10-Q 1 0001.txt ================================================================================ 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 September 30, 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 83,659,240 shares of the registrant's common stock, par value $0.10 per share, and 30,297,409 shares of the registrant's Series A convertible preferred stock, par value $0.10 per share, outstanding as of October 31, 2000. ================================================================================ PART I FINANCIAL INFORMATION SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings For the Three and Nine Months Ended September 30, 2000 and 1999 (In thousands of dollars except share data) (Unaudited) For the For the Three Months Ended Nine Months Ended September 30 September 30 -------------------- ---------------------- 2000 1999 2000 1999 --------- -------- ---------- ---------- Net sales $746,860 $714,755 $2,194,990 $2,088,813 Cost of sales 493,426 457,551 1,429,594 1,332,331 -------- -------- ---------- ---------- Gross profit 253,434 257,204 765,396 756,482 Marketing, administrative and development expenses 129,790 130,721 388,774 391,304 Goodwill amortization 13,438 12,278 38,129 36,860 -------- -------- ---------- -------- Operating profit 110,206 114,205 338,493 328,318 Other income (expense): Interest expense (17,082) (14,631) (44,093) (44,088) Other, net 7,269 822 5,652 (199) -------- -------- ---------- -------- Other expense, net (9,813) (13,809) (38,441) (44,287) -------- -------- ---------- -------- Earnings before income taxes 100,393 100,396 300,052 284,031 Income taxes 45,679 46,684 136,524 132,513 -------- -------- ---------- -------- Net earnings $ 54,714 $ 53,712 $ 163,528 $151,518 ======== ======== ========== ======== Less: Series A preferred stock dividends 15,991 17,879 50,090 53,668 Add: Excess of redemption value over repurchase price of Series A preferred stock 8,914 -- 11,725 39 -------- -------- ---------- -------- Net earnings ascribed to common shareholders $ 47,637 $ 35,833 $ 125,163 $ 97,889 ======== ======== ========== ======== Earnings per common share (See Note 3): Basic $ 0.57 $ 0.43 $ 1.50 $ 1.17 ======== ======== ========== ======== Diluted $ 0.46 $ 0.43 $ 1.36 $ 1.17 ======== ======== ========== ======== Weighted average number of common shares outstanding (000's): Basic 83,723 83,648 83,675 83,552 ======== ======== ========== ======== Diluted 85,116 83,784 86,367 83,688 ======== ======== ========== ========
See accompanying notes to consolidated financial statements. 2 SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2000 and December 31, 1999 (In thousands of dollars except share data) September 30, 2000 December 31, (Unaudited) 1999 ------------- ------------ ASSETS ------ Current assets: Cash and cash equivalents $ 6,251 $ 13,672 Notes and accounts receivable, net of allowances for doubtful accounts of $20,817 in 2000 and $21,396 in 1999 491,335 470,046 Inventories 298,629 245,934 Other current assets 75,499 73,572 ---------- ---------- Total current assets 871,714 803,224 ---------- ---------- Property and equipment: Land and buildings 434,103 426,460 Machinery and equipment 1,357,213 1,364,454 Other property and equipment 111,553 115,111 Construction in progress 80,702 40,106 ---------- ---------- 1,983,571 1,946,131 Less accumulated depreciation and amortization 965,293 922,722 ---------- ---------- Property and equipment, net 1,018,278 1,023,409 ---------- ---------- Goodwill, less accumulated amortization of $121,427 in 2000 and $84,699 in 1999 1,919,375 1,859,958 Other assets 180,234 168,642 ---------- ---------- Total assets $3,989,601 $3,855,233 ========== ========== See accompanying notes to consolidated financial statements. 3 SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2000 and December 31, 1999 (Continued) (In thousands of dollars except share data) September 30, 2000 December 31, (Unaudited) 1999 ------------- ------------ LIABILITIES, CONVERTIBLE PREFERRED STOCK ---------------------------------------- & SHAREHOLDERS' EQUITY ---------------------- Current liabilities: Short-term borrowings $ 174,488 $ 152,653 Current portion of long-term debt 1,801 6,908 Accounts payable 160,648 175,166 Other current liabilities 213,597 216,487 Income taxes payable 57,847 30,880 ----------- ----------- Total current liabilities 608,381 582,094 Long-term debt, less current portion 884,695 665,116 Deferred income taxes 210,540 214,906 Other liabilities 73,053 80,425 ----------- ----------- Total liabilities 1,776,669 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, outstanding 30,716,182 shares in 2000 and 35,233,245 shares in 1999, mandatory redemption in 2018 1,535,809 1,761,662 Shareholders' equity: Common stock, $.10 par value. Authorized 400,000,000 shares, issued 84,279,505 shares in 2000 and 84,135,255 shares in 1999 8,427 8,413 Additional paid-in capital 651,620 632,230 Retained earnings 245,511 132,073 Accumulated translation adjustment (182,008) (171,521) ----------- ----------- 723,550 601,195 ----------- ----------- Less: Deferred compensation 16,691 24,511 Less: Cost of treasury common stock, 617,646 shares in 2000 and 535,356 shares in 1999 27,734 23,652 Less: Minimum pension liability 2,002 2,002 ----------- ----------- Total shareholders' equity 677,123 551,030 ----------- ----------- Total liabilities, preferred stock and shareholders' equity $ 3,989,601 $ 3,855,233 =========== =========== See accompanying notes to consolidated financial statements. 