UNITED STATES
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, 2016
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
incorporation or organization)
(I.R.S. Employer
Identification Number)
8215 Forest Point Boulevard
Charlotte, North Carolina
28273
(Address of principal executive offices)
(Zip Code)
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 197,142,884 shares of the registrant’s common stock, par value $0.10 per share, issued and outstanding as of April 29, 2016.
Page
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets — March 31, 2016 and December 31, 2015
5
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015
6
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015
7
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015
8
Notes to Condensed Consolidated Financial Statements
9
Note 1 Organization and Basis of Presentation
Note 2 Recently Issued Accounting Standards
11
Note 3 Divestitures
13
Note 4 Segments
14
Note 5 Inventories
16
Note 6 Property Plant and Equipment, net
Note 7 Goodwill and Identifiable Assets
17
Note 8 Accounts Receivable Securitization Programs
18
Note 9 Restructuring and Relocation Activities
19
Note 10 Debt and Credit Facilities
21
Note 11 Derivatives and Hedging Activities
22
Note 12 Fair Value Measurements and Other Financial Instruments
25
Note 13 Defined Benefit Pension Plans and Other Post-Employment Benefit Plans
27
Note 14 Income Taxes
28
Note 15 Commitments and Contingencies
Note 16 Stockholders’ Equity
29
Note 17 Accumulated Other Comprehensive Income (Loss)
32
Note 18 Other Income (Expense), net
33
Note 19 Net Earnings Per Common Share
34
Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operation
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
51
Item 4. Controls and Procedures
53
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
54
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
56
Signature
57
2
Cautionary Notice Regarding Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 concerning our business, consolidated financial condition and results of operations. The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking statements so that investors can better understand a company’s future prospects and make informed investment decisions. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Therefore, you should not rely on any of these forward-looking statements. Forward-looking statements can be identified by such words as “anticipates,” “believes,” “plan,” “assumes,” “could,” “should,” “estimates,” “expects,” “intends,” “potential,” “seek,” “predict,” “may,” “will” and similar references to future periods. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding expected future operating results, expectations regarding the results of restructuring and other programs, anticipated levels of capital expenditures and expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings.
Please refer to Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Non-U.S. GAAP Information
We present financial information that conforms to Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”). We also present financial information that does not conform to U.S. GAAP, which we refer to as non-U.S. GAAP, as our management believes it is useful to investors. In addition, non-U.S. GAAP measures are used by management to review and analyze our operating performance and, along with other data, as internal measures for setting annual budgets and forecasts, assessing financial performance, providing guidance and comparing our financial performance with our peers. The non-U.S. GAAP information has limitations as an analytical tool and should not be considered in isolation from or as a substitute for U.S. GAAP information. It does not purport to represent any similarly titled U.S. GAAP information and is not an indicator of our performance under U.S. GAAP. Non-U.S. GAAP financial measures that we present may not be comparable with similarly titled measures used by others. Investors are cautioned against placing undue reliance on these non-U.S. GAAP measures. Further, investors are urged to review and consider carefully the adjustments made by management to the most directly comparable U.S. GAAP financial measure to arrive at these non-U.S. GAAP financial measures. See Note 4, “Segments” and our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for reconciliations of our non-U.S. GAAP financial measures to U.S. GAAP.
Our management may assess our financial results both on a U.S. GAAP basis and on a non-U.S. GAAP basis. Non-U.S. GAAP financial measures provide management with additional means to understand and evaluate the core operating results and trends in our ongoing business by eliminating certain one-time expenses and/or gains (which may not occur in each period presented) and other items that management believes might otherwise make comparisons of our ongoing business with prior periods and peers more difficult, obscure trends in ongoing operations or reduce management’s ability to make useful forecasts.
Our non-U.S. GAAP financial measures may also be considered in calculations of our performance measures set by the Organization and Compensation Committee of our Board of Directors for purposes of determining incentive compensation. The non-U.S. GAAP financial metrics mentioned above exclude items that we consider as unusual or special items. We evaluate unusual or special items on an individual basis. Our evaluation of whether to exclude an unusual or special item for purposes of determining our non-U.S. GAAP financial measures considers both the quantitative and qualitative aspects of the item, including among other things (i) its nature, (ii) whether or not it relates to our ongoing business operations, and (iii) whether or not we expect it to occur as part of our normal business on a regular basis.
We also present our adjusted income tax rate or provision (“Adjusted Tax Rate”). The Adjusted Tax Rate is a Non-U.S. GAAP measure of our U.S. GAAP effective tax rate, adjusted to exclude the tax impact from the special items that are excluded from our Adjusted Net Earnings and Adjusted EPS metrics as well as expense or benefit from any special taxes or tax benefits. The Adjusted Tax Rate is an indicator of the taxes on our core business. The tax situation and effective tax rate in the specific countries where the excluded or special items occur will determine the impact (positive or negative) to the Adjusted Tax Rate.
3
In our “Net Sales by Geographic Region,” “Components of Change in Net Sales by Segment” and in some of the discussions and tables that follow, we exclude the impact of foreign currency translation when presenting net sales information, which we define as “constant dollar.” Changes in net sales excluding the impact of foreign currency translation are non-U.S. GAAP financial measures. As a worldwide business, it is important that we take into account the effects of foreign currency translation when we view our results and plan our strategies. Nonetheless, we cannot control changes in foreign currency exchange rates. Consequently, when our management looks at our financial results to measure the core performance of our business, we may exclude the impact of foreign currency translation by translating our current period results at prior period foreign currency exchange rates. We also may exclude the impact of foreign currency translation when making incentive compensation determinations. As a result, our management believes that these presentations are useful internally and may be useful to investors.
We also exclude the impact of divestitures and acquisitions when comparing results to prior periods. Changes in operating results excluding the impact of divestitures are non-U.S. GAAP financial measures; however, we feel it is important to exclude the impact of divestitures on year-over-year results in order to evaluate performance on a more comparable basis.
4
SEALED AIR CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions, except share data)
March 31,
2016
(unaudited)
December 31,
2015(1)
ASSETS
Current assets:
Cash and cash equivalents
$
315.7
358.4
Trade receivables, net of allowance for doubtful accounts of $24.6 in 2016 and $24.9 in 2015
787.6
758.4
Income tax receivables
25.3
22.7
Other receivables
141.8
124.8
Inventories, net of inventory reserves of $25.6 in 2016 and $21.9 in 2015
736.5
660.8
Assets held for sale
3.5
10.3
Prepaid expenses and other current assets
308.7
280.2
Total current assets
2,319.1
2,215.6
Property and equipment, net
954.4
930.7
Goodwill
2,929.4
2,909.5
Intangible assets, net
783.6
784.3
Non-current deferred taxes
201.6
204.7
Other non-current assets(1)
351.2
345.2
Total assets
7,539.3
7,390.0
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings
353.1
241.9
Current portion of long-term debt
61.6
46.6
Accounts payable
719.7
675.3
Accrued restructuring costs
61.2
53.6
Other current liabilities
704.3
789.7
Total current liabilities
1,899.9
1,807.1
Long-term debt, less current portion(1)
4,280.0
4,266.8
63.6
75.0
Other non-current liabilities
734.7
714.0
Total liabilities
6,978.2
6,862.9
Commitments and contingencies - Note 15
Stockholders’ equity:
Preferred stock, $0.10 par value per share, 50,000,000 shares authorized; no shares issued in
2016 and 2015
—
Common stock, $0.10 par value per share, 400,000,000 shares authorized; shares issued:
227,151,277 in 2016 and 225,625,636 in 2015; shares outstanding: 197,157,078 in 2016 and
196,013,299 in 2015
22.6
Additional paid-in capital
1,936.6
1,915.0
Retained earnings
740.8
675.2
Common stock in treasury, 29,994,199 shares in 2016 and 29,612,337 shares in 2015
(1,284.7
)
(1,265.7
Accumulated other comprehensive loss, net of taxes
(854.3
(820.0
Total stockholders’ equity
561.1
527.1
Total liabilities and stockholders’ equity
See accompanying notes to condensed consolidated financial statements.
(1)
As of January 1, 2016, we have adopted ASU 2015-03 and ASU 2015-15 with retrospective application. This resulted in a reclassification from other non-current assets to long-term debt, less current portion for debt issuance costs. Refer to Note 2, “Recently Issued Accounting Standards” of the notes to the condensed consolidated financial statements for further details.
Condensed Consolidated Statements of Operations
Three Months Ended
2015
Net sales
1,590.6
1,746.4
Cost of sales
1,001.3
1,096.8
Gross profit
589.3
649.6
Selling, general and administrative expenses
396.0
427.8
Amortization expense of intangible assets acquired
21.4
Stock appreciation rights expense
0.3
2.9
Restructuring and other charges
12.7
Operating profit
171.6
183.6
Interest expense
(54.7
(58.5
Foreign currency exchange (loss) gain related to Venezuelan subsidiaries
(1.7
0.8
Other (expense) income , net
(2.9
5.4
Earnings before income tax provision
112.3
131.3
Income tax provision
20.4
34.1
Net earnings available to common stockholders
91.9
97.2
Net earnings per common share:
Basic
0.47
0.46
Diluted
Dividends per common share
0.13
Weighted average number of common shares outstanding:
195.2
208.9
197.0
211.7
Condensed Consolidated Statements of Comprehensive Income
Three Month Ended
(In millions)
Other comprehensive income, net of taxes:
Recognition of deferred pension items, net of taxes of $(0.6) for
the three months ended March 31, 2016 and $(0.8) for the
three months ended March 31, 2015
1.7
2.0
Unrealized losses on derivative instruments for net investment
hedge, net of taxes of $14.0 for the three months ended
March 31, 2016 and $4.9 for the three months ended March 31, 2015
(22.6
(8.0
Unrealized losses on derivative instruments for cash flow hedge,
net of taxes of $1.9 for the three months ended
March 31, 2016 and $(0.1) for the three months ended
March 31, 2015
(4.1
2.6
Foreign currency translation adjustments, net of taxes of $2.1 for
the three months ended March 31, 2016 and $4.0 for the three months
ended March 31, 2015
(9.3
(58.1
Other comprehensive (loss), net of taxes
(34.3
(61.5
Comprehensive income, net of taxes
57.6
35.7
For the three months ended March 31, 2015, certain foreign currency translation adjustments were misclassified on the Condensed Consolidated Statement of Comprehensive Income in deferred pension items and unrealized losses on cash flow hedge derivative instruments. See Note 1 “Organization and Basis of Presentation” under the heading “Reclassifications and Revisions” for further discussion of the revisions.
Condensed Consolidated Statements of Cash Flows
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization
49.1
54.8
Share-based incentive compensation
12.6
18.3
Profit sharing expense
6.8
9.8
Loss on debt redemption and refinancing activities
0.5
Remeasurement loss (gain) related to Venezuelan subsidiaries
(0.8
Provisions for bad debt
1.0
2.1
Provisions for inventory obsolescence
3.6
3.2
Deferred taxes, net
(11.4
16.0
Excess tax benefit from stock based compensation
(6.8
Net (gain) on disposals of property and equipment and other
(3.3
Net loss on sale of business
2.5
Other non-cash items
3.7
(0.1
Changes in operating assets and liabilities:
Trade receivables, net
(22.3
8.5
Inventories
(65.1
(83.8
39.0
Settlement agreement and related items
235.2
Other assets and liabilities
(102.3
(107.5
Net cash provided by operating activities
4.0
325.1
Cash flows from investing activities:
Capital expenditures
(51.8
(20.7
Proceeds, net from sale of business
4.2
Businesses acquired in purchase transactions, net of cash and cash equivalents acquired
(8.5
Proceeds from sales of property, equipment and other assets
1.3
25.4
Settlement of foreign currency forward contracts
(22.4
32.0
Net cash (used in) provided by investing activities
(68.7
28.2
Cash flows from financing activities:
Net proceeds from (re-payments of) borrowings
106.8
(39.1
Cash used as collateral on borrowing arrangements
(0.2
(14.2
Dividends paid on common stock
(26.2
(27.5
Acquisition of common stock for tax withholding obligations under our Omnibus stock plan and 2005
Contingent Stock Plan
(6.2
Repurchases of common stock
(32.0
(69.2
Net cash provided by (used in) financing activities
32.9
(156.2
Effect of foreign currency exchange rate changes on cash and cash equivalents
(10.9
Balance, beginning of period
286.4
Net change during the period
(42.7
199.6
Balance, end of period
486.0
Supplemental Cash Flow Information:
Interest payments, net of amounts capitalized
48.9
58.7
Income tax payments
29.6
23.8
Stock appreciation rights payments (less amounts included in restructuring payments)
0.1
Restructuring payments including associated costs
18.7
22.0
Non-cash items:
Transfers of shares of our common stock from treasury for our 2015 and 2014 profit-sharing plan
contributions
37.6
36.7
For the three months ended March 31, 2015, certain amounts related to foreign currency gains and losses, including the remeasurement loss related to Venezuelan subsidiaries in 2015, and the settlement of foreign currency forward contracts were misclassified. Additional revisions were made to the Condensed Consolidated Balance Sheets for the three months ended March 31, 2015. As a result, corresponding changes were made on the Condensed Consolidated Statement of Cash Flows. See Note 1 “Organization and Basis of Presentation” under the heading “Reclassifications and Revisions” for further discussion of the revisions.
Notes to Condensed Consolidated Financial Statements (unaudited)
Organization
We are a global leader in food safety and security, facility hygiene and product protection. We serve an array of end markets including food and beverage processing, food service, retail, healthcare and industrial, and commercial and consumer applications. Our focus is on achieving quality sales growth through leveraging our geographic footprint, technological know-how and leading market positions to bring measurable, sustainable value to our customers and investors.
We conduct substantially all of our business through three wholly-owned subsidiaries, Cryovac, Inc., Sealed Air Corporation (US) and Diversey, Inc. Throughout this report, when we refer to “Sealed Air,” the “Company,” “we,” “our,” or “us,” we are referring to Sealed Air Corporation and all of our subsidiaries, except where the context indicates otherwise.
Basis of Presentation
Our Condensed Consolidated Financial Statements include all of the accounts of the Company and our subsidiaries. We have eliminated all significant intercompany transactions and balances in consolidation. In management’s opinion, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of our Condensed Consolidated Balance Sheets as of March 31, 2016 and our Condensed Consolidated Statement of Operations for the three months ended March 31, 2016 and 2015 have been made. The results set forth in our Condensed Consolidated Statement of Operations for the three months ended March 31, 2016 and in our Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year. All amounts are in millions, except per share amounts, and approximate due to rounding. Some prior period amounts have been reclassified to conform to the current year presentation. These reclassifications, individually and in the aggregate, did not have a material impact on our condensed consolidated financial condition, results of operations or cash flows.
