SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 83,619,100 shares of the registrant's common stock, par value $0.10
per share, and 35,758,634 shares of the registrant's Series A convertible
preferred stock, par value $0.10 per share, outstanding as of July 31, 1999.
PART I
FINANCIAL INFORMATION
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Three and Six Months Ended June 30, 1999 and 1998
(In thousands of dollars except per share data)
(Unaudited)
For the For the
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
--------- --------- ---------- -----------
Net sales $695,121 $670,005 $1,374,058 $1,101,040
Cost of sales 441,541 442,945 874,780 733,858
--------- --------- ---------- -----------
Gross profit 253,580 227,060 499,278 367,182
Marketing, administrative
and development expenses 131,969 124,084 260,583 218,537
Goodwill amortization 12,331 12,018 24,582 12,108
--------- --------- ---------- -----------
Operating profit 109,280 90,958 214,113 136,537
Other income (expense):
Interest expense (14,738) (20,642) (29,457) (20,724)
Other, net 1,143 (1,537) (1,021) (1,948)
--------- --------- ---------- -----------
Other expense, net (13,595) (22,179) (30,478) (22,672)
--------- --------- ---------- -----------
Earnings before
income taxes 95,685 68,779 183,635 113,865
Income taxes 44,493 33,214 85,829 51,248
--------- --------- ---------- -----------
Net earnings $ 51,192 $ 35,565 $ 97,806 $ 62,617
========= ========= ========== ==========
Less: Series A
Preferred stock dividends 17,879 18,011 35,789 18,011
Less: Retroactive
recognition of preferred
stock dividends -- -- -- 18,011
Add: Excess of book value
over repurchase price of
Series A preferred stock 29 -- 39 --
--------- --------- ---------- -----------
Net earnings ascribed to
common shareholders $ 33,342 $ 17,554 $ 62,056 $ 26,595
========= ========= ========== ===========
Earnings per common share
(See Note 4):
Basic $ 0.40 $ 0.21 $ 0.74 $ 0.43
========= ========= ========== ===========
Diluted $ 0.40 $ 0.21 $ 0.74 $ 0.43
========= ========= ========== ===========
Weighted average number of
common shares outstanding:
Basic 83,626 83,612 83,505 62,249
========= ========= ========== ===========
Diluted 83,758 83,746 83,637 62,426
========= ========= ========== ===========
See accompanying notes to consolidated financial statements.
2
SEALED AIR CORPORATION
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
(In thousands of dollars except share data)
June 30, December 31,
1999 1998
(Unaudited)
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 60,027 $ 44,986
Notes and accounts receivable, net of allowances
for doubtful accounts of $19,076 in 1999 and
$17,945 in 1998 450,118 453,124
Inventories 269,065 275,312
Other current assets 72,226 71,192
---------- -----------
Total current assets 851,436 844,614
---------- -----------
Property and equipment:
Land and buildings 414,005 420,589
Machinery and equipment 1,322,147 1,349,716
Other property and equipment 115,308 121,252
Construction in progress 50,767 54,538
---------- -----------
1,902,227 1,946,095
Less accumulated depreciation and amortization 858,824 829,513
---------- -----------
Property and equipment, net 1,043,403 1,116,582
---------- -----------
Goodwill, less accumulated amortization of
$60,218 in 1999 and $36,083 in 1998 1,883,948 1,907,736
Other assets 177,859 170,998
---------- -----------
Total assets $3,956,646 $ 4,039,930
========== ===========
See accompanying notes to consolidated financial statements.
3
SEALED AIR CORPORATION
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 (Continued)
(In thousands of dollars except share data)
June 30, December 31,
1999 1998
(Unaudited)
----------- ------------
LIABILITIES, CONVERTIBLE PREFERRED STOCK & SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion
of long-term debt $ 148,656 $ 85,131
Accounts payable 163,992 176,594
Other current liabilities 209,008 230,332
Income taxes payable 43,026 42,933
---------- ----------
Total current liabilities 564,682 534,990
Long-term debt, less current portion 845,332 996,526
Deferred income taxes 206,289 200,699
Other liabilities 82,002 79,577
---------- ----------
Total liabilities 1,698,305 1,811,792
---------- ----------
Series A convertible preferred stock, $50 per
share redemption value, authorized and issued
36,016,696 shares in 1999 and 36,021,851
shares in 1998, including 257,500 shares in
1999 and 200,000 shares in 1998 in treasury,
mandatory redemption in 2018 1,787,960 1,791,093
Shareholders' equity:
Common stock, $.10 par value. Authorized
400,000,000 shares, issued 84,009,118 shares in
1999 and 83,806,361 shares in 1998 8,401 8,380
Additional paid-in capital 622,958 610,505
Retained earnings (deficit) 54,051 (7,966)
Accumulated translation adjustment (172,884) (124,843)
---------- ----------
512,526 486,076
---------- ----------
Less: Deferred compensation 27,193 28,683
Less: Cost of treasury common stock, 331,904 shares
in 1999 and 494,550 shares in 1998 11,838 17,234
Less: Minimum pension liability 3,114 3,114
---------- ----------
Total shareholders' equity 470,381 437,045
---------- ----------
Total liabilities, preferred stock and
shareholders' equity $3,956,646 $4,039,930
========== ==========
See accompanying notes to consolidated financial statements.
4
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998
(In thousands of dollars)
(Unaudited)
1999 1998
---------- ----------
Cash flows from operating activities:
Net earnings $ 97,806 $ 62,617
Adjustments to reconcile net earnings to
net cash provided by operating activities,
net of effect of businesses acquired:
Depreciation and amortization 111,946 86,006
Amortization of senior debt discount 19 --
Deferred tax (benefit)provision (2,162) 5,673
Net loss on disposals of fixed assets 105 608
Changes in operating assets and liabilities,
net of assets and liabilities
acquired and transferred to/from Grace:
Notes and accounts receivable (11,253) (8,743)
Inventories (1,031) 5,320
Other current assets (422) 1,417
Other assets (1,542) (9,357)
Accounts payable (9,753) (2,243)
Other current liabilities (7,563) 9,301
Other liabilities 4,317 5,271
---------- ---------
Net cash provided by operating activities 180,467 155,870
---------- ---------
Cash flows from investing activities:
Capital expenditures for property and equipment (31,843) (32,462)
Proceeds from sales of property and equipment 2,155 4,191
Businesses acquired, net of cash acquired
and debt assumed (8,905) 48,994
---------- ---------
Net cash(used) provided by investing activities (38,593) 20,723
---------- ---------
Cash flows from financing activities:
Net advances to Grace -- (24,106)
Proceeds from long-term debt 298,175 1,258,807
Payment of long-term debt (455,053) (125,768)
Payment of senior debt issuance costs (1,950) --
Dividends paid on preferred stock (35,821) --
Purchase of treasury preferred stock (2,836) --
Proceeds from stock option exercises 1,663 --
Transfer of funds to New Grace -- (1,256,614)
Net proceeds from short-term borrowings 69,352 4,230
---------- ---------
Net cash used in financing activities (126,470) (143,451)
---------- ---------
Effect of exchange rate changes on cash and cash
equivalents (363) 922
---------- ---------
Cash and cash equivalents:
Increase during the period 15,041 34,064
Balance, beginning of period 44,986 --
---------- ---------
Balance, end of period $ 60,027 $ 34,064
========== =========
See accompanying notes to consolidated financial statements.