4 SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2000 and 1999 (In thousands of dollars) (Unaudited) 2000 1999 ----------- ---------- Cash flows from operating activities: Net earnings $ 163,528 $ 151,518 Adjustments to reconcile net earnings to net cash provided by operating activities, net of effect of businesses acquired: Depreciation and amortization 164,574 167,871 Amortization of bond discount 242 92 Deferred tax provision (benefit) 80 (2,217) Net loss on disposals of fixed assets 100 200 Changes in operating assets and liabilities, net of businesses acquired: Notes and accounts receivable (27,730) (24,130) Inventories (51,191) 5,033 Other current assets (1,851) 1,265 Other assets (7,702) (727) Accounts payable (12,239) (5,513) Other current liabilities 36,536 11,125 Other liabilities (3,619) 6,202 ---------- ---------- Net cash provided by operating activities 260,728 310,719 ---------- ---------- Cash flows from investing activities: Capital expenditures for property and equipment (81,262) (51,145) Proceeds from sales of property and equipment 957 2,371 Businesses acquired in purchase transactions, net of cash acquired (176,502) (10,430) ---------- ---------- Net cash used in investing activities (256,807) (59,204) ---------- ---------- Cash flows from financing activities: Proceeds from long-term debt 499,390 500,855 Payment of long-term debt (256,223) (808,440) Payment of senior debt issuance costs 0 (3,123) Dividends paid on preferred stock (51,890) (53,700) Purchase of treasury common stock (19,468) (14,189) Purchase of treasury preferred stock (214,073) (2,836) Proceeds from stock option exercises 677 1,924 Net proceeds from short-term borrowings 21,074 158,599 ---------- ---------- Net cash used in financing activities (20,513) (220,910) ---------- ---------- Effect of exchange rate changes on cash and cash equivalents 9,171 (1,188) ---------- ---------- Cash and cash equivalents: (Decrease) Increase during the period (7,421) 29,417 Balance, beginning of period 13,672 44,986 ---------- ---------- Balance, end of period $ 6,251 $ 74,403 ========== ==========
See accompanying notes to consolidated financial statements. 5 SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2000 and 1999 (Continued) (In thousands of dollars) (Unaudited) 2000 1999 ----------- ---------- Supplemental Cash Flow Items: Interest payments, net of amounts capitalized $ 34,560 $ 36,110 =========== ========== Income tax payments $ 119,618 $ 133,473 =========== ========== Non-Cash Items: Issuance of shares of common stock to the profit-sharing plan $ 13,877 $ 8,823 =========== ==========
See accompanying notes to consolidated financial statements. 6 SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2000 and 1999 (In thousands of dollars) (Unaudited) For the For the Three Months Ended Nine Months Ended September 30, September 30, ---------------------- --------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Net earnings $ 54,714 $ 53,712 $ 163,528 $ 151,518 Other comprehensive loss: Foreign currency translation adjustments (6,906) (2,641) (10,487) (50,682) ---------- -------- -------- --------- Comprehensive income $ 47,808 $ 51,071 $153,041 $ 100,836 ========== ========= ======== =========
See accompanying notes to consolidated financial statements. 7 SEALED AIR CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 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 all periods presented have been made. The consolidated statements of earnings for the three and nine months ended September 30, 2000 are 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) Series A Convertible Preferred Stock 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 sheets. During the first nine months of 2000 the Company repurchased approximately 4,516 shares of the Company's series A convertible preferred stock at a cost of approximately $214,073, which represents a cost that is $11,725 below its book value. This excess of book value over the repurchase price of the preferred stock is recorded as an increase to additional paid-in-capital. (3) Earnings Per Common Share The following table sets forth the reconciliation of the computations of basic and diluted earnings per common share for the three and nine months ended September 30, 2000 and 1999. Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- Basic EPS: Numerator --------- Net earnings $ 54,714 $ 53,712 $ 163,528 $ 151,518 Add: Excess of book value over repurchase price of preferred stock 8,914 -- 11,725 39 Less: Preferred stock dividends 15,991 17,879 50,090 53,668 --------------------------------------------------------------------------------------------------------------------------------- Net earnings ascribed to common shareholders $ 47,637 $ 35,833 $ 125,163 $ 97,889 --------------------------------------------------------------------------------------------------------------------------------- Denominator ----------- Weighted average common shares outstanding - basic 83,723 83,648 83,675 83,552 8 --------------------------------------------------------------------------------------------------------------------------------- Basic earnings per common share(1) $ 0.57 $ 0.43 $ 1.50 $ 1.17 --------------------------------------------------------------------------------------------------------------------------------- Diluted EPS: Numerator --------- Earnings ascribed to common shareholders $ 47,637 $ 35,833 $ 125,163 $ 97,889 Less: Excess of book value over repurchase price of preferred stock 8,914 -- 11,725 -- Add: Dividends associated with repurchased preferred stock 633 -- 4,002 -- --------------------------------------------------------------------------------------------------------------------------------- Earnings ascribed to common shareholders - diluted $ 39,356 $ 35,833 $ 117,440 $ 97,889 --------------------------------------------------------------------------------------------------------------------------------- Denominator ----------- Weighted average common shares outstanding - basic 83,723 83,648 83,675 83,552 Effect of assumed exercise of stock options 112 136 112 136 Effect of conversion of repurchased preferred stock 1,281 -- 2,580 -- --------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding - diluted 85,116 83,784 86,367 83,688 --------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share(2) $ 0.46 $ 0.43 $ 1.36 $ 1.17 ---------------------------------------------------------------------------------------------------------------------------------
(1) The basic earnings per common share calculation for the three and nine months ended September 30, 2000 includes a $0.11 and $0.14 per share gain (excess of book value over repurchase price of preferred stock), respectively, attributable to the repurchase of preferred stock. Such gain is not included in the calculation of diluted earnings per common share for the three and nine months ended September 30, 2000. The gain attributable to the repurchase of preferred stock was not significant in the 1999 periods. (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 the 2000 periods, and the weighted average common shares outstanding have been adjusted to assume conversion of the shares of preferred stock repurchased during the 2000 periods in accordance with the Financial Accounting Standards Board's Emerging Issues Task Force Topic D-53 guidance. The assumed conversion of the outstanding preferred stock is not considered in the calculation of diluted earnings per common share for all periods as the effect is antidilutive. (4) Inventories At September 30, 2000 and December 31, 1999, the components of inventories by major classification were as follows: September 30, December 31, 2000 1999 ------------- ------------ Raw materials $ 71,690 $ 60,596 Work in process 59,907 43,021 Finished goods 185,300 157,341 ----------- ---------- Subtotal 316,897 260,958 Reduction of certain inventories to LIFO basis (18,268) (15,024) ----------- ---------- Total inventories $ 298,629 $ 245,934 =========== ========== 9 (5) Income Taxes The Company's effective income tax rates were 45.5% and 46.5% for the third quarters of 2000 and 1999, respectively, and 45.5% and 46.7% for the first nine months of 2000 and 1999, respectively. Such rates were higher than the statutory U.S. federal income tax rate primarily due to the non-deductibility for tax purposes of goodwill amortization and state income taxes. (6) Long-Term Debt At September 30, 2000 and December 31, 1999, the Company's outstanding 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"). The Company's two principal credit agreements (as amended, 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 expires on March 26, 2001 (included in short-term borrowings). The Company can borrow up to $900,000 in the aggregate under the Credit Agreements. As of September 30, 2000 and December 31, 1999, outstanding borrowings were $404,436 and $160,978, respectively, under the 5-year revolving credit facility and $26,258 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 September 30, 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 6.7% at September 30, 2000 and 6.0% at December 31, 1999. The Company had certain interest rate and currency swaps outstanding at September 30, 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 September 30, 2000 and December 31, 1999 did not change significantly as a result of these derivative financial instruments. At September 30, 2000, the Company was party to interest rate swaps with an aggregate notional amount of approximately $144,000 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 September 30, 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. dollar-denominated rates which ranged from 7.0% to 7.3% at September 30, 2000 and 6.2% to 6.5% at December 31, 1999, and euro-denominated rates which ranged from 5.0% to 5.6% at September 30, 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 September 30, 2000. 10 (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 $2,241 at September 30, 2000 and $4,996 at December 31, 1999. The components of the restructuring charges, spending and other activity through September 30, 2000 and the remaining reserve balance at September 30, 2000 were as follows: Employee Contract Termination Plant/Office Termination Costs Closures Costs Total ------------------------------------------------------------------------------------------------------- Restructuring provision recorded in 1998 $ 39,848 $ 2,291 $ 1,150 $ 43,289 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 (2,393) (362) - (2,755) ------------------------------------------------------------------------------------------------------- Restructuring reserve at September 30, 2000 $ 1,577 $ 664 $ - $ 2,241 -------------------------------------------------------------------------------------------------------
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 planned to eliminate approximately 750 positions or approximately 5% of its workforce, of which 746 positions had been eliminated as of September 30, 2000. All restructuring actions were substantially completed as of September 30, 2000. The remaining reserves of $2,241 are related principally to outstanding employee severance obligations 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 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). 11 For the For the Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ----------------------------- 2000 1999(1) 2000 1999(1) --------------------------------------------------------------------------------------------------------------- Net sales Food Packaging $ 452,215 $ 434,486 $ 1,320,914 $ 1,280,047 Protective and Specialty Packaging 294,645 280,269 874,076 808,766 --------------------------------------------------------------------------------------------------------------- Total $ 746,860 $ 714,755 $ 2,194,990 $ 2,088,813 --------------------------------------------------------------------------------------------------------------- Operating profit Food Packaging $ 66,387 $ 68,625 $ 206,948 $ 207,653 Protective and Specialty Packaging 61,983 62,928 184,056 174,213 --------------------------------------------------------------------------------------------------------------- Total segments 128,370 131,553 391,004 381,866 Corporate operating expenses(2) (18,164) (17,348) (52,511) (53,548) --------------------------------------------------------------------------------------------------------------- Total $ 110,206 $ 114,205 $ 338,493 $ 328,318 --------------------------------------------------------------------------------------------------------------- Depreciation and amortization Food Packaging $ 27,562 $ 27,432 $ 82,063 $ 82,175 Protective and Specialty Packaging 14,599 16,376 44,276 47,833 --------------------------------------------------------------------------------------------------------------- Total segments 42,161 43,808 126,339 130,008 Corporate (including goodwill amortization) 13,124 12,117 38,235 37,863 --------------------------------------------------------------------------------------------------------------- Total $ 55,285 $ 55,925 $ 164,574 $ 167,871 ---------------------------------------------------------------------------------------------------------------
