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, 1998
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 83,424,661 shares of the registrant's common stock, par value $0.10
per share, and 35,941,851 shares of the registrant's convertible preferred
stock, par value $.10 per share, outstanding as of October 31, 1998.
PART I
FINANCIAL INFORMATION
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings (Loss)
For the Three and Nine Months Ended September 30, 1998 and 1997
(In thousands of dollars except share data)
(Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------ ------ ------ ------
Net sales $684,302 $461,835 $1,785,342 $1,347,739
Cost of sales 443,249 299,699 1,177,107 873,856
------- ------- --------- ---------
Gross profit 241,053 162,136 608,235 473,883
Marketing, administrative and
development expenses 130,994 102,677 349,531 273,324
Goodwill amortization 11,756 90 23,864 270
Restructuring and other charges 111,074 (1,167) 111,074 8,371
Operating profit (loss) (12,771) 60,536 123,766 191,918
Other income (expense):
Interest expense (18,968) (258) (39,692) (406)
Other, net (3,342) 958 (5,290) (1,809)
------- ------- --------- ---------
Other income (expense), net (22,310) 700 (44,982) (2,215)
------- ------- --------- ---------
Earnings (loss) before
income taxes (35,081) 61,236 78,784 189,703
Income taxes 19,022 25,210 70,270 78,158
------- ------- --------- ---------
Net earnings (loss) $(54,103) $ 36,026 $ 8,514 $ 111,545
======= ======= ========= =========
Less: Preferred dividends 17,999 -- 36,010 --
Excess of book value over repurchase
price of preferred stock 816 -- 816 --
Net earnings (loss) applicable
to common shareholders $(71,286) $ 36,026 $ (26,680) $ 111,545
======= ======= ========= =========
Earnings(loss)per common share
(see Note 4):
Basic $( .85) $ .45 $ ( .64) $ 1.44
======= ======= ========= =========
Diluted $( .85) $ .45 $ ( .64) $ 1.43
======= ======= ========= =========
Weighted average number of
common shares outstanding (000's):
Basic 83,637 39,890 69,504 39,998
======= ======= ========= =========
Diluted 83,637 40,063 69,504 40,171
======= ======= ========= =========
See accompanying notes to consolidated financial statements.
SEALED AIR CORPORATION
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(In thousands of dollars except share data)
(Unaudited)
September 30, December 31,
1998 1997
ASSETS ------------- ------------
------
Current assets:
Cash and cash equivalents $ 39,914 $ --
Notes and accounts receivable, less allowance
for doubtful accounts of $17,744 in 1998 and
$7,256 in 1997 438,440 272,194
Inventories 301,252 225,976
Other current assets 50,271 29,188
--------- ---------
Total current assets 829,877 527,358
--------- ---------
Property and equipment:
Land and buildings 403,062 320,099
Machinery and equipment 1,310,195 1,125,567
Other property and equipment 121,066 119,533
Construction in progress 78,037 187,797
--------- ---------
1,912,360 1,752,996
Less accumulated depreciation and amortization 793,883 712,844
--------- ---------
Property and equipment, net 1,118,477 1,040,152
--------- ---------
Goodwill, less accumulated amortization of
$23,946 in 1998 and $379 in 1997 1,870,445 13,433
Other assets 196,742 65,888
--------- ---------
$4,015,541 $1,646,831
========= =========
SEALED AIR CORPORATION
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 (Continued)
(In thousands of dollars except share data)
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
LIABILITIES, CONVERTIBLE PREFERRED STOCK & EQUITY
-------------------------------------------------
Current Liabilities:
Notes payable and current
installments of long-term debt $ 94,079 $ --
Accounts payable 170,216 114,907
Other accrued liabilities 237,016 68,710
Income taxes payable 41,368 --
--------- ---------
Total current liabilities 542,679 183,617
Long-term debt, less current
installments 1,038,653 --
Deferred income taxes 147,612 13,939
Other non-current liabilities 88,485 96,647
--------- ---------
Total liabilities 1,817,429 294,203
--------- ---------
Convertible preferred stock, $50.00 per share
redemption value. Authorized 50,000,000
shares, issued 36,021,851 shares in 1998,
including 80,000 shares in treasury 1,797,093 --
Equity:
Net assets -- 1,482,682
Accumulated translation adjustment -- (130,054)
Shareholders' equity:
Common stock, $.10 par value. Authorized
400,000,000 shares, issued 83,796,061
shares in 1998 8,379 --
Additional paid-in capital 624,168 --
Accumulated deficit (54,548) --
Accumulated translation adjustment (134,233) --
--------- ---------
443,766 --
--------- ---------
Less: Deferred compensation 32,480
Less: Cost of treasury common stock,
286,800 shares 10,267 --
--------- ---------
Total equity 401,019 1,352,628
--------- ---------
$4,015,541 $1,646,831
========= =========
See accompanying notes to consolidated financial statements.
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
(In thousands of dollars)
(Unaudited)
1998 1997
-------- --------
Cash Flows From Operating Activities:
Net earnings $ 8,514 $ 111,545
Adjustments to reconcile net earnings to
net cash provided by operating activities, net of
effect of businesses acquired:
Depreciation and amortization 139,277 78,701
Deferred taxes (5,501) 12,261
Restructuring and other charges 67,785 8,371
Loss on disposals of property and equipment 587 594
Cash provided (used) by changes in:
Notes and accounts receivable (23,629) (5,161)
Inventories 5,560 (2,355)
Other current assets 2,603 (2,910)
Other assets (12,146) (5,150)
Accounts payable 4,807 (20,170)
Income taxes payable 19,158 -
Other accrued liabilities 62,649 (19,998)
Other non-current liabilities 6,802 7,318
--------- ---------
Net cash provided by operating activities 276,466 163,046
--------- ---------
Cash Flows From Investing Activities:
Capital expenditures for property and equipment (55,866) (77,952)
Businesses acquired, net of cash acquired and
debt assumed 48,994 (13,709)
Proceeds from sales of property and equipment 2,421 260
--------- ---------
Net cash used in investing activities (4,451) (91,401)
--------- ---------
Cash Flows From Financing Activities:
Net advances to W. R. Grace & Co.-Conn. (14,062) (71,645)
Proceeds from Credit Agreements 1,258,807 --
Payment of debt, principally Credit
Agreements (187,067) --
Payment of contribution to New Grace (1,256,614) --
Net payments on notes payable (2,144) --
Purchase of Treasury Stock (10,195) --
Purchase of Company Preferred Stock (3,184) --
Dividends Paid (18,011) --
--------- ---------
Net cash used in financing
activities (232,470) (71,645)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents 369 --
--------- ---------
Cash and Cash Equivalents:
Increase during the period 39,914 --
Balance, beginning of period -- --
--------- ---------
Balance, end of period $ 39,914 $ --
========= =========
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997 (Continued)
(In thousands of dollars)
(Unaudited)
1998 1997
---- ----
Supplemental Non-Cash Items:
Issuance of 36,021,851 shares of convertible
preferred stock and 40,647,815 shares of common
stock in connection with the Recapitalization $1,805,000 $ --
========= ========
Net assets acquired in exchange for the
issuance of 42,624,246 shares of common stock in
connection with the Merger, net of cash balance
of $51,259 acquired $2,089,000 $ --
========= ========
See accompanying notes to consolidated financial statements.
