10-K 1 a07-4820_110k.htm 10-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

(Mark One)

x                               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

or

o                                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                  


Commission file number 1-12139


SEALED AIR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

 

65-0654331

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

200 Riverfront Boulevard,
Elmwood Park, New Jersey

 

07407-1033

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, including Area Code: (201) 791-7600


Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.10 per share

 

New York Stock Exchange

 

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of June 30, 2006, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $4,166,000,000, based on the closing sale price as reported on the New York Stock Exchange.

There were 80,672,810 shares of the registrant’s common stock, par value $0.10 per share, issued and outstanding as of January 31, 2007.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s definitive proxy statement for its 2007 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

 




SEALED AIR CORPORATION AND SUBSIDIARIES

Table Of Contents

Part I

 

 

 

 

 

 

 

 

 

Item 1.

 

Business

 

3

 

 

 

Item 1A.

 

Risk Factors

 

8

 

 

 

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

12

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

13

 

 

 

Item 2.

 

Properties

 

13

 

 

 

Item 3.

 

Legal Proceedings

 

14

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

14

 

 

 

 

 

Executive Officers of the Registrant

 

14

 

Part II

 

 

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

17

 

 

 

Item 6.

 

Selected Financial Data

 

20

 

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

46

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

48

 

 

 

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

101

 

 

 

Item 9A.

 

Controls and Procedures

 

101

 

 

 

Item 9B.

 

Other Information

 

104

 

Part III

 

 

 

 

 

 

 

 

 

Item 10.

 

Directors and Executive Officers of the Registrant

 

104

 

 

 

Item 11.

 

Executive Compensation

 

105

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

105

 

 

 

Item 13.

 

Certain Relationships and Related Transactions

 

106

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

106

 

Part IV

 

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

106

 

Signatures

 

111

 

 

Exhibit 21

 

Subsidiaries of the Company

 

Exhibit 23

 

Consent of Independent Registered Public Accounting Firm (not included in printed version, but available upon request)

 

Exhibit 31.1

 

Certification of William V. Hickey, Chief Executive Officer of the Company, pursuant to Rule 13a-14(a), dated February 28, 2007.

 

Exhibit 31.2

 

Certification of David H. Kelsey, Chief Financial Officer of the Company, pursuant to Rule 13a-14(a), dated February 28, 2007.

 

Exhibit 32

 

Certification of William V. Hickey, Chief Executive Officer of the Company, and David H. Kelsey, Chief Financial Officer of the Company pursuant to 18 U.S.C. § 1350, dated February 28, 2007.

 

 

2




PART I

Item 1.                        Business

Sealed Air Corporation (the “Company”), operating through its subsidiaries, manufactures and sells a wide range of food and protective packaging products.

The Company conducts substantially all of its business through two direct wholly-owned subsidiaries, Cryovac, Inc. and Sealed Air Corporation (US). These two subsidiaries directly and indirectly own substantially all of the assets of the business and conduct operations themselves and through subsidiaries around the globe. References herein to the Company include, collectively, the Company and its subsidiaries, except where the context indicates otherwise.

Segments

The Company operates in two reportable business segments: (i) Food Packaging and (ii) Protective Packaging, described more fully below. Information concerning the Company’s reportable segments, including net sales, operating profit and assets, appears in Note 3 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, which information is incorporated herein by reference.

Food Packaging Products

The Company’s principal food packaging products are flexible materials, associated packaging equipment systems, rigid containers and absorbent pads. These products package a broad range of perishable foods and are marketed globally. The Company primarily sells the products in this segment to food processors, distributors, supermarket retailers and food service businesses.

Flexible Materials and Related Systems

The Company produces a variety of high-performance proprietary flexible vacuum shrink products, including shrink bags and shrink films, as well as non-shrink structures and associated packaging equipment systems, marketed and sold primarily under the Cryovac® trademark. Customers use these products to package a broad range of perishable foods such as fresh meat and poultry, smoked and processed meat, cheese, produce, seafood, baked goods, and processed and prepared foods such as soups, stews, condiments and sauces for restaurants and institutions.

The Company’s principal food packaging materials offerings are shrink bags, shrink films and non-shrink structures. The bags and films are co-extruded, multi-layered materials that, when exposed to heat, mold themselves to the shape of the product. The non-shrink structures are multi-layered plastic materials used to package perishable foods and shelf-stable products such as syrups and toppings. The Company’s flexible materials start with a co-extruded film produced by combining two or more resins into a multi-layered film. Some of these films are subsequently laminated to other films to provide additional properties. The Company generally produces films and bags in barrier and permeable forms, depending on the extent to which customers want oxygen or other gases to pass through the material. For fresh-cut produce, the Company produces films that permit gases to pass through at various rates, matching the varying respiration rates of different vegetables, thereby extending shelf life. For the heat-and-serve category, the Company offers its Simple Steps™ package, which is an easy-open microwavable package designed with Cryovac® vacuum skin packaging technology and a unique self-venting feature. The Company’s Darfresh® product offerings provide vacuum skin packaging for a variety of foods. The Company also offers films, tubing and connectors for use in manufacturing bags and pouches for a wide variety of medical applications. Additionally, the Company thermoforms packaging materials for medical and technical products. Many of the Company’s offerings in the medical field are manufactured using

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technology comparable to that used to manufacture the Company’s food packaging products and are similar in form to those products.

The Company’s principal food packaging equipment offerings are rotary chamber vacuum systems, vertical form-fill-seal pouch packaging systems, dispensing equipment, manual and automated loading units, shrink tunnels, bagging systems and auxiliary equipment. Equipment offerings may be installed to package foods in shrink, vacuum or vacuum skin packages, which can utilize the Company’s films and bags. The vertical pouch-packaging units may be used to package hot-fill or cold-fill pumpable foods using the Company’s non-shrink structures. The Company’s case ready packaging customers, principally meat and poultry processors, purchase trays and pads as discussed below, specially designed films, and packaging equipment to package consumer cuts of meat and poultry products at a central location prior to shipment to the supermarket. Case ready packages are ready for the meat case upon arrival at the retail store.

Rigid Packaging and Absorbent Pads

The Company sells foam and solid plastic trays and containers that customers use to package a wide variety of food products. The Company manufactures such products in its own facilities in various regions or has them fabricated by other manufacturers. Food processors and supermarkets use these products to protect and display fresh meat, poultry, dairy, produce and other food products. The Company also manufactures and sells absorbent pads used for food packaging, such as its Dri-Loc® absorbent pads.

Protective Packaging Products

The Company’s principal protective packaging products provide cushioning, surface protection and void fill. The Company sells its protective packaging products and systems to distributors and manufacturers in a wide variety of industries. The products in this segment enable end users to provide a high degree of protection in packaging their items. They also aid product display and merchandising.

Cushioning and Surface Protection Products

The Company manufactures and markets Bubble Wrap® and AirCap® air cellular packaging materials, which consist of air encapsulated between two layers of plastic film, each containing a barrier layer to retard air loss. This material forms a pneumatic cushion to protect products from damage through shock or vibration during shipment. Also, the Company sells performance shrink films under the Cryovac®, Opti® and CorTuff® trademarks for product display and merchandising applications. Customers use these films to “shrink-wrap” a wide assortment of industrial and consumer products. The Company offers Shanklin® and Opti® shrink packaging systems for these applications. The Company’s Instapak® polyurethane foam packaging systems (which consist of proprietary blends of polyurethane chemicals, high performance polyolefin films and specially designed dispensing equipment) provide protective packaging for a wide variety of products. These products include the Instapak® Continuous Foam Tube packaging system. The Company generally sells CelluPlank® plank foams and Stratocell® laminated polyethylene foams to fabricators and converters for packaging and non-packaging applications. The Company also manufactures thin polyethylene foams in roll and sheet form under the trademarks Cell-Aire® and Cellu-Cushion®. Korrvu® packaging is the Company’s suspension and retention packaging offering. In addition, the Company makes insulation products with foil-laminated air cellular materials.

The Company manufactures and markets Jiffy® protective mailers and other durable mailers and bags in several standard sizes. The Company’s principal protective mailers are lightweight, tear-resistant mailers marketed under various trademarks, including Jiffylite®, Mail Lite® and TuffGard®, lined with air cellular cushioning material, as well as the widely used Jiffy® padded mailers made from recycled kraft paper padded with macerated recycled newspaper. The Company’s durable mailers and bags, composed of multi-layered polyolefin film, are lightweight, water-resistant and puncture-resistant and are available in

4




tamper-evident varieties. The Company markets these mailers and bags under the ShurTuff®, Trigon®, Lab Pak®, and Keepsafe® trademarks and other brands. The Company also manufactures and sells paper packaging products under the trademarks Kushion Kraft®, Custom Wrap™, Jiffy Packaging™ and Void Kraft™.