Our Condensed Consolidated Financial Statements were prepared in accordance with the interim reporting requirements of the SEC. As permitted under those rules, annual footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted. The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ from these estimates.
We are responsible for the unaudited Condensed Consolidated Financial Statements and notes included in this report. As these are condensed financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 as filed with the SEC on February 22, 2016 (“2015 Form 10-K”) and with the information contained in other publicly-available filings with the SEC.
As of April 15, 2015, we realigned our regional organization. There was no change to our previously reported Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income, Consolidated Statements of Stockholders’ Equity or Consolidated Statements of Cash Flows due to our change in regional organization. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details on the realignment.
Reclassifications and Revisions
For the three months ended March 31, 2015, certain amounts related to foreign currency gains and losses, including the remeasurement loss related to Venezuelan subsidiaries in 2015, and the settlement of foreign currency forward contracts were misclassified on the Condensed Consolidated Statement of Cash Flows. The reclassification of these items in the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2015 resulted in an increase in cash provided by operating activities of $6.1 million, an increase to cash provided by investing activities of $32.0 million, and a decrease of $38.1 million due to the effect of foreign currency exchange rate changes on cash.
Additionally, for the three months ended March 31, 2015, certain amounts related to compensating balance arrangements were misclassified in the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flows. The revision of these items resulted in a decrease of $50.1 million in cash and an increase in other current assets ($23.9 million) and other non-current assets ($26.2 million) related to cash deposits held in compensating balance arrangements for certain short-term borrowing agreements on the Condensed Consolidated Balance Sheet. The revision of these items on the Condensed Consolidated Statement of Cash Flows resulted in an increase to cash provided by financing activities of $14.2 million.
For the three months ended March 31, 2015, foreign currency translation adjustments were misclassified on the Condensed Consolidated Statement of Comprehensive Income (Loss) in deferred pension items and unrealized losses on cash flow hedge derivative instruments. The reclassification of these items in the Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2015 resulted in a decrease in recognition of deferred pension items of $15.3 million, an increase in unrealized losses on derivative instruments for cash flow hedge of $0.6 million, and an increase in the foreign currency translation adjustments of $14.7 million. These classification adjustments did not result in a change to total stockholder’s equity.
Impact of Inflation and Currency Fluctuation
Venezuela
Economic and political events in Venezuela have continued to expose us to heightened levels of foreign currency exchange risk. Accordingly, Venezuela has been designated a highly inflationary economy under U.S. GAAP, and the U.S. dollar replaced the bolivar fuerte as the functional currency for our subsidiaries in Venezuela. All bolivar-denominated monetary assets and liabilities are re-measured into U.S. dollars using the current exchange rate available to us, and any changes in the exchange rate are reflected in foreign currency exchange gains and losses related to our Venezuelan subsidiaries on the Condensed Consolidated Statements of Operations.
2015 Activity
In February 2015, the Venezuelan government announced a new foreign exchange platform called the Marginal Currency System or SIMADI. The SIMADI basically replaced the SICAD 2 rate. When this market opened on February 12, 2015 the SIMADI rate was 170.0390 and then at March 31, 2015 it was 192.9537. The SICAD 1 and the SICAD 2 were merged into the SICAD. The opening rate was 12 for the SICAD. In addition, the CENCOEX will continue and provide preferential treatment for certain import operations such as food and medicines.
Since these changes were announced by the Venezuelan government, the new SIMADI market has had very little activity and companies have not been able to access this market to obtain U.S. dollars. In addition, the SICAD rate which is established via auctions has had no auctions held since October 2014. However, in June 2015 an auction was held for the automotive parts and school supplies industries.
Therefore, in 2015 there were three legal mechanisms to exchange bolivars for US dollars:
·
CENCOEX at the official rate at 6.3;
SICAD auction process at the awarded exchange rate (opening rate at 12); and
SIMADI at the negotiated rate (rate of 192.9537 at March 31, 2015).
During the three months ended March 31, 2015, we evaluated which legal mechanisms were available to each Venezuelan subsidiary to access U.S. dollars and also estimated the excess cash position over the next 18 months. We concluded that as of March 31, 2015 the excess cash position for our Venezuelan subsidiaries would be remeasured at the SIMADI rate, which was 192.9537 at March 31, 2015, since the SICAD 2 rate which was 49.9883 at December 31, 2014 (and used for the December 31, 2014 remeasurement) no longer existed at March 31, 2015. For the remaining Bolívar cash balance and all other Bolívar denominated monetary assets and liabilities, the Company determined that it would continue to remeasure these items at the CENCOEX official rate of 6.3. As a result of this evaluation, the Company reported a remeasurement net gain of $0.8 million for the three months ended March 31, 2015.
During the remainder of 2015, we continued to evaluate which legal mechanisms were available to our Venezuelan subsidiaries to access U.S. dollars. Starting June 30, 2015 through to December 31, 2015, we concluded that we would use the SIMADI rate to remeasure our bolivar denominated monetary assets and liabilities since it was our only legally available option and at that time, our intent on a go-forward basis to utilize this market to settle any future transactions based on the then current facts and circumstances. The SIMADI rate as of December 31, 2015 was 198.6986. During 2015, the Company did not receive U.S. dollars via the CENCOEX
10
official rate of 6.3. We expected that we would only have limited access to the CENCOEX market to settle certain past transactions. However, if the option did become available to us to use the CENCOEX in the future, the Company would consider this further. In addition, there were no SICAD auctions for the food or chemical industries as of December 31, 2015. During 2015, we were only able to access the SIMADI market and only received minimal amounts of U.S. dollars.
2016 Activity
On February 17, 2016, the Venezuelan government made further changes to the exchange rates including a further devaluation and on March 9, 2016 published in Exchange Agreement No. 35 further rules governing foreign exchange transactions which were effective March 10, 2016. This includes the following key changes:
The preferential rate for essential goods and services was changed from 6.3 to 10 bolivars per U.S. dollars and is no longer called CENCOEX but is now DIPRO;
The SICAD rate was eliminated which reduced the number of legal mechanisms from three down to only two; and
Eliminated the SIMADI rate which was replaced by the DICOM rate which will be allowed to float freely beginning at a rate of approximately 203 bolivars to U.S. dollar.
At March 31, 2016, we evaluated which legal mechanisms were available to our Venezuelan subsidiaries to access U.S. dollars. As noted above, the SIMADI rate was replaced with the DICOM rate. We concluded that we will use the DICOM rate to remeasure our bolivar denominated monetary assets and liabilities since it is our only legally available option and our intent on a go-forward basis to utilize this market to settle any future transactions based on the current facts and circumstances. The DICOM rate as of March 31, 2016 was 272.9123.
During the first quarter of 2016, we were only able to access the SIMADI market (during the period the market was available) and only received minimal amounts of U.S. dollars. We did not receive any U.S. dollars via the CENCOEX (at an official rate of 6.3) or the DIPRO (at an official rate of 10.0). We expect that we will only have limited access to the DIPRO market to settle certain past transactions. However, if the option becomes available to us to use the DIPRO in the future, the Company will consider this further. For any U.S. dollar denominated monetary asset or liability, such amounts do not get remeasured at month-end since it is already an asset or liability denominated in U.S. dollars. As a result of this evaluation, the Company reported a remeasurement loss of $1.7 million for the three months ended March 31, 2016. We will continue to evaluate each reporting period the appropriate exchange rate to remeasure our financial statements based on the facts and circumstances at that time.
For the three months ended March 31, 2016, less than 1% of our consolidated net sales and operating income were derived from our businesses in Venezuela. As of March 31, 2016, we had net assets of $4 million in Venezuela, which included cash and cash equivalents of $1 million. Also, as of March 31, 2016, our Venezuelan subsidiaries had a negative cumulative translation adjustment balance of $46 million.
The Company is currently evaluating options regarding the future operations of its Venezuelan subsidiaries.
Recently Adopted Accounting Standards
In November 2015, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2015-17 Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). This ASU will simplify the presentation of deferred tax assets and liabilities by requiring companies to classify all deferred tax as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 31, 2016 and interim periods within those annual periods. However, as early adoption is available, we have adopted this standard as of December 31, 2015 with retrospective application.
In September 2015, the FASB issued ASU 2015-16 – Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments amounts are determined. The ASU also requires that in the same period, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and will be applied prospectively for adjustments to provisional amounts that occur after that date. The impact of ASU 2015-16 will depend on any future events whereby we have any business combinations and any adjustments to the provisional amounts identified during the measurement period are recorded.
In August 2015, the FASB issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (“ASU 2015-12”). This ASU designates contract value as the only required measure for fully benefit-responsive investment contracts; simplifies the investment disclosure requirements under Accounting Standards Codification (“ASC”) topic 820 for fair value, and topics 960, 962 and 965 for employee benefit plans; and provides a similar measurement date practical expedient for employee benefit plans. The amendments in ASU 2015-12 were effective as of January 1, 2016. We do not expect ASU 2015-12 to have a material impact on our financial statements.
In April 2015, the FASB issued ASU 2015-03 Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). This ASU will simplify the presentation of debt issuance costs. It will require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 Emerging Issues Task Forces (“EITF”) Meeting (SEC Update) (“ASU 2015-15”). This ASU clarifies that as line of credit arrangements were not specifically discussed in ASU 2015-03, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 should be adopted concurrent with the adoption of ASU 2015-03. The amendments in ASU 2015-03 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. We have adopted this standard as of January 1, 2016 with retroactive application. Adoption of ASU 2015-03 and ASU 2015-15 resulted in a decrease in other assets of $35.9 million and a decrease in long-term debt of $35.9 million as of December 31, 2015 on the Condensed Consolidated Balance Sheet.
In April 2015, the FASB issued ASU 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). This ASU will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. It provides guidance about whether a cloud computing arrangement includes a software license. The amendments in ASU 2015-05 have been adopted prospectively. The adoption of ASU 2015-05 does not have a material impact on the financial statements.
Recently Issued Accounting Standards
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted. We are currently in the process of evaluating this new standard update.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), (“ASU 2016-02”). This ASU requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The amendments in ASU 2016-02 are effective for fiscal years ending after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The updated guidance requires a modified retrospective adoption. We are currently in the process of evaluating this new standard update.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This ASU requires equity investments except those under the equity method of accounting to be measured at fair value with the changes in fair value recognized in net income. The amendment simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In addition, it also requires enhanced disclosures about investments. The amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application for certain provisions is allowed but early adoption of the amendments is not permitted. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are currently in the process of evaluating this new standard update.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), which applies to inventory valued at first-in, first-out (FIFO) or average cost. ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value, rather than at the lower of cost or market. ASU 2015-11 is effective on a prospective basis for annual periods, including interim reporting periods within those periods, beginning after December 15, 2016. We are currently in the process of evaluating this new standard update.
12
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). Previous revenue recognition guidance in U.S. GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principal, five steps are required to be applied. In addition, ASU 2014-09 expands and enhances disclosure requirements which require disclosing sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This includes both qualitative and quantitative information. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” (“ASU 2015-14”). The amendments in ASU 2015-14 delay the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017 and allow early adoption as of the original public entity effective date. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), (“ASU 2016-08”). This ASU clarifies the implementation guidance on principal versus agent considerations. The updated guidance improves the understandability of determining whether an entity is a principal or agent, the nature of the good or service, and involvement of other parties in a sale. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) (“ASU 2016-10”). ASU 2016-10 clarifies two aspects of Topic 606: identifying performance obligation and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in ASU 2016-08 and ASU 2016-10 are effective in conjunction with ASU 2015-14. We are currently in the process of evaluating this new standard update.
Sale of North American foam trays and absorbent pads business
On April 1, 2015, we completed the sale of our North American foam trays and absorbent pads business to NOVIPAX, a portfolio company of Atlas Holdings LLC, for net proceeds of $76 million, net of certain purchase price adjustments of $6 million and subject to final purchase price adjustment. In 2015, we recorded a $27 million pre-tax gain on the sale of business which was reflected in our Condensed Consolidated Statement of Operations. There was no impact to the Condensed Consolidated Statement of Operations for the three months ended March 31, 2016 or March 31, 2015 due to this disposition.
The decision to sell this business was consistent with the Company's overall strategy to focus on innovation and differentiation in its portfolio of products within the flexible packaging industry. The sale included our manufacturing facilities in Paxinos and Reading, PA, Indianapolis, IN, Rockingham, NC, and Grenada, MS.
The North American foam trays and absorbent pads business was part of the Company’s Food Care division.
For the three months ended March 31, 2015, the North American foam trays and absorbent pads businesses contributed approximately $53 million of net sales and $10 million of earnings before income taxes, which excludes certain allocated costs, including corporate support services, for which the Company would normally include in measuring its performance.
Sale of European food trays business
On November 1, 2015, we completed the sale of our European food trays business to Faerch Plast A/S, a European food packaging solutions provider, for net proceeds at that time of €18 million euros or approximately $19 million, net of certain purchase price adjustments of €2 million euros or approximately $2 million and subject to final purchase price adjustments. The net proceeds excluded contingent consideration which will be received if certain performance targets are met. This transaction follows the sale of our North American foam trays and absorbent pads business in April 2015 and is aligned with our continued commitment to a disciplined approach to portfolio management strategy. The European sale included the manufacturing facilities in Poole, UK and Bunol, Spain.
In the Condensed Consolidated Statement of Operations for the three months ended March 31, 2016 we recorded an additional $2 million pre-tax loss on the sale of business primarily due to a reduction in the net proceeds that occurred during the three months ended March 31, 2016. This resulted in cumulative net proceeds of €16 million euros or approximately $17 million which is still subject to final purchase price adjustments.
The European food trays business was part of the Company’s Food Care division.
For the three months ended March 31, 2015, the European food trays business contributed approximately $14 million of net sales and $2 million of earnings from continuing operations before income tax provision, respectively, which excludes certain allocated costs, including corporate support services for which the Company would normally include in measuring its performance.
The Company’s segment reporting structure consists of three reportable segments and an “Other” category and is as follows:
Food Care;
Diversey Care;
Product Care; and
Other (includes Corporate, Medical Applications and New Ventures businesses).
The Company’s Food Care, Diversey Care and Product Care segments are considered reportable segments under FASB ASC Topic 280. Our reportable segments are aligned with similar groups of products. Other includes Corporate and the Medical Applications and New Ventures businesses. Other includes certain costs that are not allocated to the reportable segments, primarily consisting of unallocated corporate overhead costs, including administrative functions and cost recovery variances not allocated to the reportable segments from global functional expenses.