(1) Certain prior period amounts have been reclassified to conform to the current year's presentation. (2) Includes goodwill amortization of $12,900 and $12,278 for the three months ended September 2000 and 1999, respectively, and $37,591 and $36,860 for the nine months ended September 2000 and 1999, respectively. (9) Acquisitions During the first nine months of 2000, the Company made several small acquisitions, including the acquisition of Dolphin Packaging plc during the third quarter 2000. These transactions, which were carried out in exchange for cash in the aggregate amount of approximately $177,000 were accounted for as purchases and resulted in goodwill of approximately $100,000. Such transactions did not have a significant impact on the Company's net earnings for the periods presented. 12 Management's Discussion and Analysis of Results of Operations and Financial Condition Net sales for the third quarter of 2000 increased 4% to $746,860,000 compared with $714,755,000 for the third quarter of 1999. For the nine-month period, the Company's net sales increased 5% to $2,194,990,000 compared with net sales of $2,088,813,000 in the 1999 period. The increase in net sales for the third quarter was primarily due to higher unit volume, the added net sales of several acquired businesses and, to a lesser extent, higher average selling prices for certain of the Company's products. Excluding the negative effect of foreign currency translation, net sales would have increased 8% compared with the third quarter of 1999. Excluding both the negative effect of foreign currency translation and the impact of acquisitions, net sales would have increased 4% compared with the third quarter of 1999. The increase in net sales for the first nine months of 2000 was due primarily to higher unit volume and, to a lesser extent, the added net sales of several acquired businesses and higher average selling prices for certain of the Company's products. Excluding the negative impact of foreign currency translation, net sales would have increased by 8% compared with the first nine months of 1999. Net sales from domestic operations increased approximately 5% and 7% compared with the third quarter and first nine months of 1999, respectively, primarily due to increased unit volume and, to a lesser extent, higher average selling prices for certain of the Company's products in both periods. Net sales from foreign operations represented approximately 45% of the Company's total net sales in both the third quarter of 2000 and the third quarter of 1999, and 45% and 46% in the first nine months of 2000 and 1999, respectively. Net sales from foreign operations in the third quarter of 2000 increased approximately 4% compared with the third quarter of 1999, primarily due to increased unit volume and the added net sales of several acquired businesses, partially offset by the negative impact of foreign currency translation. Net sales from foreign operations in the first nine months of 2000 increased approximately 3% compared with the first nine months of 1999, primarily due to increased unit volume, and, to a lesser extent, the added net sales of several acquired businesses, partially offset by the negative impact of foreign currency translation. Net sales of the Company's food packaging products segment, which consists primarily of the Company's Cryovac(R) food packaging products and Dri-Loc(R) absorbent pads, increased approximately 4% for the third quarter and 3% for the first nine months of 2000 compared with the respective 1999 periods. The increase in the third quarter of 2000 was primarily due to the added net sales of several acquired businesses and, to a lesser extent, higher unit volume and higher average selling prices for certain of the segment's products. The increase in the first nine months of 2000 was due to higher unit volume and, to a lesser extent, the added net sales of several acquired businesses and higher average selling prices for certain of the segment's products. Excluding the negative effect of foreign currency translation, net sales of this segment would have increased by 8% for the third quarter and 7% for the first nine months of 2000 compared with the respective 1999 13 periods. Excluding both the negative effect of foreign currency and the impact of acquisitions, net sales would have increased by 4% and 5% for the third quarter and the first nine months of 2000, respectively, compared to the respective 1999 periods. Net sales of the Company's protective and specialty packaging segment, which consists primarily of Instapak(R) chemicals and equipment, Cryovac(R) performance shrink films, air cellular and polyethylene foam surface protection and cushioning materials and protective and durable mailers and bags, increased approximately 5% for the third quarter and 8% for the first nine months of 2000 compared to the respective 1999 periods. The increases in both periods were due primarily 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 by 8% for the third quarter and 11% for the first nine months of 2000 compared with the respective 1999 periods. Gross profit as a percentage of net sales was 33.9% for the third quarter and 34.9% for the first nine months of 2000 compared to 36.0% for the third quarter of 1999 and 36.2% for the