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, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________to_______ Commission file number 1-12139 SEALED AIR CORPORATION (Exact name of registrant as specified in its charter) Delaware 65-0654331 - ------------------------------- --------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) Park 80 East Saddle Brook, New Jersey 07663-5291 - ------------------------ ---------------- (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number, including area code (201) 791-7600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ---- There were 83,639,976 shares of the registrant's common stock, par value $0.10 per share, and 34,002,692 shares of the registrant's Series A convertible preferred stock, par value $0.10 per share, outstanding as of April 28, 2000.
PART I FINANCIAL INFORMATION SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings For the Three Months Ended March 31, 2000 and 1999 (In thousands of dollars except per share data) (Unaudited) 2000 1999 -------- -------- Net sales $ 716,588 $ 678,937 Cost of sales 458,599 433,239 -------- -------- Gross profit 257,989 245,698 Marketing, administrative and development expenses 129,758 128,614 Goodwill amortization 12,310 12,251 -------- -------- Operating profit 115,921 104,833 Other income (expense): Interest expense (13,088) (14,719) Other, net (1,946) (2,164) -------- -------- Other expense, net (15,034) (16,883) -------- -------- Earnings before income taxes 100,887 87,950 Income taxes 45,904 41,336 -------- -------- Net earnings $ 54,983 $ 46,614 ======== ======== Less: Series A preferred stock dividends 17,097 17,910 Add: Excess of book value over repurchase price of Series A preferred stock 2,779 10 -------- -------- Net earnings ascribed to common shareholders $ 40,665 $ 28,714 ======== ======== Earnings per common share (See Note 3): Basic $ 0.49 $ 0.34 ======== ======== Diluted $ 0.45 $ 0.34 ======== ======== Weighted average number of common shares outstanding: (000) Basic 83,629 83,364 ======== ======== Diluted 84,382 83,496 ======== ======== See accompanying notes to consolidated financial statements. 2
SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets March 31, 2000 and December 31, 1999 (In thousands of dollars except share data) March 31, 2000 December 31, (Unaudited) 1999 ------------ ------------- ASSETS ------ Current assets: Cash and cash equivalents $ 17,721 $ 13,672 Notes and accounts receivable, net of allowances for doubtful accounts of $21,271 in 2000 and $21,396 in 1999 473,055 470,046 Inventories 265,675 245,934 Other current assets 74,534 73,572 ---------- --------- Total current assets 830,985 803,224 ---------- --------- Property and equipment: Land and buildings 425,765 426,460 Machinery and equipment 1,356,672 1,364,454 Other property and equipment 111,484 115,111 Construction in progress 50,442 40,106 --------- --------- 1,944,363 1,946,131 Less accumulated depreciation and amortization 937,915 922,722 --------- --------- Property and equipment, net 1,006,448 1,023,409 --------- --------- Goodwill, less accumulated amortization of $96,256 in 2000 and $84,699 in 1999 1,857,843 1,859,958 Other assets 176,718 168,642 --------- --------- Total assets $ 3,871,994 $ 3,855,233 ========= ========= See accompanying notes to consolidated financial statements. 3
SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets March 31, 2000 and December 31, 1999 (Continued) (In thousands of dollars except share data) March 31, 2000 December 31, (Unaudited) 1999 ------------ -------------- LIABILITIES, CONVERTIBLE PREFERRED STOCK & SHAREHOLDERS' EQUITY Current Liabilities: Short-term borrowings $ 129,348 $ 152,653 Current portion of long-term debt 6,495 6,908 Accounts payable 173,024 175,166 Other current liabilities 195,680 216,487 Income taxes payable 66,838 30,880 --------- --------- Total current liabilities 571,385 582,094 Long-term debt, less current portion 706,902 665,116 Deferred income taxes 212,659 214,906 Other liabilities 77,881 80,425 --------- --------- Total liabilities 1,568,827 1,542,541 --------- --------- Authorized 50,000,000 preferred shares. Series A convertible preferred stock, $50.00 per share redemption value, authorized 36,021,851 shares in 2000 and 1999, issued 36,015,291 shares in 2000 and 36,015,645 shares in 1999, including 1,987,149 shares in 2000 and 782,400 shares in 1999 in treasury, mandatory redemption in 2018 1,701,407 1,761,662 Shareholders' equity: Common stock, $.10 par value. Authorized 400,000,000 shares, issued 84,153,371 shares in 2000 and 84,135,255 shares in 1999 8,415 8,413 Additional paid-in capital 636,578 632,230 Retained earnings 169,959 132,073 Accumulated translation adjustment (168,916) (171,521) --------- --------- 646,036 601,195 --------- --------- Less: Deferred compensation 19,870 24,511 Less: Cost of treasury common stock, 495,296 shares in 2000 and 535,356 shares in 1999 22,404 23,652 Less: Minimum pension liability 2,002 2,002 --------- --------- Total shareholders' equity 601,760 551,030 --------- --------- Total liabilities, preferred stock and shareholders' equity $ 3,871,994 $ 3,855,233 ========= ========= See accompanying notes to consolidated financial statements. 4
SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2000 and 1999 (In thousands of dollars) (Unaudited) 2000 1999 ---------- --------- Cash flows from operating activities: Net earnings $ 54,983 $ 46,614 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 55,091 55,787 Amortization of bond discount 82 -- Deferred tax provision (benefit) 2,953 (1,401) Net loss (gain) on disposals of fixed assets 63 (292) Changes in operating assets and liabilities, net of businesses acquired: Notes and accounts receivable (12,211) (11,368) Inventories (20,548) (2,511) Other current assets (1,584) 33 Other assets (922) (1,451) Accounts payable 1,440 (6,608) Other current liabilities 29,812 (2,461) Other liabilities (773) (3,351) ---------- ----------- Net cash provided by operating activities 108,386 72,991 ---------- ---------- Cash flows from investing activities: Capital expenditures for property and equipment (23,867) (16,943) Proceeds from sales of property and equipment 296 861 Businesses acquired in purchase transactions, net of cash acquired (27,542) -- ---------- -------- Net cash used in investing activities (51,113) (16,082) ---------- ---------- Cash flows from financing activities: Proceeds from long-term debt 101,221 2,753 Payment of long-term debt (46,385) (191,517) Dividends paid on preferred stock (17,791) (17,911) Purchase of treasury common stock (14,145) -- Purchase of treasury preferred stock (57,458) (1,240) Proceeds from stock option exercises 233 -- (Payments of) net proceeds from short-term borrowings (19,988) 193,181 ---------- --------- Net cash used in financing activities (54,313) (14,734) --------- --------- Effect of exchange rate changes on cash and cash equivalents 1,089 (1,881) --------- --------- Cash and cash equivalents: Increase during the period 4,049 40,294 Balance, beginning of period 13,672 44,986 --------- --------- Balance, end of period $ 17,721 $ 85,280 ========= ========= See accompanying notes to consolidated financial statements. 5
SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2000 and 1999 (Continued) (In thousands of dollars) (Unaudited) 2000 1999 --------- --------- Supplemental Cash Flow Items: Interest payments, net of amounts capitalized $ 6,104 $ 17,303 ======== ======== Income tax payments $ 17,304 $ 2,626 ======== ======== Non-Cash Items: Issuance of shares of common stock to the profit-sharing plan $ 13,877 $ 8,796 ======== ======== See accompanying notes to consolidated financial statements. 6
SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2000 and 1999 (In thousands of dollars) (Unaudited) Three Months Ended March 31, --------------------- 2000 1999 ----------- -------- Net earnings $ 54,983 $ 46,614 Other comprehensive income: Foreign currency translation adjustments 2,605 (40,679) ------- -------- Comprehensive income $ 57,588 $ 5,935 ======= ======= See accompanying notes to consolidated financial statements. 7
SEALED AIR CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 2000 and 1999 (Amounts in thousands, except per share data) (Unaudited) (1) Basis of Consolidation The consolidated financial statements include the accounts of Sealed Air Corporation and its subsidiaries (the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. In management's opinion, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the consolidated financial position and results of operations for the quarter ended March 31, 2000 have been made. The consolidated statement of earnings for the quarter ended March 31, 2000 is not necessarily indicative of the results to be expected for the full year. Certain prior period amounts, including segment information, have been reclassified to conform to the current year's presentation. (2) Equity The outstanding Series A preferred stock is convertible at any time into approximately 0.885 share of common stock for each share of preferred stock, votes with the common stock on an as-converted basis, pays a cash dividend, as declared by the Board of Directors, at an annual rate of $2.00 per share, payable quarterly in arrears, becomes redeemable at the option of the Company beginning March 31, 2001, subject to certain conditions, and is subject to mandatory redemption on March 31, 2018 at $50 per share, plus any accrued and unpaid dividends. Because it is subject to mandatory redemption, the Series A convertible preferred stock is classified outside of the shareholders' equity section of the consolidated balance sheet. (3) Earnings Per Common Share The following table sets forth the reconciliation of the basic and diluted earnings per common share computations for the quarters ended March 31, 2000 and 1999. Quarter ended March 31, --------------------- 2000 1999 --------- --------- Basic EPS: Numerator - --------- Net earnings $ 54,983 $ 46,614 Add: Excess of book value over repurchase price of preferred stock 2,779 10 Less: Preferred stock dividends 17,097 17,910 --------- --------- Earnings ascribed to common shareholders $ 40,665 $ 28,714 ========= ========= Denominator - ----------- Weighted average common shares outstanding - basic 83,629 83,364 --------- --------- Basic earnings per common share(1) $ 0.49 $ 0.34 ========= ========= 8