We allocate and disclose depreciation and amortization expense to our segments, although property and equipment, net is not allocated to the segment assets, nor is depreciation and amortization included in the segment performance metric Adjusted EBITDA. We also disclose restructuring and other charges by segment, although these items are not included in the segment performance metric Adjusted EBITDA since restructuring and other charges are categorized as special items as outlined in the table reconciling Non-U.S. GAAP Total Company Adjusted EBITDA to U.S. GAAP net earnings from continuing operations set forth below. The accounting policies of the reportable segments and Other are the same as those applied to the Consolidated Financial Statements.
The following tables show Net Sales and Adjusted EBITDA by our segment reporting structure:
Net Sales:
Food Care
764.7
879.8
As a % of Total Company net sales
48.1
%
50.4
Diversey Care
441.4
467.9
27.8
26.8
Product Care(1)
367.2
379.9
23.1
21.8
Total Reportable Segments Net Sales
1,573.3
1,727.6
Other(1)
17.3
18.8
Total Company Net Sales
Adjusted EBITDA:
147.8
190.5
Adjusted EBITDA Margin
19.3
21.7
36.3
41.1
8.2
8.8
77.1
76.4
21.0
20.1
Total Reportable Segments Adjusted EBITDA
261.2
308.0
(18.1
(23.8
Non-U.S. GAAP Total Company Adjusted EBITDA
243.1
284.2
15.3
16.3
As of January 1, 2016, our Kevothermal business was moved from Other to our Product Care Segment. This resulted in a reclassification of $2.8 million of net sales and $0.8 million of adjusted EBITDA for the three months ended March 31, 2015.
The following table shows a reconciliation of Total Company Adjusted EBITDA to Net earnings available to common stockholders:
Total Company Adjusted EBITDA
Depreciation and amortization (1)
(63.5
(73.1
Special items:
Accelerated depreciation of non-strategic assets related
to restructuring programs
0.6
Restructuring and other charges(2)
(12.7
Other restructuring associated costs included in cost of
sales and selling, general and administrative expenses
(6.1
(8.6
Gain from sale of building in connection with relocation
SARs
(0.3
Foreign currency exchange (loss) gains related to
Venezuelan subsidiaries
Loss from sale of European food trays business
(1.6
Other special items
(2.0
Depreciation and amortization by segment is as follows:
25.7
28.5
23.0
26.1
Product Care
9.6
10.1
Total reportable segments
58.3
64.7
Other
5.2
8.4
Total Company depreciation and amortization(1)
63.5
73.1
Includes share-based incentive compensation of $14.4 million for the three months ended March 31, 2016 and $18.3 million for the three months ended March 31, 2015.
(2)
Restructuring and other charges by segment were as follows:
6.9
Total Company restructuring and other charges
15
Assets by Reportable Segments
The following table shows assets allocated by our segment reporting structure. Only assets identifiable by segment and reviewed by our chief operating decision maker by segment are allocated by the reportable segment assets, which are trade receivables, net, and finished goods inventory, net. All other assets are included in “Assets not allocated.”
Assets:
Trade receivables, net, and finished goods inventories, net
555.6
522.4
467.6
440.3
230.1
222.0
17.8
12.5
Total segments and other
1,271.1
1,197.2
Assets not allocated
1,281.6
1,199.6
Total
The following table details our inventories:
Inventories:
Raw materials
130.8
109.6
Work in process
122.2
112.4
Finished goods
483.5
438.8
Note 6 Property and Equipment, net
The following table details our property and equipment, net:
Land and improvements
89.0
86.7
Buildings
617.5
602.0
Machinery and equipment
2,177.3
2,141.3
Other property and equipment
131.4
129.1
Construction-in-progress
210.9
190.7
Property and equipment, gross
3,226.1
3,149.8
Accumulated depreciation and amortization
(2,271.7
(2,219.1
The following table details our interest cost capitalized and depreciation and amortization expense for property and equipment.
Interest cost capitalized
1.6
Depreciation and amortization expense for property and equipment
27.7
32.2
The following table shows our goodwill balances by our segment reporting structure. We review goodwill for impairment on a reporting unit basis annually during the fourth quarter of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. As of March 31, 2016, we did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable.
Gross Carrying Value at
December 31, 2015
804.3
1,820.9
1,373.7
4,000.5
Accumulated impairment
(208.0
(883.0
(1,091.0
Carrying Value at December 31, 2015
596.3
937.9
Acquisition method adjustments
Currency translation
0.2
19.4
0.7
20.2
March 31, 2016
804.2
1,840.3
1,374.4
1.5
4,020.4
Carrying Value at March 31, 2016
596.2
957.3
Identifiable Intangible Assets
The following tables summarize our identifiable intangible assets with definite and indefinite useful lives. As of March 31, 2016, there were no impairment indicators present.
Gross
Carrying
Accumulated
Value
Amortization
Impairment
Net
Customer relationships
861.8
(269.0
(148.9
443.9
846.2
(249.4
447.9
Trademarks and tradenames
1.8
(0.6
1.2
(0.4
Capitalized Software
153.9
(129.0
24.9
143.0
(125.3
17.7
Technology
142.5
(68.6
(22.2
51.7
141.9
(65.0
54.7
Contracts
43.3
(32.5
10.8
42.8
(31.2
11.6
Total intangible assets
with definite lives
1,203.3
(499.7
(171.1
532.5
1,175.6
(471.3
533.2
with indefinite lives(1)
881.3
(630.2
251.1
Total identifiable
intangible assets
2,084.6
(801.3
2,056.9
The intangible assets include $251 million of trademarks and trade names that we have determined to have indefinite useful lives, primarily acquired in connection with the acquisition of Diversey.
The following table shows the remaining estimated future amortization expense at March 31, 2016.
Year
Amount
(in millions)
Remainder of 2016
65.6
2017
81.3
2018
68.1
2019
58.4
Thereafter
259.1
U.S. Accounts Receivable Securitization Program
We and a group of our U.S. operating subsidiaries maintain an accounts receivable securitization program under which they sell eligible U.S. accounts receivable to an indirectly wholly-owned subsidiary that was formed for the sole purpose of entering into this program. The wholly-owned subsidiary in turn may sell an undivided fractional ownership interest in these receivables with two banks and issuers of commercial paper administered by these banks. The wholly-owned subsidiary retains the receivables it purchases from the operating subsidiaries. Any transfers of fractional ownership interests of receivables under the U.S. receivables securitization program to the two banks and issuers of commercial paper administered by these banks are considered secured borrowings with pledge of collateral and will be classified as short-term borrowings on our Condensed Consolidated Balance Sheets. These banks do not have any recourse against the general credit of the Company. The net trade receivables that served as collateral for these borrowings are reclassified from trade receivables, net to prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets.
As of March 31, 2016, the maximum purchase limit for receivable interests was $90 million, subject to the availability limits described below.
The amounts available from time to time under this program may be less than $90 million due to a number of factors, including but not limited to our credit ratings, trade receivable balances, the creditworthiness of our customers and our receivables collection experience. During the three months ended March 31, 2016, the level of eligible assets available under the program was lower than $90 million primarily due to certain required reserves against our receivables. As a result, the amount available to us under the program was $72 million at March 31, 2016. Although we do not believe restrictions under this program presently materially restrict our operations, if an additional event occurs that triggers one of these restrictive provisions, we could experience a further decline in the amounts available to us under the program or termination of the program.
The program expires annually in September and is renewable. The program was renewed in September 2015 for an additional year.
European Accounts Receivables Securitization Program
We and a group of our European subsidiaries maintain an accounts receivable securitization program with a special purpose vehicle, or SPV, two banks and issuers of commercial paper administered by these banks. The European program is structured to be a securitization of certain trade receivables that are originated by certain of our European subsidiaries. The SPV borrows funds from the banks to fund its acquisition of the receivables and provides the banks with a first priority perfected security interest in the accounts receivable. We do not have an equity interest in the SPV. We concluded the SPV is a variable interest entity because its total equity investment at risk is not sufficient to permit the SPV to finance its activities without additional subordinated financial support from the bank via loans or via the collections from accounts receivable already purchased. Additionally, we are considered the primary beneficiary of the SPV since we control the activities of the SPV, and are exposed to the risk of uncollectable receivables held by the SPV. Therefore, the SPV is consolidated in our Condensed Consolidated Financial Statements. Any activity between the participating subsidiaries and the SPV is eliminated in consolidation. Loans from the banks to the SPV will be classified as short-term borrowings on our Condensed Consolidated Balance Sheet. The net trade receivables that served as collateral for these borrowings are reclassified from trade receivables, net to prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet.
As of March 31, 2016, the maximum purchase limit for receivable interests was €110 million, ($125 million equivalent at March 31, 2016) subject to availability limits. The terms and provisions of this program are similar to our U.S. program discussed above. As of March 31, 2016, the amount available under this program was €91 million ($103 million equivalent as of March 31, 2016).
This program expires annually in February and is renewable. The program was renewed in February 2016 for an additional year.
Utilization of Our Accounts Receivable Securitization Programs
As of March 31, 2016, there were borrowings of $70 million outstanding under our U.S. program and borrowings of €72 million ($82 million equivalent as of March 31, 2016) under our European program. We continue to service the trade receivables supporting the programs, and the banks are permitted to re-pledge this collateral. Total interest expense related to the use of these programs was less than $1 million for the three months ended March 31, 2016 and March 31, 2015.
Under limited circumstances, the banks and the issuers of commercial paper can end purchases of receivables interests before the above expiration dates. A failure to comply with debt leverage or various other ratios related to our receivables collection experience could result in termination of the receivables programs. We were in compliance with these ratios at March 31, 2016.
As of December 31, 2015, the total amount of borrowings was $67 million under our U.S. program and €70 million ($77 million equivalent as of December 31, 2015) under our European program.
Consolidation of Restructuring Programs
As reported in our 2015 Form 10-K, our December 2011 Integration and Optimization Program (“IOP”) is substantially complete and is not expected to significantly impact 2016. The May 2013 Earnings Quality Improvement Program (“EQIP”) and the December 2014 Fusion program will show significant activity in 2016.
In the first quarter of 2016, the Board of Directors agreed to consolidate the remaining activities of all restructuring programs to create a single program to be called the “Sealed Air Restructuring Program” or the “Program.”
Program metrics are as follows:
Program
EQIP
Fusion
Announcement Date
May 2013
December 2014
Status
Estimated to be completed by 12/31/2016
Estimated to be completed by 12/31/2018
Approximate positions eliminated by the program
900
1,050
1,950
Estimated Program Costs (in millions):
Costs of reduction in headcount as a result of
reorganization
$130
$105-$110
$235-$240
Other expenses associated with the plan
50-55
110-115
160-170
Total expense
$180-185
$215-225
$395-410
45
205-210
250-255
Proceeds, foreign exchange and other cash items
(5) -(10)
(60)-(65)
(65)-(75)
Total estimated net cash cost
$220
$360-$370
$580-$590
Program to Date Cumulative Expense
(in millions):
130
83
213
48
36
84
Total Cumulative Expense
178
119
297
64
109
The following table details our restructuring activities as reflected in the Condensed Statement of Operations for the three months ended March 31, 2016 and 2015:
Three months ended March 31
Other associated costs
6.1
8.6
Restructuring charges
Total Expense
21.3
Capital Expenditures
19.1
2.4
The restructuring accrual, spending and other activity for the three months ended March 31, 2016 and the accrual balance remaining at March 31, 2016 related to these programs were as follows (in millions):
Restructuring accrual at December 31, 2015
76.3
Accrual and accrual adjustments
Cash payments during 2016
(12.6
Effect of changes in foreign currency exchange rates
Restructuring accrual at March 31, 2016
65.5
We expect to pay $61 million of the accrual balance remaining at March 31, 2016 within the next twelve months. This amount is included in accrued restructuring costs on the Condensed Consolidated Balance Sheet at March 31, 2016. The remaining accrual of $4 million is expected to be paid in 2017. This amount is included in other non-current liabilities on our Condensed Consolidated Balance Sheet at March 31, 2016.
The most substantial component of our Restructuring Program is the Fusion Program (“Fusion” or the “Plan”), which was approved by the Company’s Board of Directors on December 18, 2014 and consists of a portfolio of restructuring projects across all of our divisions as part of our transformation of Sealed Air into a knowledge-based company, including reduction in headcount and consolidation and relocation of certain facilities and offices.
Fusion includes that relocation of our global headquarters to Charlotte, North Carolina, including the headquarters for our divisions, research and development facilities, and corporate offices. By December 31, 2017, we anticipate approximately 1,300 jobs will have been relocated to Charlotte primarily from our former corporate headquarters in Elmwood Park, New Jersey; and facilities in Saddle Brook, New Jersey; Racine, Wisconsin; and, Duncan and Greenville, South Carolina. The cost of the Charlotte campus is estimated to be approximately $120 million.
In January, 2015, in connection with our relocation efforts, we closed on an agreement to sell our building located in Racine, Wisconsin. The final sales price was $30 million, of which net proceeds of $24 million were received as part of the closing along with a $6 million unsecured promissory note which was received in the third quarter of 2015. We recorded a pre-tax gain on the sale of approximately $3 million in the first quarter of 2015.
In May 2013, we announced the commencement of EQIP, which is an initiative to deliver meaningful cost savings and network optimization. The costs associated with this plan consist primarily of a reduction in headcount and other costs associated with divisional realignment and connected profitability improvement programs and costs and capital expenditures associated with incremental supply chain network optimization projects, including facility relocation and closures. The plan is expected to be substantially completed by the end of 2016.
20
Our total debt outstanding consisted of the amounts set forth on the following table:
2015(3)
Short-term borrowings (1)
Total current debt
414.7
288.5
Term Loan A due July 2017
249.7
Term Loan A due July 2019 (2)
1,055.5
1,058.9
6.50% Senior Notes due December 2020
422.8
422.7
4.875% Senior Notes due December 2022
419.1
418.9
5.25% Senior Notes due April 2023
419.2
419.0
4.50% Senior Notes due September 2023
449.2
432.9
5.125% Senior Notes due December 2024
419.8
419.7
5.50% Senior Notes due September 2025
396.1
6.875% Senior Notes due July 2033
445.2
3.4
Total long-term debt, less current portion(5)
Total debt(4)(6)
4,694.7
4,555.3
Short-term borrowings of $353 million at March 31, 2016 are comprised primarily of $70 million of borrowings outstanding under our U.S. accounts receivable securitization program, $82 million of borrowings outstanding under our European accounts receivable securitization program, $92 million outstanding under our revolving credit facility and $109 million short-term borrowing from various lines of credit. Short-term borrowings at December 31, 2015 are comprised primarily of $67 million of borrowings outstanding under our U.S. accounts receivable securitization program, $77 million of borrowings outstanding under our European accounts receivable securitization program and $98 million short-term borrowings from various lines of credit.
