Sealed Air: 10-Q Report SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________ FORM 10-Q (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 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 1-7834 SEALED AIR CORPORATION (Exact name of registrant as specified in its charter) Delaware 22-1682767 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) Park 80 East 07663-5291 Saddle Brook, New Jersey (Zip Code) (Address of Principal 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 42,593,346 shares of the registrant's common stock, par value $0.01 per share, outstanding as of April 30, 1997. PART I FINANCIAL INFORMATION SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings For the Three Months Ended March 31, 1997 and 1996 (In thousands of dollars except per share data) (Unaudited) 1997 1996 Net sales $202,859 $185,930 Cost of sales 127,425 117,189 Gross profit 75,434 68,741 Marketing, administrative and development expenses 41,750 38,855 Operating profit 33,684 29,886 Other income (expense): Interest income 188 250 Interest expense (2,196) (3,511) Other, net 414 (361) Other income (expense), net (1,594) (3,622) Earnings before income taxes 32,090 26,264 Income taxes 12,649 10,374 Net earnings $ 19,441 $ 15,890 Net earnings per common share $ 0.46 $ 0.37 Weighted average number of shares outstanding (000) 42,593 42,416 See accompanying notes to consolidated financial statements. 2 SEALED AIR CORPORATION Consolidated Balance Sheets March 31, 1997 and December 31, 1996 (In thousands of dollars except share data) (Unaudited) March 31, December 31, 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 6,596 $ 2,985 Accounts receivable, less allowance for doubtful accounts of $5,699 in 1997 and $5,623 in 1996 127,908 124,204 Other receivables 7,863 8,258 Inventories 59,275 57,231 Prepaid expenses 2,246 1,095 Deferred taxes 12,899 13,193 Total current assets 216,787 206,966 Property and equipment: Land and buildings 80,409 81,629 Machinery and equipment 197,174 199,275 Leasehold improvements 7,944 8,409 Furniture and fixtures 11,563 12,029 Construction in progress 8,520 6,139 305,610 307,481 Less accumulated depreciation and amortization 135,593 132,919 Property and equipment, net 170,017 174,562 Patents, patent applications and rights, less accumulated amortization of $15,481 in 1997 and $15,139 in 1996 11,229 11,998 Excess of cost over fair value of net assets acquired, less accumulated amortization of $14,362 in 1997 and $12,966 in 1996 44,905 47,840 Other assets 24,487 25,753 $467,425 $467,119 See accompanying notes to consolidated financial statements. 3 SEALED AIR CORPORATION Consolidated Balance Sheets March 31, 1997 and December 31, 1996 (Continued) (In thousands of dollars except share data) (Unaudited) March 31, December 31, 1997 1996 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable and current installments of long-term debt $ 19,182 $ 15,565 Accounts payable 45,093 46,934 Accrued interest 834 323 Other accrued liabilities 61,812 69,526 Income taxes payable 21,809 15,708 Total current liabilities 148,730 148,056 Long-term debt, less current installments 79,269 99,900 Deferred income taxes 19,392 19,863 Other non-current liabilities 13,937 12,651 Total liabilities 261,328 280,470 Shareholders' equity: Common stock, $.01 par value. Authorized 60,000,000 shares, issued 42,774,404 shares in 1997 and 42,747,704 shares in 1996 428 427 Additional paid-in capital 170,724 167,801 Retained earnings 35,462 16,021 Accumulated translation adjustment 4,633 8,615 211,247 192,864 Less deferred compensation and cost ($182 in 1997 and $227 in 1996) of 181,058 shares in 1997 and 226,758 in 1996 of common stock held as treasury stock 5,150 6,215 Shareholders' equity 206,097 186,649 $467,425 $467,119 See accompanying notes to consolidated financial statements. 4 SEALED AIR CORPORATION AND SUBSIDIARIES Consolidated Statements (abbreviated) of Cash Flows For the Three Months Ended March 31, 1997 and 1996 (In thousands of dollars) (Unaudited) 1997 1996 Cash Flows From Operating Activities: Net earnings $ 19,441 $ 15,890 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 11,160 9,147 Deferred taxes (129) 191 Net loss (gain) on disposals of fixed assets 33 (84) Other, net (1,748) (1,770) Cash provided (used) by changes in: Receivables (3,275) (2,173) Inventories (2,044) 981 Prepaid expenses (1,151) (930) Accounts payable (1,863) (278) Accrued interest 511 (24) Other accrued liabilities (4,422) (2,718) Income taxes payable 6,101 5,387 Net cash provided by operating activities 22,614 23,619 Cash Flows From Investing Activities: Capital expenditures for property and equipment (4,942) (2,858) Proceeds from sales of property and equipment 19 495 Net cash used in investing activities (4,923) (2,363) Cash Flows From Financing Activities: Proceeds from long-term debt 2,550 11,334 Payments of long-term debt (20,214) (27,905) Net proceeds (payments) on notes payable 3,754 (507) Net cash used by financing activities (13,910) (17,078) Effect of exchange rate changes on cash and cash equivalents (170) (82) Cash and Cash Equivalents: Increase during the period 3,611 4,096 Balance, beginning of period 2,985 7,661 Balance, end of period $ 6,596 $ 11,757 Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest $ 1,663 $ 3,466 Income taxes $ 6,548 $ 4,987 See accompanying notes to consolidated financial statements. 