected in the first quarter of 1999 by
the continued weakness of foreign currencies compared with the U.S. dollar,
particularly in Latin America and the Asia-Pacific region. Excluding the
negative effect of foreign currency translation, net sales would have increased
7% compared with the first quarter of 1998 on a pro forma basis.
Net sales from domestic operations increased approximately 5% compared
with the first quarter of 1998 on a pro forma basis, primarily due to increased
unit volume. Net sales from foreign operations, which represented approximately
47% of the Company's total net sales in both periods, increased approximately 6%
compared with the first quarter of 1998 on a pro forma basis, primarily due to
increased unit volume which more than offset the negative effect of foreign
currency translation.
Net sales of the Company's food and specialty packaging products
segment, which consist primarily of the Company's Cryovac(R) food packaging
products and Dri-Loc(R) absorbent pads, increased approximately 6% compared with
the first quarter of 1998 on a pro forma basis. This increase was due primarily
to increased unit volume partially offset by the negative effect of foreign
currency translation. Excluding the effect of foreign currency translation, net
sales of this segment would have increased 8% compared with the first quarter of
1998 on a pro forma basis.
Net sales of the Company's protective packaging segment, which consist
primarily of Cryovac(R) industrial and consumer packaging, Instapak(R) chemicals
and equipment, air cellular and polyethylene foam surface protection and
cushioning materials and protective and durable mailers and bags, increased 4%
compared with the first quarter of 1998 on a pro forma basis primarily due to
higher unit volume. Foreign currency translation had a minimal effect on the net
sales of this segment.
Gross profit as a percentage of net sales increased to 36.2% compared
to 34.2% for the first quarter of 1998 on a pro forma basis. This increase
resulted from the higher level of net sales, certain lower raw material prices
and cost reductions arising out of certain improvements in the Company's
operations.
Marketing, administrative and development expenses and goodwill
amortization as a percentage of net sales were 20.7% for the first quarter of
1999 compared to 21.2% for the first quarter of 1998 on a pro forma basis. This
decrease resulted primarily from the higher level of net sales and cost
reductions arising out of certain improvements in the Company's operations,
partially offset by integration and information systems costs.
16
On a pro forma basis, the decrease in other expense, net, consisting
primarily of interest expense, was primarily due to the lower level of debt
outstanding for the first quarter of 1999.
The Company's effective income tax rate was 47.0% for the first quarter
of 1999 compared with a pro forma rate of 46.4% for the first quarter of 1998.
These rates are higher than the Company's applicable statutory rates primarily
due to the non-deductibility for tax purposes of the goodwill amortization
resulting from the Merger. The Company expects that its effective tax rate will
remain higher than statutory rates for 1999.
As a result of the above, the Company recorded net earnings of
$46,614,000 for the first quarter of 1999 compared to pro forma net earnings of
$32,805,000 for the 1998 period.
Basic and diluted earnings per common share for the first quarter of
1999 were $0.34 compared with pro forma earnings per common share of $0.18 for
the first quarter of 1998. The effect of the conversion of the Company's
outstanding convertible preferred stock is not considered in the calculation of
diluted earnings per common share because it would be antidilutive (i.e., would
increase earnings per common share to $0.40 for the first quarter of 1999
compared with pro forma earnings per common share of $0.28 for the first quarter
of 1998).
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash flows from
operations and amounts available under the Company's existing lines of credit,
including principally the Credit Agreements mentioned above. Prior to the
consummation of the Merger, Cryovac participated in Grace's centralized cash
management system, whereby cash received from operations was transferred to, and
disbursements were funded from, centralized corporate accounts. As a result, any
cash flows from operations that were in excess of Cryovac's cash needs were
transferred to these corporate accounts and used for other corporate purposes.
In connection with the Reorganization, most of the Company's net cash at March
31, 1998 (other than $51,259,000 of cash recorded on the balance sheet of old
Sealed Air immediately before the Merger) was transferred to New Grace.
Net cash provided by operating activities increased to $72,991,000 in
the first quarter of 1999. The increase in operating cash flows in the first
quarter of 1999 was primarily due to the inclusion of the operations of old
Sealed Air, higher levels of depreciation and amortization partially offset by
the change in operating assets and liabilities in the ordinary course of
business.
Net cash used in investing activities amounted to $16,082,000 in the
first quarter of 1999 compared to net cash provided by investing activities of
$36,997,000 in the 1998 period. The decrease in 1999 compared to the first
quarter of 1998 was primarily due to the $51,259,000 of cash acquired from old
Sealed Air at the time of the Merger. Capital
17
expenditures were $16,943,000 for the first quarter of 1999 and $16,963,000 for
the 1998 period.