5
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998 (Continued)
(In thousands of dollars)
(Unaudited)
1999 1998
---------- ----------
Supplemental Cash Flow Items:
Interest payments, net of amounts capitalized $ 30,135 $ 13,745
========== ==========
Income tax payments $ 85,275 $ 11,016
========== ==========
Non-Cash Items:
Issuance of 36,021,851 shares of Series A
convertible preferred stock and
40,647,815 shares of common stock
in connection with the Recapitalization $ -- $1,801,093
========== ==========
Net assets acquired in exchange for the
issuance of 42,624,246 shares of common
stock in connection with the Merger, net
of cash balance of $51,259 acquired $ -- $2,110,752
========== ==========
See accompanying notes to consolidated financial statements.
6
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 1999 and 1998
(In thousands of dollars)
(Unaudited)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net Earnings $ 51,192 $ 35,565 $ 97,806 $ 62,617
Other comprehensive income:
Foreign currency translation
adjustments (7,362) (2,561) (48,041) (12,678)
-------- -------- -------- --------
Comprehensive income $ 43,830 $ 33,004 $ 49,765 $ 49,939
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
7
SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(Amounts in thousands, except per share data)
(Unaudited)
(1) Reorganization, Recapitalization and Merger
On March 31, 1998, the Company (formerly known as W. R. Grace & Co.) and Sealed
Air Corporation ("old Sealed Air"), completed a series of transactions as a
result of which:
(a) The specialty chemicals business of the Company was separated from
its packaging business, the packaging business ("Cryovac") was
contributed to one group of wholly owned subsidiaries, and the
specialty chemicals business was contributed to another group of
wholly owned subsidiaries ("New Grace"); the Company and Cryovac
borrowed approximately $1.26 billion under two revolving credit
agreements (the "Credit Agreements") (which, as amended, are
discussed below) and transferred substantially all of those funds to
New Grace; and the Company distributed all of the outstanding shares
of common stock of New Grace to its shareholders. As a result, New
Grace became a separate publicly owned corporation that is unrelated
to the Company. These transactions are referred to below as the
"Reorganization."
(b) The Company recapitalized its outstanding shares of common stock, par
value $0.01 per share ("Grace Common Stock"), into a new common stock
and Series A convertible preferred stock, each with a par value of
$0.10 per share (the "Recapitalization").
(c) A subsidiary of the Company merged into old Sealed Air (the
"Merger"), with old Sealed Air being the surviving corporation. As a
result of the Merger, old Sealed Air became a subsidiary of the
Company, and the Company was renamed Sealed Air Corporation.
References to "Grace" in these notes refer to the Company before the
Reorganization, the Recapitalization and the Merger.
(2) Basis of Presentation
The Merger was accounted for as a purchase of old Sealed Air by the Company as
of March 31, 1998. Accordingly, the financial statements include the operating
results and cash flows as well as the assets and liabilities of Cryovac for all
periods presented. The operating results, cash flows, assets and liabilities of
old Sealed Air are included from March 31, 1998. See Note 8 for unaudited
selected pro forma statement of earnings information for the quarter and six
months ended June 30, 1998. For periods prior to the Merger, the financial
statements exclude all of the assets, liabilities (including contingent
liabilities), revenues and expenses of Grace other than the assets,
liabilities, revenues and expenses of Cryovac.
Subsequent to the Merger, the consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. In
management's opinion, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
position and results of operations for the quarter and six months ended June
30, 1999 have been made. The consolidated statements of earnings for the three
and six months ended June 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
8
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
(3) Equity
In connection with the Recapitalization, the Company, among other things,
recapitalized the outstanding shares of Grace Common Stock into 40,647,815
shares of the Company's common stock and 36,021,851 shares of Series A
convertible preferred stock (convertible into approximately 31,900,000 shares
of the Company's common stock), each with a par value of $0.10 per share. In
the Merger, the Company issued 42,624,246 shares of common stock to the
shareholders of old Sealed Air.
The outstanding Series A preferred stock is convertible at any time into
approximately 0.885 share of common stock for each share of preferred stock,
votes with the common stock on an as-converted basis, pays a cash dividend, as
declared by the Board of Directors, at an annual rate of $2.00 per share,
payable quarterly in arrears, becomes redeemable at the option of the Company
beginning March 31, 2001, subject to certain conditions, and is subject to
mandatory redemption on March 31, 2018 at $50 per share, plus any accrued and
unpaid dividends. Because it is subject to mandatory redemption, the Series A
convertible preferred stock is classified outside of the shareholders' equity
section of the balance sheet. At its date of issuance, the fair value of the
Series A convertible preferred stock exceeded its mandatory redemption amount
primarily due to the common stock conversion feature of such preferred stock.
Accordingly, the carrying amount of the Series A convertible preferred stock is
reflected in the consolidated balance sheet at its mandatory redemption value.
The Company has authority to issue a total of 50,000,000 shares of preferred
stock, par value $0.10 per share.
(4) Earnings Per Common Share
In calculating basic and diluted earnings per common share for the first six
months of 1998, retroactive recognition was given to the Recapitalization as if
it had occurred on January 1, 1998 in accordance with SAB No. 98. Accordingly,
net earnings were reduced for preferred stock dividends for the first quarter
of 1998 (as if such shares had been outstanding during the period) to arrive at
net earnings ascribed to common shareholders. The weighted average number of
outstanding common shares used for the first six months of 1998 to calculate
basic earnings per common share was calculated on an equivalent share basis
using the weighted average number of shares of common stock outstanding for the
first quarter of 1998, adjusted to reflect the terms of the Recapitalization.
The weighted average number of common shares used to calculate diluted earnings
per common share also considers the exercise of dilutive stock options in each
period. The outstanding preferred stock is not assumed to be converted in the
calculation of diluted earnings per common share for all periods presented
because the treatment of the preferred stock as the common stock into which it
is convertible would be antidilutive (i.e., would increase earnings per common
share) in those periods.
The following table sets forth the reconciliation of the basic and diluted
earnings per common share computations for the three and six months ended June
30, 1999 and 1998 (amounts other than per share amounts in thousands).