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 1998 and 1997
(In thousands of dollars)
(Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
Net earnings (loss) $(54,103) $ 36,026 $ 8,514 $111,545
Other comprehensive income:
Foreign currency
translation adjustments 8,499 (16,490) (4,179) (39,872)
------ ------ ----- -------
Comprehensive income (loss) $(45,604) $ 19,536 $ 4,335 $ 71,673
====== ====== ===== =======
See accompanying notes to consolidated financial statements.
SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(Amounts in thousands, except share data)
(Unaudited)
(1) Reorganization and Merger
On March 31, 1998, the Company (formerly known as W. R. Grace & Co.) and
Sealed Air Corporation ("old Sealed Air"), completed a series of transactions
as a result of which:
(a) The specialty chemicals business of the Company was separated from
its packaging business, the packaging business was contributed to one
wholly owned subsidiary ("Cryovac"), and the specialty chemicals
business was contributed to another wholly owned subsidiary ("New
Grace"); the Company and Cryovac borrowed approximately $1,258,807
under two new credit agreements (the "Credit Agreements") (see Note
7) and transferred substantially all of those funds to New Grace; and
the Company distributed all of the outstanding shares of common stock
of New Grace to its shareholders. These transactions are referred to
below as the "Reorganization."
(b) The Company recapitalized its outstanding shares of common stock,
par value $0.01 per share ("Old Grace Common Stock"), into a new
common stock and Series A convertible preferred stock (the
"Recapitalization").
(c) A subsidiary of the Company merged into old Sealed Air (the
"Merger"), with old Sealed Air being the surviving corporation. As a
result of the Merger, old Sealed Air became a subsidiary of the
Company, and the Company was renamed Sealed Air Corporation.
(2) Basis of Presentation
The Merger has been accounted for as a purchase of old Sealed Air by the
Company as of March 31, 1998. After giving effect to the Merger, the
consolidated statements of earnings and cash flows reflect the consolidated
operating results from April 1, 1998 of the Company and its subsidiaries,
including Cryovac and old Sealed Air, while the operating results for the
first three months of 1998 include only the operating results of Cryovac.
The results for 1997 reflect only the operating results of Cryovac. The
consolidated balance sheet at December 31, 1997 reflects the financial
position of Cryovac only while the consolidated balance sheet at September
30, 1998 reflects the consolidated financial position of the Company and
its subsidiaries, including Cryovac and old Sealed Air, after giving effect
to the Merger.
In connection with the Merger, the Company issued 42,624,246 shares of
common stock at a value of $49.52 per share and incurred costs related to
the Merger of approximately $30,000 for a purchase price of approximately
$2,141,000 in exchange for the net assets of old Sealed Air. The fair
value of such net assets acquired by the Company included approximately
$181,000 of property and equipment, approximately $95,800 of working
capital (including a cash balance of approximately $51,259), and other
long-term assets and liabilities resulting in approximately $1,900,000 of
goodwill, which is being amortized over 40 years. See Note 8 for unaudited
pro forma financial information for the quarter and nine months ended
September 30, 1998 and 1997.
All significant intercompany transactions and balances have been eliminated
in consolidation. In management's opinion, all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
consolidated financial position and results of operations for the quarter
and nine months ended September 30, 1998 have been made.
(3) Equity
Prior to the Reorganization and the Merger, Cryovac's operations were
conducted by divisions or subsidiaries of the Company, and Cryovac did not
have a separately identifiable capital structure. Therefore, the balance
sheet as of December 31, 1997 reflects the net assets rather than
shareholders' equity of Cryovac at such date. In connection with the
Recapitalization, the Company recapitalized the outstanding shares of Old
Grace Common Stock into 40,647,815 shares of common stock and 36,021,851
shares of Series A convertible preferred stock (convertible into
approximately 31,900,000 shares of common stock), each with a par value of
$0.10 per share. In connection with the Merger, the Company issued
42,624,246 shares of common stock to the shareholders of old Sealed Air.
During the three months ended September 30, 1998, the Company repurchased
285,000 shares of common stock and 80,000 shares of convertible preferred
stock at an aggregate cost of $13,379 which shares are held in treasury.
The excess of the book value over cost amounting to $816 of the convertible
preferred stock has been credited to additional paid-in-capital.
The convertible 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, will become redeemable at the option of the Company beginning
March 31, 2001, subject to certain conditions, and will be subject to
mandatory redemption on March 31, 2018 at $50.00 per share, plus any
accrued and unpaid dividends. Because it is subject to mandatory
redemption, the convertible preferred stock is classified outside of the
shareholders' equity section of the balance sheet at its mandatory
redemption value of $50.00 per share.
On June 26, 1998 the Board of Directors declared a third quarter cash
dividend of $0.50 per share on the convertible preferred stock, which is
due and payable on October 1, 1998. The Company accrued this dividend in
the third quarter. The quarterly dividend paid on July 1, 1998 was accrued
during the second quarter of 1998.
The funds that the Company and Cryovac transferred to New Grace in
connection with the Reorganization included estimates of amounts that had
not been finalized as of the date of the Reorganization. The Company and
New Grace have agreed to adjust periodically such amounts as additional
facts become available and until the Company has paid or received final
agreed-upon amounts. Certain of such amounts may be recorded as
adjustments to shareholders' equity.
(4) Earnings Per Common Share
Prior to the Reorganization and the Recapitalization, Cryovac's operations
were conducted by divisions or subsidiaries of the Company, and therefore
Cryovac did not have a separately identifiable capital structure upon which
a calculation of earnings per common share could be based. In February
1998, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 98, "Computation of Earnings per Share" ("SAB 98").
SAB 98 revised prior SEC guidance concerning presentations of earnings per
common share information for companies whose historical financial
statements are not indicative of the ongoing entity. SAB 98 requires the
presentation of earnings per common share information for all periods for
which earnings statement information is presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
In calculating basic and diluted earnings per common share for the 1997
periods and the first nine months of 1998, retroactive recognition has been
given to the Recapitalization as if it had occurred on January 1, 1997.