first nine months of 1999. The decrease in gross profit as a percentage of net sales for the third quarter of 2000 was primarily due to certain higher raw material costs and, to a limited extent, charges in the U.K. related to a factory realignment and rationalization and inclusion of the operating results of the newly acquired Dolphin Packaging plc business, which was acquired in early August 2000. The decrease in gross profit as a percentage of net sales for the first nine months of 2000 was primarily due to higher raw material costs. Marketing, administrative and development expenses and goodwill amortization as a percentage of net sales were 19.2% for the third quarter of 2000 compared to 20.0% for the 1999 period and were 19.4% for the first nine months of 2000 compared to 20.5% for the 1999 period. As in the third quarter and first nine months of 1999, the Company continued to incur information system costs related to implementation of its enterprise resource planning system. Other expense, net, declined compared to the third quarter and first nine months of 1999. Interest expense increased to $17,082,000 and $44,093,000 for the third quarter and first nine months of 2000, respectively, compared to $14,631,000 and $44,088,000 for the comparable 1999 periods. The increase in interest expense was primarily due to additional borrowings made in connection with business acquisitions and stock repurchases made under the Company's stock repurchase program. The increased interest expense was more than offset by the receipt of a $10,000,000 fee from a third party for the assignment of a pre-existing contract during the third quarter of 2000. The remaining amount in other expense, net, primarily represents foreign currency exchange losses attributable to the weakness of foreign currencies, particularly the euro, relative to the U.S. dollar. The Company's effective income tax rate was 45.5% in the third quarter and first nine months of 2000 and 46.5% and 46.7% in the third quarter and the first nine months of 1999, respectively. These rates are higher than the applicable statutory U.S. Federal 14 income tax rate primarily due to the non-deductibility for tax purposes of goodwill amortization and to state income taxes. The Company expects that its effective tax rate will remain higher than statutory rates for 2000. As a result of the above, the Company recorded net earnings of $54,714,000 for the third quarter of 2000 and $163,528,000 for the first nine months of 2000 compared to net earnings of $53,712,000 and $151,518,000 for the respective 1999 periods. Basic earnings per common share were $0.57 and diluted earnings per common share were $0.46 for the third quarter of 2000, and basic and diluted earnings per common share were $0.43 for the third quarter of 1999. Basic earnings per common share were $1.50 and diluted earnings per common share were $1.36 for the first nine months of 2000, and basic and diluted earnings per common share were $1.17 for the first nine months of 1999. The basic earnings per common share calculation for the quarter and nine months ended September 30, 2000 includes an $0.11 and $0.14 per share gain, respectively, attributable to the repurchase of preferred stock. Such gain is not included in the calculation of diluted earnings per common share. Gains attributable to the repurchase of preferred stock were not significant in the respective 1999 periods. The diluted earnings per common share for the third quarter and first nine months of 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 Topic D-53 guidance. The Company's preferred stock is convertible into shares of its common stock at a rate of approximately 0.885 share of common stock for each share of preferred stock. 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 third quarter and first nine months of 2000 and the respective 1999 periods 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 described below. Net cash provided by operating activities amounted to $260,728,000 and $310,719,000 in the first nine months of 2000 and 1999, respectively. The decrease in operating cash flows for the first nine months of 2000 was primarily due to changes in operating assets and liabilities in the ordinary course of business. Net cash used in investing activities amounted to $256,807,000 in the first nine months of 2000 compared to $59,204,000 in the 1999 period. The change in the first nine months of 2000 compared to the 1999 period was primarily due to the higher level of capital expenditures and several small acquisitions in 2000, including the acquisition of Dolphin Packaging plc during the third quarter of 2000. Capital expenditures were $81,262,000 in the 2000 period and $51,145,000 in the 1999 period. The Company currently 15 anticipates that capital expenditures for the