Term Loan A facility due July 2019 has required prepayments which are due in 2016.
(3)
As of January 1, 2016, we have adopted ASU 2015-03 and ASU 2015-15 which resulted in $36 million of unamortized debt issuance costs being reclassified from other assets to long-term debt. See Note 2, “Recently Issued Accounting Standards” for additional information related to this adoption.
(4)
As of March 31, 2016, our weighted average interest rate on our short-term borrowings outstanding was 3.5% and on our long-term debt outstanding was 4.6%. As of December 31, 2015, our weighted average interest rate on our short-term borrowings outstanding was 3.4% and on our long-term debt outstanding was 4.6%.
(5)
Amounts are net of unamortized discounts/issuance costs of $35 million as March 31, 2016 and $36 million as of December 31, 2015.
(6)
Long-term debt instruments are listed in order of priority.
Senior Notes
In the second quarter 2015, Sealed Air issued $400 million of 5.50% Senior Notes due September 15, 2025 and €400 million of 4.50% Senior Notes due September 15, 2023. The proceeds from these notes were used to repurchase the Company’s $750 million 8.375% Notes due September 2021. The aggregate repurchase price was $866 million, which included the principal amount of $750 million, a premium of $99 million and accrued interest of $17 million. We recognized a total pre-tax loss of $111 million on the repurchase, which included the premiums mentioned above. Also included in the loss on debt redemption was $11 million of accelerated amortization of original non-lender fees related to the 8.375% Senior Notes. We also capitalized $8 million of fees incurred in connection with the 5.50% Senior Notes and 4.50% Senior Notes that are included as a reduction to long-term debt, less current portion on our Condensed Consolidated Balance Sheet.
Lines of Credit
The following table summarizes our available lines of credit and committed and uncommitted lines of credit, including the Revolving Credit Facility discussed above, and the amounts available under our accounts receivable securitization programs.
Used lines of credit (1)(2)
Unused lines of credit
935.0
1,039.9
Total available lines of credit(3)
1,288.1
1,281.8
Includes total borrowings under the accounts receivable securitization programs, the revolving credit facility and borrowings under lines of credit available to several subsidiaries.
As of March 31, 2016 and December 31, 2015, there were $57 million and $56 million of cash held on deposit, respectively, as a compensating balance for certain short-term borrowings that are included in other current assets on the Condensed Consolidated Balance Sheet.
Of the total available lines of credit, $875 million were committed as of March 31, 2016.
Covenants
Each issue of our outstanding senior notes imposes limitations on our operations and those of specified subsidiaries. The Second Amended and Restated Syndicated Credit Facility (“Amended Credit Facility”) contains customary affirmative and negative covenants for credit facilities of this type, including limitations on our indebtedness, liens, investments, restricted payments, mergers and acquisitions, dispositions of assets, transactions with affiliates, amendment of documents and sale leasebacks, and a covenant specifying a maximum permitted ratio of Consolidated Net Debt to Consolidated EBITDA (as defined in the Amended Credit Facility). We were in compliance with the above financial covenants and limitations at March 31, 2016.
We report all derivative instruments on our Condensed Consolidated Balance Sheets at fair value and establish criteria for designation and effectiveness of transactions entered into for hedging purposes.
As a large global organization, we face exposure to market risks, such as fluctuations in foreign currency exchange rates and interest rates. To manage the volatility relating to these exposures, we enter into various derivative instruments from time to time under our risk management policies. We designate derivative instruments as hedges on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments offset in part or in whole corresponding changes in the fair value or cash flows of the underlying exposures being hedged. We assess the initial and ongoing effectiveness of our hedging relationships in accordance with our policy. We do not purchase, hold or sell derivative financial instruments for trading purposes. Our practice is to terminate derivative transactions if the underlying asset or liability matures or is sold or terminated, or if we determine the underlying forecasted transaction is no longer probable of occurring.
We record the fair value positions of all derivative financial instruments on a net basis by counterparty for which a master netting arrangement is utilized.
Foreign Currency Forward Contracts Designated as Cash Flow Hedges
The primary purpose of our cash flow hedging activities is to manage the potential changes in value associated with the amounts receivable or payable on equipment and raw material purchases that are denominated in foreign currencies in order to minimize the impact of the changes in foreign currencies. We record gains and losses on foreign currency forward contracts qualifying as cash flow hedges in other comprehensive income to the extent that these hedges are effective and until we recognize the underlying transactions in net earnings, at which time we recognize these gains and losses in cost of sales, on our Condensed Consolidated Statements of Operations. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows. These contracts generally have original maturities of less than 12 months.
Net unrealized after-tax gains/losses related to these contracts that were included in other comprehensive income were $3.4 million loss for the three months ended March 31, 2016, respectively, and $1 million gain for the three months ended March 31, 2015. The unrealized amounts in other comprehensive income will fluctuate based on changes in the fair value of open contracts during each reporting period.
We estimate that $2.5 million of net unrealized derivative gains included in accumulated other comprehensive income (AOCI) will be reclassified into earnings within the next twelve months.
Foreign Currency Forward Contracts Not Designated as Hedges
Our subsidiaries have foreign currency exchange exposure from buying and selling in currencies other than their functional currencies. The primary purposes of our foreign currency hedging activities are to manage the potential changes in value associated with the amounts receivable or payable on transactions denominated in foreign currencies and to minimize the impact of the changes in foreign currencies related to foreign currency-denominated interest-bearing intercompany loans and receivables and payables. The changes in fair value of these derivative contracts are recognized in other income, net, on our Condensed Consolidated Statements of Operations and are largely offset by the remeasurement of the underlying foreign currency-denominated items indicated above. Cash flows from derivative financial instruments are classified as cash flows from investing activities in the Condensed Consolidated Statements of Cash Flows. These contracts generally have original maturities of less than 12 months.
Interest Rate Swaps
From time to time, we may use interest rate swaps to manage our fixed and floating interest rates on our outstanding indebtedness. At March 31, 2016, we had no outstanding interest rate swaps.
Interest Rate and Currency Swaps
In 2014, in connection with exercising the $100 million delayed draw under the senior secured credit facility, we entered into a series of interest rate and currency swaps in a notional amount of $100 million. These swaps convert the U.S. dollar-denominated variable rate obligation under the credit facility into a fixed Brazilian real-denominated obligation. The delayed draw and the interest rate and currency swaps are used to fund expansion and general corporate purposes of our Brazilian subsidiaries.
Net Investment Hedge
During the second quarter of 2015, we entered into a series of foreign currency exchange forwards totaling €270 million. These foreign currency exchange forwards hedged a portion of the net investment in a certain European subsidiary against fluctuations in foreign exchange rates and expired in June 2015. The loss of $3.5 million ($2.2 million after tax) is recorded in AOCI on our Condensed Consolidated Balance Sheet.
The €400 million 4.50% notes issued in June 2015 are designated as a net investment hedge, hedging a portion of our net investment in a certain European subsidiary against fluctuations in foreign exchange rates. The change in the fair value of the debt was $3.8 million as of March 31, 2016 and is reflected in long-term debt on our Condensed Consolidated Balance Sheet.
In March 2015, we entered into a series of cross-currency swaps with a combined notional amount of $425 million, hedging a portion of the net investment in a certain European subsidiary against fluctuations in foreign exchange rates.
For derivative instruments that are designated and qualify as hedges of net investments in foreign operations, settlements and changes in fair values of the derivative instruments are recognized in unrealized net gains or loss on derivative instruments for net investment hedge, a component of AOCI, net of taxes, to offset the changes in the values of the net investments being hedged. Any portion of the net investment hedge that is determined to be ineffective is recorded in other income, net on the Condensed Consolidated Statements of Operations.
Other Derivative Instruments
We may use other derivative instruments from time to time to manage exposure to foreign exchange rates and to access to international financing transactions. These instruments can potentially limit foreign exchange exposure by swapping borrowings denominated in one currency for borrowings denominated in another currency.
Fair Value of Derivative Instruments
See Note 12, “Fair Value Measurements and Other Financial Instruments,” for a discussion of the inputs and valuation techniques used to determine the fair value of our outstanding derivative instruments.
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The following table details the fair value of our derivative instruments included on our Condensed Consolidated Balance Sheets.
Cash Flow
Non-Designated
Derivative Assets
Foreign currency forward contracts
15.6
25.0
17.2
Interest rate and currency swaps
37.3
44.0
Total Derivative Assets (2)
38.9
47.2
54.5
72.2
Derivative Liabilities
(4.6
(1.3
(43.5
(26.9
(44.8
Cross-currency swaps
(32.4
(12.0
Total Derivative Liabilities(2)
(59.3
(56.8
Net Derivatives (1)
34.3
45.9
(6.7
(18.5
(4.8
15.4
Excludes €400 million of euro-denominated debt ($449 million equivalent at March 31, 2016), designated as a net investment hedge.
The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:
Other Current Assets
Other Current Liabilities
Other Non-current Assets
Other Non-current Liabilities
Gross position
36.2
29.5
36.0
Impact of master netting agreements
(24.1
24.1
Net amounts recognized on the
Condensed Consolidated
Balance Sheet
24.8
12.1
(26.7
The following table details the effect of our derivative instruments on our Condensed Consolidated Statements of Operations.
Amount of Gain (Loss) Recognized in
Earnings on Derivatives
Derivatives designated as hedging instruments:
Cash Flow Hedges:
Foreign currency forward contracts(1)
Interest rate and currency swaps(2)
15.0
Treasury locks(3)
Sub-total cash flow hedges
(9.1
15.9
Fair Value Hedges:
Interest rate swaps
Derivatives not designated as hedging instruments:
(10.6
37.9
(19.6
53.9
Amounts recognized on the foreign currency forward contracts were included in cost of sales during the three months ended March 31, 2016 and other income, net in the three months ended March 31, 2015.
Amounts recognized on the interest rate and currency swaps for the three months ended March 31, 2016 and 2015, included a $10 million loss and $17 million gain, respectively, which is included in other income, net and interest expense of $1 million and $2 million related to the hedge of the interest payments.
Amounts recognized on the treasury locks were included in interest expense.
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Fair Value Measurements
In determining fair value of financial instruments, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. We determine fair value of our financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The following table details the fair value hierarchy of our financial instruments:
Total Fair Value
Level 1
Level 2
Level 3
Cash equivalents
52.1
44.1
8.0
Compensating balance deposits
56.7
Derivative financial and hedging instruments net asset
(liability):
(9.7
56.3
48.3
56.5
Derivative financial instruments net asset (liability):
(16.5
Cash Equivalents
Our cash equivalents at March 31, 2016 and December 31, 2015 consisted of commercial paper (fair value determined using Level 2 inputs) and bank time deposits (Level 1). Since these are short-term highly liquid investments with original maturities of three months or less at the date of purchase, they present negligible risk of changes in fair value due to changes in interest rates.
Compensating Balance Deposits
We have compensating balance deposits related to certain short-term borrowings. These represent bank certificates of deposits with maturities of greater than 3 months.
Derivative Financial Instruments
Our foreign currency forward contracts, foreign currency options, euro-denominated debt, interest rate and currency swaps and cross-currency swaps are recorded at fair value on our Condensed Consolidated Balance Sheets using a discounted cash flow analysis that incorporates observable market inputs. These market inputs include foreign currency spot and forward rates, and various interest rate curves, and are obtained from pricing data quoted by various banks, third party sources and foreign currency dealers involving identical or comparable instruments (Level 2).
Counterparties to these foreign currency forward contracts are rated at least A- by Standard & Poor’s and Baa2 by Moody’s. Credit ratings on some of our counterparties may change during the term of our financial instruments. We closely monitor our counterparties’ credit ratings and, if necessary, will make any appropriate changes to our financial instruments. The fair value generally reflects the estimated amounts that we would receive or pay to terminate the contracts at the reporting date.
Other Financial Instruments
The following financial instruments are recorded at fair value or at amounts that approximate fair value: (1) trade receivables, net, (2) certain other current assets, (3) accounts payable and (4) other current liabilities. The carrying amounts reported on our Condensed Consolidated Balance Sheets for the above financial instruments closely approximate their fair value due to the short-term nature of these assets and liabilities.
Other liabilities that are recorded at carrying value on our Condensed Consolidated Balance Sheets include our senior notes. We utilize a market approach to calculate the fair value of our senior notes. Due to their limited investor base and the face value of some of our senior notes, they may not be actively traded on the date we calculate their fair value. Therefore, we may utilize prices and other relevant information generated by market transactions involving similar securities, reflecting U.S. Treasury yields to calculate the yield to maturity and the price on some of our senior notes. These inputs are provided by an independent third party and are considered to be Level 2 inputs.
We derive our fair value estimates of our various other debt instruments by evaluating the nature and terms of each instrument, considering prevailing economic and market conditions, and examining the cost of similar debt offered at the balance sheet date. We also incorporated our credit default swap rates and currency specific swap rates in the valuation of each debt instrument, as applicable.
These estimates are subjective and involve uncertainties and matters of significant judgment, and therefore we cannot determine them with precision. Changes in assumptions could significantly affect our estimates.
The table below shows the carrying amounts and estimated fair values of our total debt:
Fair
Amount(2)
Term Loan A Facility due July 2017
Term Loan A Facility due July 2019(1)
1,115.3
1,103.8
476.9
473.7
441.9
426.5
448.6
436.2
4.50% Senior Notes due September 2023(1)
476.6
452.7
441.2
427.6
419.3
410.2
473.4
462.7
Other foreign loans(1)
182.9
183.1
165.7
165.8
Other domestic loans
175.4
175.6
81.6
81.9
Total debt
4,901.6
4,690.8
Includes borrowings denominated in currencies other than U.S. dollars.
As of March 31, 2016, we did not have any non–financial assets and liabilities, aside from contingent consideration liabilities related to acquisitions and certain equity compensation, that were carried at fair value on a recurring basis in the Condensed Consolidated Financial Statements or for which a fair value measurement was required. Included among our non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis are inventories, net property and equipment, goodwill, intangible assets and asset retirement obligations. Refer to Note 16 “Stockholders’ Equity” for share based compensation and below for contingent consideration.
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Contingent Consideration
As part of the Intellibot acquisition in 2015, the Company recorded contingent consideration which is classified as a liability which includes earnout fees to be paid out in cash to the seller over a 10 year period based on various percentages of net sales of the Intellibot business over the 10 year period. Since it is classified as a liability, we must remeasure to fair value each reporting period. The fair value of the liability as of March 31, 2016 was $10 million, mostly included in non-current liabilities on the Condensed Consolidated Balance Sheet. The less than $1 million change in fair value for the three months ended March 31, 2016 was recognized in selling, general and administrative expenses. The valuation of the contingent consideration is based on a probability weighted projection of payments over the 10 year period using the deterministic method. These projections are based on our internal forecast of the business performance and since this is an unobservable input used in the fair value measurement it would be considered a Level 3 input (as defined above). In addition, the probability weighted earnout payments were present valued using factors to consider the risk associated with achievement of the sales forecast and the credit risk associated with the payments.