Accordingly, net earnings have been reduced for each period by the
dividends that would have been payable on the convertible preferred stock
(as if such shares had been outstanding during each period) to arrive at
earnings available to common stockholders. The weighted average number of
outstanding common shares used to calculate basic earnings per common share
has been calculated on an equivalent share basis using the weighted average
number of shares of common stock outstanding for the first quarter of 1998
and the 1997 periods, adjusted to reflect the terms of the
Recapitalization. The weighted average number of common shares used to
calculate diluted earnings per common share also considers the exercise of
outstanding dilutive stock options. The convertible preferred stock is not
considered in the calculation of diluted earnings per common share because
the treatment of the convertible preferred stock as the common stock into
which it is convertible would be anti-dilutive (i.e., would increase
earnings (decrease loss) per common share).
The following represents the reconciliation of the basic and diluted
earnings (loss) per common share computations for the three and nine months
ended September 30, 1998 and 1997 (shares in thousands).
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Basic EPS:
Numerator
- ---------
Net earnings (loss) ($54,103) $36,026 $ 8,514 $111,545
Excess of book value over
repurchase price of
preferred stock 816 -- 816 --
Less: Preferred dividends 17,999 18,011 54,021 54,033
------ ------ ------ ------
Earnings (loss) applicable to
common shareholders $(71,286) $18,015 $(44,691) $57,512
====== ====== ====== ======
Denominator
- -----------
Weighted average common shares
outstanding - basic 83,637 39,890 69,504 39,998
====== ====== ====== ======
Basic earnings (loss) per
common share $(0.85) $0.45(a) $(0.64)(a) $1.44(a)
====== ====== ====== ======
Diluted EPS:
Numerator
- ---------
Earnings (loss) applicable to
common shareholders $(71,286) $18,015 $(44,691) $57,512
====== ====== ====== ======
Denominator
- -----------
Weighted average common shares
outstanding - basic 83,637 39,890 69,504 39,998
====== ====== ====== ======
Effect of assumed
exercise of options -- 173 -- 173
Weighted average common shares
outstanding - diluted 83,637 40,063 69,504 40,171
====== ====== ====== ======
Diluted earnings (loss) per
common share $ (0.85) $0.45(a) $(0.64)(a) $1.43(a)
====== ====== ====== ======
(a) Such earnings (loss) per common share amounts are not necessarily
indicative of the results that would have occurred had Cryovac been a
stand-alone company for the periods prior to March 31, 1998.
(5) Inventories
At September 30, 1998, the components of inventories by major classification
(raw materials, work in process and finished goods) are as follows:
September 30, December 31,
1998 1997
------------- ------------
Raw materials $ 70,189 $ 44,043
Work in process 59,355 54,532
Finished goods 189,336 142,282
------- -------
Subtotal 318,880 240,857
Less LIFO reserve 17,628 14,881
Total inventory $ 301,252 $ 225,976
======= =======
(6) Income Taxes
The Company's effective income tax rates were 46.0% and 41.2% for the third
quarters of 1998 and 1997, respectively, before giving effect to the tax
benefit associated with 1998 restructuring and other charges (note 9) and the
special income tax charge discussed below. Such rates were higher than the
statutory U.S. federal income tax rate primarily due to the non-deductibility
of goodwill amortization resulting from the Merger and state income taxes.
During the third quarter, the Company incurred a special income tax charge of
$26 million for the assumed repatriation to the U.S. of that portion of
accumulated earnings of its foreign subsidiaries that are no longer considered
permanently invested in their businesses.
All tax liabilities related to earnings of Cryovac prior to the Merger were
or will be paid by W. R. Grace & Co.-Conn. The liability for income
taxes payable reflected on the consolidated balance sheet at September 30,
1998 relates to accrued income taxes of old Sealed Air for the first nine
months of 1998 and of Cryovac for the period subsequent to April 1, 1998.
(7) Debt
At September 30, 1998, debt consisted primarily of borrowings that were
made in connection with the Reorganization under the Credit Agreements
described below and also includes certain other loans incurred by the
Company's subsidiaries. The balance sheet at December 31, 1997 does not
reflect any long-term debt or notes payable because, prior to the Merger,
the Company generally borrowed for its subsidiaries and divisions and did
not allocate such debt to those subsidiaries or divisions.
In connection with the Reorganization, the Company entered into the Credit
Agreements, which include a $1 billion 5-year revolving credit facility that
expires on March 30, 2003 and a $600 million 364-day revolving credit facility
that expires on March 29, 1999. The Credit Agreements provide that the
Company and certain of its subsidiaries, including Cryovac and old Sealed Air,
may borrow for various purposes, including the refinancing of existing debt,
the provision of working capital and other general corporate needs.
The Company's obligations under the Credit Agreements bear interest at
floating rates. The weighted average interest rate under the Credit
Agreements was approximately 6.2% at September 30, 1998. The Company has
entered into certain interest rate swap agreements that have the effect of
fixing the interest rates on a portion of such debt. The weighted average
interest rate at September 30, 1998 did not change as a result of these
derivative financial instruments.
The Credit Agreements provide for changes in borrowing margins based on
financial criteria and impose certain limitations on the operations of the
Company and certain of its subsidiaries. These limitations include
financial covenants relating to interest coverage and debt leverage as well
as certain restrictions on the incurrence of additional indebtedness, the
creation of liens, mergers and acquisitions, and certain dispositions of
property or assets. The Company was in compliance with these requirements
as of September 30, 1998.