The Company also offers inflatable packaging systems. Its Fill-Air® inflatable packaging system converts rolls of polyethylene film into continuous perforated chains of air-filled cushions. The Company’s Fill-Air® RF system consists of a compact, portable inflator and self-sealing inflatable plastic bags. In addition, its NEWAIR I.B.™ 200 and high speed 600 packaging systems provide on-site, on-demand Barrier Bubble® cushioning material. The Company also markets its PriorityPak™ system, a high-speed product containment and protective packaging solution with advance sensor technology, to mail-order and Internet fulfillment applications. The Company produces and markets converting systems that convert some of the Company’s packaging materials, such as air cellular cushioning materials, thin polyethylene foam and paper into sheets of a pre-selected size and quantity, or in the case of the Company’s recycled kraft paper, into paper dunnage material. Recently the Company introduced its FillTeck™ line of equipment and materials and markets this product for applications requiring on-site production of high performance air-filled quilted cushioning material.

Other Products

The Company manufactures and sells a number of other products, such as specialty adhesive tapes, solar collectors and covers for swimming pools, and products related to the elimination and neutralization of static electricity. The Company also manufactures loose-fill polystyrene packaging.

Foreign Operations

The Company operates in the United States and in 50 other countries, and its products are distributed in those countries as well as in other parts of the world. In maintaining its foreign operations, the Company faces risks inherent in these operations, such as those of currency fluctuations. Information on currency exchange risk appears in Part II, Item 7A of this Annual Report on Form 10-K, which information is incorporated herein by reference. Financial information about geographic areas setting forth net sales and total long-lived assets for each of the years in the three-year period ended December 31, 2006 appears in Note 3 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, which information is incorporated herein by reference. The Company maintains programs to comply with the various laws, rules and regulations that it may be subject to in the many countries in which it operates. See “Environmental Matters,” below.

Marketing, Distribution and Customers

The Company’s global sales and marketing staff numbers approximately 2,500 employees, who sell and market the Company’s products to and through a large number of distributors, fabricators and converters, as well as directly to end users such as food processors, food service businesses, and manufacturers.

To support its food packaging customers, the Company operates food science laboratories that assist customers in identifying the appropriate food packaging materials and systems to meet their needs. The Company also offers customized graphic design services to its customers.

To assist its marketing efforts for its protective packaging products and to provide specialized customer services, the Company operates packaging laboratories in many of its facilities. These laboratories are staffed by professional packaging engineers and equipped with drop-testing and other equipment used to develop and test cost-effective package designs to meet the particular protective packaging requirements of each customer.

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The Company has no material long-term contracts for the distribution of its products. In 2006, no customer or affiliated group of customers accounted for 10% or more of the Company’s consolidated net sales.

Although net sales of both food packaging products and protective packaging products tend to be slightly higher in the fourth quarter, the Company does not consider seasonality to be material to its consolidated business or to either reportable business segment.

Competition

Competition for most of the Company’s packaging products is based primarily on packaging performance characteristics, service and price. Since competition is also based upon innovations in packaging technology, the Company maintains ongoing research and development programs to enable it to maintain technological leadership. There are other companies producing competing products that are well established.

There are other manufacturers of food packaging products, some of which are companies offering similar products that operate on a global basis and others that operate in a region or single country. Competing manufacturers produce a wide variety of food packaging based on plastic, paper, metals and other materials. In rigid packaging, the Company is generally one of many suppliers in the geographic areas in which it operates. The Company believes that it is one of the leading suppliers of (i) flexible food packaging materials and related systems in the principal geographic areas in which it offers those products, (ii) solid plastic trays for case ready meat products in the United States, and (iii) absorbent pads for food products to supermarkets and to meat and poultry processors in the United States.

The Company’s protective packaging products compete with similar products made by other manufacturers and with a number of other packaging materials that customers use to provide protection against damage to their products during shipment and storage. Among the competitive materials are various forms of paper packaging products, expanded plastics, corrugated die cuts, loose fill packaging materials, strapping, envelopes, reinforced bags, boxes and other containers, and various corrugated materials. The Company’s Instapak® packaging and its plank and laminated foam products also compete with various types of molded foam plastics, fabricated foam plastics, mechanical shock mounts, and wood blocking and bracing systems. The Company believes that it is one of the leading suppliers of air cellular cushioning materials containing a barrier layer, inflatable packaging, shrink films for industrial and commercial applications, protective mailers, polyethylene foam and polyurethane foam packaging systems in the principal geographic areas in which it sells these products.

Raw Materials

The principal raw materials used in both of the Company’s reportable business segments are polyolefin and other petrochemical-based resins and films, and paper and wood pulp products. The Company also purchases corrugated materials, cores for rolls of products such as films and Bubble Wrap® cushioning, inks for printed materials, and blowing agents used in the expansion of foam packaging products. In addition, the Company offers a wide variety of specialized packaging equipment, some of which it manufactures or has manufactured to its specifications, some of which it assembles and some of which it purchases from other suppliers.

The raw materials for the Company’s products generally have been readily available on the open market and in most cases are available from several suppliers. Natural disasters such as hurricanes, as well as political instability and terrorist activities, may negatively impact the production or delivery capabilities of refineries and natural gas and petrochemical suppliers in the future. These factors could lead to increased prices for the Company’s raw materials, curtailment of supplies and allocation of raw materials by the Company’s suppliers. Some materials used in the Company’s protective packaging products are sourced

6




from materials recycled in the Company’s manufacturing operations or obtained through participation in recycling programs.

Research and Development Activities

The Company maintains a continuing effort to develop new products and to improve its existing products and processes, including developing new packaging and non-packaging applications for its products. From time to time, the Company also acquires and commercializes new packaging designs or techniques developed by others. The Company has joint research and development projects combining the technical capabilities of its food packaging operations and its protective packaging operations. The Company spent $78.2 million for Company-sponsored research and development in 2006, compared with $75.8 million during 2005, and $73.2 million during 2004.

Patents and Trademarks

The Company is the owner or licensee of a number of United States and foreign patents, patent applications, trademarks and trademark registrations that relate to many of its products, manufacturing processes and equipment. The Company believes that its patents and trademarks collectively provide a competitive advantage. Neither of the Company’s reportable segments is dependent upon any single patent or trademark alone. Rather, the Company believes that its success depends primarily on its marketing, engineering and manufacturing skills and on its ongoing research and development efforts. The Company believes that the expiration or unenforceability of any of its patents, applications, licenses or trademark registrations would not be material to the Company’s business or financial position.

Environmental Matters

As a manufacturer, the Company is subject to various laws, rules and regulations in the countries, jurisdictions and localities in which it operates covering the release of materials into the environment, regarding standards for the treatment, storage and disposal of solid and hazardous wastes or otherwise relating to the protection of the environment. In 2006, the European Parliament approved a major expansion of the European Union’s chemical regulations. The legislation is known as REACH or Registration, Evaluation and Authorization of Chemicals. REACH, which becomes effective in June 2007, is expected to have a widespread impact on industries and products worldwide through trade in and with the European Union. The Company is working with its suppliers to manage the impact of REACH on its operations and to insure compliance with its provisions. The Company reviews environmental laws and regulations pertaining to its operations and believes that compliance with current environmental laws and regulations has not had a material effect on the Company’s capital expenditures or financial position.

In some jurisdictions in which the Company’s packaging products are sold or used, laws and regulations have been adopted or proposed that seek to regulate, among other things, recycled or reprocessed content and sale or disposal of packaging materials. In addition, customer demand continues to evolve for packaging materials that are viewed as being “environmentally sound” or that minimize the generation of solid waste. The Company maintains programs designed to comply with these laws and regulations, to monitor their evolution, and to meet this customer demand. These issues can be a competitive advantage for the Company given the inherent source reduction benefits of many of its processes and products. One advantage inherent in many of the Company’s products is that thin, lightweight packaging solutions reduce customer waste and transportation costs in comparison to available alternatives. The Company continues to evaluate and implement new technologies in this area as they become available.

The Company also supports its customers’ interests in eliminating waste by offering or participating in collection programs for some of the Company’s products or product packaging and for materials used in some of the Company’s products. When possible, materials collected through these programs are reprocessed and either reused in the Company’s protective packaging operations or offered to other

7




manufacturers for use in other products. In addition, recent gains made in internal recycling programs have allowed the Company to improve its net raw material yield, thus mitigating the impact of rising resin costs, while lowering solid waste disposal costs.

Employees

As of December 31, 2006, the Company had approximately 17,400 employees worldwide. Approximately 7,300 of those employees were in the U.S., with approximately 600 of those covered by collective bargaining agreements. Of the approximately 10,100 Company employees who were outside the U.S., approximately 6,000 were covered by collective bargaining agreements. Outside of the U.S., many of the covered employees are represented by works councils or industrial boards, as is customary in the jurisdictions in which they are employed. The Company believes that its employee relations are satisfactory.

Available Information

The Company’s Internet address is www.sealedair.com. The Company makes available, free of charge, on or through its web site at www.sealedair.com, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, known as the Exchange Act, as soon as reasonably practicable after the Company electronically files these materials with, or furnishes them to, the Securities and Exchange Commission.

Item 1A.                Risk Factors

Introduction

Investors should carefully consider the risks described below before making an investment decision. These are the most significant factors that make investing in the Company risky; however, they are not the only factors that should be considered in making an investment decision.