Credit and Market Risk
Financial instruments, including derivatives, expose us to counterparty credit risk for nonperformance and to market risk related to changes in interest or currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit standards, establishing credit limits, diversification of counterparties, and procedures to monitor concentrations of credit risk.
We do not expect any of our counterparties in derivative transactions to fail to perform as it is our policy to have counterparties to these contracts that are rated at least BBB- or higher by Standard & Poor’s and Baa3 or higher by Moody’s. Nevertheless, there is a risk that our exposure to losses arising out of derivative contracts could be material if the counterparties to these agreements fail to perform their obligations. We will replace counterparties if a credit downgrade is deemed to increase our risk to unacceptable levels.
We regularly monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest and currency exchange rates and restrict the use of derivative financial instruments to hedging activities. We do not use derivative financial instruments for trading or other speculative purposes and do not use leveraged derivative financial instruments.
We continually monitor the creditworthiness of our diverse base of customers to which we grant credit terms in the normal course of business and generally do not require collateral. We consider the concentrations of credit risk associated with our trade accounts receivable to be commercially reasonable and believe that such concentrations do not leave us vulnerable to significant risks of near-term severe adverse impacts. The terms and conditions of our credit sales are designed to mitigate concentrations of credit risk with any single customer. Our sales are not materially dependent on a single customer or a small group of customers.
Effective December 31, 2015, the Company changed the approach used to calculate the service and interest components of net periodic benefit cost for certain of its International and U.S. benefit plans to provide a more precise measurement of service and interest costs. The change was applied to plans in countries where the benefit obligation was approximately $50 million or higher, and for which a yield curve is used to measure the benefit obligation. Historically, the Company calculated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Going forward, the Company has elected to utilize an approach that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. Based on current economic conditions, the Company estimates that the service cost and interest cost for these benefit plans will be reduced by approximately $4 million in 2016. The Company has accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly has accounted for it prospectively.
The following table shows the components of our net periodic benefit cost (income) for our defined benefit pension plans for the three months ended March 31, 2016 and 2015:
U.S.
International
Components of net periodic benefit cost or
(income):
Service cost
2.8
Interest cost
1.9
6.4
8.3
2.2
7.6
Expected return on plan assets
(2.5
(11.6
(10.3
(13.2
Amortization of net actuarial loss
2.3
Net periodic benefit cost (income)
Cost (income) of
settlement/curtailment
Total benefit cost (income)
The following table shows the components of our net periodic benefit cost for our other employee benefit plans for the three month period ended March 31, 2016 and 2015:
Components of net periodic
benefit cost or (income):
Amortization of net prior service cost
Net periodic benefit cost
Effective Income Tax Rate and Income Tax Provision
Our effective income tax rate for the three months ended March 31, 2016 was 18.2%. Our effective income tax rate benefited from a favorable earnings mix with earnings in jurisdictions with lower tax rates. The Company also recorded net discrete benefits of $8 million, including $3 million related to repatriation strategies and $4 million for releases of certain reserves due to the expiration of the statute of limitations and settlements with taxing authorities. The reserves are primarily related to positions recorded at the time of the Diversey acquisition.
Our effective income tax rate for the three months ended March 31, 2015 was 25.9%. Our effective income tax rate benefited from a favorable earnings mix with earnings in jurisdictions with low tax rates.
Unrecognized Tax Benefits
During the three months ended March 31, 2016, we did not make a material change to our unrecognized tax benefits other than those disclosed above. We have not changed our policy with regard to the reporting of penalties and interest related to unrecognized tax benefits.
Cryovac Transaction Commitments and Contingencies
Refer to Part II, Item 8, Note 17, “Commitments and Contingencies” to our audited Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for a description of the Settlement agreement (as defined therein).
Environmental Matters
We are subject to loss contingencies resulting from environmental laws and regulations, and we accrue 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 are not reduced by potential insurance recoveries, if any. We do not believe that it is reasonably possible that our liability in excess of the amounts that we have accrued for environmental matters will be material to our Condensed Consolidated Balance Sheet or Statement of Operations. Environmental liabilities are reassessed whenever circumstances become better defined or remediation efforts and their costs can be better estimated.
We evaluate these liabilities 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) or new sites are assessed and costs can be reasonably estimated, we adjust the recorded accruals, as necessary. We believe that these exposures are not material to our Condensed Consolidated Balance Sheet or Statement of Operations. We believe that we have adequately reserved for all probable and estimable environmental exposures.
Guarantees and Indemnification Obligations
We are a party to many contracts containing guarantees and indemnification obligations. These contracts primarily consist of:
product warranties with respect to certain products sold to customers in the ordinary course of business. These warranties typically provide that products will conform to specifications. We generally do not establish a liability for product warranty based on a percentage of sales or other formula. We accrue a warranty liability on a transaction-specific basis depending on the individual facts and circumstances related to each sale. Both the liability and annual expense related to product warranties are immaterial to our Condensed Consolidated Balance Sheet or Statement of Operations; and
licenses of intellectual property by us to third parties in which we have agreed to indemnify the licensee against third party infringement claims.
Repurchase of Common Stock
On July 9, 2015, our Board of Directors authorized a repurchase program of up to $1.5 billion of the Company’s common stock, reflecting its commitment to return value to shareholders. The repurchase program has no expiration date and replaced the previously authorized program, which was terminated. Refer to Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for further information. This program replaced our prior share repurchase program, approved by our Board of Directors in August 2007 authorizing us to repurchase in the aggregate up to 20 million shares of our outstanding common stock.
During the three months ended March 31, 2016 and March 31, 2015, we repurchased 699,345 and 1,014,147 shares, for approximately $32 million and $44 million, respectively. These repurchases were made under privately negotiated or open market transactions in accordance with Rule 10b5-1 of the Securities Act of 1933, as amended, and pursuant to the share repurchase program previously approved by our Board of Directors.
Additionally, during the three months ended March 31, 2015, the Company entered into an accelerated share repurchase agreement with a third-party financial institution to repurchase $25 million of the Company’s common stock. Upon completion of the transaction, the Company received a total of 546,574 shares with an average price of $45.74 per share.
Dividends
On February 17, 2016, our Board of Directors declared a quarterly cash dividend of $0.13 per common share, or $26 million, which was paid on March 18, 2016 to stockholders of record at the close of business day March 4, 2016.
On March 21, 2016, our Board of Directors declared a quarterly cash dividend of $0.16 per common share. The dividend is payable on June 17, 2016 to stockholders of record at the close of business on June 3, 2016.
The dividend payment discussed above is recorded as a reduction to cash and cash equivalents and retained earnings on our Condensed Consolidated Balance Sheets. Our credit facility and our notes contain covenants that restrict our ability to declare or pay dividends. However, we do not believe these covenants are likely to materially limit the future payment of quarterly cash dividends on our common stock. From time to time, we may consider other means of returning value to our stockholders based on our Condensed Consolidated Financial Condition and Results of Operations. There is no guarantee that our Board of Directors will declare any further dividends.
Share-based Incentive Compensation
We record share-based incentive compensation expense in selling, general and administrative expenses and cost of sales on our Condensed Consolidated Statements of Operations with a corresponding credit to additional paid-in capital within stockholders’ equity based on the fair value of the share-based incentive compensation awards at the date of grant. We recognize an expense or credit reflecting the straight-line recognition, net of estimated forfeitures, of the expected cost of the program. For the various PSU awards programs described below, the cumulative amount accrued to date is adjusted up or down to the extent the expected performance against the targets has improved or worsened.
The table below shows our total share-based incentive compensation expense:
Total share-based incentive compensation expense (1)
14.4
The amounts included above do not include the expense related to our U.S. profit sharing contributions made in the form of our common stock or the expense or income related to SARs and certain cash-based awards. See Stock Appreciation Rights below for further details of SARs. At March 31, 2016 and March 31, 2015, our other cash-based awards were not material to our Condensed Consolidated Balance Sheet or Statement of Operations.
President and Chief Executive Officer (CEO) 2016 Inducement Awards
On January 15, 2016, Mr. Peribere, entered into a letter agreement (the “Amendment Letter”) amending the terms of his employment letter with the Company dated August 28, 2012 to extend the term of Mr. Peribere’s employment and make certain compensation adjustments. The Amendment Letter also provides Mr. Peribere with two additional awards of restricted stock units under the Company’s 2014 Omnibus Incentive Plan (the “Inducement Awards”), one that is time-vesting and the other that is performance-vesting.
The time-vesting Inducement Award, for 75,000 shares, requires Mr. Peribere to remain in service with the Company through December 31, 2017. The grant date fair value for this award was $39.95.
The performance-vesting Inducement Award, also for 75,000 shares, in addition to the time-vesting requirement noted above, requires that either (i) the Company’s cumulative total stockholder return (“TSR”) for 2016-2017 be in the top 25% of its peers (using the same peers and methodology under the Company’s performance stock unit (PSU) awards) and the Company’s stock price as of December 31, 2017 equals at least $43.70/share, or (ii) the Company’s stock price as of December 31, 2017 equals at least $55/share. The Amendment Letter provides that the stock price as of December 31, 2017 for this purpose will be determined using a 30-day arithmetic mean of closing prices. Since the award includes a market condition, compensation expense will be recognized regardless of whether the market condition is satisfied provided that the requisite service has been provided.
The grant date fair value for this award was determined using a Monte Carlo Simulation model that incorporates predictive modeling techniques using Geometric Brownian Motion and Crystal Ball’s random number generation. Other assumptions include the expected volatility of all companies included in the total shareholder return, valuation modeling of vesting payoff determination featuring both performance goals as noted above, the historical share price returns analysis of all companies included in the total shareholder return and assumes dividends are reinvested. The expected volatility was based on the historical volatility for a period of time that approximates the duration between the valuation date and the end of the performance period. The risk-free interest rate is based on the Zero-Coupon Treasury STRIP yield curve matching the term from the valuation date to the end of the performance period Compensation expense for the performance-vesting Inducement Award is a fixed amount determined at the grant date fair value and is recognized 100% over the two-year award performance period regardless of whether shares are awarded at the end of the award performance period.
30
The assumptions used to calculate the grant date fair value of the performance-vesting Inducement Award are shown in the following table:
2016 Performance-vesting Inducement Award
Fair value on grant date
12.55
Expected price volatility
24.6
Risk-free interest rate
0.92
The awards are described in further detail in Mr. Peribere’s Amendment Letter filed with the SEC as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 20, 2016.
Performance Share Unit (“PSU”) Awards
During the first 90 days of each year, the Organization and Compensation (“O&C”) Committee of our Board of Directors approves PSU awards for our executive officers and other selected key executives, which include for each officer or executive a target number of shares of common stock and performance goals and measures that will determine the percentage of the target award that is earned following the end of the three-year performance period. Following the end of the performance period, in addition to shares, participants will also receive a cash payment in the amount of the dividends (without interest) that would have been paid during the performance period on the number of shares that they have earned. Each PSU is subject to forfeiture if the recipient terminates employment with the Company prior to the end of the three-year award performance period for any reason other than death, disability or retirement. In the event of death, disability or retirement, a participant will receive a prorated payment based on such participant’s number of full months of service during the award performance period, further adjusted based on the achievement of the performance goals during the award performance period. All of these PSUs are classified as equity in the Condensed Consolidated Balance Sheet.
2016 Three-year PSU Awards
In February 2016, O&C Committee approved awards with a three-year performance period beginning January 1, 2016 to December 31, 2018 for certain executives. The Compensation Committee established principal performance goals, which are (i) total shareholder return (TSR) weighted at 50%, and (ii) 2018 consolidated adjusted EBITDA margin weighted at 50%. The total number of shares to be issued for these awards can range from zero to 200% of the target number of shares.
The number of PSUs granted and the grant date fair value of the PSUs are shown in the following table:
TSR
Adjusted EBITDA
Number of units granted
124,755
165,391
57.14
43.10
The assumptions used to calculate the grant date fair value of the PSUs based on TSR are shown in the following table:
TSR of 2016 PSU Award
26.5
0.98
2013 Three-year PSU Awards
In February 2016, the O&C Committee reviewed the performance results for the 2013-2015 PSUs. Performance goals for these PSUs were based on Adjusted EBITDA margins and relative TSR. The overall performance for 2013-2015 PSUs was above maximum levels and as a result these awards paid out at 200% of target or 1,074,017 units.
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Stock Appreciation Rights (“SARs”)
In connection with the acquisition of Diversey, Sealed Air exchanged Diversey’s cash-settled stock appreciation rights and stock options that were unvested as of May 31, 2011 and unexercised at October 3, 2011 into cash-settled stock appreciation rights based on Sealed Air common stock. The remaining unexercised SARs were fully vested as of March 31, 2015. We continue to record expense related to these SARs until the last expiration date of these awards (February 2020). The amount of related future expense will fluctuate based on exercise and forfeiture activity and changes in the assumptions used in the Black-Scholes valuation model, including the price of Sealed Air common stock.
We recognized SARs expense of less than $1 million and $3 million in the three months ended March 31, 2016 and 2015, respectively. Cash payments due to the exercise of these SARs were less than $1 million and $4 million in the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, the remaining liability for these SARs was $4 million and is included in other current liabilities on our Condensed Consolidated Balance Sheet.
The following table provides details of comprehensive income (loss) for the three months ended March 31, 2016 and 2015:
Unrecognized
Pension Items
Cumulative
Translation
Adjustment
Unrecognized Gains
(Losses) on
Derivative
Instruments for net
investment hedge
Instruments for
cash flow hedge
Accumulated Other
Comprehensive Income
(Loss), Net of Taxes
Balance at December 31, 2014
(250.1
(369.9
6.2
(613.8
Other comprehensive income (loss) before
reclassifications
13.4
(53.1
Less: amounts reclassified from accumulated
other comprehensive income (loss)
(10.8
(8.4
Net current period other comprehensive income
(loss)
Balance at March 31, 2015(1)(2)
(248.1
(428.0
(675.3
Balance at December 31, 2015
(266.0
(564.0
(9.6
(41.7
5.5
7.4
Balance at March 31, 2016(2)
(264.3
(573.3
(20.9
For the three months ended March 31, 2015, certain foreign currency translation adjustments were misclassified within Accumulated Other Comprehensive Loss (“AOCI”) on the Consolidated Balance Sheet. Refer Note 2 “Summary of Significant Accounting Policies and Recently Issued Accounting Standards” under the heading “Reclassifications and Revisions” for further discussion of the revisions.