(8) Pro Forma Information
The following table presents selected unaudited pro forma financial
information for the three and nine-month periods ended September 30, 1998 and
1997 that has been prepared as if the Reorganization, the Recapitalization and
the Merger had occurred on January 1, 1997. This information is not intended
to represent what the Company's actual results of operations would have been
for such periods.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
For the Three and Nine Months Ended September 30, 1998 and 1997
(In thousands of dollars except per share data)
(Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30(1) September 30(1)
1998 1997 1998(2) 1997
---- ---- ---- ----
Net sales $684,302 $667,799 $1,998,094 $1,967,529
Cost of sales 443,249 430,243 1,302,044 1,267,966
------- ------- --------- ---------
Gross profit 241,053 237,556 696,050 699,563
Marketing, administrative and
development expenses 130,994 125,712 379,640 368,688
Goodwill amortization 11,756 12,327 35,695 36,169
Restructuring and other charges 111,074 (1,167) 111,074 8,371
------- ------- --------- ---------
Operating profit (12,771) 100,684 169,641 286,335
Interest expense (18,968) (16,778) (61,448) (59,730)
Other income (expense), net (3,342) 958 (5,290) (1,809)
------- ------- --------- ---------
Earnings (loss) before income taxes (35,081) 84,864 102,903 224,796
Income taxes 21,717 38,515 85,904 103,667
------- ------- --------- ---------
Net earnings (loss) $(56,798) $ 46,349 $ 16,999 $ 121,129
======= ======= ========= =========
Preferred dividends 17,999 18,011 54,021 54,033
Excess of book value over repurchase
price of preferred stock 816 -- 816 --
Net earnings (loss) applicable to
common shareholders $(73,981) $ 28,338 $ (36,206) $ 67,096
======= ======= ========= =========
Earnings (loss) per common share (3):
Basic $ (0.88) $ 0.34 $ (0.43) $ 0.81
======= ======= ========= =========
Diluted $ (0.88) $ 0.34 $ (0.43) $ 0.80
======= ======= ========= =========
Weighted average number of
common shares outstanding (000):
Basic 83,637 83,272 83,504 83,272
======= ======= ========= =========
Diluted 83,637 83,445 83,504 83,445
======= ======= ========= =========
(1) Reflects pro forma adjustments made in combining the historical
results of old Sealed Air and Cryovac as a result of the Merger and its
related transactions for all periods presented. Such amounts include,
among others, incremental goodwill amortization of approximately $10.3
million and incremental interest expense of approximately $20.4 million in
the first quarter of 1998 and in each of the first three quarters of 1997.
(2) The data for nine months ended September 30, 1998 includes the
Company's actual operating results during the second and third quarters of
1998 but excludes a non-cash inventory charge of approximately $8 million
recorded in the second quarter resulting from the turnover of certain of
the Company's inventories previously stepped-up to fair value in connection
with the Merger.
(3) For purposes of calculating basic and diluted earnings (loss) per
common share, net earnings for the first quarter of 1998 and the 1997
periods have been reduced by the dividend ($18,011 per quarter) that would
have been payable on the Company's convertible preferred stock (as if such
shares had been outstanding during the periods) to arrive at earnings
available to common shareholders. The weighted average number of
outstanding common shares used to calculate basic earnings per common share
is calculated on an equivalent share basis using the shares of common stock
outstanding for the first quarter of 1998 and the 1997 periods, adjusted to
reflect the terms of the Recapitalization. The assumed conversion of the
convertible preferred stock is not considered in the calculation of diluted
earnings (loss) per common share as the effect would be anti-dilutive
(i.e., would increase earnings (decrease loss) per share).
(9) Restructuring and Other Charges
Restructuring During the third quarter of 1998, the Company began
implementation of a combined operating plan for the post-merger integration
of old Sealed Air and Cryovac. This worldwide program focused on stream-
lining processes and reducing general and administrative expenses and
factory administration costs. In connection with this program, the Company
recorded restructuring charges of $43,289 in the third quarter of 1998.
These charges primarily related to headcount reductions attributable to the
reorganization of operations worldwide as well as costs associated with
closing certain facilities throughout the world.
The components of the 1998 restructuring charges, spending and other
activity during the third quarter 1998, and the remaining balance as of
September 30, 1998 are as follows:
Employee
Termination Plant/Office Other
Benefits Closures Costs Total
----------- ------------ --------- ---------
Restructuring Provision $ 39,848 $ 2,291 $ 1,150 $ 43,289
Cash Payments ( 4,101) ( 526) ( -- ) ( 4,627)
--------- -------- ------- -------
Restructuring Reserve
Balance September 30, 1998 $ 35,747 $ 1,765 $ 1,150 $ 38,662
========= ======== ======= =======
The above stated reserve is reflected as part of other accrued liabilities
and it is anticipated that these cash payments will be substantially
completed by the end of 1999.
Employee termination benefits primarily represent severance pay and other
benefits associated with the elimination of approximately 750 positions
worldwide. Through September 30, 1998, approximately 290 positions had
been eliminated.
Other Charges During the third quarter of 1998, the Company determined
that, due to changed manufacturing capacity strategies as a result of the
Company's post-merger combined operating plan and certain economic
conditions in respect to regions and product lines in which the Company
operates, certain long-lived assets and related goodwill were impaired. As
a result, in the third quarter of 1998, the Company recorded non-cash
pretax charges of approximately $67,785. The amount of charges recorded
were based on various valuation techniques, including discounted cash flow,
replacement cost and net realizable value of assets to be disposed of, as
prescribed by SFAS No. 121. The components of the charges were as follows:
Goodwill . . . . . . . . . . . $ 13,008
Property and Equipment . . . . 51,720
Other Assets . . . . . . . . . 3,057
-------
Total . . . . . $ 67,785
=======
Management's Discussion and Analysis of Results of
Operations and Financial Condition
On March 31, 1998, the Company (formerly known as W. R. Grace & Co.)
and Sealed Air Corporation ("old Sealed Air") completed a series of
transactions as a result of which:
(a) the specialty chemicals business of the Company was separated from
its packaging business, the packaging business was contributed to one
wholly owned subsidiary ("Cryovac"), and the specialty chemicals
business was contributed to another wholly owned subsidiary ("New
Grace"); the Company and Cryovac borrowed approximately $1,258,807,000
under two new credit agreements (the "Credit Agreements") that are
discussed below and transferred substantially all of those funds to
New Grace; and the Company distributed all of the outstanding shares
of common stock of New Grace to its stockholders. These transactions
are referred to below as the "Reorganization."
(b) The Company recapitalized its outstanding shares of common stock,
par value $0.01 per share ("Old Grace Common Stock"), into a new
common stock and Series A convertible preferred stock (the
"Recapitalization").
(c) A subsidiary of the Company merged into old Sealed Air (the
"Merger"), with old Sealed Air being the surviving corporation. As a
result of the Merger, old Sealed Air became a subsidiary of the
Company, and the Company was renamed Sealed Air Corporation.
The Merger has been accounted for as a purchase of old Sealed Air by
the Company as of March 31, 1998. As a result, the operating results for
the second and third quarters of 1998 reflect the consolidated operating
results of the Company and its subsidiaries, including Cryovac and old
Sealed Air, from April 1, 1998 while the operating results for the first
three months of 1998 include only the operating results of Cryovac. The
1997 periods reflect only the operating results of Cryovac.
In order to facilitate review of the factors that affected the
Company's operating results for the third quarter and first nine months of
1998, the Company has included selected unaudited pro forma financial
information in Note 8 to the consolidated financial statements included in
this Form 10-Q. This information has been prepared as if the
Reorganization, the Recapitalization and the Merger had occurred on January
1, 1997. A discussion and analysis of that information is set forth below.
Such pro forma information is not intended to represent what the Company's
actual results of operations would have been for such periods had the
transactions actually occurred on January 1, 1997.