full year of 2000 will be in the range of $110,000,000 to $125,000,000. Net cash used in financing activities declined to $20,513,000 in the first nine months of 2000 compared with $220,910,000 in the first nine months of 1999. In the 2000 period, the Company incurred net borrowings of $264,241,000, while in the first nine months of 1999, the Company made net debt repayments of $148,986,000. The borrowings made in the 2000 period were incurred to finance a portion of the cost of the acquisitions made in the first nine months of the year as well as repurchases of the Company's outstanding convertible preferred stock and common stock. During the first nine months of 2000, the Company repurchased approximately 4,516,000 shares of its preferred stock and 409,000 shares of its common stock at a cost of approximately $214,073,000 and $19,468,000, respectively. These repurchases were made under the Company's share repurchase program, as authorized by its Board of Directors. As of November 2, 2000, the total number of shares of preferred stock and common stock authorized to be repurchased under this program was the equivalent of approximately 16,977,000 shares of common stock on an as-converted basis, of which approximately 6,234,000 had been repurchased, leaving the equivalent of approximately 10,744,000 shares of common stock on an as-converted basis available for repurchase under this program. During the first nine months of 2000, the Company made several acquisitions, including the acquisition of Dolphin Packaging plc during the third quarter of 2000. These transactions, which were affected in exchange for cash in the aggregate amount of approximately $177,000,000, were accounted for as purchases. At September 30, 2000, the Company had working capital of $263,333,000 or 7% of total assets, compared to working capital of $221,130,000, or 6% of total assets, at December 31, 1999. The increase in working capital was primarily due to increases in accounts receivable and inventory and decreases in accounts payable, partially offset by increases in short-term borrowings, primarily under the Credit Agreements, and increases in income taxes payable. The Company's ratio of current assets to current liabilities (current ratio) was 1.4 at September 30, 2000 and December 31, 1999. The Company's ratio of current assets less inventory to current liabilities (quick ratio) was 0.9 at September 30, 2000 and 1.0 at December 31, 1999. At September 30, 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") and the 7-year 5.625% euro notes due July 2006 (the "Euro Notes"). The Company's two principal credit agreements (as amended, 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 expires on March 26, 2001 (included in short-term borrowings). The Company can borrow up to $900,000,000 in the aggregate under the Credit Agreements. As of September 30, 2000 and December 31, 1999, outstanding borrowings were $404,436,000 and $160,978,000, respectively, under the 5-year revolving 16 credit facility and $26,258,000 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 September 30, 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 6.7% at September 30, 2000 and 6.0% at December 31, 1999. The Company had certain interest rate and currency swaps outstanding at September 30, 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 September 30, 2000 and December 31, 1999 did not change significantly as a result of these derivative financial instruments. At September 30, 2000, the Company was party to interest rate swaps with an aggregate notional amount of approximately $144,000,000 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 September 30, 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. dollar-denominated rates which ranged from 7.0% to 7.3% at September 30, 2000 and 6.2% to 6.5% at December 31, 1999, and euro-denominated rates which ranged from 5.0% to 5.6% at September 30, 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 September 30, 2000. At September 30, 2000, the Company had available lines of credit, including those available under the Credit Agreements, of approximately $1.2 billion of which approximately $650 million were unused. The Company's shareholders' equity was $677,123,000 at September 30, 2000 compared to $551,030,000 at December 31, 1999. Shareholders' equity increased in the first nine months of 2000 due to the Company's net earnings of $163,528,000 and the excess of book value over repurchase price of $11,725,000 recognized in connection with the preferred stock repurchases, which were partially offset by preferred stock dividends of $50,090,000 and by an additional foreign currency translation adjustment of $10,487,000. 17 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, which was included as a portion of Exhibit 13 to the Company's Annual Report on Form 10-K 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. 