The ending balance in AOCI includes gains and losses on intra-entity foreign currency transactions. The intra-entity currency translation adjustment was $(19.4) million as of March 31, 2016 and $68.7 million as of March 31, 2015.
The following table provides detail of amounts reclassified from accumulated other comprehensive income:
2016 (1)
2015 (1)
Location of Amount
Reclassified from AOCI
Defined benefit pension plans and other post-
employment benefits:
Prior service costs
0.4
Actuarial losses
(2.8
(3.0
Settlement/curtailment loss
Total pre-tax amount
(3.1
Tax (expense) benefit
Net of tax
(1.9
(2.4
Net gains (losses) on cash flow hedging derivatives:
(3) Other income, net
15.1
(3) Various
Treasury locks
(3) Interest expense
(9.0
(5.2
(5.5
Total reclassifications for the period
(7.4
Amounts in parenthesis indicate debits to earnings (loss).
These accumulated other comprehensive components are included in the computation of net periodic benefit costs within cost of sales and selling, general, and administrative expenses on the Condensed Consolidated Statement of Operations.
These accumulated other comprehensive components are included in our derivative and hedging activities. See Note 11, “Derivatives and Hedging Activities” for additional details.
The following table provides details of other income (expense), net:
Interest and dividend income
Net foreign exchange transaction gains (losses)
(1.5
(0.5
Bank fee expense
(1.4
(1.1
Net gain/(loss) on disposals of business and property and
equipment
(2.7
3.3
Other, net
(0.9
Other income (expense), net
The following table shows the calculation of basic and diluted net earnings per common share under the two-class method:
(In millions, except per share amounts)
Basic Net Earnings Per Common Share:
Numerator
Distributed and allocated undistributed net loss to non-
vested restricted stockholders
Distributed and allocated undistributed net earnings to
common stockholders
91.3
96.6
Distributed net earnings - dividends paid to common
stockholders
(25.4
(27.3
Allocation of undistributed net earnings to common
65.9
69.3
Denominator
Weighted average number of common shares outstanding -
basic
Basic net earnings per common share:
Distributed net earnings to common stockholders
Allocated undistributed net earnings to common
0.34
0.33
Diluted Net Earnings Per Common Share:
Add: Allocated undistributed net earnings to unvested
restricted stockholders
Less: Undistributed net earnings (loss) reallocated to non-
Net earnings available to common stockholders - diluted
Effect of contingently issuable shares
Effect of unvested restricted stock units
Weighted average number of common shares
outstanding - diluted under two-class
196.4
Effect of unvested restricted stock - participating security
diluted under treasury stock
Diluted net earnings per common share
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with our Condensed Consolidated Financial Statements and related notes set forth in Item 1 of Part I of this Quarterly Report on Form 10-Q, our MD&A set forth in Item 7 of Part II of our 2015 Form 10-K and our Consolidated Financial Statements and related notes set forth in Item 8 of Part II of our 2015 Form 10-K. See Part II, Item 1A, “Risk Factors,” below and “Cautionary Notice Regarding Forward-Looking Statements,” above, and the information referenced therein, for a description of risks that we face and important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. All amounts and percentages are approximate due to rounding and all dollars are in millions, except per share amounts or where otherwise noted. When we cross-reference to a “Note,” we are referring to our “Notes to Condensed Consolidated Financial Statements,” unless the context indicates otherwise.
Highlights of Financial Performance
Below are the highlights of our financial performance for the three months ended March 31, 2016 and 2015:
Change
(8.9
)%
As a % of net sales
37.0
37.2
(6.5
10.5
Net earnings per common share - basic
Net earnings per common share - diluted
(—
outstanding:
Non-U.S. GAAP Adjusted EBITDA(1)
(14.5
Non-U.S. GAAP Adjusted EPS (2)
0.50
0.54
See Note 4, “Segments” for a reconciliation of Non-U.S. GAAP Adjusted EBITDA to U.S. GAAP net earnings.
See “Diluted Net Earnings per Common Share” for a reconciliation of our U.S. GAAP EPS to our non-U.S. GAAP adjusted EPS.
Diluted Net Earnings per Common Share
The following table presents a reconciliation of our U.S. GAAP EPS to non-U.S. GAAP adjusted EPS.
Three Months Ended March 31,
(In millions, except per share data)
Earnings
EPS
U.S. GAAP net earnings and EPS available to common stockholders (1)
Special items(2)
6.3
0.04
17.4
0.08
Non-U.S. GAAP adjusted net earnings and adjusted EPS available to
98.2
114.6
Weighted average number of common shares outstanding - Diluted
Net earnings per common share are calculated under the two-class method.
Special items are certain specified infrequent, non-operational or one-time costs/credits that are included in our U.S. GAAP reported results.
For the three months ended March 31, 2016, this amount primarily includes restructuring and other associated costs related to our restructuring programs of $6 million ($5 million, net of taxes), loss from the sale of our European food trays business and other divestitures of $2 million ($2 million, net of taxes), and foreign currency exchange losses related to Venezuelan subsidiaries of $2 million ($2 million, net of taxes). This was partially offset by a $4 million reduction in tax reserves related to lapses in statute of limitations and settlements with taxing authorities.
For the three months ended March 31, 2015, this amount primarily includes restructuring and other associated costs related to our Fusion, EQIP and IOP programs of $19 million ($16 million, net of taxes), partially offset by a gain from the sale of our facility located in Racine, Wisconsin of approximately $3 million ($2 million, net of taxes).
Our U.S. GAAP and non-U.S. GAAP income taxes are as follows:
Effective
Provision
Tax Rate
U.S. GAAP
18.2
25.9
Tax effect on special items(1)
4.5
Non-U.S. GAAP(2)
21.5
38.6
25.2
Represents the tax effect on special items recorded in the reconciliation of our U.S. GAAP earnings to our non-U.S. GAAP earnings, as discussed in the table above.
Our Adjusted Tax Rate is defined as the effective income tax rate on non-U.S. GAAP Adjusted Earnings before income tax provision.
Foreign Currency Translation Impact on Condensed Consolidated Financial Results
Since we are a U.S. domiciled company, we translate our foreign currency-denominated financial results into U.S. dollars. Due to the changes in the value of foreign currencies relative to the U.S. dollar, translating our financial results from foreign currencies to U.S. dollars may result in a favorable or unfavorable impact. Historically, the most significant currencies that have impacted the translation of our Condensed Consolidated Financial Results are the euro, the Venezuelan bolivar, the Australian dollar, the Brazilian real, the British pound, the Canadian dollar, the Mexican peso and the Russian ruble.
The following table presents the approximate favorable or (unfavorable) impact foreign currency translation had on some of our Condensed Consolidated Financial Results:
(113.0
(145.7
(73.8
89.2
(23.3
Net earnings
(11.3
(17.8
Net Sales by Geographic Region
As previously announced, the Company underwent a reorganization of its AMAT region. This reorganization involved transitioning the previously reported AMAT region to an Asia Pacific (APAC) region, which now includes Asia, Australia, New Zealand, and moving the Middle East, Africa and Turkey countries into the Company’s existing European regional organization, now referred to as EMEA. This took effect beginning in the second quarter of 2015. Net sales by geographic region for the three months ended March 31, 2016 and 2015 as follows:
North America
664.0
737.1
(9.9
41.7
42.2
EMEA(1)
547.9
580.7
(5.6
34.4
33.3
Latin America
144.4
177.8
(18.8
9.1
10.2
APAC(2)
234.3
250.8
(6.6
14.7
EMEA = Europe, Middle East and Africa
APAC = Asia, Australia, New Zealand, Japan and Korea
The following tables present the components of the change in net sales by geographic region for the three months ended March 31, 2016 compared with 2015. We also present the change in net sales excluding the impact of foreign currency translation, a non-U.S. GAAP measure, which we define as “constant dollar.” We believe using constant dollar measures aids in the comparability between periods as it eliminates the volatility of changes in foreign currency exchange rates.
Three Months Ended March 31, (In millions)
EMEA
APAC
2015 net sales
Volume-Units
0.9
14.8
(8.1
14.5
Price/mix(1)
(20.3
4.6
24.5
13.8
Divestiture
(52.9
(7.2
(67.1
(3.8
Total constant dollar change
(Non-U.S. GAAP)
(66.4
16.4
9.2
(42.8
Foreign currency translation
(38.0
(49.8
(28.0
(32.8
(33.4
(155.8
2016 net sales
Our price/mix reported above includes the net impact of our pricing actions and rebates as well as the period-to-period change in the mix of products sold. Also included in our reported price/mix is the net effect of some of our customers purchasing our products in non-U.S. dollar or euro-denominated countries at selling prices denominated in U.S. dollars or euros. This primarily arises when we export products from the U.S. and euro-zone countries. The impact to our reported price/mix of these purchases in other countries at selling prices denominated in U.S. dollars or euros was not material in the periods included in the table above.
37
Net Sales by Segment
The following table presents net sales by our segment reporting structure:
(13.1
(5.7
Total Reportable Segments
Total Company
As of January 1, 2016, our Kevothermal business was moved from Other to our Product Care Segment. This resulted in a reclassification of $2.8 million of net sales for the three months ended March 31, 2015.
Components of Change in Net Sales by Segment
The following tables present the components of change in net sales by our segment reporting structure for the three months ended March 31, 2016 compared with March 31, 2015. We also present the change in net sales excluding the impact of foreign currency translation, a non-U.S. GAAP measure, which we define as “constant dollar.” We believe using constant dollar measures aids in the comparability between periods as it eliminates the volatility of changes in foreign currency exchange rates.
2015 Net Sales
Volume - Units
12.8
5.9
7.9
4.3
(7.6
(48.4
(5.4
1.4
(66.7
(7.7
(33.3
(7.1
(7.5
Total change (U.S. GAAP)
(115.1
(26.5
2016 Net Sales
38
The following net sales discussion is on a constant dollar basis.
Three Months Ended March 31, 2016 Compared With the Same Period of 2015
The $48 million, or 5% constant dollar decrease in net sales in 2016 compared with 2015 was primarily due to:
the divestiture of the North American foam trays and absorbent pads and European food trays businesses of $67 million.
This was partially offset by:
favorable price/mix of $6 million, reflecting an increase in Latin America and EMEA, primarily reflecting a favorable mix of new higher margin products and the implementation of value-added pricing initiatives, as well as pricing initiatives implemented to offset currency devaluation and non-material inflationary costs, which was partially offset by unfavorable price/mix in the United States primarily attributable to formula pricing at key customers; and
the impact of higher unit volumes of $13 million, reflecting an increase in EMEA and North America due to strong product adoption and increased market penetration of advanced packaging solutions, partially offset by lower unit volumes in Latin America which were negatively impacted by general political and economic conditions in Brazil and Venezuela.
The $7 million, or 1%, constant dollar increase in net sales in 2016 compared with 2015 was primarily due to:
favorable price/mix of $8 million across all regions.
lower unit volumes of $1 million, reflecting lower volumes in North America, related to declines in the distribution channel market and the ERP implementation, which were partially offset by higher unit volumes in Latin America and APAC due to increased sales driven by new customers and strong demand from distributors as well as strong end-market demand in food retail and food service sectors reflecting increased demand for our infection prevention portfolio of products.
Recently, the Company has had, and anticipates further, discussions with a partner regarding certain portions of a licensing agreement which, if not renewed, expires in 2017, under which Diversey has license to sell certain products and use specified trade names in certain institutional and industrial channels. Failure to successfully conclude our discussions with this partner or renew the licensing agreement upon expiration could result in an adverse effect on the Company’s consolidated net sales from continuing operations.
The $1 million, or less than 1%, constant dollar decrease in net sales in 2016 compared with 2015 was primarily due to:
unfavorable price/mix of $5 million primarily related to North America and EMEA.
higher unit volumes of $4 million, primarily in EMEA and to a lesser extent North America due to ongoing strength in the e-Commerce and third party logistics markets offset by rationalization efforts and weakness in the industrial sectors.
39
Cost of Sales
Cost of sales for the three months ended March 31, 2016 and 2015 were as follows:
(8.7
63.0
62.8
Cost of sales was impacted by favorable foreign currency translation of $74 million. On a constant dollar basis, cost of sales decreased $20 million, or 2%, primarily due to the divestiture of the North American foam trays and absorbent pads business and European food trays business of $53 million, partially offset by an increase of $35 million reflecting higher non-material manufacturing costs, including salary and wage inflation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31, 2016 and 2015 are included in the table below.
SG&A expenses were impacted by favorable foreign currency translation of $23 million. On a constant dollar basis, SG&A expenses decreased $8 million, or 5%. This decrease was primarily due to restructuring savings, partially offset by salary inflation.
Amortization Expense of Intangible Assets Acquired
Amortization expense of intangible assets acquired for the three months ended March 31, 2016 and 2015 were as follows:
(5.3
The reduction in amortization expense of intangibles for the three months ended March 31, 2016 was primarily as a result of the favorable impact of foreign currency translation.
Stock Appreciation Rights Expense
SARs expense for the three months ended March 31, 2016 and 2015 is as follows:
(89.7
0.0
40
SARs expense includes the impact of changes in the share price of our common stock. The share price of our common stock has increased approximately 11% in the first three months of 2016 and increased 7% in the first three months of 2015. SARs expense decreased primarily due to a decrease in the number of SARs that remain outstanding. See Note 16, “Stockholders’ Equity,” for further details of our SARs program. As of March 31, 2016, we had approximately 97,000 SARs outstanding, all of which are fully vested.
Restructuring Activities
See Note 9, “Restructuring and Relocation Activities,” for additional details regarding each of the Company’s restructuring programs discussed below, restructuring plan’s accrual, spending and other activity for the three months ended March 31, 2016.
As reported in our 2015 Form 10-K, our December 2011 Integration and Optimization Program (“IOP”) is substantially complete, while the May 2013 Earnings Quality Improvement Program (“EQIP”) is nearing completion. In the first quarter of 2016, the Board of Directors agreed to consolidate the remaining activities of those programs together with the December 2014 Fusion program to create a single program to be called the “Sealed Air Restructuring Program” or the “Program”.
The combined programs are estimated to generate incremental cost savings of $100 million to $120 million per annum by the end of 2018, compared with the savings run rate achieved by the end of 2015, of which approximately $30 million is expected to be achieved in 2016.
For the three months ended March 31, 2016, the Program generated cost savings of $14 million, primarily in selling, general and administration expenses.
Additionally, the Program is expected to generate one-time cash and benefits of approximately $65 million from the sale of certain assets, state and local incentives in connection with the relocation of the Company’s headquarters and reductions in working capital. As of March 31, 2016, we had generated $30 million in cash related to the sale of our facility located in Racine, Wisconsin.