This Annual Report on Form 10-K also contains and may incorporate by reference from the Company’s Proxy Statement for its 2007 Annual Meeting of Stockholders, or from exhibits, forward-looking statements that involve risks and uncertainties. See the “Cautionary Statement Regarding Forward-Looking Statements” below. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risks faced by the Company described below and elsewhere in this Annual Report on Form 10-K or in documents incorporated by reference in this report.

The Company’s business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of the Company’s securities could decline due to any of these risks, and investors in the Company’s securities may lose all or part of their investment.

Asbestos Litigation and Related Litigation

If the settlement of the asbestos claims that the Company has agreed to is not implemented, the Company will not be released from the various asbestos-related, fraudulent transfer, successor liability, and indemnification claims made against it arising from a 1998 transaction with W. R. Grace & Co. Further, the Company is a defendant in a lawsuit seeking class action status concerning the Company’s public disclosures regarding these asbestos-related claims. The Company is also a defendant in a number of asbestos-related actions in Canada arising from Grace’s activities in Canada prior to 1998.

On November 27, 2002, the Company reached an agreement in principle with the Official Committee of Asbestos Personal Injury Claimants and the Official Committee of Asbestos Property Damage Claimants appointed to represent asbestos claimants in the W. R. Grace & Co. bankruptcy case to resolve

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all current and future asbestos-related claims made against the Company and its affiliates. The settlement will also resolve the fraudulent transfer claims and successor liability claims, as well as indemnification claims by Fresenius Medical Care Holdings, Inc. and affiliated companies in connection with the Cryovac transaction. The Cryovac transaction was a multi-step transaction, completed on March 31, 1998, which brought the Cryovac packaging business and the former Sealed Air Corporation’s business under the common ownership of the Company. The parties to the agreement in principle signed a definitive settlement agreement as of November 10, 2003 consistent with the terms of the agreement in principle. On June 27, 2005, the U.S. Bankruptcy Court for the District of Delaware, where the Grace bankruptcy case is pending, signed an order approving the definitive settlement agreement. Although Grace is not a party to the settlement agreement, under the terms of the order, Grace is directed to comply with the settlement agreement subject to limited exceptions. If the settlement agreement does not become effective, either because Grace fails to emerge from bankruptcy or because Grace does not emerge from bankruptcy with a plan of reorganization that is consistent with the terms of the settlement agreement, then the Company will not be released from the various asbestos-related, fraudulent transfer, successor liability, and indemnification claims made against the Company and its affiliates noted above, and all of these claims would remain pending and would have to be resolved through other means, such as through agreement on alternative settlement terms or trials. In that case, the Company could face liabilities that are significantly different from its obligations under the settlement agreement. The Company cannot estimate at this time what those differences or their magnitude may be. In the event these liabilities are materially larger than the current existing obligations, they could have a material adverse effect on the Company’s financial condition and results of operations. Although Grace filed a proposed plan of reorganization with the bankruptcy Court in January 2005, the Company cannot predict when a final plan of reorganization will become effective or whether the final plan will be consistent with the terms of the settlement agreement.

The Company is a defendant in the case of Senn v. Hickey, et al. (Case No. 03-CV-4372) in the U.S. District Court for the District of New Jersey (Newark). This lawsuit seeks class action status on behalf of all persons who purchased or otherwise acquired securities of the Company during the period from March 27, 2000 through July 30, 2002. The lawsuit names the Company and five current and former officers and directors of the Company as defendants. One of these individuals and the Company remain as defendants after a partial grant of the defendants’ motion to dismiss the action. The plaintiff’s principal allegations against the defendants are that during the above period the defendants materially misled the investing public, artificially inflated the price of the Company’s common stock by publicly issuing false and misleading statements and violated U.S. Generally Accepted Accounting Principles, or GAAP, by failing to properly account and accrue for the Company’s contingent liability for asbestos claims arising from past operations of Grace. The plaintiffs seek compensatory damages and other relief. If the Court determines that the Company is liable in this case, the Company could be required to pay substantial damages, which the Company cannot estimate at this time and which could have a material adverse effect on the Company’s financial condition and results of operations. On October 3, 2006, plaintiff filed a motion to certify a class of all persons who purchased or otherwise acquired the securities of the Company during the period from March 27, 2000 through July 30, 2002. On November 22, 2006, plaintiff filed an amended motion for class certification, seeking to withdraw as a class representative and the substitution of a new class representative, the State of Louisiana Municipal Police Employees Retirement System. Discovery concerning class certification and the merits is ongoing.

Since November 2004, the Company and specified subsidiaries have been named as defendants in a number of cases, including a number of putative class actions, brought in Canada as a result of Grace’s alleged marketing, manufacturing or distributing of asbestos or asbestos-containing products in Canada prior to the Cryovac Transaction. Grace has agreed to defend and indemnify the Company and its subsidiaries in these cases. The Canadian cases are currently stayed, and Grace’s proposed plan of reorganization provides for payment of these claims and enforcement of the plan of reorganization in the Canadian courts. However, if Grace’s final plan does not make the same provisions or if the Canadian courts refuse to enforce Grace’s final plan in the Canadian courts, and if in addition Grace is unwilling or

9




unable to defend and indemnify the Company and its subsidiaries in these cases, then the Company could be required to pay substantial damages, which the Company cannot estimate at this time and which could have a material adverse effect on the Company’s financial condition and results of operations.

For further information concerning these matters, see Note 16, “Commitments and Contingencies,” of the Notes to the Consolidated Financial Statements, which is contained in Item 8 of Part II of this Annual Report on Form 10-K, under “Asbestos Settlement and Related Costs,” “Cryovac Transaction,” and “Contingencies Related to the Cryovac Transaction.”

Raw Materials and Energy

Raw material pricing, availability and allocation by suppliers as well as other energy-related costs may negatively impact the Company’s results of operations, including its profit margins.

The Company uses petrochemical-based raw materials to manufacture many of its food and protective packaging products. During most of 2006 petrochemical-based raw material and other energy-related costs increased, with oil futures setting a record high. This negatively impacted the Company’s profit margins. Continued increases in market demand for petrochemical-based raw materials and energy could increase costs for the Company. Natural disasters such as hurricanes, as well as political instability and terrorist activities, may negatively impact the production or delivery capabilities of refineries and natural gas and petrochemical suppliers in the future. These factors could lead to increased prices for the Company’s raw materials, curtailment of supplies and allocation of raw materials by the Company’s suppliers, which could reduce revenues and profit margins and harm relations with the Company’s customers and which could have a material adverse effect on the Company’s financial condition and results of operations.

Animal and Food-Related Health Issues

The effects of animal and food-related health issues such as bovine spongiform encephalopathy, also known as “mad cow” disease, foot-and-mouth disease and avian influenza or “bird-flu,” as well as other health issues affecting the food industry, may lead to decreased revenues for the Company.

The Company manufactures and sells food packaging products, among other products. Various health issues affecting the food industry have in the past and may in the future have a negative effect on the sales of food packaging products. During 2006, additional cases of mad cow disease were confirmed and incidents of bird flu have continued to surface in various countries. Outbreaks of animal diseases such as mad cow or foot-and-mouth disease, for example, may lead governments to restrict exports and imports of potentially affected animals and food products, leading to decreased demand for the Company’s products and possibly also to the culling or slaughter of significant numbers of the animal population otherwise intended for food supply. Also, consumers may change their eating habits as a result of perceived problems with certain types of food. These restrictions and changes may lead to reduced sales of food packaging products by the Company, which could have a material adverse effect on the Company’s financial condition and results of operations.

Global Operations

The global nature of the Company’s operations in the United States and in fifty foreign countries exposes it to numerous risks that could materially adversely affect its financial condition and results of operations.

10




The Company operates in the United States and in 50 other countries, and its products are distributed in those countries as well as in other parts of the world. The Company continues to expand its global presence as net sales outside the United States in 2006 made up approximately 52% of the Company’s total net sales. Additionally the Company has 73 manufacturing facilities and approximately 10,100 employees located outside the United States.

As a result of its global operations, the Company is exposed to economic, political, business and market conditions in the geographic areas in which it conducts business. Changes in domestic or foreign laws, rules or regulations (such as the REACH legislation discussed above in Part I, Item 1 of this Annual Report on Form 10-K under “Environmental Matters”), or governmental or agency actions can negatively affect the Company’s ability to carry on its business. Governments may impose restrictive or protective import/export requirements as well as other trade measures that may have a negative impact on the Company. Some of the countries in which the Company’s subsidiaries operate have significantly different laws on the enforcement of intellectual property and contract rights. As a global entity, the Company may also have greater exposure to the acts and effects of war or terrorism.

The Company is exposed to market risk from fluctuations in foreign currency exchange rates. The Company may use financial instruments from time to time to manage exposure to foreign exchange rate fluctuations, which use exposes the Company to counterparty credit risk for nonperformance. Additionally, some of the Company’s subsidiaries may operate in countries that have highly inflationary economies.

Global Manufacturing Strategy

The Company has begun the first phase of a new global manufacturing strategy. The costs of the global manufacturing strategy could exceed the benefits if market forces or other factors negatively impact the execution and fulfillment of the strategy.