5 SEALED AIR CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1997 and 1996 (Unaudited) (1) Principles 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 financial position and results of operations for the quarter ended March 31, 1997 have been made. Where appropriate, financial statement amounts for prior periods have been reclassified to conform with their 1997 presentation. (2) Income Taxes An explanation of the difference between the effective income tax rate and statutory U.S. federal income tax rate expressed as a percentage of earnings before income taxes for the three months ended March 31, 1997 and 1996 follows: 1997 1996 Statutory U.S. federal income tax rate 35.0% 35.0% Provision for foreign withholding taxes and additional U.S. taxes on the accumulated earnings of foreign subsidiaries 0.3 0.6 Tax effect of U.S. expenses not subject to tax benefit 0.8 0.4 State income taxes, net of U.S. federal income tax benefit 4.0 4.0 Taxes on foreign earnings at other than the statutory U.S. federal income tax rate 0.1 (1.4) Other miscellaneous items (0.8) 0.9 Effective income tax rate 39.4% 39.5% (3) Earnings Per Share Earnings per common share are computed on the basis of the weighted average number of shares of common stock outstanding during the year, including shares issued for contingent stock awards and non-cash compensation. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," ("FASB 128") which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. The impact of FASB 128 on the calculation of earnings per share amounts is not expected to be material. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations The Company's net sales increased 9% in the first quarter of 1997 compared with the first quarter of 1996. The increase primarily reflects increased unit volume and added net sales from businesses acquired during 1996. Foreign currency translation had a modestly negative effect on the increase in net sales. Net sales from domestic operations increased 8% compared with the first quarter of 1996 primarily due to increased unit volume. Net sales from foreign operations increased 11% compared with the first quarter of 1996 primarily due to added net sales from businesses acquired during 1996 and increased unit volume. Net sales of engineered products, primarily Instapak(R) products and specialty polyethylene foams, increased 9% compared with the first quarter of 1996 primarily due to increased unit volume of these products. Net sales of surface protection and other cushioning products, primarily air cellular products, other polyethylene foam products and protective and durable mailers and bags, increased 12% compared with the first quarter of 1996 primarily due to added net sales from businesses acquired during 1996 and increased unit volume. Net sales of food packaging products decreased 4% compared with the first quarter of 1996 primarily due to the absence in the 1997 period of the net sales of certain food packaging products that were transferred during 1996 to a small unconsolidated joint venture in Australia. Excluding the effect of such joint venture, net sales of food packaging products increased modestly as higher unit volume was partially offset by lower average selling prices. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION Cost of sales increased 9% and marketing, administrative and development expenses increased 7% compared with the first quarter of 1996 primarily reflecting the Company's higher level of net sales. Operating profit increased 13% in the first quarter of 1997 primarily reflecting the Company's higher level of net sales and the changes in costs and expenses mentioned above. Interest expense, which is the principal component of other income (expense), net, decreased to $2,196,000 in the first quarter of 1997 from $3,511,000 in the first quarter of 1996 primarily reflecting the decrease in the Company's outstanding indebtedness. The Company's effective income tax rate was 39.4% in the first quarter of 1997 and 39.5% in the first quarter of 1996. Net earnings increased 22% to $19,441,000, or $0.46 per share, compared with net earnings of $15,890,000, or $0.37 per share, for the first quarter of 1996 primarily reflecting the Company's higher level of operating profit and lower interest expense. 