Net cash used in financing activities amounted to $14,734,000 in the
first quarter of 1999 and $40,600,000 in the first quarter of 1998. Repayments
of debt in the first quarter of 1999 were offset by additional borrowings. Also
included in the first quarter of 1999 was $17,911,000 of dividends paid on the
Company's Series A Preferred Stock and $1,240,000 for the repurchase on the open
market of shares of Series A Preferred Stock. In 1998, cash flows from financing
activities reflected the proceeds from borrowings under the Credit Agreements,
offset by the contribution of funds to New Grace in connection with the
Reorganization.
At March 31, 1999, the Company had working capital of $172,339,000, or
4% of total assets, compared to working capital of $309,624,000, or 8% of total
assets, at December 31, 1998. Working capital declined primarily due to an
increase in short-term borrowings and current installments of long-term debt of
$193,726,000 arising out of the reclassification of certain borrowings made
under the Credit Agreements from the Company's 5-year facility to its 364-day
facility, partially offset by a $40,294,000 increase in cash.
The Company's ratio of current assets to current liabilities (current
ratio) was 1.2 at March 31, 1999 and 1.6 at December 31, 1998. The Company's
ratio of current assets less inventory to current liabilities (quick ratio) was
0.9 at March 31, 1999 and 1.1 at December 31, 1998. The decreases in these
ratios in 1999 resulted primarily from the decreases in working capital
discussed above.
The Company's two principal Credit Agreements are a 5-year revolving
credit facility that expires on March 30, 2003 and a $600 million 364-day
revolving credit facility that was renewed effective March 29, 1999 for an
additional 364-day period. At that time, the Company voluntarily reduced the
aggregate amount available under the 5-year revolving credit facility from $1
billion to $800 million. Borrowings outstanding under the 5-year facility are
recorded as long-term debt and borrowings outstanding under the 364-day facility
are recorded as short-term borrowings. The Credit Agreements provide that the
Company and certain of its subsidiaries may borrow for various purposes,
including the refinancing of existing debt, the provision of working capital and
other general corporate needs. Long term debt, less current installments
outstanding at March 31, 1999 includes primarily borrowings under the 5-year
Credit Agreement, less prepayments made through March 31, 1999.
On May 13, 1999, the Company priced an offering of $300 million
aggregate principal amount of 10-year 6.95% senior notes that is being made
under Rule 144A and Regulation S under the Securities Act of 1933, as amended.
The net proceeds of such offering will be used to repay indebtedness outstanding
under the Credit Agreements. The Company expects this offering to be completed
in May 1999. Although amounts repaid under the Credit Agreements may be
reborrowed under the Credit Agreements, the Company is considering a further
voluntary reduction of the aggregate amounts available under the Credit
Agreements.
The Company's obligations under the Credit Agreements bear interest at
floating rates. The weighted average interest rate under the Credit Agreements
was approximately 5.4% at March 31, 1999. The Company has entered into certain
interest rate swap
18
agreements that have the effect of fixing the interest rates on a portion of
such debt. The weighted average interest rate at March 31, 1999 did not change
as a result of these derivative financial instruments.
The Credit Agreements provide for changes in borrowing margins based on
financial criteria and the Company's senior unsecured debt ratings, and impose
certain limitations on the operations of the Company and certain of its
subsidiaries. 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, mergers and acquisitions, and
certain dispositions of property or assets. The Company was in compliance with
these requirements as of March 31, 1999.
At March 31, 1999, the Company had available lines of credit, including
those available under the Credit Agreements, of approximately $1.6 billion of
which approximately $566 million were unused.
The Company's shareholders' equity was $438,015,000 at March 31, 1999
compared to $437,045,000 at December 31, 1998. Shareholders' equity increased
marginally in the first quarter of 1999 as the Company's net earnings of
$46,614,000 were substantially offset by the payment of the preferred stock
dividends of $17,911,000 and by $40,679,000 reflecting the negative effect of
foreign currency translation in the accumulated translation adjustment.
Other Matters
Environmental Matters
The Company is subject to loss contingencies resulting from
environmental laws and regulations, and it accrues for anticipated costs
associated with investigatory and remediation efforts when an assessment has
indicated that a loss is probable and can be reasonably estimated. These
accruals do not take into account any discounting for the time value of money
and are not reduced by potential insurance recoveries, if any. Environmental
liabilities are reassessed whenever circumstances become better defined and/or
remediation efforts and their costs can be better estimated. These liabilities
are evaluated periodically based on available information, including the
progress of remedial investigations at each site, the current status of
discussions with regulatory authorities regarding the methods and extent of
remediation and the apportionment of costs among potentially responsible
parties. As some of these issues are decided (the outcomes of which are subject
to uncertainties) and/or new sites are assessed and costs can be 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.