Restructuring and Other Charges
During the third quarter of 1998, the Company announced a
restructuring program that resulted in restructuring and other charges in
the third quarter of $137,074,000. These restructuring and other charges
arose out of a review that the Company made of its operations following the
Merger in order to develop a combined operating plan for Sealed Air and
Cryovac.
These charges include restructuring and other charges of $111,074,000
consisting of $67,785,000 of asset impairments, $39,848,000 of employee
termination costs, and $3,441,000 of exit costs related primarily to
facilities closures. The Company expects to incur approximately $43.2
million of cash expenditures in carrying out this restructuring program.
It is anticipated that these cash payments will be substantially completed
by the end of 1999. These cash costs include primarily severance and other
personnel related costs, costs of terminating leases and facilities
disposition costs. The remainder of these restructuring costs relates to
the impairment of long-lived assets that were identified during the
Company's review of its combined operations. Due to the closing of certain
of facilities and the restructuring of certain administrative and other
functions, the Company is eliminating approximately 750 positions from its
14,500 person workforce as part of the restructuring.
These charges also include in the third quarter a special income tax
charge of $26 million for the net tax effect of the assumed repatriation to
the U.S. of the accumulated earnings of the Company's foreign subsidiaries
that are not considered to be permanently invested in their businesses.
Results of Operations
Discussion and Analysis of Actual Operating Results
The Company's net sales increased 48% to $684,302,000 in the third
quarter of 1998 from $461,835,000 in the third quarter of 1997. For the
nine-month period, the Company's net sales increased 32% to $1,785,342,000
in 1998 from $1,347,739,000 in 1997. These increases in net sales as well
as most of the increases in cost of sales, marketing, administrative and
development expenses and other costs and expenses, including the
substantial increases in interest expense and goodwill amortization, that
the Company experienced in both the third quarter and first nine months of
1998 were due to the inclusion of old Sealed Air's operations in these
periods and adjustments arising from the Merger, the Reorganization and the
Recapitalization.
Gross profit increased as a percentage of net sales to 35.2% for the
third quarter of 1998 from 35.1% for the third quarter of 1997. For the
first nine months of 1998, gross profit declined as a percentage of net
sales to 34.1% from 35.2% in the 1997 period reflecting higher levels of
depreciation and inventory and equipment parts provisions, which were
partly offset by certain lower raw material costs. Gross profit for the
first nine months of 1998 includes a one-time inventory charge of
$8,000,000 that was recorded in the second quarter resulting from the
turnover of certain of the Company's inventories previously stepped-up to
fair value in connection with the Merger. Excluding this inventory charge,
gross profit for the first nine months of 1998 would have been 34.5% of
sales.
Included in marketing, administrative and development expenses are
certain corporate expenses that were allocated to Cryovac by W. R. Grace
& Co. prior to the Merger. These amounted to $18,044,000 in 1998 prior to
the Merger and $24,620,000 and $44,439,000 in the third quarter and first
nine months of 1997, respectively. Such allocated expenses ceased as a
result of the Merger. However, following the Merger, the Company has
incurred and expects that it will continue to incur marketing,
administrative and development expenses that will partially offset the
savings derived from the elimination of these allocated expenses.
Additionally, primarily as a result of the Merger, the Company recorded
goodwill amortization of $11,756,000 and $23,864,000 in the third quarter
and first nine months of 1998, respectively.
For the third quarter of 1998, the Company reported an operating loss
of $12,771,000, which was primarily the result of the restructuring and
other charges referred to above. Excluding restructuring and other
charges, operating profit would have increased from $59,369,000 in the
third quarter of 1997 to $98,303,000 in the third quarter of 1998 and for
the nine-month period from $200,289,000 in 1997 to $234,840,000 in 1998.
Such increases in both periods primarily reflect primarily the gross profit
on the added net sales of old Sealed Air from April 1, 1998, partially
offset by the higher level of goodwill amortization arising from the Merger
and the changes in costs and expenses discussed above.
The increase in other expense, net for both the third quarter and the
first nine months of 1998 was due primarily to interest expense on the debt
incurred in connection with the Reorganization.
The Company's income taxes for the third quarter and first nine months
of 1998 include a special income tax charge of $26 million for the net tax
effect of the assumed repatriation to the U.S. of the accumulated earnings
of the Company's foreign subsidiaries that are not considered to be
permanently invested in their businesses. The effective income tax rate
for the three months and nine months ended September 30, 1998 was 46.0% and
45.2%, respectively, excluding the special income tax charge and the
restructuring and other charges discussed above. The higher effective
income tax rates in 1998 resulted primarily from the non-deductibility of
goodwill amortization.
As a result of the restructuring and other charges and the special
income tax charge discussed above, the Company reported a net loss of
$54,103,000 for the third quarter of 1998 compared with net earnings of
$36,026,000 for the third quarter of 1997, and net earnings declined to
$8,514,000 for the first nine months of 1998 from $111,545,000 for the
first nine months of 1997.
For the third quarter and first nine months of 1998, the Company
reported a basic and diluted loss per common share of $(0.85) and $(0.64),
respectively. For the third quarter of 1997, the Company reported basic
and diluted earnings per share of $0.45, and for the first nine months of
1997 basic and diluted earnings per share were $1.44 and $1.43,
respectively.
Discussion and Analysis of Pro Forma Operating Results
The following discussion relates to the unaudited selected pro forma
financial information that appears in Note 8 to the consolidated financial
statements included in this Form 10-Q.
Net sales for the third quarter of 1998 increased 2% to $684,302,000
compared with pro forma net sales of $667,799,000 for the third quarter of
1997. Pro forma net sales for the first nine months of 1998 increased 2%
to $1,998,094,000 compared to $1,967,529,000 for the first nine months of
1997.
The Company's net sales were affected in the third quarter and first nine
months of 1998 by the continued weakness of foreign currencies compared with
the U.S. dollar, particularly in the Asia-Pacific region, continued sluggish
sales in Asia and the spill-over of the Asian economic crisis into other
markets, particularly Australia and New Zealand. Excluding the negative
effect of foreign currency translation, net sales would have increased on a
pro forma basis 6% and 5% compared to the third quarter and first nine months
of 1997, respectively, primarily due to higher unit volume. The Company's
third quarter 1998 sales improved over the second quarter principally as a
result of increased unit volume. The negative effect of foreign currency
translation partially offset the increase in unit volume in the third quarter
and nine-month periods. Price and product mix changes had a minor negative
effect on net sales in the 1998 periods compared with the 1997 periods.
Net sales from domestic operations increased approximately 5% on a pro
forma basis compared with both the third quarter and first nine months of
1997 primarily due to increased unit volume. Net sales from foreign
operations, which represented approximately 46% of the Company's total net
sales in both periods, were substantially unchanged compared with the third
quarter of 1997 and decreased 3% compared with the first nine months of
1997, primarily due to the negative effect of foreign currency translation
which more than offset increased unit volume.