The Company has begun the first phase of a new global manufacturing strategy. This strategy includes an expansion of the Company’s global production capabilities in developing markets around the world, as well as a realignment of its existing production into manufacturing centers of excellence. The goal of this multi-year program is to expand capacity in growing markets in developing countries, further improve the Company’s operating efficiencies, lower its overall cost structure and implement new technologies more effectively. There are risks inherent in the undertaking of such a program, including the stability and sustainability of developing markets, shifts in customer preferences, competitive forces and technologies, cost overruns and unanticipated consequences, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

Reliance on Subsidiaries

The Company’s subsidiaries hold substantially all of its assets and liabilities and conduct substantially all of its operations, and as a result the Company relies on distributions or advances from its subsidiaries.

The Company conducts substantially all of its business through two direct wholly-owned subsidiaries, Cryovac, Inc. and Sealed Air Corporation (US). These two subsidiaries directly and indirectly own substantially all of the assets of the Company’s business and conduct operations themselves and through other subsidiaries around the globe. Therefore, the Company depends on distributions or advances from its subsidiaries to meet its debt service and other obligations and to pay dividends with respect to shares of its common stock. Contractual provisions, laws or regulations to which the Company or any of its subsidiaries may become subject, as well its subsidiaries’ financial condition and operating requirements, may reduce funds available for service of its indebtedness, dividends, and general corporate purposes.

11




Volatility of Stock Price, Volume Sales and Large Holdings

The price of the Company’s common stock historically has experienced significant price and volume fluctuations, which may make it difficult for investors to resell the common stock, and the sale of substantial amounts of the Company’s common stock could adversely affect the price of the common stock. One shareholder has been identified as having sole voting and dispositive power with respect to 28,916,696 shares, or approximately 35.9%, of the Company’s common stock, and another shareholder has been identified as having sole dispositive power with respect to 12,710,000 shares, or approximately 15.8%, of the Company’s common stock.

The market price of the Company’s common stock historically has experienced and may continue to experience significant price and volume fluctuations similar to those experienced by the broader stock market in recent years. In addition, the Company’s announcements of its quarterly operating results, future developments relating to the W. R. Grace bankruptcy, additional asbestos or other litigation against the Company, the effects of animal and food-related health issues, spikes in raw material and energy-related costs, changes in general conditions in the economy or the financial markets and other developments affecting the Company, its affiliates or its competitors could cause the market price of the common stock to fluctuate substantially.

The sale of substantial amounts of the Company’s common stock could adversely affect its price. According to a Schedule 13G/A filed with the Securities and Exchange Commission, or SEC, dated as of December 31, 2006, Davis Selected Advisers, L.P. reported sole voting and dispositive power with respect to 28,916,696 shares, or approximately 35.9%, of the outstanding shares of the Company’s common stock, and according to a Schedule 13G/A filed with the SEC, dated as of February 7, 2007, Capital Research and Management Company reported sole dispositive power with respect to 12,710,000 shares, or approximately 15.8%, of the Company’s outstanding common stock. In addition, as of December 31, 2006, 2,072,874 shares of common stock were reserved for issuance under the Company’s contingent stock plan and directors’ stock plan. Issuance of such reserved shares would cause dilution of stock holdings. Moreover, as of December 31, 2006, nine million shares of the Company’s common stock were reserved for issuance pursuant to the settlement of the asbestos litigation upon the effectiveness of a plan of reorganization in the bankruptcy of W. R. Grace. The sale or the availability for sale of a large number of shares of the Company’s common stock in the public market could adversely affect the price of the common stock.

While the Schedules 13G/A filed by Davis Selected Advisers and Capital Research and Management indicate that the referenced shares of the Company’s common stock were not acquired for the purpose of changing or influencing the control of the Company, if either stockholder were to change its purpose of holding the Company’s common stock from investment to attempting to influence the management of the Company, these concentrations of the Company’s common stock could potentially negatively impact the Company and the price of its common stock.

Cautionary Statement Regarding Forward-Looking Statements

Some of the Company’s statements in this report, in documents incorporated by reference into this report and in the Company’s future oral and written statements, may be forward-looking. These statements reflect the Company’s beliefs and expectations as to future events and trends affecting the Company’s business, its financial condition and its results of operations. These forward-looking statements are based upon the Company’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 “anticipates,” “believes,” “could be,” “estimates,” “expects,” “intends,” “plans to,” “will” and similar expressions. Forward-looking statements are necessarily subject to risks and uncertainties, many of which are outside the control of the Company, that could cause actual results to differ materially from these statements.

12




In addition to the most significant risk factors described above, the following are important factors that the Company believes could cause actual results to differ materially from those in the Company’s forward-looking statements:

·       legal and environmental proceedings, claims and matters involving the Company;

·       factors affecting the customers, industries and markets that use the Company’s packaging materials and systems;

·       competitive factors;

·       changes in the Company’s relationships with customers and suppliers;

·       changes in tax rates, laws and regulations;

·       changes in interest rates, credit availability and ratings;

·       the Company’s ability to hire, develop and retain talented employees worldwide;

·       the Company’s development and commercialization of successful new products;

·       the Company’s accomplishments in entering new markets and acquiring and integrating new businesses;

·       the Company’s access to financing and other sources of capital;

·       the costs and success of the Company’s key information systems projects;

·       disruptions to data or voice networks;

·       the magnitude and timing of the Company’s capital expenditures and the ultimate value generated from those expenditures;

·       the costs and results of any exit and disposal activities and restructuring programs that the Company may undertake;

·       the Company’s working capital management proficiency;

·       the effect on the Company of new pronouncements by regulatory and accounting authorities;

·       natural disasters, health crises, epidemics and pandemics; and

·       the effects of potential federal asbestos legislation, if enacted.

Except as required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Item 1B.               Unresolved Staff Comments

None.

Item 2.                        Properties

The Company produces products in 120 manufacturing facilities, with 22 of those facilities serving both its food packaging and protective packaging business segments. The Company produces food packaging products in 51 manufacturing facilities, of which 15 were in North America, 12 in the European region, 9 in Latin America, 13 in the Asia Pacific region, and 2 in Africa. The Company produces protective packaging products in 91 manufacturing facilities, of which 42 were in North America, 26 in the European region, 9 in Latin America, 12 in the Asia Pacific region, and 2 in Africa. The Company occupies

13




other facilities containing sales, distribution, technical, warehouse or administrative functions at a number of locations in the United States and in various foreign countries.

In the United States, the Company manufactures food packaging products at facilities in Arkansas, Indiana, Iowa, Mississippi, Missouri, New York, North Carolina, Pennsylvania, South Carolina and Texas. It manufactures protective packaging products at facilities in California, Connecticut, Delaware, Florida, Illinois, Indiana, Massachusetts, Mississippi, Missouri, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Texas and Washington. Because of the relatively low density of the Company’s air cellular, polyethylene foam and protective mailer products, the Company realizes significant freight savings by locating manufacturing facilities for these products near its customers and distributors.

The Company owns the large majority of its manufacturing facilities. Some of these facilities are subject to secured or other financing arrangements. The Company also leases sites for warehouse and office needs, as well as for the balance of its manufacturing facilities, which are generally smaller sites. The Company’s manufacturing facilities are usually located in general purpose buildings that house the Company’s specialized machinery for the manufacture of one or more products. The Company believes that its manufacturing, warehouse and office facilities are well maintained, suitable for their purposes and adequate for the Company’s needs.

Item 3.                        Legal Proceedings

The information set forth in Part II, Item 8 of this Annual Report on Form 10-K in Note 16 under the captions “Cryovac Transaction,” “Contingencies Related to the Cryovac Transaction” and “Compliance Matters” is incorporated herein by reference.

At December 31, 2006, the Company was a party to, or otherwise involved in, several federal, state and foreign environmental proceedings and private environmental claims for the cleanup of “Superfund” sites under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 and other sites. The Company may have potential liability for investigation and cleanup of some of these sites. It is the Company’s policy to accrue for environmental cleanup costs if it is probable that a liability has been incurred and if the Company can reasonably estimate an amount or range of costs associated with various alternative remediation strategies, without giving effect to any possible future insurance proceeds. As assessments and cleanups proceed, the Company reviews these liabilities periodically and adjusts its reserves as additional information becomes available. At December 31, 2006, environmental related reserves were not material to the Company’s financial condition or results of operations. While it is often difficult to estimate potential liabilities and the future impact of environmental matters, based upon the information currently available to the Company and its experience in dealing with these matters, the Company believes that its potential future liability with respect to these sites is not material to the Company’s financial condition and results of operations.

The Company is also involved in various other legal actions incidental to its business. The Company believes, after consulting with counsel, that the disposition of these other legal proceedings and matters will not have a material effect on the Company’s financial condition and results of operations.

Item 4.                        Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the Company’s stockholders during the fourth quarter of 2006.