The actual timing of future costs and cash payments related to the Program described above and our relocation activities is subject to change due to a variety of factors that may cause a portion of the costs, spending and benefits to occur later than expected. In addition, changes in foreign exchange rates may impact future costs, spending and benefits and cost synergies.
Adjusted EBITDA by Segment
We allocate and disclose depreciation and amortization expense to our segments, although property and equipment, net is not allocated to the segment assets, nor is depreciation and amortization included in the segment performance metric Adjusted EBITDA. We also allocate and disclose restructuring and other charges and impairment of goodwill and other intangible assets by segment, although it is not included in the segment performance metric Adjusted EBITDA since restructuring and other charges and impairment of goodwill and other intangible assets are categorized as special items. The accounting policies of the reportable segments and Other are the same as those applied to the Condensed Consolidated Financial Statements.
See Note 4, “Segments,” for the reconciliation of Non-U.S. GAAP Adjusted EBITDA to U.S. GAAP net earnings and other segment details.
(11.7
(15.2
(23.9
Non-U.S. GAAP Total Company
41
As of January 1, 2016, our Kevothermal business was moved from Other to our Product Care Segment. This resulted in a reclassification of $0.8 million of adjusted EBITDA for the three months ended March 31, 2015.
The following is a discussion of the factors that contributed to the change in Adjusted EBITDA by segment in the three months ended March 31, 2016 as compared with the prior period.
Adjusted EBITDA was impacted by unfavorable foreign currency translation of $13 million. On a constant dollar basis, Adjusted EBITDA decreased $30 million, or 15.7%, in 2016 compared with the same period in 2015 primarily due to the impact of:
the effect of the divestitures of the North American foam trays and absorbent pads business and the European food trays business of $14 million;
higher non-material manufacturing expenses of $19 million, including salary and wage inflation; and
unfavorable price/mix and direct cost spread of $9 million primarily reflecting formula pricing.
These were partially offset by:
restructuring savings of $6 million; and
the impact of higher sales volumes of $6 million.
Adjusted EBITDA was impacted by unfavorable foreign currency translation of $3 million. On a constant dollar basis, Adjusted EBITDA decreased $1 million, or 3.4%, in 2016 compared with the same period in 2015 primarily due to the impact of:
higher expenses of $14 million primarily related to non-material inflation, and targeted investments in sales and marketing, research and development.
favorable price/mix and direct cost spread of $8 million; and
restructuring savings of $6 million.
Adjusted EBITDA was impacted by unfavorable foreign currency translation of $2 million. On a constant dollar basis, Adjusted EBITDA increased $3 million, or 3.6%, in 2016 compared with the same period in 2015 primarily as a result of positive volume trends.
Adjusted EBITDA, on a constant dollar basis, increased $5 million, or 23.9%, in 2016 compared with the same period in 2015 which included $2 million of restructuring savings.
42
Reconciliation of Non-U.S. GAAP Total Company Adjusted EBITDA to U.S. GAAP Net Earnings Available to Common Stockholders
See Note 4, “Segments,” for other segment details. The following table shows the reconciliation of Non-U.S. GAAP Total Company Adjusted EBITDA to U.S. GAAP net earnings available to common stockholders:
Depreciation and amortization by segment, including share-based incentive compensation, is as follows:
(1)Includes share-based incentive compensation of $14.4 million for the three months ended March 31, 2016 and $18.3 million for the three months ended March 31, 2015.
Restructuring and other charges by our segment reporting structure were as follows:
The restructuring and other charges in the first three months of 2015 primarily relate to our previously announced Earnings Quality Improvement Program (EQIP). See Note 9, “Restructuring and Relocation Activities,” for further discussion.
43
Interest Expense
Interest expense includes the stated interest rate on our outstanding debt, as well as the net impact of capitalized interest, the effects of interest rate swaps and the amortization of capitalized senior debt issuance costs and credit facility fees, bond discounts, and terminated treasury locks.
Interest expense for the three months ended March 31, 2016 and 2015 was as follows:
2016 vs. 2015
Interest expense on our various debt
instruments:
7.2
(5.9
Term Loan A due July 2019 (October 2016 prior
to refinance)
7.1
1.1
6.0
Revolving credit facility due July 2019 (October
2016 prior to refinance)
7.0
8.375% Senior Notes due September 2021(1)
(16.0
5.3
5.7
5.1
5.6
5.50% Senior Notes due September 2025(1)
7.8
7.7
Other interest expense
Less: capitalized interest
58.5
In June 2015, we issued $400 million of 5.50% senior notes due 2025 and €400 million of 4.50% senior notes due 2023 and used the net proceeds of these notes to retire the existing $750 million of 8.375% senior notes due 2021.
Foreign Currency Exchange (Losses) Gains Related to Venezuelan Subsidiaries
Effective January 1, 2010, Venezuela was designated a highly inflationary economy. The foreign currency exchange gains and losses we recorded in 2016 and 2015 for our Venezuelan subsidiary were the result of the significant changes in the exchange rates used to remeasure our Venezuelan subsidiary’s financial statements at the balance sheet date. We believe these gains and losses are attributable to the unstable foreign currency environment in Venezuela. See Note 1, “Organization and Basis of Presentation – Impact of Inflation and Currency Fluctuation” for further details.
Other Income (Expense), Net
See Note 18, “Other Income (Expense), net,” for the components and discussion of other income, net.
Income Taxes
Our effective income tax rate for the three months ended March 31, 2016 was 18.2%. Our effective income tax rate benefited from a favorable earnings mix with earnings in jurisdictions with lower tax rates. The Company recorded net discrete benefits of $8 million, including $3 million related to repatriation strategies and $4 million for releases of certain reserves due to the expiration of the statute of limitations and settlements with taxing authorities. The reserves are primarily related to positions recorded at the time of the Diversey acquisition.
Our effective income tax rate for the three months ended March 31, 2015 was 25.9%. Our effective income tax rate benefited from a favorable mix with earnings in jurisdictions with lower tax rates.
44
Our effective tax rate depends on the realization of our deferred tax assets, net of our valuation allowances. We have deferred tax assets related to other accruals not yet deductible for tax purposes, foreign tax credits, U.S. and foreign net operating loss carry forwards and investment tax allowances, employee benefit items, and other items.
The Internal Revenue Service (the “Service”) has concluded its examination of the legacy Sealed Air U.S. federal income tax returns for all years through 2008, except 2007 remains open to the extent of a capital loss carryback. The Service is currently auditing the 2011 consolidated U.S. federal income tax returns of legacy Sealed Air and the 2012-2014 consolidated U.S. federal income tax return of the Company. Included in the audit of the 2014 return is the examination by the Service with respect to the Settlement agreement deduction in 2014. The outcome of the examination may affect the utilization of certain tax attributes and require us to return a portion of the refund.
We have established valuation allowances to reduce our deferred tax assets to an amount that is more likely than not to be realized. Our ability to utilize our deferred tax assets depends in part upon our ability to carry back any losses created by the deduction of these temporary differences, the future income from existing temporary differences and the ability to generate future taxable income within the respective jurisdictions during the periods in which these temporary differences reverse. If we are unable to generate sufficient future taxable income in the U.S. and certain foreign jurisdictions, or if there is a significant change in the time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowances against our deferred tax assets. Conversely, if we have sufficient future taxable income in jurisdictions where we have valuation allowances, we may be able to reverse those valuation allowances.
Liquidity and Capital Resources
Principal Sources of Liquidity
Our primary sources of cash are the collection of trade receivables generated from the sales of our products and services to our customers and amounts available under our existing lines of credit, including our Amended Credit Facility, and our accounts receivable securitization programs. Our primary uses of cash are payments for operating expenses, investments in working capital, capital expenditures, interest, taxes, dividends, share repurchases, debt obligations, restructuring expenses and other long-term liabilities. We believe that our current liquidity position and future cash flows from operations will enable us to fund our operations, including all of the items mentioned above in the next twelve months.
As of March 31, 2016, we had cash and cash equivalents of $316 million, of which approximately $297 million, or approximately 94%, was located outside of the U.S. As of March 31, 2016, there were certain foreign government regulations restricting transfers on less than $35 million of the cash located outside of the U.S. As of March 31, 2016, our U.S. cash balances and committed liquidity facilities available to U.S. borrowers were sufficient to fund our U.S. operating requirements and capital expenditures, current debt obligations and dividends.
Cash and Cash Equivalents
The following table summarizes our accumulated cash and cash equivalents:
See “Analysis of Historical Cash Flows” below.
Accounts Receivable Securitization Programs
At March 31, 2016, we had $175 million available to us under the programs of which we had $152 million outstanding as of March 31, 2016. At December 31, 2015, we had $192 million available to us under the programs of which we had $144 million outstanding at December 31, 2015. See Note 8, “Accounts Receivable Securitization Programs,” for information concerning these programs.
We have a $700 million revolving credit facility. During the first three months of 2016, we utilized borrowings under this facility and had outstanding borrowings of $92 million at March 31, 2016 and no outstanding borrowings at December 31, 2015. See Note 10, “Debt and Credit Facilities,” for further details.
There was $109 million and $98 million outstanding under various lines of credit extended to our subsidiaries at March 31, 2016 and December 31, 2015, respectively. See Note 10, “Debt and Credit Facilities,” for further details.
At March 31, 2016, we were in compliance with our financial covenants and limitations, as discussed in “Covenants” of Note 10, “Debt and Credit Facilities.”
Debt Ratings
Our cost of capital and ability to obtain external financing may be affected by our debt ratings, which the credit rating agencies review periodically. Below is a table that details our credit ratings by the various types of debt by rating agency.
Moody’s
Investor
Standard
Services
& Poor’s
Corporate Rating
Ba3
BB
Senior Unsecured Rating
B1
Senior Secured Credit Facility Rating
Ba1
BBB-
Outlook
Positive
Stable
These credit ratings are considered to be below investment grade (with the exception of the BBB- Senior Secured Credit Facility Rating with Standard & Poor’s which is classified as investment grade). If our credit ratings are downgraded, there could be a negative impact on our ability to access capital markets and borrowing costs could increase. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.
Outstanding Indebtedness
At March 31, 2016 and December 31, 2015, our total debt outstanding consisted of the amounts set forth in the following table.
Total long-term debt, less current portion(1)(2)
4,270.1
4,558.6
As of January 1, 2016, we have adopted ASU 2015-03 and ASU 2015-15 with retrospective application. This resulted in a reclassification from other assets to long-term for debt issuance costs. Refer to Note 2, “Recently Issued Accounting Standards” of the notes to condensed consolidated financial statements for further details.
See Note 10, “Debt and Credit Facilities,” for further details.
46
Analysis of Historical Cash Flow
The following table shows the changes in our Condensed Consolidated Statement of Cash Flows in the three months ended March 31, 2016 and 2015.
Effect of foreign currency exchange rate changes on cash
and cash equivalents
For three months ended March 31, 2015, certain amounts related to foreign currency gains and losses, including the remeasurement loss related to Venezuelan subsidiaries in 2015, and the settlement of foreign currency forward contracts were misclassified. Additional revisions were made to the Condensed Consolidated Balance Sheets for the three months ended March 31, 2015. As a result, corresponding changes were made on the Condensed Consolidated Statement of Cash Flows. See Note 1 “Organization and Basis of Presentation” under the heading “Reclassifications and Revisions” for further discussion of the revisions.
In addition to net cash provided by operating activities, we use free cash flow as a useful measure of performance and as an indication of the strength and ability of our operations to generate cash. We define free cash flow as cash provided by operating activities less capital expenditures (which is classified as an investing activity). Free cash flow is not defined under U.S. GAAP. Therefore, free cash flow should not be considered a substitute for net income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. Free cash flow does not represent residual cash available for discretionary expenditures, including certain debt servicing requirements or non-discretionary expenditures that are not deducted from this measure. We typically generate the majority of our annual free cash flow in the second half of the year. Below are the details of free cash flow for the three months ended March 31, 2016 and 2015.
Cash flow provided by (used in) operating activities
(321.1
(31.1
Free cash flow(1)
(47.8
304.4
(352.2
Free cash flow was $69 million in 2015 excluding the tax refund received of $235 million in connection with the Settlement agreement.
Net Cash Provided by Operating Activities
Three Months Ended March 31, 2016
Net cash provided by operating activities of $4 million in the three months ended March 31, 2016 was primarily attributable to:
$92 million of net earnings, which included $63 million of non-cash adjustments to reconcile net earnings to net cash provided by operating activities, including adjustments for depreciation and amortization and share-based incentive compensation expenses.
$102 million of changes in other liabilities and assets. This activity primarily reflects the timing of certain annual incentive compensation payments.
$48 million of changes in operating assets and liabilities, primarily reflecting an increase in trade receivables and inventory partially offset by an increase in accounts payable. This activity reflects the timing of inventory purchases and the related payments of cash and the seasonality of sales and collections.
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Three Months Ended March 31, 2015
Net cash provided by operating activities of $325 million in the three months ended March 31, 2015 was primarily attributable to:
$235 million tax refund related to the Settlement agreement payment;
$101 million of non-cash adjustments to reconcile net earnings to net cash provided by operating activities, including adjustments for depreciation and amortization and share-based incentive compensation expenses; and
$97 million of net earnings.
A net cash use of $108 million in changes in operating assets and liabilities, primarily in other liabilities, and to a lesser extent, other assets, net. This activity primarily reflects the timing of certain annual incentive compensation payments.
Net Cash (Used in) Provided by Investing Activities
Net cash used in investing activities of $69 million in the three months ended March 31, 2016 primarily consisted of the following:
capital expenditures of $52 million; and
$22 million related to settlements of foreign currency forward contracts.
$6 million related to net proceeds in the sale of business and property and equipment.
Net cash provided by investing activities of $28 million in the three months ended March 31, 2015 primarily consisted of the following:
$24 million proceeds from the sale of our facility located in Racine, Wisconsin. See Note 9, “Restructuring and Relocation Activities” for further discussion on the sale of the Racine facility; and
$32 million related to settlements of foreign currency forward contracts.
$21 million of capital expenditures related to capacity expansions to support growth in net sales; and
$9 million related to a business acquisition.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities of $33 million in the three months ended March 31, 2016 was primarily due to the following:
increases in short-term borrowings under our revolving credit facility, local lines of credit and accounts receivable securitization programs of $107 million; and
an excess tax benefit of $7 million related to stock-based compensation.
These factors were partially offset by:
repurchases of common stock of $32 million;
payments of quarterly dividends of $26 million; and
acquisition of common stock for tax withholding obligations relating to stock-based compensation of $22 million.