Net sales of the Company's food and specialty packaging products,
which consist primarily of the Company's Cryovac[Registered] food packaging
products and Dri-Loc[Registered] absorbent pads, increased marginally for
both the third quarter and first nine months of 1998 compared with the 1997
periods. These increases were due primarily to increased unit volume
offset partially by the negative effect of foreign currency translation.
Excluding the effect of foreign currency translation, net sales of these
products would have increased on a pro forma basis by 6% and 5% for the
third quarter and first nine months of 1998, respectively.
Net sales of the Company's protective packaging and other packaging
products, which consist primarily of Cryovac[Registered] industrial and
consumer packaging, Instapak[Registered] chemicals and equipment, air
cellular and polyethylene foam surface protection and cushioning materials
and protective and durable mailers and bags, increased 6% on a pro forma
basis for the third quarter and 4% for the first nine months of 1998
primarily due to higher unit volume, which was partially offset in both
periods by the negative effect of foreign currency translation and, in the
nine month period, by changes in product mix. Excluding the effect of
foreign currency translation, net sales in this class of products would
have increased on a pro forma basis by 7% and 6% for the third quarter and
first nine months of 1998, respectively.
On a pro forma basis, gross profit as a percentage of net sales for
the third quarter of 1998 decreased to 35.2% from 35.6% in 1997 and for the
first nine months of 1998 decreased to 34.8% from 35.6% in 1997. These
decreases were primarily due to the higher levels of depreciation arising
from capital expenditures made in prior years and to inventory and
equipment parts provisions, partially offset by certain lower raw material
costs. Also the Company incurred certain manufacturing and product
introduction costs and changes in product mix that affected the first
quarter of 1998.
On a pro forma basis, marketing, administrative and development
expenses as a percentage of net sales increased modestly in the third
quarter and first nine months of 1998 compared with the respective 1997
periods primarily as a result of merger integration activities and
additional provisions for doubtful receivables in light of current business
conditions.
On a pro forma basis, before the 1998 and 1997 restructuring and other
charges, operating profit decreased by 1% for the third quarter and 5% for
the first nine months of 1998 compared with the comparable 1997 periods
primarily due to the pro forma changes in costs and expenses discussed
above.
On a pro forma basis, interest expense primarily reflects the interest
expense on the borrowings under the Credit Agreements entered into in
connection with the Reorganization. Other expense reflects primarily,
among other items, foreign exchange losses related to trade purchases. On
a pro forma basis and excluding the restructuring and special income tax
charges, the Company's effective income tax rates were 47.0% and 45.4% in
the third quarters of 1998 and 1997, respectively, and 47.6% and 46.1% for
the first nine months of 1998 and 1997, respectively. These rates are
higher than the Company's historical 1997 effective income tax rate and
statutory rate primarily due to the non-deductibility for tax purposes of
goodwill amortization resulting from the Merger. The Company expects that
this higher effective tax rate will continue in future periods.
As a result of the restructuring charges and special income tax charge,
the Company recorded on a pro forma basis a net loss of $56,798,000 for the
third quarter of 1998 compared to net earnings of $46,349,000 for the 1997
period. On a pro forma basis, net earnings declined from $121,129,000 for the
first nine months of 1997 to $16,999,000 for the 1998 period primarily due to
the restructuring and special income tax charges discussed above.
On a pro forma basis, basic and diluted earnings (loss) per common
share was $(0.88) for the third quarter of 1998 and $0.34 for the third
quarter of 1997. On a pro forma basis, basic and diluted earnings (loss)
per common share was $(.43) for the first nine months of 1998 compared to
basic and diluted earnings per common share of $0.81 and $0.80,
respectively, for the first nine months of 1997. The effect of the
conversion of the Company's outstanding convertible preferred stock is not
considered in the calculation of diluted earnings (loss) per common share
because it would be anti-dilutive (i.e., would increase earnings (decrease
loss) per share on a pro forma basis to $0.36 for the third quarter of 1998
compared with $0.40 for the third quarter of 1997 and to $1.00 for the
first nine months of 1998 compared with $1.09 for the 1997 period excluding
the effects of the restructuring and other charges, including the special
income tax charge).
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 the Credit Agreements mentioned above. Prior to the
consummation of the Merger, Cryovac participated in a centralized cash
management system, whereby cash received from operations was transferred
to, and disbursements were funded from, centralized corporate accounts. As
a result, any cash flows from operations that were in excess of Cryovac's
cash needs were transferred to these corporate accounts and used for other
corporate purposes. In the first nine months of 1997, $71,645,000 of net
cash was advanced by Cryovac to W. R. Grace & Co.-Conn. (which is now
part of New Grace) pursuant to these procedures. In connection with the
Reorganization, most of the Company's net cash at March 31, 1998 (other
than $51,259,000 of cash recorded on the balance sheet of old Sealed Air
immediately before the Merger) was transferred to New Grace.
Net cash provided by operating activities amounted to $276,466,000 and
$163,046,000 in the first nine months of 1998 and 1997, respectively. The
increase in operating cash flows in the first nine months of 1998 was
primarily due to the inclusion of the operations of old Sealed Air from
April 1, 1998, higher levels of depreciation and amortization and changes
in operating assets and liabilities.
Net cash used in investing activities amounted to $4,451,000 in the
first nine months of 1998. The cash acquired from old Sealed Air of
$51,259,000 at the time of the Merger offset most of the cash used for
capital expenditures and acquisitions. Cash used in investing activities
amounted to $91,401,000 in the first nine months of 1997 primarily due to
cash used for capital expenditures and acquisitions. Capital expenditures
were $55,866,000 for the first nine months of 1998 and $77,952,000 for the
1997 period. The decrease in 1998 reflects the completion in 1997 and
early 1998 of several major Cryovac manufacturing expansion programs. As
the assets of old Sealed Air were acquired in the Merger through the
issuance of common stock, the consolidated statement of cash flows for the
first nine months of 1998 does not reflect the changes in the related
balance sheet items caused by the addition of old Sealed Air's assets and
liabilities, except for old Sealed Air's cash balance. The acquisition of
such net assets is reflected as supplementary information to the
consolidated statement of cash flows.
Net cash used in financing activities amounted to $232,470,000 in the
first nine months of 1998 primarily due to the repayment of debt,
principally relating to the Credit Agreements. Cash flows from financing
activities in 1998 also reflected the proceeds from borrowings under the
Credit Agreements, offset by the contribution of funds to New Grace in
connection with the Reorganization. In the first nine months of 1997,
$71,645,000 of net cash was advanced by the Company to W. R. Grace & Co.