9
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------
Basic EPS:
NUMERATOR
Net earnings $ 51,192 $ 35,565 $ 97,806 $ 62,617
Add: Excess of book value over
repurchase price of preferred stock 29 -- 39 --
Less: Preferred stock dividends 17,879 18,011 35,789 18,011
Less: Retroactive recognition of
preferred stock dividends -- -- -- 18,011
- ----------------------------------------------------------------------------------------
Net earnings ascribed to common
shareholders $ 33,342 $ 17,554 $ 62,056 $ 26,595
- ----------------------------------------------------------------------------------------
DENOMINATOR
Weighted average common shares
outstanding - basic 83,626 83,612 83,505 62,249
- ----------------------------------------------------------------------------------------
Basic earnings per common share $ 0.40 $ 0.21 $ 0.74 $ 0.43
- ----------------------------------------------------------------------------------------
Diluted EPS:
NUMERATOR
Net earnings ascribed to common
shareholders $ 33,342 $ 17,554 $ 62,056 $ 26,595
- ----------------------------------------------------------------------------------------
DENOMINATOR
Weighted average common shares
Outstanding - basic 83,626 83,612 83,505 62,249
Effect of assumed exercise of stock
options 132 134 132 177
Weighted average common shares
Outstanding - diluted 83,758 83,746 83,637 62,426
- ----------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.40 $ 0.21 $ 0.74 $ 0.43
- ----------------------------------------------------------------------------------------
(5) Inventories
At June 30, 1999 and December 31, 1998, the components of inventories by major
classification (raw materials, work in process and finished goods) were as
follows:
June 30, December 31,
1999 1998
----------- ------------
Raw materials $ 61,579 $ 63,805
Work in process 51,294 50,714
Finished goods 172,364 176,965
----------- -----------
Subtotal 285,237 291,484
Reduction of certain
inventories to LIFO basis (16,172) (16,172)
----------- -----------
Total inventories $ 269,065 $ 275,312
=========== ============
10
(6) Income Taxes
The Company's effective income tax rates were 46.5% and 48.3% for the second
quarters of 1999 and 1998, respectively. Such rates were higher than the
statutory U.S. federal income tax rate primarily due to the non-deductibility
of the goodwill amortization resulting from the Merger and state income taxes.
(7) Long-Term Debt
On May 18, 1999, the Company issued $300 million aggregate principal amount of
10-year 6.95% senior notes ("Senior Notes") under Rule 144A and Regulation S of
the Securities Act of 1933, as amended. Accrued interest on the Senior Notes is
payable semi-annually in cash on May 15 and November 15 of each year,
commencing on November 15, 1999. The net proceeds of $297,834 from the issuance
of the Senior Notes were used to reduce outstanding borrowings under the Credit
Agreements described below. At June 30, 1999, the outstanding borrowings under
the Senior Notes were $297,853 net of unamortized bond discount of $2,147.
At June 30, 1999, the Company's outstanding debt consisted primarily of
borrowings made under the Credit Agreements described below, the Senior Notes
and certain other loans incurred by the Company's subsidiaries. The Company's
outstanding debt balance as of December 31, 1998 primarily included borrowings
under the Credit Agreements and certain other loans incurred by the Company's
subsidiaries.
The Company's two principal Credit Agreements are a 5-year revolving credit
facility that expires on March 30, 2003 and a 364-day revolving credit facility
that expires on March 27, 2000. During the first six months of 1999, the
Company voluntarily reduced the amounts available under the Credit Agreements
from $1 billion to $650 million under the 5-year revolving credit facility and
from $600 million to $475 million under the 364-day revolving facility. As of
June 30, 1999, outstanding borrowings under the 5-year and 364-day revolving
credit facilities were approximately $537 million (included in long-term debt)
and $41 million (included in short-term borrowings), respectively. The Credit
Agreements provide that the Company and certain of its subsidiaries may borrow
for various purposes, including the refinancing of existing debt, the provision
of working capital and other general corporate needs.
The Company's obligations under the Credit Agreements bear interest at floating
rates. The weighted average interest rate under the Credit Agreements was
approximately 5.6% at June 30, 1999 and 5.8% at December 31, 1998. 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 rates at June 30, 1999 and December 31, 1998 did not change
significantly as a result of these derivative financial instruments.
The Credit Agreements provide for changes in borrowing margins based on
financial criteria and the Company's senior unsecured debt ratings, and impose
certain limitations on the operations of the Company and certain of its
subsidiaries. The limitations include financial covenants relating to interest
coverage and debt leverage as well as certain restrictions on the incurrence of
additional indebtedness, the creation of liens, mergers and acquisitions, and
certain dispositions of property and assets. The Company was in compliance with
these requirements as of June 30, 1999.
The Senior Notes impose certain limitations on the operations of the Company
and certain of its subsidiaries. The limitations include restrictions on the
creation of liens, entrance into sale-leaseback transactions, merger or
consolidation of the Company and disposition of substantially all of the
Company's assets. The Company was in compliance with these requirements as of
June 30, 1999.
On July 19, 1999, the Company issued euro 200 million (approximately $205
million) aggregate principal amount of 7-year 5.625% notes in the European
market ("Euro Notes")
11
under Regulation S of the Securities Act of 1933, as amended. Accrued interest
on the Euro Notes is payable annually in cash on July 19 of each year,
commencing on July 19, 2000. The net proceeds of euro 198,624 (approximately
$203 million) were used to repay borrowings under the Credit Agreements.
(8) Pro Forma Information
The following table presents selected unaudited pro forma statement of earnings
information for the quarter and six months ended June 30, 1998 as a result of
the Reorganization, the Recapitalization and the Merger. Such information
reflects pro forma adjustments made in combining the historical results of old
Sealed Air and Cryovac as a result of such transactions for the three and six
months ended June 30, 1998. Such amounts include for the first quarter of 1998,
among others, incremental goodwill amortization of approximately $10 million
and incremental interest expense of approximately $20 million. This pro forma
information is not intended to represent what the Company's actual results of
operations would have been for such periods.