Diluted EPS: Numerator - --------- Earnings ascribed to common shareholders $ 40,665 $ 28,714 Less: Excess of book value over repurchase price of preferred stock 2,779 -- Add: Dividends associated with repurchased preferred stock 71 -- --------- --------- Earnings ascribed to common shareholders $ 37,957 $ 28,714 ========= ========= Denominator - ----------- Weighted average common shares outstanding - basic 83,629 83,364 Effect of assumed exercise of options 120 132 Effect of conversion of repurchased preferred stock 633 -- --------- --------- Weighted average common shares outstanding - diluted 84,382 83,496 --------- --------- Diluted earnings per common share(2) $ 0.45 $ 0.34 ========= ========= - ---------- (1) The basic earnings per common share calculation for the quarter ended March 31, 2000 includes a $0.03 per share gain attributable to the repurchase of preferred stock. Such gain is not included in the calculation of diluted earnings per common share for the quarter ended March 31, 2000. The gain attributable to the repurchase of preferred stock was not significant in the 1999 period. (2) For the purpose of calculating diluted earnings per common share, net earnings ascribed to common shareholders have been adjusted to exclude the gain attributable to the repurchase of preferred stock and to add back dividends attributable to such repurchased preferred stock in each period, and the weighted average common shares outstanding have been adjusted to assume conversion of the shares of preferred stock repurchased during each period in accordance with the Financial Accounting Standards Board's Emerging Issues Task Force D-53 guidance. (4) Inventories At March 31, 2000 and December 31, 1999, the components of inventories by major classification (raw materials, work in process and finished goods) were as follows: March 31, December 31, 2000 1999 ----------- ------------ Raw materials $ 62,674 $ 60,596 Work in process 46,126 43,021 Finished goods 174,516 157,341 ----------- ---------- Subtotal 283,316 260,958 Reduction of certain inventories to LIFO basis (17,641) (15,024) ----------- ---------- Total inventories $ 265,675 $ 245,934 ========== ========= (5) Income Taxes The Company's effective income tax rates were 45.5% and 47.0% for the first quarters of 2000 and 1999, respectively. These rates are higher than the statutory U.S. federal income tax rate primarily due to the non-deductibility of goodwill amortization. 9
(6) Debt At March 31, 2000 and December 31, 1999, debt consisted primarily of borrowings that were made under the Credit Agreements described below, the 10-year 6.95% senior notes due May 2009 (the "Senior Notes"), the 7-year 5.625% euro notes due July 2006 (the "Euro Notes") and certain other loans. The Company's two principal credit agreements (the "Credit Agreements") are a 5-year revolving credit facility that expires on March 30, 2003 (included in long-term debt) and a 364-day revolving credit facility that was renewed during the first quarter of 2000 for an additional period that expires on March 26, 2001 (included in short-term borrowings). During the first quarter of 2000, the Company voluntarily reduced the amounts available under the Credit Agreements to $900,000 in the aggregate. As of March 31, 2000 and December 31, 1999, outstanding borrowings were $214,030 and $160,978, respectively, under the 5-year revolving credit facility and $6,680 and $38,342, respectively, under the 364-day revolving credit facility. The Credit Agreements provide that the Company and certain of its subsidiaries may borrow for various purposes, including the refinancing of existing debt, the provision of working capital and other general corporate needs, including acquisitions and capital expenditures. Amounts repaid under the Credit Agreements may be reborrowed from time to time. As of March 31, 2000, facility fees were payable on the total amounts available under the Credit Agreements and amounted to 0.095% and 0.100% per annum under the 5-year revolving credit facility and the 364-day revolving credit facility, respectively. The Company's obligations under the Credit Agreements bear interest at floating rates. The weighted average interest rate under the Credit Agreements was approximately 6.0% at March 31, 2000 and December 31, 1999. The Company had certain interest rate and currency swaps outstanding at March 31, 2000 and December 31, 1999, related to its obligations under the Credit Agreements. These agreements had the effect of adjusting the interest rates on a portion of such debt. The weighted average interest rate at March 31, 2000 and December 31, 1999 did not change significantly as a result of these derivative financial instruments. At March 31, 2000, the Company was party to interest rate swaps with an aggregate notional amount of approximately $148,000 with various expiration dates through November 2004 compared to forward-starting interest rate swaps with an aggregate notional amount of approximately $151,000 with various expiration dates through November 2004 at December 31, 1999. The interest rate swaps outstanding as of March 31, 2000 and December 31, 1999 had the effect of converting a portion of the Company's fixed rate debt to variable rate debt at U.S. denominated rates which ranged from 6.2% to 6.5% at March 31, 2000 and December 31, 1999, and euro denominated rates which ranged from 3.7% to 4.4% at March 31, 2000 and 3.8% to 4.4% at December 31, 1999. The Credit Agreements provide for changes in borrowing margins based on financial criteria and the Company's senior unsecured debt ratings. The Credit Agreements, Senior Notes and Euro Notes impose certain limitations on the operations of the Company and certain of its subsidiaries. The Company was in compliance with these requirements as of March 31, 2000. (7) Restructuring and Other Charges The Company's restructuring reserve, which arose primarily out of a restructuring undertaken by the Company during the third quarter of 1998, amounted to $3,400 at March 31, 2000 and $4,996 at December 31, 1999. The components of the restructuring charges, spending and other activity through March 31, 2000 and the remaining reserve balance at March 31, 2000 were as follows: 10