- - Conn. pursuant to the cash management procedures discussed above.
On June 26, 1998 the Company received approval from its Board of
Directors to purchase up to 5% of the outstanding shares of the Company's
Common Stock and Series A Convertible Preferred Stock from time to time,
subject to market conditions. Through September 30, 1998 the Company
purchased 285,000 shares of Common Stock for approximately $10,195,000 and
80,000 shares of Series A Preferred Stock for approximately $3,184,000. An
additional 1,800 shares of the Company's Common Stock was reacquired as a
result of forfeitures pursuant to the terms of the Company's contingent
stock Plan.
At September 30, 1998, the Company had working capital of
$287,198,000, or 7% of total assets, compared to working capital of
$343,741,000, or 21% of total assets, at December 31, 1997. Working
capital declined primarily due to the increase in notes payable and current
installments of long-term debt of $94,079,000 arising out of borrowings
made under the Credit Agreements, partially offset by the acquired working
capital of old Sealed Air and an increase in accrued liabilities of
$38,662,000 for costs associated with the Company's restructuring program
(See Note 9 to Notes to Consolidated Financial Statements).
The Company's ratio of current assets to current liabilities (current
ratio) was 1.5 at September 30, 1998 and 2.9 at December 31, 1997. The
Company's ratio of current assets less inventory to current liabilities
(quick ratio) was 1.0 at September 30, 1998 and 1.6 at December 31, 1997.
The decreases in these ratios in 1998 resulted primarily from the decreases
in working capital discussed above.
Prior to the Merger, Cryovac had no capital structure since it was
operated by divisions or subsidiaries of the Company. In addition, there
was no allocation of the Company's borrowings and related interest expense,
except for interest capitalized as a component of Cryovac's properties and
equipment. Therefore, the financial position of the Company at December
31, 1997 was not indicative of the financial position that would have
existed if Cryovac had been an independent stand-alone entity at that time.
At June 30, 1998, the consolidated balance sheet reflects the consolidated
financial position of the Company, as adjusted for the Reorganization,
Recapitalization and Merger.
In connection with the Reorganization, the Company entered into the
Credit Agreements, one of which is a $1 billion 5-year revolving credit
facility that expires on March 30, 2003 and the second of which is a $600
million 364-day revolving credit facility that expires on March 29, 1999.
The Credit Agreements provide that the Company and certain of its
subsidiaries, including Cryovac and old Sealed Air, may borrow for various
purposes, including the refinancing of existing debt, the provision of
working capital and for other general corporate needs. Long term debt,
less current installments outstanding at September 30, 1998 includes
primarily borrowings under the Credit Agreements made in connection with
the Reorganization, less prepayments made through September 30, 1998.
The Company's obligations under the Credit Agreements bear interest at
floating rates. The weighted average interest rate under the Credit
Agreements was approximately 6.2% at September 30, 1998. The Company has
entered into certain interest rate swap agreements that have the effect of
fixing the interest rates on a portion of such debt. The weighted average
interest rate at September 30, 1998 did not change as a result of these
swap agreements.
The Credit Agreements provide for changes in borrowing margins based
on financial criteria and impose certain limitations on the operations of
the Company and certain of its subsidiaries. These limitations include
financial covenants relating to interest coverage and debt leverage as well
as certain restrictions on the incurrence of additional indebtedness, the
creation of liens, mergers and acquisitions, and certain dispositions of
property or assets. The Company was in compliance with these requirements
as of September 30, 1998.
At September 30, 1998, the Company had available lines of credit,
including those available under the Credit Agreements, of approximately
$1,739,000,000 of which approximately $629,000,000 were unused.
Since Cryovac did not have a separately identifiable capital structure
before the Merger, the balance sheet as of December 31, 1997 reflects the
net assets of Cryovac at such date rather than shareholders' equity. In
connection with the Recapitalization, the Company recapitalized the
outstanding shares of Old Grace Common Stock into outstanding shares of a
new common stock and Series A convertible preferred stock. In connection
with the Merger, the Company issued 42,624,246 shares of common stock to
the shareholders of old Sealed Air.
The convertible preferred stock votes with the common stock on an as-
converted basis, pays a cash dividend, as declared by the Board, at an
annual rate of $2.00 per share, payable quarterly in arrears, will be
redeemable at the option of the Company beginning March 31, 2001, subject
to certain conditions, and will be subject to mandatory redemption on March
31, 2018 at $50.00 per share, plus accrued and unpaid dividends. Because
it is subject to mandatory redemption, the convertible preferred stock is
classified outside of the shareholders' equity section of the balance sheet
at the mandatory redemption value of $50.00 per share.
The Company's shareholders' equity was $401,019,000 at September 30,
1998. The decrease in total equity (shareholders' equity of $401,019,000
at September 30, 1998 and net assets of $1,352,628,000 at December 31,
1997) resulted primarily from the cash transferred to New Grace in
connection with the Reorganization and the issuance and classification of
the convertible preferred stock outside of shareholders' equity, partially
offset by the common stock issued in connection with the Merger.
Other Matters
Environmental Matters
The Company is subject to loss contingencies resulting from
environmental laws and regulations, and it accrues for anticipated costs
associated with investigatory and remediation efforts when an assessment
has indicated that a loss is probable and can be reasonably estimated.
These accruals do not take into account any discounting for the time value
of money and are not reduced by potential insurance recoveries, if any.
Environmental liabilities are reassessed whenever circumstances become
better defined and/or remediation efforts and their costs can be better
estimated. These liabilities are evaluated periodically based on available
information, including the progress of remedial investigation at each site,
the current status of discussions with regulatory authorities regarding the
methods and extent of remediation and the apportionment of costs among
potentially responsible parties. As some of these issues are decided (the
outcomes of which are subject to uncertainties) and/or new sites are
assessed and costs can be reasonably estimated, the Company adjusts the
recorded accruals, as necessary. However, the Company believes that it has
adequately reserved for all probable and estimable environmental exposures.
Year 2000 Computer System Compliance
The Company is addressing various Year 2000 issues. Year 2000 issues
are the result of computer programs that utilize only the last two digits
of a year to define a particular year rather than the complete four digit
year. As a result, certain computer programs may not process dates that
fall into the year 2000 or subsequent years properly. Year 2000 issues
affect both computer-based information systems and also systems with
embedded microcontrollers or microcomputers.
In addressing Year 2000 issues, the Company has considered the
following four areas:(a) computer-based information technology systems, (b)
other systems not directly involving information technology, including
embedded systems, (c) packaging and dispensing equipment used by the
Company's customers, and (d) Year 2000 readiness of the Company's key
suppliers and customers. The Company's action plan for dealing with these
issues consists of the following four phases:(1) identifying the
potentially affected items, (2) assessing the effect of Year 2000 issues on
these items, (3) remediating the deficiencies of these items with updates,
repairs or replacements, and (4) testing these items.