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
Reported Pro Forma Reported Pro Forma
1999 1998(1) 1999 1998(1)
---- ------- ---- -------
Net sales by business segment:
Food and specialty packaging $431,807 $419,932 $857,786 $820,802
Protective packaging 263,314 250,073 516,272 492,990
- --------------------------------------------------------------------------------------
Total net sales 695,121 670,005 1,374,058 1,313,792
Cost of sales 441,541 434,945 874,780 858,795
- --------------------------------------------------------------------------------------
Gross profit 253,580 235,060 499,278 454,997
Marketing, administrative and
development expenses 131,969 124,084 260,583 248,646
Goodwill amortization 12,331 12,018 24,582 23,939
- --------------------------------------------------------------------------------------
Operating profit 109,280 98,958 214,113 182,412
Other income (expense):
Interest expense (14,738) (20,642) (29,457) (43,095)
Other, net 1,143 (1,537) (1,021) (1,333)
- --------------------------------------------------------------------------------------
Other expense, net (13,595) (22,179) (30,478) (44,428)
Earnings before income taxes 95,685 76,779 183,635 137,984
Income taxes 44,493 35,787 85,829 64,187
- --------------------------------------------------------------------------------------
Net earnings 51,192 40,992 97,806 73,797
- --------------------------------------------------------------------------------------
Less: Preferred stock dividends 17,879 18,011 35,789 36,022
Add: Excess of book value over
repurchase price of preferred stock 29 -- 39 --
- --------------------------------------------------------------------------------------
Net earnings ascribed to common
shareholders 33,342 22,981 62,056 37,775
12
Earnings per common share (2)
Basic 0.40 0.27 0.74 0.45
Diluted 0.40 0.27 0.74 0.45
- --------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding:
Basic 83,626 83,612 83,505 83,443
Diluted 83,758 83,746 83,637 83,620
- --------------------------------------------------------------------------------------
(1) The second quarter of 1998 represents the actual operating results
resulting from the Merger of Sealed Air and Cryovac excluding the non-cash
inventory charge of approximately $8 million resulting from the turnover
of certain of the Company's inventories previously stepped-up to fair
value in connection with the Merger.
(2) For purposes of calculating basic and diluted earnings per common share in
the 1998 periods, net earnings have been reduced by the dividends that
would have been payable on the Company's Series A convertible preferred
stock for the first quarter of 1998 if such shares had been outstanding
during such period to arrive at net earnings ascribed to common
shareholders. The weighted average number of outstanding common shares
used to calculate basic earnings per common share is calculated on an
equivalent share basis using the weighted average number of shares
outstanding of the Company's common stock for the first quarter of 1998,
adjusted to reflect the terms of the Recapitalization. The assumed
conversion of the convertible preferred stock is not considered in the
calculation of diluted earnings per common share for all periods presented
as the effect is antidilutive (i.e. would increase the earnings per common
share for each period presented).
(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 $10,579 at June 30, 1999 and $26,924 at December 31, 1998. The
components of the restructuring charges, spending and other activity through
June 30, 1999 and the remaining reserve balance at June 30, 1999 were as
follows:
Employee Contract
Termination Plant/Office Termination
Costs Closures Costs Total
- ---------------------------------------------------------------------------------------------
Restructuring reserve at December 31, 1998 25,362 1,562 - 26,924
Cash payments during 1999 (16,004) (341) - (16,345)
- ---------------------------------------------------------------------------------------------
Restructuring reserve at June 30, 1999 9,358 1,221 - 10,579
- ---------------------------------------------------------------------------------------------
The Company expects to incur approximately $43,289 of cash outlays to carry out
this restructuring program, of which approximately $32,710 was incurred through
June 30, 1999. These cash outlays include primarily severance and other
personnel related costs, costs of terminating leases and facilities and
equipment disposition costs. In connection with the restructuring, the Company
is eliminating 750 positions, or approximately 5% of its workforce, across all
functional areas. Through June 30, 1999, approximately 624 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.
(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
13
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).
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- --------------------------------------
1999 1998 1999 1998
====================================================================================================================================
Net sales
Food and Specialty Packaging $ 431,807 $ 419,932 $ 857,786 $ 795,454
Protective Packaging 263,314 250,073 516,272 305,586
- ------------------------------------------------------------------------------------------------------------------------------------
Total segments $ 695,121 $ 670,005 $ 1,374,058 $ 1,101,040
====================================================================================================================================
Operating profit
Food and Specialty Packaging $ 72,688 $ 64,210 $ 140,252 $ 100,824
Protective Packaging 56,958 41,227 110,511 50,282
- ------------------------------------------------------------------------------------------------------------------------------------
Total segments 129,646 105,437 250,763 151,106
Corporate operating expenses(1) (20,366) (14,479) (36,650) (14,569)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 109,280 $ 90,958 $ 214,113 $ 136,537
====================================================================================================================================
Depreciation and amortization
Food and Specialty Packaging $ 27,269 $ 31,112 $ 55,618 $ 53,725
Protective Packaging 15,218 13,299 30,132 19,892
- ------------------------------------------------------------------------------------------------------------------------------------
Total segments 42,487 44,411 85,750 73,617
Corporate (including goodwill amortization) 13,672 12,299 26,196 12,389
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 56,159 $ 56,710 $ 111,946 $ 86,006
====================================================================================================================================
(1) Includes goodwill amortization of $12,331 and $12,018 in the second
quarters of 1999 and 1998, respectively and $24,582 and $12,108 in the
first six months of 1999 and 1998, respectively.
(11) Acquisitions
During the first six months of 1999, the Company made certain small
acquisitions. These transactions, which were effected in exchange for cash,
were accounted for as purchases and were not material to the Company's
consolidated financial statements.
14
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 second quarter and first six months of
1999, the Company has included selected unaudited pro forma financial
information in Note 8 to the consolidated financial statements included in
this Form 10-Q.
15
RESULTS OF OPERATIONS
Discussion and Analysis of Reported Operating Results
The Company's net sales increased 4% to $695,121,000 in the second
quarter of 1999 from $670,005,000 in the second quarter of 1998. A discussion of
the factors affecting this increase in net sales in the second quarter of 1999
is set forth below in the discussion and analysis of pro forma operating
results. For the six-month period, the Company's net sales increased 25% to
$1,374,058,000 in 1999 from $1,101,040,000 in 1998. This 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 six-month period were due primarily to the inclusion of the
protective packaging business of old Sealed Air in the entire 1999 period, but
not in the first quarter of 1998, and adjustments arising from the Merger, the
Reorganization and the Recapitalization.
Gross profit increased as a percentage of net sales to 36.5% for the
second quarter of 1999 from 33.9% for the second quarter of 1998. For the
first six months of 1999, gross profit as a percentage of net sales was 36.3%
compared to 33.3% in the 1998 period. During the second quarter of 1998, the
Company incurred a non-cash inventory charge of approximately $8,000,000 (the
"Inventory Charge") resulting from the turnover of certain of the Company's
inventories previously stepped-up to fair value in connection with the Merger.
Excluding the Inventory Charge, gross profit as a percentage of net sales
would have been 35.1% and 34.1% for the second quarter and first six-months of
1998, respectively. The increases in both periods, excluding the Inventory
Charge, resulted primarily 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.