<TABLE> Employee Contract Termination Plant/Office Termination Costs Closures Costs Total ------------ ------------ ------------ ------- <S> <C> <C> <C> <C> Restructuring provision recorded in 1998 $ 39,848 $ 2,291 $ 1,150 $ 43,289 Payments during 1998 (14,486) (729) (1,150) (16,365) -------- -------- -------- -------- Restructuring reserve at December 31, 1998 25,362 1,562 - 26,924 Payments during 1999 (21,392) (536) - (21,928) -------- -------- -------- -------- Restructuring reserve at December 31, 1999 3,970 1,026 - 4,996 Payments during 2000 (1,484) (112) - (1,596) -------- -------- -------- -------- Restructuring reserve at March 31, 2000 $ 2,486 $ 914 $ - $ 3,400 ======== ======== ======== ======== </TABLE> The cash outlays include primarily severance and other personnel-related costs, costs of terminating leases, and facilities and equipment disposition costs. As of September 30, 1998, in connection with the restructuring, the Company was eliminating approximately 750 positions or approximately 5% of its workforce, of which 746 positions have been eliminated as of March 31, 2000. All restructuring actions were substantially completed as of March 31, 2000, and the remaining reserves of $3,400 are related principally to outstanding employee severances and lease termination costs that are expected to be completed during 2000 and to a limited extent in later years. (8) Business Segment Information The Company operates in two reportable business segments: (i) Food Packaging and (ii) Protective and Specialty Packaging. The Food Packaging segment comprises primarily the Company's Cryovac(R) food packaging products. The Protective and Specialty Packaging segment includes the aggregation of the Company's packaging products, engineered products and specialty products, all of which products are principally for non-food applications. The Food Packaging segment includes flexible materials and related systems (shrink film products, laminated films and packaging systems marketed primarily under the Cryovac(R) trademark for a broad range of perishable foods). This segment also includes rigid packaging and absorbent pads (absorbent pads used for the packaging of meat, fish and poultry, foam trays for supermarkets and food processors, and rigid plastic containers for dairy and other food products). The Protective and Specialty Packaging segment includes cushioning and surface protection products (including air cellular cushioning materials, films for non-food applications, polyurethane foam packaging systems sold under the Instapak(R) trademark, polyethylene foam sheets and planks, a comprehensive line of protective and durable mailers and bags, certain paper-based protective packaging materials, suspension and retention packaging, and packaging systems) and other products (principally specialty adhesive products). Quarter Ended March 31, ----------------------------------- 2000 1999 ------------------- --------------- Net Sales Food Packaging $ 429,401 $ 419,693 Protective and Specialty Packaging 287,187 259,244 ----------- ------------ Total segments $ 716,588 $ 678,937 =========== ============ Operating profit Food Packaging $ 69,407 $ 66,904 Protective and Specialty Packaging 63,285 54,213 ----------- ------------ Total segments 132,692 121,117 Corporate operating expenses (including goodwill amortization of $12,310 and $12,251 in 2000 and 1999, respectively) (16,771) (16,284) ----------- ------------ Total $ 115,921 $ 104,833 =========== ============ 11
Quarter Ended March 31, ----------------------------------- 2000 1999 ------------------- --------------- Depreciation and amortization Food Packaging $ 27,595 $ 27,878 Protective and Specialty Packaging 14,738 15,385 ----------- ------------ Total segments 42,333 43,263 Corporate (including goodwill amortization) 12,758 12,524 ----------- ------------ Total $ 55,091 $ 55,787 =========== ============ (9) Acquisitions During the first quarter of 2000, the Company made two small acquisitions. These transactions, which were effected in exchange for cash in the aggregate amount of approximately $27,542, were accounted for as purchases and were not material to the Company's consolidated financial statements. 12
Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Net sales increased 6% to $716,588,000, compared with net sales of $678,937,000 for the first quarter of 1999, primarily due to higher unit volume, partially offset by the negative effect of foreign currency translation. The Company's net sales were affected by the continued weakness of foreign currencies compared with the U.S. dollar, particularly in Europe and Latin America. Excluding the negative effect of foreign currency translation, net sales would have increased 9% compared with the first quarter of 1999. Net sales from domestic operations increased approximately 8% compared with the first quarter of 1999, primarily due to increased unit volume. Net sales from foreign operations, which represented approximately 46% and 47% of the Company's total net sales in the first quarters of 2000 and 1999, respectively, increased approximately 3% compared with the first quarter of 1999, primarily due to increased unit volume and, to a lesser extent, the added net sales of several small acquired businesses, which more than offset the negative effect of foreign currency translation. Net sales of the Company's food packaging products segment, which consist primarily of the Company's Cryovac(R) food packaging products and Dri-Loc(R) absorbent pads, increased approximately 2% compared with the first quarter of 1999. This increase was due primarily to increased unit volume partially offset by the negative effect of foreign currency translation. Excluding the negative effect of foreign currency translation, net sales of this segment would have increased 6% compared with the first quarter of 1999. Net sales of the Company's protective and specialty packaging segment, which consist primarily of Cryovac(R) industrial and consumer packaging, Instapak(R) chemicals and equipment, air cellular and polyethylene foam surface protection and cushioning materials and protective and durable mailers and bags, increased 11% compared with the first quarter of 1999 primarily due to higher unit volume and, to a lesser extent, the added net sales of several small acquired businesses. Excluding the negative effect of foreign currency translation, net sales of this segment would have increased 14%. Gross profit increased to $257,989,000 or 36.0% of net sales from $245,698,000 or 36.2% of net sales for the first quarter of 1999. The increase in gross profit compared to the first quarter of 1999 was due primarily to the higher level of net sales. Certain higher raw material costs resulted in the decline in gross profit as a percentage of net sales compared to the first quarter of 1999. Marketing, administrative and development expenses and goodwill amortization remained relatively flat compared to the first quarter of 1999. Such expenses declined to 19.8% of net sales compared to 20.7% for the first quarter of 1999. As in the first quarter of 13
1999, the Company continued to incur information system costs related to the implementation of its enterprise resource planning system. The decrease in other expense, net, consisting primarily of interest expense, was primarily due to the lower level of debt outstanding compared to the first quarter of 1999. The Company's effective income tax rate was 45.5% compared with 47.0% for the first quarter of 1999. These rates are higher than the Company's applicable statutory rates primarily due to the non-deductibility for tax purposes of goodwill amortization. The Company expects that its effective tax rate will remain higher than statutory rates for 2000. As a result of the above, net earnings increased to $54,983,000 for the first quarter of 2000 compared to $46,614,000 for the 1999 period. Basic and diluted earnings per common share were $0.49 and $0.45, respectively, compared with basic and diluted earnings per common share of $0.34 for the first quarter of 1999. The basic earnings per common share calculation for the quarter ended March 31, 2000 includes a $0.03 per share gain attributable to the repurchase of preferred stock. Such gain is not included in the calculation of diluted earnings per common share. The diluted earnings per common share for the quarter ended March 31, 2000 is calculated assuming the conversion of the shares of preferred stock repurchased during the period in accordance with the Financial Accounting Standards Board's Emerging Issues Task Force D-53 guidance. The effect of the conversion of the Company's outstanding convertible preferred stock is not considered in the calculation of diluted earnings per common share in the first quarters of 2000 and 1999 because it would be antidilutive. Liquidity and Capital Resources The Company's principal sources of liquidity are cash flows from operations and amounts available under the Company's existing lines of credit, including principally the Credit Agreements mentioned below. Net cash provided by operating activities increased to $108,386,000 from $72,991,000 in the first quarter of 1999. The increase in operating cash flows in the first quarter of 2000 was primarily due to increased net earnings and changes in operating assets and liabilities in the ordinary course of business. Net cash used in investing activities amounted to $51,113,000 compared to $16,082,000 in the first quarter of 1999. The increase in the first quarter of 2000 was primarily due to $27,542,000 of cash used for businesses acquired in the 2000 period and to a higher level of capital expenditures in the first quarter of 2000. Capital expenditures were $23,867,000 for the first quarter of 2000 and $16,943,000 for the 1999 period. The Company currently anticipates that capital expenditures for the full year of 2000 will be in the range of $125,000,000 to $150,000,000. Net cash used in financing activities amounted to $54,313,000 compared to $14,734,000 in the first quarter of 1999. The increase in net cash used in financing activities in the first quarter of 2000 14