State of Readiness
The Company has examined the hardware and software of its computer-based
information technology systems, including mainline systems, personal computers
and telephone systems. The Company has also examined other devices
incorporating electronic microchips that might fail as a result of the Year
2000 issue. These include security and control systems in Company facilities
and programmable logic controllers and microcomputers embedded into production
and other equipment in the Company's plants and warehouses. The Company has
substantially finished the identification and assessment phases of its Year
2000 action plan in these two areas. Also, the Company has completed
approximately 75% of the remediation and testing phases of the plan for these
areas. The Company expects to complete its work on Year 2000 issues for
computer-based information technology systems by June 30, 1999 and for
non-information technology systems by September 30, 1999.
The Company has examined certain packaging and dispensing equipment
that the Company sold or leased to customers in order to identify Year 2000
issues. This equipment often incorporates microprocessors as controllers.
The Company believes that no further remediation is necessary for these
devices.
The Company has conducted an initial Year 2000 issue survey of key
suppliers, particularly single-source suppliers of important raw materials,
and initial responses have been received. Remedial action will be
requested as required. The Company expects that all survey activity
regarding suppliers will be completed by March 31, 1999. In addition, the
Company intends to contact certain customers by March 31, 1999 regarding
their overall Year 2000 readiness.
Costs
The Company estimates that the total costs to address the Company's
Year 2000 issues will be in the neighborhood of $10 million. No
significant information technology projects have been deferred by the
Company due to Year 2000 issues.
Risks
While the Company believes it is taking all steps reasonably necessary
to assure its ability to conduct business and to safeguard its assets
during the period affected by Year 2000 issues, risks cannot in every case
be eliminated. Utilities and other sole-source suppliers may disrupt one
or more of the Company's operations if they are unable to conduct business
during this period.
If the Company is unable to complete its remediation efforts
satisfactorily and on a timely basis, substantial business interruptions
may occur in its operations. These could include disruptions to plant
operations, logistics, invoicing, collections and vendor payments. The
Company's efforts described herein are expected to reduce the Company's
uncertainty about Year 2000 issues. The Company believes that its efforts
to date in this regard have contributed to reduce the risk of significant
interruptions of its operations, and it intends to further these efforts as
described herein.
Contingency Plans
The Company has certain contingency measures in place, including in
some cases dual utility services, backup power equipment, backup data
centers, manual backup procedures and alternate suppliers. The Company
does not have a formal Year 2000 contingency plan in place as of yet.
However, the Company intends to continue to evaluate additional protection
measures. The Company expects to define these additional measures during
the first half of 1999 in a Company-wide contingency plan and to implement
them on a timely basis.
Euro
On January 1, 1999, eleven of the fifteen members countries of the
European Union (the "participating countries") are scheduled to establish
fixed conversion rates between their existing currencies ("legacy
currencies") and one common non-cash currency - the euro. The euro will
then trade on currency exchanges and may be used in business transactions.
Beginning in 2002, the participating countries will issue new euro-
denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation. Additionally, by this date all companies
operating in these countries must have restated their statutory accounting
data in euros as the base currency.
The Company's operating subsidiaries that will be affected by the euro
conversion have 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/or
euros during the 3-year transition period, (3) the requirement to change
the base statutory and reporting currency of each local subsidiary
corporation into euros during the transition period,(4) the foreign
currency exposure changes resulting from the alignment of the legacy
currencies into a single currency, and (5) the need to modify material
contracts and sales agreements that will have the contractual stated
currency changing to euros on or prior to January 1, 2002. The Company
believes that the euro conversion will not have a material adverse impact
on its financial condition or results of operations.
Recently Issued Statements of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). This
Statement, which becomes effective for the Company beginning January 1,
2000, establishes accounting and operating standards for hedging activities
and derivative instruments, including certain derivative instruments
embedded in other contracts. The Company is reviewing the potential
impact, if any, of SFAS 133 on its financial statements.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Post-retirement Benefits" ("SFAS 132"), which became
effective for the Company beginning January 1, 1998. SFAS 132 requires
additional information about changes in benefit obligations and the fair
value of plan assets during the period, while standardizing the disclosure
requirements for pensions and other post-retirement benefits. The Company will
include the appropriate disclosures in its Form 10-K for the year ended
December 31, 1998.
In June 1997, the Financial Accounting Standards Board released
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and
Statement No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). Both statements became effective for the
Company beginning January 1, 1998. These statements require disclosure of
certain components of changes in equity and certain information about
operating segments and geographic areas of operation, respectively. The
Company adopted SFAS 130 in the first quarter of 1998 (see "Consolidated
Statements of Comprehensive Income"). The Company has completed its
evaluation of the disclosure requirements of SFAS 131 and intends to
include such disclosures in its Form 10-K for the year ended December 31,
1998. The Company believes that it conducts substantially all of its
operations in two major segments, Food and Specialty Packaging and
Protective Packaging. SFAS 130 and SFAS 131 are disclosure statements and
will not affect the results of operations or financial position of the
Company.
Forward-Looking Statements
Certain statements made by the Company in this report 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 the
continuing effect of the Asian economic crisis on business and market
conditions in Asia and in other geographic areas around the world, changes
in the value of foreign currencies against the U.S. dollar, the ability of
the Company to implement integration and restructuring activities relating
to the merger of Sealed Air and Cryovac and the success of those efforts,
general economic, business and market conditions, conditions in the
industries and markets that use the Company's packaging materials and other
products, the development and success of new products, the Company's
success in entering new markets, competitive factors, raw material
availability and pricing, changes in the Company's relationship with
customers and suppliers, future litigation and claims (including
environmental matters) involving the Company, changes in domestic or
foreign laws or regulations, or difficulties related to the Year 2000 issue
or the Euro conversion.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1998.
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, 1998 By /s/ Jeffrey S. Warren
------------------------------
Jeffrey S. Warren
Controller
(Authorized Executive Officer
and Chief Accounting Officer)
5
0001012100
SEALED AIR CORPORATION
9-MOS
DEC-31-1998
SEP-30-1998
39,914,000
0
456,184,000
17,744,000
301,252,000
829,877,000
1,912,360,000
793,883,000
4,015,541,000
542,679,000
0
1,797,093,000
0
8,379,000
392,640,000
4,015,541,000
1,785,342,000
1,785,342,000
1,177,107,000
1,177,107,000
489,759,000
0
39,692,000
78,784,000
70,270,000
8,514,000
0
0
0
8,514,000
(.64)
(.64)