The higher level of marketing, administrative and development
expenses reflects primarily the higher level of net sales and, as noted above
with respect to the six-month period, is due primarily to the inclusion of
old Sealed Air's operations for the full first six months of 1999 but only the
second quarter of 1998. Such expenses also reflect the absence in the first
six months of 1999 of $18,044,000 of corporate expenses that were allocated to
Cryovac by Grace in the first quarter of 1998 prior to the Merger. Such
allocations ceased upon the Merger. As a result of the Merger, the Company
recorded goodwill amortization of $24,582,000 in the first six months of 1999
compared to $12,108,000 in the first six months of 1998.
Other expense, net which reflects primarily interest expense on the
Company's indebtedness, decreased for the second quarter of 1999 due to the
lower level of debt outstanding during the 1999 period. The increase in
interest expense for the first six months of 1999 was due to the timing of
indebtedness entered into under the Credit Agreements on March 31, 1998,
whereby the debt under the Credit Agreements was outstanding for the full
six-month period of 1999 but only for the second quarter of 1998.
The Company's effective income tax rate for the quarter ended June
30, 1999 was 46.5% compared to 48.3% for the quarter ended June 30, 1998. The
effective tax rate for
16
the first six months of 1999 was 46.7% compared to 45.0% for the 1998 period.
Such rates were higher than the statutory U.S. federal income tax rate
primarily due to the non-deductibility of the goodwill amortization resulting
from the Merger and state income taxes.
As a result of the factors discussed above, the Company's net earnings
increased to $51,192,000 from $35,565,000 for the second quarter of 1998 and to
$97,806,000 for the first six months of 1999 from $62,617,000 for the first six
months of 1998.
Basic and diluted earnings per common share for the quarter increased
to $.40 from $0.21 in the 1998 period and for the first six months of 1999
increased to $0.74 from $0.43 in the 1998 period.
Discussion and Analysis of Pro Forma Operating Results
The following discussion relates to the unaudited selected pro forma
financial information that appears in Note 8 to the consolidated financial
statements included in this Form 10-Q.
Reported net sales for the second quarter of 1999 increased 4% to
$695,121,000 compared with $670,005,000 for the second quarter of 1998. For
the six-month period, the Company's reported net sales increased 5% to
$1,374,058,000 compared with pro forma net sales of $1,313,792,000 in the 1998
period. The increases in net sales in both periods were primarily due to
higher unit volume, partially offset by the negative effect of foreign
currency translation.
The Company's net sales continued to be affected in the second
quarter and first six months of 1999 by the continued weakness of foreign
currencies compared with the U.S. dollar in Latin America, Europe and the
Asia-Pacific region. Excluding the negative effect of foreign currency
translation, net sales would have increased 6% for both the second quarter
and, on a pro forma basis, the first six months of 1999 compared to the
respective 1998 periods.
Net sales from domestic operations increased approximately 4%
compared with the second quarter of 1998 and, on a pro forma basis, 5%
compared to the first six months of 1998, primarily due to increased unit
volume. Net sales from foreign operations, which represented approximately 46%
of the Company's total net sales in both periods, increased approximately 3%
compared with the second quarter of 1998 and, on a pro forma basis, 5%
compared with the first six months of 1998, 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 consists primarily of the Company's Cryovac(R) food packaging
products and Dri-Loc(R) absorbent pads, increased approximately 3% for the
second quarter and, on a pro forma basis, 5% compared to the first six months
of 1998. These increases were due primarily to higher unit volume partially
offset by the negative effect of foreign currency translation. Excluding the
negative effect of foreign currency translation, net sales of
17
this segment would have increased by 6% for the second quarter and, on a pro
forma basis, 7% for the first six months of 1999 compared to the respective
1998 periods.
Net sales of the Company's protective packaging segment, which
consists primarily of Cryovac(R) performance shrink films, Instapak(R)
chemicals and equipment, air cellular and polyethylene foam surface protection
and cushioning materials and protective and durable mailers and bags,
increased 5% for the second quarter and, on a pro forma basis, 5% for the
first six months of 1999 compared to the respective 1998 periods. These
increases were due primarily to higher unit volume. The sales benefit
resulting from small acquisitions completed during the past year was largely
offset by changes in product mix and average selling prices and by foreign
currency translation for both the second quarter and, on a pro forma basis,
the first six months of 1999. Excluding the negative effect of foreign
currency translation, net sales of this segment would have increased 6% for
the second quarter and, on a pro forma basis, 5% for the first six months of
1999 compared to the respective 1998 periods.
On a pro forma basis (which excludes the effect of the Inventory
Charge), gross profit as a percentage of net sales was 36.5% for the second
quarter and 36.3% for the first six months of 1999 compared to 35.1% and 34.6%
for the respective 1998 periods. These increases resulted primarily 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 and goodwill
amortization as a percentage of net sales were 20.8% for the second quarter of
1999 compared to 20.3% for the 1998 period and were 20.8% for the first six
months of 1999 compared to, on a pro forma basis, 20.7% for the 1998 period.
These increases reflect continuing integration and information system costs
partially offset by certain improvements in the Company's operations.
On a pro forma basis, other expense, net, which reflects primarily
interest expense on the Company's indebtedness, decreased compared to the
second quarter and first six months of 1998 primarily due to the lower level
of debt outstanding during the 1999 periods.
On a pro forma basis, the Company's effective income tax rates were
46.5% and 46.6% in the second quarters of 1999 and 1998, respectively, and
46.7% and 46.5% for the first six months of 1999 and 1998, respectively. These
rates are higher than the applicable statutory rates primarily due to the
non-deductibility for tax purposes of the goodwill amortization resulting from
the Merger and state income taxes. The Company expects that its effective tax
rate will remain higher than statutory rates for 1999.
As a result of the above, the Company recorded net earnings of
$51,192,000 for the second quarter of 1999 and $97,806,000 for the first six
months of 1999 compared to pro forma net earnings of $40,992,000 and
$73,797,000 for the respective 1998 periods.
Basic and diluted earnings per common share were $0.40 for the second
quarter of 1999 and, on a pro forma basis, $0.27 for the second quarter of
1998. Basic and diluted
18
earnings per common share were $0.74 for the first six months of 1999 and, on
a pro forma basis, $0.45 for the first six months of 1998. The effect of the
conversion of the Company's outstanding convertible preferred stock is not
considered in the calculation of diluted earnings per common share because it
would be antidilutive (i.e., would increase earnings per common share for the
quarter ended June 30, 1999 and pro forma earnings per common share for the
quarter ended June 30, 1998 to $0.44 and $0.36, respectively, and for the six
months ended June 30, 1999 and pro forma earnings per common share for the six
months ended June 30, 1998 to $0.85 and $0.64, respectively).