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. The Company has met, and currently expects that it will continue to meet, substantially all of its working capital and capital expenditure requirements as well as its debt service requirements with funds provided by operations and borrowings made under its available lines of credit or otherwise. Net cash provided by operating activities amounted to $22,614,000 in the first quarter of 1997 compared with $23,619,000 for the 1996 period. In the 1997 period, changes in operating assets and liabilities partially offset the Company's increased net earnings and higher level of depreciation and amortization. The changes in operating assets and 8 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION liabilities were primarily due to the timing of cash receipts and payments and the Company's higher level of operations. Net cash used in investing activities increased to $4,923,000 in the first quarter of 1997 compared with $2,363,000 for the first quarter of 1996 primarily due to the timing of capital expenditures. Net cash used in financing activities amounted to $13,910,000 in the first quarter of 1997 compared with $17,078,000 in the 1996 period, primarily reflecting the net repayment of long-term debt. At March 31, 1997, the Company had working capital of $68,057,000, or 15% of total assets, compared with $58,910,000, or 13% of total assets, at December 31, 1996. The increase in working capital was due primarily to an increase in total current assets. Such increase was due primarily to increases in cash and accounts receivable. Current liabilities increased modestly from December 31, 1996 to March 31, 1997 due primarily to increases in notes payable and current installments of long-term debt and increases in income taxes payable, offset by decreases in accrued liabilities and accounts payable. These changes in working capital balances were primarily due to the timing of cash receipts and payments and the timing of working capital borrowings. The decrease in accrued liabilities was due primarily to the payment during the first quarter of 1997 of the Company's annual profit-sharing contribution. The Company's ratio of current assets to current liabilities (current ratio) was 1.5 at March 31, 1997 and 1.4 at December 31, 1996. The Company's ratio of current assets less inventory to current liabilities (quick ratio) was 1.1 at March 31, 1997 and 1.0 at December 31, 1996. The increase in these ratios is due primarily to the increase in working capital discussed above. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION Long-term debt, less current installments, decreased to $79,269,000 at March 31, 1997 from $99,900,000 at December 31, 1996 primarily due to repayments made in the first quarter of 1997. At March 31, 1997, the Company's available lines of credit amounted to approximately $252,462,000 of which approximately $203,236,000 were unused. Such lines of credit permit the Company and certain of its subsidiaries to make borrowings for working capital and other corporate purposes. The Company's principal credit facility is an unsecured $200 million revolving credit facility with Bankers Trust Company, as agent for a syndicate of banks (the "BT Credit Agreement"), that expires on June 30, 2001. The Company's obligations under the BT Credit Agreement and certain other loans and lines of credit bear interest at floating rates. The Company has entered into certain derivative financial instruments, including interest rate swap, interest rate collar and interest rate and currency swap agreements that have the effect of fixing or limiting the Company's exposure to fluctuations in interest rates on a portion of the Company's floating rate debt. The BT Credit Agreement provides for changes in borrowing margins based on financial criteria and imposes certain limitations on the operations of the Company and its subsidiaries. These limitations include restrictions on the incurrence of additional indebtedness, the creation of liens, the making of investments, dispositions of property or assets, certain transactions with affiliates, and the payment by the Company of cash dividends to its stockholders, as well as financial covenants relating to interest coverage and debt leverage. The Company was in compliance with these requirements as of March 31, 1997. The Company's shareholders' equity increased to $206,097,000 at March 31, 1997 from $186,649,000 at December 31, 1996 primarily as a result of the Company's net earnings for the first quarter of 1997 and the value of shares of common stock issued during the first quarter of 1997 for non- cash compensation. 10 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 March 31,1997. 11 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: May 2, 1997 By s/Horst Tebbe Horst Tebbe Vice President-Finance & Chief Financial Officer (Authorized Executive Officer and Principal Financial Officer)