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 September 30, 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 $152,000,000 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 September 30, 2000, the carrying value of the Company's total debt was $1,060,984,000 of which approximately $477,465,000 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 September 30, 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 $6,874,000 and $5,000,000, respectively. 18 The Company uses foreign currency forwards to fix the amount payable on certain transactions denominated in foreign currencies. At September 30, 2000, the Company had foreign currency forward agreements, maturing through June 2001, with an aggregate notional amount of approximately $25,000,000. 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 which are subject to various 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, (1) the need to adapt computer, accounting and other business systems and equipment to accommodate euro-denominated transactions, (2) the need to modify banking and cash management systems in order to be able to handle payments between customers and suppliers in legacy currencies and euros until 2002, (3) the requirement to change the base statutory and reporting currency of each subsidiary in the participating countries into euros during the transition period, (4) the foreign currency exposure changes resulting from the alignment 19 of the legacy currencies into the euro, and (5) the identification of material contracts and sales agreements whose contractual stated currency will need to be converted into euros. The Company believes that it will be euro compliant by January 1, 2002. The Company has implemented plans to accommodate euro-denominated transactions and to handle euro payments with third party customers and suppliers in the participating countries. The Company plans to meet the requirement to convert statutory and reporting currencies to the euro by acquiring and installing new financial software systems. If there are delays in such installation, the Company plans to pursue alternate means to convert statutory and reporting currencies to the euro by 2002. The Company expects that its foreign currency exposures 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, each of its business segments will be affected by the conversion process. However, the Company expects that the total impact of all strategic and operational issues related to the euro conversion and the cost of implementing its plans for the euro conversion will not have a material adverse impact on its consolidated financial condition or results of operations. Recently Issued Statements of Financial Accounting Standards In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133." In June 1999, the FASB issued 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, as amended, 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 potential impact, if any, of SFAS Nos. 138 and 133 on the Company's Consolidated Financial Statements is contingent on the financial market conditions at January 1, 2001 and actions taken by the Company regarding its derivative instruments through December 31, 2000. Based on current financial market conditions, the impact of implementing SFAS Nos. 138 and 133 is not expected to be material to the Company's Consolidated Financial Statements. 20 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 economic, business and market conditions in the geographic areas in which it conducts business, changes in the value of the euro and other foreign currencies against the U.S. dollar, the success of certain information systems projects, factors affecting the customers, 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 and integrating new businesses, the timing of capital expenditures, competitive factors, raw material availability and pricing, changes in the Company's relationship with customers and suppliers, litigation and claims (including environmental matters) involving the Company, changes in domestic or foreign laws or regulations, or difficulties related to the euro conversion. 21 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description -------------- ----------- 10.1 Contingent Stock Plan of the Company, as amended. 10.2 Form of Contingent Stock Purchase Agreement - Officer. 10.3 Form of Compensation Deferral Agreement. 27 Financial Data Schedule. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the third quarter of 2000. 22 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEALED AIR CORPORATION Date: November 13, 2000 By s/ Jeffrey S. Warren ----------------------------- Jeffrey S. Warren Controller (Authorized Executive Officer and Chief Accounting Officer) 23