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 amounted to $180,467,000
and $155,870,000 in the first six months of 1999 and 1998, respectively. The
increase in operating cash flows for the first six months of 1999 was
primarily due to the inclusion of the operations of old Sealed Air for the
full six month period, increased net earnings and higher levels of
depreciation and amortization partially offset by the change in operating
assets and liabilities due to the timing of cash receipts and payments and the
Company's higher level of operations.
Net cash used in investing activities amounted to $38,593,000 in the
first six months of 1999 compared to net cash provided by investing activities
of $20,723,000 in the 1998 period. The change in the first six months of 1999
compared to the 1998 period was primarily due to the absence in the 1999
period of the cash acquired from old Sealed Air in the Merger and the use of
$8,905,000 of cash to make various small acquisitions in 1999. Capital
expenditures were $31,843,000 in the 1999 period and $32,462,000 in the 1998
period.
Net cash used in financing activities amounted to $126,470,000 in the
first six months of 1999 and $143,451,000 in the first six months of 1998. The
net cash used in the first six months of 1999 was used primarily to repay
outstanding debt, principally under the Credit Agreements, and to pay
dividends on the Company's Series A Preferred Stock. Such amounts were
partially offset by the net proceeds from the Senior Notes, which were used to
reduce outstanding borrowings under the Credit Agreements, and net proceeds
from short-term borrowings. In the 1998 period, cash used in financing
activities primarily
19
reflected the proceeds from borrowings under the Credit Agreements, offset by
the contribution of funds to New Grace in connection with the Reorganization
and the repayment of debt, principally relating to the Credit Agreements.
At June 30, 1999, the Company had working capital of $286,754,000, or
7% of total assets, compared to working capital of $309,624,000, or 8% of
total assets, at December 31, 1998. The decrease in working capital was
primarily due to increases in short-term borrowings and decreases in notes and
accounts receivable and inventory that were partially offset by an increase in
cash and a decrease in accounts payable and other current liabilities (which
related to accrued payroll and costs associated with the Company's
restructuring program).
The Company's ratio of current assets to current liabilities (current
ratio) was 1.5 at June 30, 1999 and 1.6 at December 31, 1998. The Company's
ratio of current assets less inventory to current liabilities (quick ratio)
was 1.0 at June 30, 1999 and 1.1 at December 31, 1998.
On May 18, 1999, the Company issued $300 million aggregate principal
amount of 10-year 6.95% senior notes ("Senior Notes") under Rule 144A and
Regulation S of the Securities Act of 1933, as amended (the "Securities Act").
Accrued interest on the Senior Notes is payable semi-annually in cash on May
15 and November 15 of each year, commencing on November 15, 1999. The net
proceeds of $297,834,000 from the issuance of the Senior Notes were used to
reduce outstanding borrowings under the Credit Agreements described below. At
June 30, 1999, the outstanding borrowings under the Senior Notes were
$297,853,000 net of unamortized bond discount of $2,147,000.
At June 30, 1999, the Company's outstanding debt consisted primarily
of borrowings made under the Credit Agreements described below, the Senior
Notes and certain other loans incurred by the Company's subsidiaries. The
Company's outstanding debt balance as of December 31, 1998 primarily included
borrowings under the Credit Agreements and certain other loans incurred by the
Company's subsidiaries.
The Company's two principal Credit Agreements are a 5-year revolving
credit facility that expires on March 30, 2003 and a 364-day revolving credit
facility that expires on March 27, 2000. During the first six months of 1999,
the Company voluntarily reduced the amounts available under the Credit
Agreements from $1 billion to $650 million under the 5-year revolving credit
facility and from $600 million to $475 million under the 364-day revolving
facility. Borrowings outstanding under the 5-year revolving credit 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. Amounts repaid under the Credit
Agreements may be reborrowed from time to time, up to the maximum $1.125
billion commitment amount under the Credit Agreements.
The Company's obligations under the Credit Agreements bear interest
at floating rates. The weighted average interest rate under the Credit
Agreements was approximately
20
5.6% at June 30, 1999 and 5.8% at December 31, 1998. 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 June 30, 1999 and December 31, 1998 did not change significantly as a
result of these derivative financial instruments.
The Credit Agreements provide for changes in borrowing margins based
on financial criteria and the Company's senior unsecured debt ratings, and
impose certain limitations on the operations of the Company and certain of its
subsidiaries. The limitations include financial covenants relating to interest
coverage and debt leverage as well as certain restrictions on the incurrence
of additional indebtedness, the creation of liens, mergers and acquisitions,
and certain dispositions of property and assets. The Company was in compliance
with these requirements as of June 30, 1999.
The Senior Notes impose certain limitations on the operations of the
Company and certain of its subsidiaries. The limitations include restrictions
on the creation of liens, entrance into sale-leaseback transactions, merger or
consolidation of the Company and disposition of substantially all of the
Company's assets. The Company was in compliance with these requirements as of
June 30, 1999.
At June 30, 1999, the Company had available lines of credit,
including those available under the Credit Agreements, of approximately $1.4
billion of which approximately $723 million were unused.
On July 19, 1999, the Company issued euro 200 million (approximately
$205 million) aggregate principal amount of 7-year 5.625% notes in the
European market ("Euro Notes") under Regulation S of the Securities Act.
Accrued interest on the Euro Notes is payable annually in cash on July 19 of
each year, commencing on July 19, 2000. The net proceeds of euro 198,624,000
(approximately $203 Million) were used to repay borrowings under the Credit
Agreements.
The Company's shareholders' equity was $470,381,000 at June 30, 1999
compared to $437,045,000 at December 31, 1998. Shareholders' equity increased
in 1999 due to the Company's net earnings of $97,806,000, which were partially
offset by the payment of the preferred stock dividends of $35,821,000 and by
an additional foreign currency translation adjustment of $48,041,000.
OTHER MATTERS
Quantitative and Qualitative Disclosures about Market Risk
For a discussion of market risks at December 31,1998, refer to Item
7a of the Company's Form 10-K for the year ended December 31, 1998.
21
Interest Rates
The Company uses interest rate swaps to reduce exposure to
fluctuations in interest rates by fixing the rate of interest the Company pays
on a portion of the Company's debt. Interest collars are used to reduce the
Company's exposure to fluctuations in the rate of interest by limiting
fluctuations in the rate of interest. At June 30, 1999, the Company had
interest rate swap and collar agreements, maturing at various dates through
March 2003, with a combined notional amount of approximately $140,000,000
compared with a notional amount of $265,000,000 at December 31, 1998. On May
18,1999, the Company issued $300 million aggregate principal amount of 10-year
6.95% senior notes. The net proceeds of $297,834,000 were used to reduce
outstanding variable-rate borrowings under the Credit Agreements.