Executive Officers of the Registrant

The information appearing in the table below sets forth the current position or positions held by each executive officer of the Company, the officer’s age as of January 31, 2007, the year in which the officer was first elected to the position currently held with the Company or with the former Sealed Air Corporation,

14




now known as Sealed Air Corporation (US) and a wholly-owned subsidiary of the Company, and the year in which such person was first elected an officer thereof (as indicated in the footnote to the table).

All of the Company’s officers serve at the pleasure of the Board of Directors. The Company and its subsidiaries have employed all officers for more than five years except for Mr. Crosier, who first was elected an officer of the Company effective October 1, 2004, and Ms. Davis, who was first elected an officer effective August 10, 2006.

Previously, Mr. Crosier was Partner—Supply Chain, Logistics, Operations Practice of C.F.A. & Associates, a privately-held advisor to small/medium sized businesses on domestic and international growth opportunities, from January 2002 through July 2004, and prior to that was Executive Vice President, Supply Chain Management and Logistics, for Staples Inc., a public company and retailer of office supplies, furniture, technology and services, from June 1998 until December 2001.

Prior to joining the Company in August 2006, Ms. Davis was Vice President, People/Development at the Sun Chemical Company, a global inks and pigment company, where she was a Corporate Leadership Team Member and provided Human Resources functional leadership from July 2002 until October 2005, and prior to that, was from January 2000 until October 2001, Vice President, Human Resources and Administration, for BF Goodrich Performance Materials, which changed its name to Noveon, Inc., a global specialty chemical company.

15




There are no family relationships among any of the Company’s officers or directors.

Name and Current Position

 

 

 

Age as of
January 31,
2007

 

First Elected to
Current Position*

 

First Elected
An Officer*

 

William V. Hickey

 

 

62

 

 

 

2000

 

 

 

1980

 

 

President, Chief Executive Officer and Director

 

 

 

 

 

 

 

 

 

 

 

 

 

David B. Crosier

 

 

57

 

 

 

2005

 

 

 

2004

 

 

Senior Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

David H. Kelsey

 

 

55

 

 

 

2003

 

 

 

2002

 

 

Senior Vice President and Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert A. Pesci

 

 

61

 

 

 

1997

 

 

 

1990

 

 

Senior Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Jonathan B. Baker

 

 

53

 

 

 

1994

 

 

 

1994

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Mary A. Coventry

 

 

53

 

 

 

1994

 

 

 

1994

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Cheryl Fells Davis

 

 

54

 

 

 

2006

 

 

 

2006

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Karl R. Deily

 

 

49

 

 

 

2006

 

 

 

2006

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Jean-Marie Demeautis

 

 

56

 

 

 

2006

 

 

 

2006

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Brian W. Elliott

 

 

53

 

 

 

2006

 

 

 

2006

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

James P. Mix

 

 

55

 

 

 

1994

 

 

 

1994

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Manuel Mondragón

 

 

57

 

 

 

1999

 

 

 

1999

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Carol Lee O’Neill

 

 

43

 

 

 

2002

 

 

 

2002

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Ruth Roper

 

 

52

 

 

 

2004

 

 

 

2004

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Hugh L. Sargant

 

 

58

 

 

 

1999

 

 

 

1999

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

James Donald Tate

 

 

55

 

 

 

2001

 

 

 

2001

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

H. Katherine White

 

 

61

 

 

 

2003

 

 

 

1996

 

 

Vice President, General Counsel and Secretary

 

 

 

 

 

 

 

 

 

 

 

 

 

Christopher C. Woodbridge

 

 

55

 

 

 

2005

 

 

 

2005

 

 

Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

Tod S. Christie

 

 

48

 

 

 

1999

 

 

 

1999

 

 

Treasurer

 

 

 

 

 

 

 

 

 

 

 

 

 

Jeffrey S. Warren

 

 

53

 

 

 

1996

 

 

 

1996

 

 

Controller

 

 

 

 

 

 

 

 

 

 

 

 

 


*                    All persons listed in the table who were first elected officers before 1998 were executive officers of the former Sealed Air Corporation, now known as Sealed Air Corporation (US), prior to the Cryovac transaction in March 1998. Mr. Hickey was first elected President in 1996, first elected Chief Executive Officer in 2000 and first elected a director in 1999. Mr. Kelsey was first elected Senior Vice President in 2003 and first elected Chief Financial Officer in 2002. Ms. White was first elected Vice President in 2003, first elected General Counsel in 1998, and first elected Secretary in 1996.

16




Part II

Item 5.                        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is listed on the New York Stock Exchange under the trading symbol SEE. The table below sets forth the quarterly high and low closing sales prices of the common stock for 2005 and 2006 as reported in the New York Stock Exchange composite listing.

2005

 

 

 

High

 

Low

 

First Quarter

 

$

53.70

 

$

47.15

 

Second Quarter

 

$

54.50

 

$

47.75

 

Third Quarter

 

$

53.96

 

$

46.05

 

Fourth Quarter

 

$

56.43

 

$

46.02

 

 

2006

 

 

 

High

 

Low

 

First Quarter

 

$

58.98

 

$

54.09

 

Second Quarter

 

$

59.03

 

$

50.49

 

Third Quarter

 

$

54.68

 

$

45.81

 

Fourth Quarter

 

$

65.55

 

$

53.77

 

 

Holders

As of January 31, 2007, there were approximately 7,900 holders of record of the Company’s Common Stock.

Dividends

There are no restrictions that currently materially limit the Company’s ability to pay dividends or that the Company reasonably believes are likely to limit materially the future payment of dividends on the common stock. On January 30, 2006, the Company announced that it was initiating payment of a quarterly cash dividend. The Company used cash of $48.6 million during 2006 to pay quarterly cash dividends of $0.15 per common share on March 17, June 16, September 15, and December 15, 2006. Previously, the Company had not paid cash dividends on its Common Stock during the periods presented.

On February 16, 2007, the Company announced that its Board of Directors had declared a two-for-one stock split to be effected in the form of a stock dividend payable on March 16, 2007 to stockholders of record of outstanding shares of its common stock at the close of business on March 2, 2007. The Company’s Board of Directors also increased the Company’s quarterly cash dividend by 33% to $0.20 per common share, declaring a quarterly cash dividend payable on the pre-split shares of the Company’s common stock on March 16, 2007 to stockholders of record at the close of business on March 2, 2007. The Company currently expects that comparable cash dividends will continue to be paid in future quarters. From time to time, the Company will consider other means of returning value to its stockholders based on its financial condition and results of operations. There is no guarantee that the Company’s Board of Directors will declare any further dividends.

17




Common Stock Performance Comparisons

The following graph shows, for the five years ended December 31, 2006, the cumulative total return on an investment of $100 assumed to have been made on December 31, 2001 in the Company’s common stock. The graph compares this return (“SAC”) with that of comparable investments assumed to have been made on the same date in (a) the Standard & Poor’s 500 Stock Index (“Composite S&P 500”), and (b) the containers and packaging segment of the Standard & Poor’s 500 Stock Index (“Containers & Packaging”), the published Standard & Poor’s market segment for the Company.

Total return for each assumed investment assumes the reinvestment of all dividends on December 31 of the year in which the dividends were paid.

GRAPHIC

18




Issuer Purchases of Equity Securities

The table below sets forth the total number of shares of the Company’s common stock, par value $0.10 per share, that the Company repurchased in each month of the quarter ended December 31, 2006. The maximum number of shares that may yet be purchased under the Company’s plans or programs is set forth below.

Period

 

 

 

Total Number
of Shares
Purchased(1)
(a)

 

Average
Price
Paid per
Share(1)
(b)

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs(2)
(c)

 

Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs(2)
(d)

 

Balance as of September 30, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,648,576

 

 

October 1, 2006 through October 31, 2006

 

 

56,871

 

 

 

$

55.26

 

 

 

48,000

 

 

 

1,600,576

 

 

November 1, 2006 through November 30, 2006 

 

 

32,623

 

 

 

(1)

 

 

 

0

 

 

 

1,600,576

 

 

December 1, 2006 through December 31, 2006

 

 

3,229

 

 

 

(1)

 

 

 

0

 

 

 

1,600,576

 

 

Total

 

 

92,723

 

 

 

$

55.26

 

 

 

48,000

 

 

 

1,600,576

 

 


(1)          The Company purchased all shares during the quarter ended December 31, 2006 pursuant to its publicly announced program (described below and under the caption “Repurchases of Capital Stock,” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K), except for (a) shares withheld from awards under the Company’s 1998 contingent stock plan pursuant to the provision thereof that permits tax withholding obligations or other legally required charges to be satisfied by having the Company withhold shares from an award under that plan and (b) shares repurchased pursuant to the repurchase option provision of its 1998 contingent stock plan  (See table below). The price calculations in column (b) in the table above only include shares purchased as part of its publicly announced program and do not include commissions. For shares withheld for tax withholding obligations or other legally required charges, the Company withholds shares at a price equal to their fair market value. In accordance with the repurchase option provision of its 1998 contingent stock plan, the Company repurchased shares at the issue price of the shares, which was $1.00 per share.