reflected primarily a higher level of purchases of treasury stock, offset in part by a higher level of net proceeds from borrowings. At March 31, 2000, the Company had working capital of $259,600,000, or 7% of total assets, compared to working capital of $221,130,000, or 6% of total assets, at December 31, 1999. Total current assets increased primarily due to increased inventory levels. Total current liabilities decreased due primarily to a decrease in short-term borrowings arising out of the replacement of certain borrowings made under the 364-day revolving credit facility with borrowings under the 5-year revolving credit facility and a decrease in other current liabilities (which related primarily to accrued payroll) due to the timing of cash payments, partially offset by an increase in income taxes payable. The Company's ratio of current assets to current liabilities (current ratio) was 1.5 at March 31, 2000 and 1.4 at December 31, 1999. The Company's ratio of current assets less inventory to current liabilities (quick ratio) was 1.0 at March 31, 2000 and December 31, 1999. The change in the current ratio in 2000 resulted primarily from the changes in working capital discussed above. At March 31, 2000 and December 31, 1999, debt consisted primarily of borrowings that were made under the Credit Agreements described below, the 10-year 6.95% senior notes due May 2009 (the "Senior Notes"), the 7-year 5.625% euro notes due July 2006 (the "Euro Notes") and certain other loans. The Company's two principal Credit Agreements (the "Credit Agreements") are a 5-year revolving credit facility that expires on March 30, 2003 (included in long-term debt) and a 364-day revolving credit facility that was renewed during the first quarter of 2000 for an additional period that expires on March 26, 2001 (included in short-term borrowings). During the first quarter of 2000, the Company voluntarily reduced the amounts available under the Credit Agreements to $900,000,000 in the aggregate. As of March 31, 2000 and December 31, 1999, outstanding borrowings were $214,030,000 and $160,978,000, respectively, under the 5-year revolving credit facility and $6,680,000 and $38,342,000, respectively, under the 364-day revolving credit facility. The Credit Agreements provide that the Company and certain of its subsidiaries may borrow for various purposes, including the refinancing of existing debt, the provision of working capital and other general corporate needs, including acquisitions and capital expenditures. Amounts repaid under the Credit Agreements may be reborrowed from time to time. As of March 31, 2000, facility fees were payable on the total amounts available under the Credit Agreements and amounted to 0.095% and 0.100% per annum under the 5-year revolving credit facility and the 364-day revolving credit facility, respectively. The Company's obligations under the Credit Agreements bear interest at floating rates. The weighted average interest rate under the Credit Agreements was approximately 6.0% at March 31, 2000 and December 31, 1999. The Company had certain interest rate and currency swaps outstanding at March 31, 2000 and December 31, 1999, related to its obligations under the Credit Agreements. These agreements had the effect of adjusting the interest rates on a portion of such debt. The weighted average interest rate at March 31, 2000 and December 15
31, 1999 did not change significantly as a result of these derivative financial instruments. At March 31, 2000, the Company was party to interest rate swaps with an aggregate notional amount of approximately $148,000,000 with various expiration dates through November 2004 compared to forward-starting interest rate swaps with an aggregate notional amount of approximately $151,000,000 with various expiration dates through November 2004 at December 31, 1999. The interest rate swaps outstanding as of March 31, 2000 and December 31, 1999 had the effect of converting a portion of the Company's fixed rate debt to variable rate debt at U.S. denominated rates which ranged from 6.2% to 6.5% at March 31, 2000 and December 31, 1999, and euro denominated rates which ranged from 3.7% to 4.4% at March 31, 2000 and 3.8% to 4.4% at December 31, 1999. The Credit Agreements provide for changes in borrowing margins based on financial criteria and the Company's senior unsecured debt ratings. The Credit Agreements, Senior Notes and Euro Notes impose certain limitations on the operations of the Company and certain of its subsidiaries. The Company was in compliance with these requirements as of March 31, 2000. At March 31, 2000, the Company had available lines of credit, including those available under the Credit Agreements, of approximately $1.1 billion of which approximately $800 million were unused. The Company's shareholders' equity was $601,760,000 at March 31, 2000 compared to $551,030,000 at December 31, 1999. Shareholders' equity increased in the first quarter of 2000 primarily due to net earnings of $54,983,000 partially offset by preferred stock dividends of $17,097,000. Other Matters Quantitative and Qualitative Disclosures about Market Risk For a discussion of market risks at December 31, 1999, refer to "Management's Discussion and Analysis of Results of Operations and Financial Condition - Quantitative and Qualitative Disclosures about Market Risk" in the Company's 1999 Annual Report to Stockholders for the year ended December 31, 1999. The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect its results of operations and financial condition. The Company seeks to minimize these risks through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not purchase, hold or sell derivative financial instruments for trading purposes. 16