Foreign Exchange Contracts
The Company uses interest rate and currency swaps to limit foreign
exchange exposure and limit or adjust interest rate exposure by swapping
certain borrowings in U.S. dollars for borrowings denominated in foreign
currencies. At June 30, 1999 the Company had interest rate and currency swap
agreements, maturing through March 2002, with an aggregate notional amount of
approximately $4,500,000.
The Company uses foreign currency forwards to fix the amount payable
on certain transactions denominated in foreign currencies. At June 30, 1999
the Company had foreign currency forward contracts, maturing at various dates
through August 1999, with an aggregate notional amount of approximately
$13,100,000.
Environmental Matters
The Company is subject to loss contingencies resulting from
environmental laws and regulations, and it accrues for anticipated costs
associated with investigatory and remediation efforts when an assessment has
indicated that a loss is probable and can be reasonably estimated. These
accruals do not take into account any discounting for the time value of money
and are not reduced by potential insurance recoveries, if any. Environmental
liabilities are reassessed whenever circumstances become better defined and/or
remediation efforts and their costs can be better estimated. These liabilities
are evaluated periodically based on available information, including the
progress of remedial investigations at each site, the current status of
discussions with regulatory authorities regarding the methods and extent of
remediation and the apportionment of costs among potentially responsible
parties. As some of these issues are decided (the outcomes of which are
subject to uncertainties) and/or new sites are assessed and costs can be
reasonably estimated, the Company adjusts the recorded accruals, as necessary.
However,
22
the Company believes that it has adequately reserved for all probable and
estimable environmental exposures.
Year 2000 Computer System Compliance
The Company is continuing to address 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 finished the identification and assessment phases of its Year 2000
action plan in these two areas. The Company has also completed approximately
95% of the remediation and testing phases of the plan for these areas. The
Company has substantially completed its work on Year 2000 issues for
computer-based information technology systems. The work remaining on Year 2000
issues primarily concerns non-information technology systems. The Company
expects to complete substantially all work on Year 2000 issues by September
30, 1999. The Company continues to test new equipment and software before
placing them into service.
The Company has examined certain packaging and dispensing equipment
that it has sold or leased to customers in order to identify Year 2000 issues.
This equipment often incorporates microprocessors as controllers. The Company
believes that no further remediation is necessary for these devices.
23
The Company has completed a Year 2000 issue survey of key suppliers.
Remedial action is being requested as required. The Company has also contacted
certain customers to assess their overall Year 2000 readiness.
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 key suppliers, may disrupt one or more
of the Company's operations if they are unable to conduct business during this
period. Significant disruptions caused by Year 2000 issues in the industries
which the Company serves could impact its operations. Year 2000 issues in
other industries could have a ripple effect on the Company's business.
If the Company is unable to complete its remediation efforts
satisfactorily 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 has developed a
Year 2000 contingency plan to implement additional protection measures. The
Company is in the process of implementing this plan on a timely basis.
Euro Conversion
On January 1, 1999, eleven of the fifteen members of the European
Union (the "participating countries") established fixed conversion rates
between their existing currencies (the "legacy currencies") and introduced the
euro, a single common non-cash currency. The euro is now traded on currency
exchanges and is being used in business transactions.
24
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
between 1999 and 2002, (3) the requirement to change the base statutory and
reporting currency of each subsidiary in the participating countries into
euros during the transition period, (4) the foreign currency exposure changes
resulting from the alignment of the legacy currencies into the euro, and (5)
the identification of material contracts and sales agreements whose
contractual stated currency will need to be converted into euros.
The Company believes that it will be euro compliant by January 1,
2002. The Company has implemented plans to accommodate euro-denominated
transactions and to handle euro payments with third party customers and
suppliers in the participating countries. The Company plans to meet the
requirement to convert statutory and reporting currencies to the euro by
acquiring and installing new financial software systems. If there are delays
in such installation, the Company plans to pursue alternate means to convert
statutory and reporting currencies to the euro by 2002. The Company expects
that its foreign currency exposures will be reduced as a result of the
alignment of legacy currencies, and the Company believes that all material
contracts and sales agreements requiring conversion will be converted to euros
prior to January 1, 2002.
Although additional costs are expected to result from the
implementation of the Company's plans, the Company also expects to achieve
benefits in its treasury and procurement areas as a result of the elimination
of the legacy currencies. Since the Company has operations in each of its
business segments in the participating countries, each of its business
segments will be affected by the conversion process. However, the Company
expects that the total impact of all strategic and operational issues related
to the euro conversion and the cost of implementing its plans for the euro
conversion will not have a material adverse impact on its consolidated
financial condition or results of operations.
Recently Issued Statements of Financial Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective date of FASB Statement No. 133." This Statement defers the
effective date of SFAS No. 133 , "Accounting for
25
Derivative Instruments and Hedging Activities." This Statement, which the
Company expects to adopt beginning January 1, 2001, establishes accounting and
operating standards for hedging activities and derivative instruments,
including certain derivative instruments embedded in other contracts. The
Company is reviewing the potential impact, if any, of SFAS No. 133 on its
Consolidated Financial Statements.
Forward-Looking Statements
Certain statements made by the Company in this Form 10-Q and in
future oral and written statements by management of the Company may be
forward-looking. These statements include comments as to the Company's beliefs
and expectations as to future events and trends affecting the Company's
business, its results of operations and its financial condition. These
forward-looking statements are based upon management's current expectations
concerning future events and discuss, among other things, anticipated future
performance and future business plans. Forward-looking statements are
identified by such words and phrases as "expects," "intends," "believes,"
"will continue," "plans to," "could be" and similar expressions.
Forward-looking statements are necessarily subject to uncertainties, many of
which are outside the control of the Company, that could cause actual results
to differ materially from such statements.
While the Company is not aware that any of the factors listed below
will adversely affect the future performance of the Company, the Company
recognizes that it is subject to a number of uncertainties, such as business and
market conditions in Asia, Latin America and other geographic areas around the
world, changes in the value of foreign currencies against the U.S. dollar, the
ability of the Company to complete integration and restructuring activities
relating to the merger of old Sealed Air and Cryovac and the success of those
efforts as well as certain information systems projects, general economic,
business and market conditions, conditions in the industries and markets that
use the Company's packaging materials and systems, the development and success
of new products, the Company's success in entering new markets, competitive
factors, raw material availability and pricing, changes in the Company's
relationship with customers and suppliers, future litigation and claims
(including environmental matters) involving the Company, changes in domestic or
foreign laws or regulations, or difficulties related to the Year 2000 issue or
the euro conversion.
26
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(a) Certain provisions of the Certificate of Incorporation of the
Company affecting the rights of holders of the common stock and the Series A
convertible preferred stock of the Company were modified pursuant to the
approval of the stockholders by a vote taken at the annual meeting of
stockholders of the Company. (See Item 4 below and Exhibits 3.1 and 3.2.)