Net cash used in financing activities of $156 million in the three months ended March 31, 2015 was primarily due to the following:
repurchases of common stock of $69 million;
repayment of $36 million under our accounts receivable securitization program;
payment of quarterly dividends of $28 million;
repayments of $23 million under our revolving credit facility; and
increase in cash used as collateral on borrowing arrangements of $14 million.
increases in short-term borrowings under local lines of credit of $18 million.
Changes in Working Capital
Working capital (current assets less current liabilities)
408.5
10.7
Current ratio (current assets divided by current liabilities)
1.2x
Quick ratio (current assets, less inventories divided by current
liabilities)
0.8x
0.9x
The $11 million, or 3%, increase in working capital reflected:
a decrease in other current liabilities primarily reflecting the payment of performance-based compensation and profit sharing previously accrued;
an increase in inventory to support higher anticipated sales in the second quarter; and
an increase in trade receivables consistent with higher net sales in the last half of the first quarter.
an increase in short-term borrowings and decrease in cash to support the increase in working capital, capital expenditures, share repurchases, and dividends; and
an increase in accounts payable consistent with the increase in inventories and continuing initiatives for longer payment terms.
Changes in Stockholders’ Equity
The $34 million, or 6%, increase in stockholders’ equity in 2016 compared with 2015 was primarily due to:
net earnings of $92 million; and
increase of $22 million in additional paid in capital due primarily to stock-based incentive compensation.
a net increase in shares held in treasury of $19 million primarily due to the repurchase of common stock into treasury stock of $32 million, $22 million of withholding taxes paid in shares, partially offset by the transfer of common stock held in treasury of $35 million related to our 2015 profit sharing plan contribution made in the first quarter of 2016;
unrealized losses on derivative instruments of $27 million;
49
dividends paid and accrued on our common stock of $25 million;
cumulative translation adjustment of $9 million; and
$7 million of excess tax benefit related to stock compensation.
We repurchased approximately 0.7 million shares of our common stock in the three months ended March 31, 2016 for $32 million. See Note 16, “Stockholders’ Equity,” for further details.
The information set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 11, “Derivatives and Hedging Activities,” under the caption “Interest Rate Swaps” is incorporated herein by reference.
The information set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 11, “Derivatives and Hedging Activities,” under the caption “Interest Rate and Currency Swaps” is incorporated herein by reference.
The information set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 11, “Derivatives and Hedging Activities,” under the caption “Net Investment Hedge” is incorporated herein by reference.
The information set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 11, “Derivatives and Hedging Activities,” under the caption “Other Derivative Instruments” is incorporated herein by reference.
Foreign Currency Forward Contracts
At March 31, 2016, we were party to foreign currency forward contracts, which did not have a significant impact on our liquidity.
The information set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 11, “Derivatives and Hedging Activities,” under the caption “Foreign Currency Forward Contracts,” is incorporated herein by reference. For further discussion about these contracts and other financial instruments, see Part I, Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”
Recently Issued Statements of Financial Accounting Standards, Accounting Guidance and Disclosure Requirements
We are subject to numerous recently issued statements of financial accounting standards, accounting guidance and disclosure requirements. Note 2, “Recently Issued Accounting Standards,” which is contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, describes these new accounting standards and is incorporated herein by reference.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates from those disclosed in our 2015 Form 10-K. For a discussion of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in Part II, Item 7 of our 2015 Form 10-K, which information is incorporated herein by reference.
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We are exposed to market risk from changes in the conditions in the global financial markets, interest rates, foreign currency exchange rates and commodity prices and the creditworthiness of our customers and suppliers, which may adversely affect our Condensed Consolidated Financial Condition and Results of Operations. We seek to minimize these risks through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not purchase, hold or sell derivative financial instruments for trading purposes.
Interest Rates
From time to time, we may use interest rate swaps, collars or options to manage our exposure to fluctuations in interest rates.
At March 31, 2016, we had no outstanding interest rate collars or options.
The information set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 11, “Derivatives and Hedging Activities,” under the caption “Interest Rate Swaps,” is incorporated herein by reference.
See Note 12, “Fair Value Measurements and Other Financial Instruments,” for details of the methodology and inputs used to determine the fair value of our fixed rate debt. The fair value of our fixed rate debt varies with changes in interest rates. Generally, the fair value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. A hypothetical 10% increase in interest rates would result in a decrease of $93 million in the fair value of the total debt balance at March 31, 2016. These changes in the fair value of our fixed rate debt do not alter our obligations to repay the outstanding principal amount or any related interest of such debt.
Foreign Exchange Rates
Operations
As a large global organization, we face exposure to changes in foreign currency exchange rates. These exposures may change over time as business practices evolve and could materially impact our Condensed Consolidated Financial Condition and Results of Operations in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above for the impacts foreign currency translation had on our operations.
Economic and political events in Venezuela have exposed us to heightened levels of foreign currency exchange risk. See Note 1, “Organization and Basis of Presentation – Impact of Inflation and Currency Fluctuation” for additional details.
Argentina
Recent economic events in Argentina, including the default on some of its international debt obligations, have exposed us to heightened levels of foreign currency exchange risks. However, as of March 31, 2016, we do not anticipate these events will have a material impact on our 2016 results of operations. For the three months ended March 31, 2016, approximately 2% of our consolidated net sales and operating income were derived from our businesses in Argentina. As of March 31, 2016, we had net assets of $24 million (including $1 million of cash and cash equivalents) in Argentina. Also, as of March 31, 2016, our Argentina subsidiaries had a negative cumulative translation adjustment balance of $42 million.
Russia
The U.S. and the European Union (EU) have recently imposed sanctions on various sectors of the Russian economy and on transactions with certain Russian nationals and entities. Russia has also announced economic sanctions against the U.S. and other nations that include a ban on imports of certain products. These sanctions are not expected to have a material impact on our business as much of the operations in Russia support local production; however they may limit the amount of future business the Company does with customers involved in activities in Russia. As of March 31, 2016, approximately 1% of our consolidated net sales were derived from products sold into Russia. Also, as of March 31, 2016, our Russian subsidiaries had a negative cumulative translation adjustment balance of $56 million.
Greece
Recent economic events in Greece, including missing payment to the International Monetary Fund and the uncertainties relating to the ability of Greece to remain in the European Monetary Union may require us to tighten credit controls that will have adverse impact on our sales and bad debt expense. However, as of March 31, 2016, we do not anticipate these events will have a material impact on our 2016 results of operations. As of March 31, 2016, less than 1% of our consolidated net sales were derived from products sold into Greece. Also, as of March 31, 2016, our Greece subsidiaries had a negative cumulative translation adjustment balance of $3 million.
Brazil
Recent economic events in Brazil, including the increase in the benchmark interest rate set by the Brazilian Central Bank, have exposed us to heightened levels of foreign currency exchange risks. However, as of March 31, 2016, we do not anticipate these events will have a material impact on our 2016 results of operations. As of March 31, 2016, less than 3% of our consolidated net sales were derived from products sold into Brazil. Also, as of March 31, 2016, our Brazil subsidiaries had a negative cumulative translation adjustment balance of $107 million.
Economic and political events in certain countries have exposed us to heightened levels of inflation and foreign currency exchange risks. The effects of these could impact our financial condition and results of operations. See Note 1, “Organization and Basis of Presentation – Impact of Inflation and Currency Fluctuation” for details regarding the impact of inflation and currency fluctuation. Also, for a discussion of our risk factors, please refer to Part II, Item 1A, “Risk Factors.”
We use foreign currency forward contracts to fix the amounts payable or receivable on some transactions denominated in foreign currencies. A hypothetical 10% adverse change in foreign exchange rates at March 31, 2016 would have caused us to pay approximately $58 million to terminate these contracts. Based on our overall foreign exchange exposure, we estimate this change would not materially affect our financial position and liquidity. The effect on our results of operations would be substantially offset by the impact of the hedged items.
Our foreign currency forward contracts are described in Note 11, “Derivatives and Hedging Activities,” contained in Part I, Item 1 of this Quarterly Report on Form 10-Q which is incorporated herein by reference.
In connection with exercising the $100 million delayed draw under the senior secured credit facility, we entered into a series of interest rate and currency swaps. These swaps convert the U.S dollar-denominated variable rate obligation under the credit facility into a fixed rate Brazilian real-denominated obligation. The delayed draw and the interest rate and currency swaps are used to fund expansion and general corporate purposes of our Brazilian subsidiaries.
52
For derivative instruments that are designated and qualify as hedges of net investments in foreign operations, settlements and changes in fair values of the derivative instruments are recognized in unrealized net gains or loss on derivative instruments for net investment hedge, a component of accumulated other comprehensive loss, net of taxes, to offset the changes in the values of the net investments being hedged. Any portion of the net investment hedge that is determined to be ineffective is recorded in other income, net on the Condensed Consolidated Statements of Operations.
Outstanding Debt
Our outstanding debt is generally denominated in the functional currency of the borrower or in Euros as is the case with the issuance of €400 million of 4.50% senior notes due 2023. We believe that this enables us to better match operating cash flows with debt service requirements and to better match the currency of assets and liabilities. The amount of outstanding debt denominated in a functional currency other than the U.S. dollar was $1 billion at March 31, 2016 and December 31, 2015.
Customer Credit
We are exposed to credit risk from our customers. In the normal course of business we extend credit to our customers if they satisfy pre-defined credit criteria. We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. An additional allowance may be required if the financial condition of our customers deteriorates. The allowance for doubtful accounts is maintained at a level that management assesses to be appropriate to absorb estimated losses in the accounts receivable portfolio.
Our customers may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Our provision for bad debt expense was $1 million for the three months ended March 31, 2016. The provision for the three months ended March 31, 2015 was $2 million. The allowance for doubtful accounts was $25 million at March 31, 2016 and $25 million at December 31, 2015.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended, that are designed to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that our employees accumulate this information and communicate it to our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), as appropriate, to allow timely decisions regarding the required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only “reasonable assurance” of achieving the desired control objectives, and management necessarily must apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures under Rule 13a-15. Our management, including our Chief Executive Officer and Chief Financial Officer, supervised and participated in this evaluation. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the “reasonable assurance” level.
Changes in Internal Control over Financial Reporting
There has not been any change in our internal control over financial reporting during the three months ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are currently engaged in a phased implementation and upgrade of enterprise resource planning software in certain regions, which will bring all regions on to common software over the next few years. The implementation is being performed in the ordinary course of business to improve efficiency through the use of common software.
The information set forth in Item 1 of Part I of this Quarterly Report on Form 10-Q in Note 15, “Commitments and Contingencies,” which is incorporated herein by reference. See also Part I, Item 3, “Legal Proceedings,” of our 2015 Form 10-K, as subsequently updated by our Quarterly Reports on Form 10-Q, as well as the information incorporated by reference in that item.
We are also involved in various other legal actions incidental to our business. We believe, after consulting with counsel, that the disposition of these other legal proceedings and matters will not have a material effect on our condensed consolidated financial condition or results of operations.
Item 1A. Risk Factors.
There have been no significant changes to our risk factors since December 31, 2015. For a discussion of our risk factors, please refer to Part I, Item 1A, “Risk Factors,” of our 2015 Form 10-K.
(a) In March 2016, we transferred 828,324 shares of our common stock, par value $0.10 per share, to our profit sharing plan as part of our 2015 contribution to the plan. The issuance of such shares to the plan was not registered under the Securities Act of 1933, as amended, because such transaction did not involve an “offer” or “sale” of securities under Section 2(a)(3) of the Securities Act.
(c) Issuer Purchases of Equity Securities
The table below sets forth the total number of shares of our common stock, par value $0.10 per share, that we repurchased in each month of the quarter ended March 31, 2016, the average price paid per share and the maximum approximate dollar value of shares that may yet be purchased under our publicly announced plans or programs.
Total Number of
Maximum Approximate Dollar
Shares Purchased as
Value of Shares that May
Average Price
Part of Announced
Yet be Purchased Under the
Period
Shares Purchased (1)
Paid Per Share
Plans or Programs
(a)
(b)
(c)
(d)
Balance as of December 31, 2015
884,181,184
January 1, 2016 through January 31, 2016
24,660
February 1, 2016 through February 29,
727,516
45.28
264,990
872,182,715
March 1, 2016 through March 31, 2016
490,654
46.04
434,355
852,184,273
1,242,830
45.75
699,345
We acquired shares by means of (a) a share trading plan we entered into with our brokers and pursuant to our publicly announced program (described below), (b) shares withheld from awards under our Omnibus Incentive Plan (the successor plan to our 2005 Contingent Stock Plan) pursuant to the provision thereof that permits minimum tax withholding obligations or other legally required charges to be satisfied by having us withhold shares from an award under that plan and (c) shares reacquired pursuant to the forfeiture provision of our Omnibus Incentive Plan. We report price calculations in column (b) in the table above only for shares purchased as part of our publicly announced program, when applicable. For shares withheld for minimum tax withholding obligations or other legally required charges, we withhold shares at a price equal to their fair market value. We do not make payments for shares reacquired by the Company pursuant to the forfeiture provision of the Omnibus Incentive Plan as those shares are simply forfeited.
Shares withheld
Average withholding
Forfeitures under
for tax obligations
price for shares
Omnibus Incentive
and charges
in column “a”
Plan
January 2016
5,104
44.60
19,556
February 2016
453,168
43.43
9,358
462,526
March 2016
54,322
46.55
1,977
56,299
512,594
30,891
543,485
On July 9, 2015, the Board of Directors authorized a new stock repurchase program to repurchase up to $1.5 billion of the Company’s issued and outstanding common stock. This new program replaced the previous stock repurchase program approved in August 2007. This program has no set expiration date. Please also refer to the "Repurchases of Capital Stock," in "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in Part II Item 7 of our 2015 Form 10-K.
55
ExhibitNumber
Description
3.1
Unofficial Composite Amended and Restated Certificate of Incorporation of the Company as currently in effect. (Exhibit 3.1 to the Company’s Registration Statement on Form S-3, Registration No. 333-108544, is incorporated herein by reference.)
Amended and Restated By-Laws of the Company as currently in effect. (Exhibit 3.1 to the Company’s Current Report on Form 8-K, Date of Report May 28, 2014, File No. 1-12139, is incorporated herein by reference.)
31.1
Certification of Jerome A. Peribere pursuant to Rule 13a-14(a), dated May 2, 2016.
31.2
Certification of Carol P. Lowe pursuant to Rule 13a-14(a), dated May 2, 2016.
Certification of Jerome A. Peribere and Carol P. Lowe, pursuant to 18 U.S.C. § 1350, dated May 2, 2016.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
SIGNATURE
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 2, 2016
By:
/s/ William G. Stiehl
William G. Stiehl
Chief Accounting Officer and Controller