Interest Rates The Company uses interest rate swaps to manage its exposure to fluctuations in interest rates. The Company also uses interest rate collars to reduce its exposure to fluctuations in the rate of interest by limiting interest rates to a given range. At March 31, 2000, the Company had interest rate swaps that had the effect of converting a portion of the Company's fixed rate debt to variable rate debt, and an interest rate collar agreement, maturing at various dates through November 2004, with a combined aggregate notional amount of approximately $156,000,000 compared with forward-starting interest rate swaps and an interest rate collar agreement with a combined aggregate notional amount of approximately $159,000,000 at December 31, 1999. At March 31, 2000, the carrying value of the Company's total debt was $842,745,000, of which $491,758,000 was fixed rate debt. At December 31, 1999, the carrying value of the Company's total debt was $824,677,000 of which $502,244,000 was fixed rate debt. Foreign Exchange Contracts The Company uses interest rate and currency swaps to limit foreign exchange exposure and limit or adjust interest rate exposure by swapping certain borrowings in U.S. dollars for borrowings denominated in foreign currencies. At March 31, 2000 and December 31, 1999, the Company had interest rate and currency swap agreements, maturing through March 2002, with an aggregate notional amount of approximately $5,000,000. The Company uses foreign currency forwards to fix the amount payable on certain transactions denominated in foreign currencies. At March 31, 2000, the Company had foreign currency forward agreements, maturing through December 2000, with an aggregate notional amount of approximately $9,000,000. At December 31, 1999, the Company did not have any material foreign currency forward contracts outstanding. Environmental Matters The Company is subject to loss contingencies resulting from environmental laws and regulations, and it accrues for anticipated costs associated with investigatory and remediation efforts when an assessment has indicated that a loss is probable and can be reasonably estimated. These accruals do not take into account any discounting for the time value of money and are not reduced by potential insurance recoveries, if any. Environmental liabilities are reassessed whenever circumstances become better defined and/or remediation efforts and their costs can be better estimated. These liabilities are evaluated periodically based on available information, including the progress of remedial investigations at each site, the current status of discussions with regulatory authorities regarding the methods and extent of remediation and the apportionment of costs among potentially responsible parties. As some of these issues are decided (the outcomes of 17
which are subject to uncertainties) and/or new sites are assessed and costs can be reasonably estimated, the Company adjusts the recorded accruals, as necessary. However, the Company believes that it has adequately reserved for all probable and estimable environmental exposures. Euro Conversion On January 1, 1999, eleven of the fifteen members of the European Union (the "participating countries") established fixed conversion rates between their existing currencies (the "legacy currencies") and introduced the euro, a single common non-cash currency. The euro is now traded on currency exchanges and is being used in business transactions. At the beginning of 2002, new euro-denominated bills and coins will be issued to replace the legacy currencies, and the legacy currencies will be withdrawn from circulation. By 2002, all companies operating in the participating countries are required to restate their statutory accounting data into euros as their base currency. In 1998, the Company established plans to address the systems and business issues raised by the euro currency conversion. These issues include, among others, (a) the need to adapt computer, accounting and other business systems and equipment to accommodate euro-denominated transactions, (b) the need to modify banking and cash management systems in order to be able to handle payments between customers and suppliers in legacy currencies and euros between 1999 and 2002, (c) the requirement to change the base statutory and reporting currency of each subsidiary in the participating countries into euros during the transition period, (d) the foreign currency exposure changes resulting from the alignment of the legacy currencies into the euro, and (e) the identification of material contracts and sales agreements whose contractual stated currency will need to be converted into euros. The Company believes that it will be euro compliant by January 1, 2002. The Company has implemented plans to accommodate euro-denominated transactions and to handle euro payments with third party customers and suppliers in the participating countries. The Company