Period

 

 

 

(a)
Shares
withheld for
tax
obligations
and charges

 

(b)
Average
withholding
price for
shares in
column ”a”

 

(c)
Repurchases
under 1998
Contingent
Stock Plan

 

(d)
Forfeitures
under 2005
Contingent
Stock Plan

 

(e)
Total

 

October 2006

 

 

8,871

 

 

 

$

56.89

 

 

 

 

 

 

 

 

8,871

 

November 2006

 

 

31,123

 

 

 

59.28

 

 

 

1,500

 

 

 

 

 

32,623

 

December 2006

 

 

3,229

 

 

 

63.70

 

 

 

 

 

 

 

 

3,229

 

Total

 

 

43,223

 

 

 

$

59.12

 

 

 

1,500

 

 

 

 

 

44,723

 


(2)          On June 29, 1998, the Company announced that its Board of Directors had authorized the purchase of up to five percent of the Company’s then issued and outstanding capital stock on an as-converted basis. On April 14, 2000, the Company announced that its Board of Directors had authorized the purchase of up to an additional five percent of the Company’s issued and outstanding capital stock as of June 30, 2000 on an as-converted basis. On November 3, 2000, the Company announced that its Board of Directors had authorized the purchase of up to an additional five percent of the Company’s issued and outstanding capital stock as of October 31, 2000 on an as-converted basis. At the time of these authorizations, the Company’s capital stock comprised its common stock and its Series A

19




convertible preferred stock. Prior to its redemption in July 2003, each share of the Company’s Series A convertible preferred stock was convertible into 0.885 shares of the Company’s common stock. These authorizations compose a single program, which has no set expiration date. As of the close of business on December 31, 2006, 16,977,147 shares of the Company’s common stock were authorized to be repurchased under this program, 15,376,571 shares had been repurchased (including preferred shares on an as-converted basis), leaving 1,600,576 shares of common stock authorized for repurchase under the program.

Item 6.                        Selected Financial Data

 

 

2006

 

2005

 

2004

 

2003

 

2002(1)

 

 

 

(In millions of dollars, except per share data)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

4,327.9

 

$

4,085.1

 

$

3,798.1

 

$

3,531.9

 

$

3,204.3

 

Gross profit(2)

 

1,240.1

 

1,158.0

 

1,162.1

 

1,112.8

 

1,057.6

 

Operating profit(2)

 

526.1

 

510.4

 

503.0

 

540.9

 

517.0

 

Earnings (loss) before income tax expense(3)

 

400.1

 

376.6

 

322.9

 

376.9

 

(391.9

)

Net earnings (loss)

 

274.1

 

255.8

 

215.6

 

240.4

 

(309.1

)

Common stock dividends(4)(6)

 

48.6

 

 

 

 

 

Series A convertible preferred stock dividends(5)

 

 

 

 

28.6

 

53.8

 

Earnings (loss) per common share(6)

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

3.38

 

$

3.09

 

$

2.56

 

$

2.21

 

$

(4.20

)

Diluted

 

$

2.93

 

$

2.69

 

$

2.25

 

$

1.97

 

$

(4.30

)

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital net asset (liability)

 

$

350.6

 

$

161.9

 

$

307.4

 

$

280.4

 

$

(34.5

)

Total assets

 

5,020.9

 

4,864.2

 

4,855.0

 

4,704.1

 

4,260.8

 

Long-term debt, less current portion(5)(7)

 

1,826.6

 

1,813.0

 

2,088.0

 

2,259.8

 

868.0

 

Series A convertible preferred stock(5)

 

 

 

 

 

1,327.0

 

Total shareholders’ equity(6)

 

1,654.8

 

1,392.1

 

1,333.5

 

1,123.6

 

813.0

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

EBIT(8)

 

$

548.1

 

$

526.3

 

$

476.6

 

$

512.9

 

$

(326.0

)

Depreciation and amortization

 

168.0

 

174.6

 

179.5

 

173.2

 

165.0

 

EBITDA(8)

 

716.1

 

700.9

 

656.1

 

686.1

 

(161.0

)

Capital expenditures

 

167.9

 

96.9

 

102.7

 

124.3

 

91.6

 


(1)          In November 2002, the Company reached an agreement in principle with the appropriate parties to resolve all current and future asbestos-related claims made against it and its affiliates in connection with the Cryovac transaction. In connection with this settlement, the Company recorded a pre-tax charge of $850.1 million in the consolidated statement of operations in 2002, which resulted in the Company’s net loss for the year ended December 31, 2002. The parties signed a definitive settlement agreement as of November 10, 2003 consistent with the terms of the agreement in principle. See Note 16 to the Consolidated Financial Statements.

(2)          In 2006, the Company recorded $15.6 million of charges related to its global manufacturing strategy. In the fourth quarter of 2004, the Company incurred restructuring and other charges of $33 million relating to global profit improvement initiatives implemented to improve the Company’s operating efficiencies and cost structure. See Note 13 to the Consolidated Financial Statements.

(3)          In 2004, the Company incurred losses of $32.2 million due to debt redemptions and repurchases. See Note 10 to the Consolidated Financial Statements. In 2003, the Company incurred losses of $33.6 million due to debt redemptions and repurchases.

20




(4)          On January 30, 2006, the Company announced that it was initiating payment of a quarterly cash dividend. The Company used cash of $48.6 million during 2006 to pay quarterly cash dividends of $0.15 per common share on March 17, June 16, September 15, and December 15, 2006.

(5)          In July 2003, the Company issued $1,281.3 million of senior notes. On July 18, 2003, the Company used the net proceeds from these offerings and additional cash on hand, approximately $1,298.1 million in the aggregate, to redeem its Series A convertible preferred stock at the redemption price of $51.00 per share.

(6)   On February 16, 2007, the Company announced that its Board of Directors had declared a two-for-one stock split to be effected in the form of a stock dividend payable on March 16, 2007 to stockholders of record of outstanding shares of its common stock at the close of business on March 2, 2007. The Company’s Board of Directors also increased the Company’s quarterly cash dividend by 33% to $0.20 per common share, declaring a quarterly cash dividend payable on the pre-split shares of the Company’s common stock on March 16, 2007 to stockholders of record at the close of business on March 2, 2007. Information presented in the selected financial data has not been restated to reflect the two-for-one stock split. See Note 23 to the Consolidated Financial Statements.

(7)          On July 19, 2006, the Company’s 5.625% euro notes with a face value of 200.0 million matured. These notes were included in the current portion of long-term debt at December 31, 2005. The Company used available cash of $251.7 million to retire this debt. Interest on the 5.625% euro notes was payable annually in arrears, with the final payment of $14.2 million made upon maturity of the euro notes.

(8)          EBIT is defined as earnings (loss) before interest expense and provisions for income taxes. EBITDA is defined as EBIT plus depreciation and amortization. EBIT and EBITDA do not purport to represent net earnings or net cash provided by operating activities as those terms are defined under generally accepted accounting principles and should not be considered as an alternative to such measurements or as indicators of the Company’s performance. The Company’s definitions of EBIT and EBITDA may not be comparable with similarly-titled measures used by other companies. EBIT and EBITDA are among the indicators used by the Company’s management to measure the performance of the Company’s operations and thus the Company’s management believes such information may be useful to investors. Such measures are also among the criteria upon which performance-based compensation may be based. The following is a reconciliation of net earnings (loss) to EBIT and EBITDA:

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Net earnings (loss)

 

$

274.1

 

$

255.8

 

$

215.6

 

$

240.4

 

$

(309.1

)

Add:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

148.0

 

149.7

 

153.7

 

136.0

 

65.9

 

Income tax expense (benefit)

 

126.0

 

120.8

 

107.3

 

136.5

 

(82.8

)

EBIT

 

$

548.1

 

$

526.3

 

$

476.6

 

$

512.9

 

$

(326.0

)

Add: depreciation and amortization

 

168.0

 

174.6

 

179.5

 

173.2

 

165.0

 

EBITDA

 

$

716.1

 

$

700.9

 

$

656.1

 

$

686.1

 

$

(161.0

)

 

21




Item 7.                        Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read together with the Company’s consolidated financial statements and related notes set forth in Item 8 of Part II of this Annual Report on Form 10-K. All amounts and percentages are approximate due to rounding.

Introduction

The Company manufactures and sells a wide range of food and protective packaging products, operating in the United States and in 50 other countries, with products distributed in those countries and in other parts of the world.

The Company operates in two reportable business segments, Food Packaging and Protective Packaging. The Company’s principal food packaging products are flexible materials, associated packaging equipment systems, rigid containers and absorbent pads. These products, many of which bear the Cryovac trademark, package a broad range of perishable foods. The Company primarily sells the products in this segment to food processors, distributors, supermarket retailers and food service businesses.

The Company’s principal protective packaging products provide cushioning, surface protection and void fill. The Company primarily sells its protective packaging products and systems to distributors and manufacturers in a wide variety of industries. The products in this segment enable end users to provide a high degree of protection in packaging their items. They also aid product display and merchandising.