19
Year 2000 Computer System Compliance
The Company is addressing various Year 2000 issues. Year 2000 issues
arise from computer programs that utilize only the last two digits of a year to
define a particular year rather than the complete four-digit year. As a result,
certain computer programs may not properly process certain dates, particularly
those that fall into the year 2000 or subsequent years. Year 2000 issues affect
both computer-based information systems and systems with embedded
microcontrollers or microcomputers.
In addressing these issues, the Company has considered the following
four areas: (a) computer-based information technology systems, (b) other systems
not directly involving information technology, including embedded systems, (c)
packaging and dispensing equipment used by the Company's customers, and (d) Year
2000 readiness of the Company's key suppliers and customers. The Company's
action plan for dealing with these issues consists of the following four phases:
(1) identifying the potentially affected items, (2) assessing the effect of Year
2000 issues on these items, (3) remediating the deficiencies of these items with
updates, repairs or replacements, and (4) testing these items.
State of Readiness
The Company has examined the hardware and software of its
computer-based information technology systems, including mainline systems,
personal computers and telephone systems. The Company has also examined other
devices incorporating electronic microchips that might fail as a result of the
Year 2000 issue. These include security and control systems in Company
facilities and programmable logic controllers and microcomputers embedded into
production and other equipment in the Company's plants and warehouses. The
Company has substantially finished the identification and assessment phases of
its Year 2000 action plan in these two areas. The Company has also completed
approximately 90% of the remediation and testing phases of the plan for these
areas. The Company expects to complete its work on Year 2000 issues for
computer-based information technology systems by June 30, 1999 and for
non-information technology systems by September 30, 1999.
The Company has examined certain packaging and dispensing equipment
that it has sold or leased to customers in order to identify Year 2000 issues.
This equipment often incorporates microprocessors as controllers. The Company
believes that no further remediation is necessary for these devices.
The Company has conducted an initial Year 2000 issue survey of key
suppliers, particularly single-source suppliers of important raw materials, and
initial responses have been received. Remedial action will be requested as
required. The Company expects that all survey activity regarding suppliers will
be completed by June 30, 1999. In addition, the Company intends to contact
certain customers by May 31, 1999 regarding their overall Year 2000 readiness.
20
Costs
The Company estimates that the total costs to address the Company's
Year 2000 issues will be in the neighborhood of $6 million. No significant
information technology projects have been deferred by the Company due to Year
2000 issues.
Risks
While the Company believes that it is taking all steps reasonably
necessary to assure its ability to conduct business and to safeguard its assets
during the period affected by Year 2000 issues, risks cannot in every case be
eliminated. Utilities and other sole-source suppliers may disrupt one or more of
the Company's operations if they are unable to conduct business during this
period.
If the Company is unable to complete its remediation efforts
satisfactorily and on a timely basis, substantial business interruptions may
occur in its operations. These could include disruptions to manufacturing
operations, logistics, invoicing, collections and vendor payments. The Company's
efforts described herein are expected to reduce the Company's uncertainty about
Year 2000 issues. The Company believes that its efforts to date in this regard
have contributed to reducing the risk of significant interruptions of its
operations, and it intends to pursue these efforts as described herein.
Contingency Plans
The Company has certain contingency measures in place, including in
some cases dual utility services, backup power equipment, backup data centers,
manual backup procedures and alternate suppliers. The Company is developing a
formal Year 2000 contingency plan to implement additional protection measures.
The Company expects to complete this plan during the first half of 1999 and to
implement it on a timely basis.
Euro Conversion
On January 1, 1999, eleven of the fifteen members of the European Union
(the "participating countries") established fixed conversion rates between their
existing currencies (the "legacy currencies") and introduced the euro, a single
common non-cash currency. The euro is now traded on currency exchanges and is
being used in business transactions.
At the beginning of 2002, new euro-denominated bills and coins will be
issued to replace the legacy currencies, and the legacy currencies will be
withdrawn from circulation. By 2002, all companies operating in the
participating countries are required to restate their statutory accounting data
into euros as their base currency.