plans to meet the requirement to convert statutory and reporting currencies to the euro by acquiring and installing new financial software systems. If there are delays in such installation, the Company plans to pursue alternate means to convert statutory and reporting currencies to the euro by 2002. The Company believes that its foreign currency exposures have been reduced as a result of the alignment of legacy currencies. The Company believes that all material contracts and sales agreements requiring conversion will be converted to euros prior to January 1, 2002. Although additional costs are expected to result from the implementation of the Company's plans, the Company also expects to achieve benefits in its treasury and procurement areas as a result of the elimination of the legacy currencies. Since the Company has operations in each of its business segments in the participating countries, 18
each of its business segments will be affected by the conversion process. However, the Company expects that the total impact of all strategic and operational issues related to the euro conversion and the cost of implementing its plans for the euro conversion will not have a material adverse impact on its consolidated financial condition, results of operations or reportable segments. Recently Issued Statements of Financial Accounting Standards In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." This Statement defers the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, which the Company expects to adopt beginning January 1, 2001, establishes accounting and operating standards for hedging activities and derivative instruments, including certain derivative instruments embedded in other contracts. The Company is reviewing the potential impact, if any, of SFAS No. 133 on its Consolidated Financial Statements. Forward-Looking Statements Certain statements made by the Company in this Form 10-Q and in future oral and written statements by management of the Company may be forward-looking. These statements include comments as to the Company's beliefs and expectations as to future events and trends affecting the Company's business, its results of operations and its financial condition. These forward-looking statements are based upon management's current expectations concerning future events and discuss, among other things, anticipated future performance and future business plans. Forward-looking statements are identified by such words and phrases as "expects," "intends," "believes," "will continue," "plans to," "could be" and similar expressions. Forward-looking statements are necessarily subject to uncertainties, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements. While the Company is not aware that any of the factors listed below will adversely affect the future performance of the Company, the Company recognizes that it is subject to a number of uncertainties, such as business and market conditions in Asia, Latin America and other geographic areas around the world, changes in the value of foreign currencies against the U.S. dollar, the success of certain information systems projects, general economic, business and market conditions, conditions in the industries and markets that use the Company's packaging materials and systems, the development and success of new products, the Company's success in entering new markets and acquiring new businesses, the timing of capital expenditures, competitive factors, raw material availability and pricing, changes in the Company's relationship with customers and suppliers, future litigation and claims 19
(including environmental matters) involving the Company, changes in domestic or foreign laws or regulations, or difficulties related to the euro conversion. 20
PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds. In March 2000, the Company issued 285,378 shares of its common stock, par value $0.10 per share ("Common Stock"), to the Profit-Sharing Plan of the Company as part of its 1999 contribution to the Profit-Sharing Plan. The issuance of such shares to the Profit-Sharing Plan was not registered under the Securities Act of 1933, as amended (the "Securities Act"), because such transaction did not involve an "offer" or "sale" of securities under Section 2(3) of the Securities Act. In February 2000 and August 1999, the Company issued an aggregate of 110,000 shares of Common Stock to consultants providing services to the Company. The issuances of such shares were not registered under the Securities Act because the transactions were exempt under Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description 10.1 Third Amendment, dated as of March 24, 2000, to Global Revolving Credit Agreement (364-Day), among the Company, certain of the Company's subsidiaries as borrowers and guarantors thereunder, ABN AMRO Bank N.V., as Administrative Agent, and certain other banks party thereto. 10.2 Consulting Agreement, dated as of February 29, 2000, between the Company and T. J. Dermot Dunphy 27 Financial Data Schedule. (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the fiscal quarter ended March 31, 2000. 21
Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEALED AIR CORPORATION (Registrant) Date: May 12, 2000 By /s/ Jeffrey S. Warren ---------------------- Jeffrey S. Warren Controller (Authorized Executive Officer and Chief Accounting Officer) 22