The Company’s global sales and marketing staff numbered approximately 2,500 employees in the countries in which it operates, who sell and market the Company’s products through a large number of distributors, fabricators and converters, as well as directly to end users such as food processors, food service businesses, and manufacturers. The Company has no material long-term contracts for the distribution of its products. In 2006, no customer or affiliated group of customers accounted for 10% or more of the Company’s consolidated net sales. Although net sales of both food packaging products and protective packaging products have tended to be slightly higher in the fourth quarter, the Company does not consider seasonality to be material to its consolidated business or to either reportable business segment.

Competition for most of the Company’s packaging products is based primarily on packaging performance characteristics, service and price. Competition is also based upon innovations in packaging technology and, as a result, the Company maintains ongoing research and development programs to enable it to maintain technological leadership.

The Company’s net sales are sensitive to developments in its customers’ business or market conditions, changes in the global economy, and the effects of foreign currency translation. Its costs can vary with changes in petrochemical-related costs, which are not within the Company’s control. Consequently, the Company’s management focuses on reducing those costs that the Company can control and using petrochemical-based raw materials as efficiently as possible. The Company also believes that its global presence helps to insulate it from localized changes in business conditions that may more strongly affect some of its competitors.

As is discussed below, the Company’s businesses are managed to generate substantial cash flow. The Company believes that its strong cash flow will permit it to continue to spend on innovative research and development and to invest in its business by means of acquisitions and capital expenditures for property and equipment. Moreover, its ability to generate substantial cash flow should provide the Company with the flexibility to modify its capital structure as the need or opportunity arises. This cash flow, along with accumulated cash and funds available under its credit facilities, should enable the Company to make the

22




settlement payment, including interest, that is expected to be required of the Company upon consummation of a plan of reorganization in the W. R. Grace & Co. bankruptcy, as discussed below.

In addition to investing in its business, the Company uses its cash flow to reduce debt and to return value to its shareholders. On January 30, 2006, the Company announced that it was initiating payment of a quarterly cash dividend. The Board of Directors declared a quarterly dividend of $0.15 per common share that was payable on March 17, June 16, September 15, and December 15, 2006. On February 16, 2007, the Company announced that its Board of Directors had declared a two-for-one stock split to be effected in the form of a stock dividend payable on March 16, 2007 to stockholders of record of outstanding shares of its common stock at the close of business on March 2, 2007. The Company’s Board of Directors also increased the Company’s quarterly cash dividend by 33% to $0.20 per common share, declaring a quarterly cash dividend payable on the pre-split shares of the Company’s common stock on March 16, 2007 to stockholders of record at the close of business on March 2, 2007. In addition, on July 19, 2006, the Company’s 5.625% euro notes with a face value of 200.0 million matured. The Company used available cash of $251.7 million to retire this debt.

Highlights for the Company’s year 2006 compared with 2005 and 2004 were:

 

 

2006

 

2005

 

2004

 

2006 vs. 2005
% Change

 

2005 vs. 2004
% Change

 

 

 

(dollars in millions)

 

 

 

 

 

U.S.

 

$

2,066.3

 

$

1,972.9

 

$

1,851.8

 

 

5

%

 

 

7

%

 

% of total net sales

 

48

%

48

%

49

%

 

 

 

 

 

 

 

 

International

 

2,261.6

 

2,112.2

 

1,946.3

 

 

7

%

 

 

9

%

 

% of total net sales

 

52

%

52

%

51

%

 

 

 

 

 

 

 

 

Total net sales

 

$

4,327.9

 

$

4,085.1

 

$

3,798.1

 

 

6

%

 

 

8

%

 

Gross profit

 

$

1,240.1

 

$

1,158.0

 

$

1,162.1

 

 

7

%

 

 

 

 

% of total net sales

 

28.7

%

28.3

%

30.6

%

 

 

 

 

 

 

 

 

Marketing, administrative and development expenses

 

$

701.1

 

$

645.9

 

$

626.1

 

 

9

%

 

 

3

%

 

% of total net sales

 

16.2

%

15.8

%

16.5

%

 

 

 

 

 

 

 

 

Restructuring and other charges

 

$

12.9

 

$

1.7

 

$

33.0

 

 

N

M

 

 

N

M

 

Operating profit

 

$

526.1

 

$

510.4

 

$

503.0

 

 

3

%

 

 

1

%

 

% of total net sales

 

12.2

%

12.5

%

13.2

%

 

 

 

 

 

 

 

 

 

Net Sales

The principal factors contributing to changes in net sales in the three years ended December 31, 2006 were changes in unit volume, changes in product mix and increases in average selling prices. In addition, the 2006 period had increased volumes from acquired businesses. The 2005 period was impacted by the effects of foreign currency translation while the impact in 2006 was minimal.

23




Net sales in 2006 increased 6% to $4,327.9 million compared with $4,085.1 million in 2005. The components of the increase in net sales for 2006 were as follows (dollars in millions):

 

 

Components of Increase in Net Sales (2006 vs. 2005):

 

 

 

Food
Packaging Segment

 

Protective
Packaging Segment

 

Total Company

 

Volume—Units

 

2.5

%

$

63.2

 

0.8

%

$

13.1

 

1.9

%

$

76.3

 

Volume—Acquired Businesses, net of dispositions

 

2.6

 

66.7

 

 

0.6

 

1.6

 

67.3

 

Price/Mix

 

1.5

 

38.5

 

3.9

 

59.3

 

2.4

 

97.8

 

Foreign Currency Translation

 

0.1

 

2.4

 

(0.1

)

(1.0

)

 

1.4

 

Total

 

6.7

%

$

170.8

 

4.6

%

$

72.0

 

5.9

%

$

242.8

 

 

In 2006, foreign currency translation had a negligible impact on net sales. During the first six months of 2006, net sales had an unfavorable impact from foreign currency translation primarily from the weakness of foreign currencies in Europe which were offset in the second half of 2006 by their strengthening against the U.S. dollar. In addition, the Brazilian real and the Canadian dollar strengthened all year against the U.S. dollar offset by the weakness of foreign currencies in Asia Pacific.

Net sales for 2005 increased 8% to $4,085.1 million compared with $3,798.1 million in 2004. The components of the increase in net sales for 2005 were as follows (dollars in millions):

 

 

Components of Increase in Net Sales (2005 vs. 2004):

 

 

 

Food
Packaging Segment

 

Protective
Packaging Segment

 

Total Company

 

Volume—Units

 

2.8

%

$

64.8

 

2.7

%

$

39.7

 

2.8

%

$

104.5

 

Volume—Acquired Businesses, net of dispositions

 

(0.2

)

(4.6

)

0.7

 

9.6

 

0.1

 

5.0

 

Price/Mix

 

3.5

 

82.7

 

2.6

 

37.5

 

3.2

 

120.2

 

Foreign Currency Translation

 

1.8

 

42.3

 

1.0

 

15.0

 

1.5

 

57.3

 

Total

 

7.9

%

$185.2

 

7.0

%

$101.8

 

7.6

%

$287.0

 

 

Foreign currency translation had a favorable impact on net sales of $57.3 million in 2005. Excluding the positive effect of foreign currency translation, net sales would have increased 6% compared with 2004. The favorable foreign currency translation impact on net sales for the full year of 2005 was primarily due to the strengthening of foreign currencies in the Asia Pacific region, Brazil and Europe against the U.S. dollar. The full year favorable impact of $57.3 million includes an unfavorable fourth quarter impact of $10.9 million, primarily due to the weakness of foreign currencies in Europe against the U.S. dollar.

Net sales of the Company’s food packaging segment, which consists primarily of the Company’s Cryovac® food packaging products, constituted 62% of net sales in 2006, 2005 and 2004. The Company’s protective packaging segment contributed the balance of net sales. This segment aggregates the Company’s protective packaging products and shrink packaging products, all of which are used principally for non-food packaging applications.

Food Packaging Segment Sales

Net sales of food packaging products increased 7% in 2006 to $2,702.9 million compared with $2,532.1 million in 2005 and increased 8% in 2005 compared with $2,346.9 million in 2004. Foreign currency translation had a favorable impact on this segment of $2.4 million in 2006 and when this impact is excluded, it would not have changed the net sales increase over the prior year. When compared with 2004, excluding the positive foreign currency translation effect of $42.3 million, net sales for this segment in 2005 would have increased 6% compared with 2004.

24




During 2006, strong unit volume growth, primarily in Latin America, the positive impact of the Company’s 2006 acquisitions and selling price increases in North America added to sales growth during the year. In 2005 unit volumes increased in all regions of the world, with the Asia Pacific and Latin America regions having the primary impact. The segment also benefited in 2005 from price/mix due in part to selling price increases.

Flexible Packaging Materials and Related Systems

Among the classes of products in the food packaging segment, net sales of flexible packaging materials and related systems increased 6% to $2,247.6 million in 2006 compared with $2,122.8 million in 2005 and increased 7% in 2005 compared with 2004 net sales of $1,976.5 million. Foreign currency translation had a favorable impact of $3.0 million in 2006 for flexible packaging materials and related systems. Excluding the positive foreign currency translation effect, the increase in net sales for flexible packaging materials and related systems would have remained the same at 6% compared with 2005.