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
21
currencies and euros between 1999 and 2002, (3) the requirement to change the
base statutory and reporting currency of each subsidiary in the participating
countries into euros during the transition period, (4) the foreign currency
exposure changes resulting from the alignment of the legacy currencies into the
euro, and (5) the identification of material contracts and sales agreements
whose contractual stated currency will need to be converted into euros.
The Company believes that it will be euro compliant by January 1, 2002.
The Company has implemented plans to accommodate euro-denominated transactions
and to handle euro payments with third party customers and suppliers in the
participating countries. The Company plans to meet the requirement to convert
statutory and reporting currencies to the euro by acquiring and installing new
financial software systems. If there are delays in such installation, the
Company plans to pursue alternate means to convert statutory and reporting
currencies to the euro by 2002. The Company expects that its foreign currency
exposures will be reduced as a result of the alignment of legacy currencies, and
the Company believes that all material contracts and sales agreements requiring
conversion will be converted to euros prior to January 1, 2002.
Although additional costs are expected to result from the
implementation of the Company's plans, the Company also expects to achieve
benefits in its treasury and procurement areas as a result of the elimination of
the legacy currencies. Since the Company has operations in each of its business
segments in the participating countries, each of its business segments will be
affected by the conversion process. However, the Company expects that the total
impact of all strategic and operational issues related to the euro conversion
and the cost of implementing its plans for the euro conversion will not have a
material adverse impact on its consolidated financial condition or results of
operations.
Recently Issued Statements of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement, which the
Company expects to adopt beginning January 1, 2000, establishes accounting and
operating standards for hedging activities and derivative instruments, including
certain derivative instruments embedded in other contracts. The Company is
reviewing the potential impact, if any, of SFAS No. 133 on its Consolidated
Financial Statements.
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
22
expectations concerning future events and discuss, among other things,
anticipated future performance and future business plans. Forward-looking
statements are identified by such words and phrases as "expects," "intends,"
"believes," "will continue," "plans to," "could be" and similar expressions.
Forward-looking statements are necessarily subject to uncertainties, many of
which are outside the control of the Company, that could cause actual results to
differ materially from such statements.
While the Company is not aware that any of the factors listed below
will adversely affect the future performance of the Company, the Company
recognizes that it is subject to a number of uncertainties, such as business and
market conditions in Asia, Latin America and other geographic areas around the
world, changes in the value of foreign currencies against the U.S. dollar, the
ability of the Company to complete integration and restructuring activities
relating to the merger of old Sealed Air and Cryovac and the success of those
efforts, general economic, business and market conditions, conditions in the
industries and markets that use the Company's packaging materials and systems,
the development and success of new products, the Company's success in entering
new markets, competitive factors, raw material availability and pricing, changes
in the Company's relationship with customers and suppliers, future litigation
and claims (including environmental matters) involving the Company, changes in
domestic or foreign laws or regulations, or difficulties related to the Year
2000 issue or the euro conversion.
23
PART II
-------
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
In March 1999, the Company issued 175,049 shares of its common stock,
par value $0.10 per share, to the Profit-Sharing Plan of the Company as part of
its 1998 contribution to the Profit-Sharing Plan. The issuance of such shares to
the Profit-Sharing Plan was not registered under the Securities Act of 1933, as
amended (the "Securities Act"), because such transaction did not involve an
"offer" or "sale" of securities under Section 2(3) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
10.1 First Amendment, dated as of March
16, 1999, to Global Revolving Credit
Agreement (5-year), among the
Company, certain of the Company's
subsidiaries as borrowers and
guarantors thereunder, ABN AMRO Bank
N.V., as Administrative Agent, and
certain other banks party thereto.
10.2 First Amendment, dated as of March
16, 1999, to Global Revolving Credit
Agreement (364-Day), among the
Company, certain of the Company's
subsidiaries as borrowers and
guarantors thereunder, ABN AMRO Bank
N.V., as Administrative Agent, and
certain other banks party thereto.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On March 16, 1999, the Company filed a Current Report on Form
8-K, Date of Report - March 15, 1999, which reported under Item 5 that the
Company's 1999 Annual Meeting will be held on May 21, 1999 in accordance with
the Company's By-Laws, and proxy materials were expected to be mailed to the
Company's stockholders on or about March 31, 1999 and that the Company's 1998
Annual Meeting was held on June 26, 1998, delayed from the date provided in the
Company's By-Laws due to the closing of the Reorganization, the Recapitalization
and the Merger.
24
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: May 14, 1999 By /s/ Jeffrey S. Warren
------------------------
Jeffrey S. Warren
Controller
(Authorized Executive Officer
and Chief Accounting Officer)
25