(b) On May 18, 1999, the Company issued $300 million aggregate
principal amount of 10-year 6.95% senior notes ("Senior Notes") under Rule 144A
and Regulation S of the Securities Act of 1933, as amended (the "Securities
Act"). The net proceeds from the issuance of the Senior Notes were used to
reduce outstanding borrowings under the credit agreements (the "Credit
Agreements") described under Liquidity and Capital Resources in the Management's
Discussion and Analysis of Results of Operations and Financial Condition in Part
I of this Form 10-Q. The Senior Notes impose certain limitations on the
operations of the Company and certain of its subsidiaries. The limitations
include restrictions on the creation of liens, entrance into sale-leaseback
transactions, merger or consolidation of the Company and disposition of
substantially all of the Company's assets. The Company was in compliance with
these requirements as of June 30, 1999.
On July 19, 1999, the Company issued euro 200 million (approximately
$205 million) aggregate principal amount of 7-year 5.625% notes in the European
market under Regulation S of the Securities Act. The net proceeds thereof were
used to repay borrowings under the Credit Agreements.
(c) In June 1999, the Company issued 425 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 because
such transaction did not involve an "offer" or "sale" of securities under
Section 2(3) of the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 21, 1999, the Company commenced its annual meeting of
stockholders. The annual meeting was thereafter adjourned until June 18, 1999
and further adjourned until July 16, 1999 in order to accept additional votes
and proxies from stockholders on the proposals to
27
amend three provisions of the Certificate of Incorporation of the Company, as
discussed below.
At the first session of the meeting on May 21, 1999, the stockholders
elected four Class I directors for a three-year term and ratified the
appointment of KPMG LLP as the Company's independent public accountants for
1999. At the third session of the meeting on July 16, 1999, the stockholders
approved three amendments to the Company's Amended and Restated Certificate of
Incorporation that repealed certain provisions, which amendments required the
affirmative vote of 80% in voting power of the Company's capital stock. Such
provisions were as follows:
(a) provisions requiring a classified board and removal of directors
only for cause;
(b) a provision prohibiting stockholder action by written consent;
and
(c) a provision requiring 80% stockholder vote to amend the Company's
By-laws.
At the first session of the meeting on May 21, 1999, a total of
76,365,742 shares of common stock and 31,412,432 shares of Series A convertible
preferred stock ("preferred stock") were present in person or by proxy at the
annual meeting, representing approximately 104,165,763 votes, or approximately
90% of the voting power of the Company entitled to vote at such meeting. Each
share of common stock was entitled to one vote on each matter before the
meeting, and each share of preferred stock was entitled to 0.885 votes on each
matter before the meeting.
At the third session of the meeting on July 16, 1999, a total of
78,120,012 shares of common stock and 31,714,931 shares of preferred stock were
present in person or by proxy, representing approximately 106,187,726 votes, or
approximately 92% of the voting power of the Company entitled to vote at such
meeting.
The votes cast on the matters before the meeting, including the broker
non-votes where applicable, were as set forth below:
Nominees for Election Number of Votes
To Board of Directors: In Favor Withheld
Hank Brown 103,448,697 717,066
John K. Castle 103,498,153 667,610
Charles F. Farrell, Jr. 103,486,754 679,009
Alan H. Miller 103,497,650 668,114
28
Approval of proposed amendments to Certificate of Incorporation:
(a) Classified board and For 93,587,234
removal for cause Against 1,145,119
Abstentions 568,423
Broker Non-Votes 10,886,950
(b) Stockholder action For 93,632,958
by written consent Against 909,208
Abstentions 758,609
Broker Non-Votes 10,886,951
(c) 80% stockholder vote For 93,266,401
to amend By-laws Against 1,255,442
Abstentions 778,933
Broker Non-Votes 10,886,950
Ratification of KPMG For 103,603,195
LLP as Independent Against 209,128
Accountants Abstentions 353,439
Item 5. Other Information.
Effective May 21, 1999, the Company amended Section 2.12 of its
By-laws to include an advance notice provision. Nominations of persons for
election to the Board of Directors of the Company and the proposal of business
to be considered by the stockholders at an annual meeting of stockholders may
be made (i) pursuant to the Company's notice of meeting, including matters
covered by Rule 14a-8 under the Securities and Exchange Act of 1934, as
amended, (ii) by or at the direction of the Board of Directors or (iii) by any
stockholder of the Company who was a stockholder of record at the time of
giving notice by the stockholder as provided in Section 2.12 of the Company's
By-laws. A notice pursuant to clause (iii) of the preceding sentence of the
intent of a stockholder to make a nomination or to bring any other matter
before an annual meeting must be made in writing and received by the Secretary
of the Company no earlier than the 119th day and not later than the close of
business on the 45th day prior to the first anniversary of the date of mailing
of the Company's proxy statement for the prior year's annual meeting. However,
if the date of the annual meeting has changed by more than 30 days from the
date it was held in the prior year or if the Company did not hold an annual
meeting in the prior year, then such notice must be received a reasonable time
before the Company mails its proxy statement. Each such notice by a stockholder
must set forth certain information as delineated in Section 2.12 of the
Company's By-laws.
29
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
3.1 Amendments to the Certificate of Incorporation of the
Company, effective July 20, 1999.
3.2 Unofficial Composite Copy of the Amended and Restated
Certificate of Incorporation of the Company, as amended to
date.
3.3 Amendments to the By-laws of the Company, effective May
21, 1999.
3.4 Complete copy of the Amended and Restated By-laws of the
Company, as amended to date.
10.1 Second Amendment, dated as of June 2, 1999, to Global
Revolving Credit Agreement (5-year), among the Company,
certain of the Company's subsidiaries as guarantors and/or
borrowers thereunder, ABN AMRO Bank N.V., as
Administrative Agent, and certain other banks party
thereto.
10.2 Second Amendment, dated as of June 2, 1999, to Global
Revolving Credit Agreement (364-Day), among the Company,
certain of the Company's subsidiaries as guarantors and/or
borrowers thereunder, ABN AMRO Bank N.V., as
Administrative Agent, and certain other banks party
thereto.
10.3 Agreement dated as of April 6, 1999, between the Company
and J. Gary Kaenzig, Jr.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following Report on Form 8-K during the second quarter of
1999:
Date of Report Disclosures
May 13, 1999 Offering of $300,000,000 principal amount of
6.95% senior notes due 2009 pursuant to Rule 144A and
Regulation S under the Securities Act.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SEALED AIR CORPORATION
Date: August 12, 1999 By /s/ Jeffrey S. Warren
------------------------
Jeffrey S. Warren
Controller
(Authorized Executive Officer
and Chief Accounting Officer)
31