Foreign currency translation had a favorable impact of $37.3 million in 2005 for flexible packaging materials and related systems. Excluding the positive foreign currency translation effect, net sales for flexible packaging materials and related systems would have increased 6% compared with 2004.

The components of the increase in net sales for 2006 and 2005 were as follows (dollars in millions):

 

 

Components of Increase in Net Sales:

 

 

 

Flexible Packaging Materials and Related
Systems

 

 

 

2006 vs. 2005

 

2005 vs. 2004

 

Volume—Units

 

1.8

%

$

38.1

 

3.0

%

$

59.4

 

Volume—Acquired Businesses

 

3.2

 

67.6

 

 

 

Price/Mix

 

0.8

 

16.1

 

2.5

 

49.6

 

Foreign Currency Translation

 

0.1

 

3.0

 

1.9

 

37.3

 

Total

 

5.9

%

$

124.8

 

7.4

%

$

146.3

 

 

Rigid Packaging and Absorbent Pads

Net sales of rigid packaging and absorbent pads, the other class of products in the food packaging segment, increased 11% to $455.3 million compared with $409.3 million in 2005 and increased 11% in 2005 compared with 2004 net sales of $370.4 million.

Foreign currency translation had a minimal unfavorable impact of $0.6 million in 2006 for rigid packaging and absorbent pads. Excluding the unfavorable effect of foreign currency translation, the increase in net sales in 2006 would have remained the same at 11% compared with 2005. Foreign currency translation had a favorable impact of $5.1 million in 2005 for rigid packaging and absorbent pads. Excluding the positive effect of foreign currency translation, net sales of rigid packaging and absorbent pads would have increased 9% compared with 2004.

The components of the increase in net sales for 2006 and 2005 were as follows (dollars in millions):

 

 

Components of Increase in Net Sales:

 

 

 

Rigid Packaging and Absorbent Pads

 

 

 

2006 vs. 2005

 

2005 vs. 2004

 

Volume—Units

 

6.1

%

$

25.1

 

1.5

%

$

5.4

 

Volume—Acquired Businesses, net of dispositions

 

(0.2

)

(0.9

)

(1.3

)

(4.7

)

Price/Mix

 

5.4

 

22.4

 

8.9

 

33.1

 

Foreign Currency Translation

 

(0.1

)

(0.6

)

1.4

 

5.1

 

Total

 

11.2

%

$

46.0

 

10.5

%

$

38.9

 

 

25




The Company sells foam and solid plastic trays and containers that customers use to package a wide variety of food products. The Company manufactures such products in its own facilities in various regions or has them fabricated by other manufacturers. The Company’s net sales of such products fabricated by other manufacturers were $157.3 million, $119.4 million and $83.5 million in 2006, 2005 and 2004, respectively.

Protective Packaging Segment Sales

Net sales of protective packaging products increased 5% to $1,625.0 million in 2006 compared with $1,553.0 million in 2005 and increased 7% in 2005 compared with 2004 sales of $1,451.2 million. During 2006, the positive impact of selling price increases in North America helped drive sales growth. In 2005, sales growth in this segment was balanced between unit volume growth of $39.7 million, primarily in North America, and a positive price/mix impact of $37.5 million, primarily in North America and to a lesser extent in Europe, in part due to selling price increases.

Foreign currency translation had an unfavorable impact of $1.0 million in 2006 for this segment,which would not have changed the net sales growth compared with 2005. In 2005, foreign currency translation had a favorable impact of $15 million for this segment. Excluding the positive foreign currency translation effect, net sales in 2005 for the protective packaging segment would have increased 6% compared with 2004.

The classes of products within the protective packaging segment are cushioning and surface protection products and other products. Other products within the protective packaging segment represented approximately 1% of consolidated net sales in 2006, 2005 and 2004.

Sales by Geographic Region

Net sales from operations in the United States represented 48% of net sales in 2006 and 2005. Net sales from U.S. operations increased 5% in 2006 to $2,066.3 million compared with $1,972.9 million in 2005. Net sales from international operations increased 7% in 2006 to $2,261.6 million compared with $2,112.2 million in 2005. Excluding the $1.4 million positive foreign currency translation effect, the increase in international net sales would have remained the same at 7% compared with 2005. The components of the increase in net sales by geographic region for 2006 were as follows (dollars in millions):

 

 

Components of Increase in Net Sales (2006 vs. 2005):

 

 

 

U.S.

 

International

 

Total Company

 

Volume—Units

 

0.3

%

$

5.6

 

3.3

%

$

70.7

 

1.9

%

$

76.3

 

Volume—Acquired Businesses, net of
dispositions

 

 

0.6

 

3.2

 

66.7

 

1.6

 

67.3

 

Price/Mix

 

4.4

 

87.2

 

0.5

 

10.6

 

2.4

 

97.8

 

Foreign Currency Translation

 

 

 

0.1

 

1.4

 

 

1.4

 

Total

 

4.7

%

$

93.4

 

7.1

%

$

149.4

 

5.9

%

$

242.8

 

 

26




Net sales from operations in the United States represented 48% and 49% of net sales in 2005 and 2004, respectively. Net sales from U.S. operations increased 7% in 2005 to $1,972.9 million compared with $1,851.8 million in 2004. Net sales from international operations increased 9% in 2005 to $2,112.2 million compared with $1,946.3 million in 2004. Excluding the $57.3 million positive foreign currency translation effect, international net sales would have increased 6% compared with 2004. The components of the increase in net sales by geographic region for 2005 were as follows (dollars in millions):

 

 

Components of Increase in Net Sales (2005 vs. 2004):

 

 

 

U.S.

 

International

 

Total Company

 

Volume—Units

 

2.2

%

$

40.0

 

3.3

%

$

64.5

 

2.8

%

$

104.5

 

Volume—Acquired Businesses, net of dispositions

 

0.1

 

1.4

 

0.2

 

3.6

 

0.1

 

5.0

 

Price/Mix

 

4.2

 

79.7

 

2.1

 

40.5

 

3.2

 

120.2

 

Foreign Currency Translation

 

 

 

2.9

 

57.3

 

1.5

 

57.3

 

Total

 

6.5

%

$

121.1

 

8.5

%

$

165.9

 

7.6

%

$

287.0

 

 

Costs and Margins

Gross profit as a percentage of net sales was 28.7% in 2006, 28.3% in 2005 and 30.6% in 2004. The increase in gross profit in 2006 was due to the positive impact of selling price increases combined with improved operating efficiencies that helped offset higher average petrochemical-based raw material and other energy-related costs compared with the prior year. During the first three quarters of 2006, petrochemical-based raw material and other energy-related costs were higher than in the corresponding 2005 quarter. During the fourth quarter of 2006, certain petrochemical-based commodity raw material prices moderated but most speciality resin costs were at or above 2005 levels.

The principal cause for the reduction in 2005 compared with 2004 was significantly higher petrochemical-based raw material and other energy-related costs. Over this time frame, the prices of crude oil and natural gas, which serve as feedstocks utilized in the production of many of the resins the Company buys, increased significantly. Although changes in prices of crude oil and natural gas are not perfect benchmarks, they are indicative of the variations in raw material and energy-related costs faced by the Company. In addition, the decrease in gross profit was also caused in part by an unfavorable shift in product mix, which was partially offset by increases in selling prices.

Marketing, administrative and development expenses increased 9% in 2006 and 3% in 2005. The increase in 2006 was due to higher year-on-year management incentive compensation of approximately $11.0 million as the Company met most of its performance objectives in 2006, incremental spending related to the upgrade of the Company’s information technology platform of approximately $10.0 million, operating expenses of businesses acquired during the year including Nelipak Holdings B.V. in January 2006 and Biosphere Industries, LLC in October 2006 of approximately $12.0 million in the aggregate and expenses to support the higher volume in net sales.

The increase in 2005 was due to the impact of foreign currency translation, higher professional fees, and, to a lesser extent, expenses for research and development related projects, partially offset by a reduction in management incentive compensation as the Company did not meet certain performance objectives for 2005 and partial year savings from restructuring activities initiated in the fourth quarter of 2004, as discussed below.

Marketing, administrative and development expenses as a percentage of net sales were 16.2% in 2006, 15.8% in 2005 and 16.5% in 2004.

27




Global Manufacturing Strategy and Restructuring Charges

Global Manufacturing Strategy

The Company’s global manufacturing strategy, when implemented, will expand production in countries where demand for the Company’s products and services has been growing significantly. At the same time, the Company intends to realign certain manufacturing capacity in North America and Europe into centers of excellence. The goals of this multi-year program are to expand capacity in growing markets, further improve the Company’s operating efficiencies, and implement new technologies more effectively. The Company expects this program, combined with the Company’s supply chain initiative, to produce meaningful savings in future years. By taking advantage of new technologies and streamlining production on a global scale, the Company expects to continue to enhance its profitable growth and its global leadership position.

In July 2006, the Company announced the first phase of this multi-year global manufacturing strategy. The financial scope of this phase is expected to be as follows:

 

 

Expected Range

 

Incurred through
December 31,
2006

 

Capital Expenditures

 

 

$

130.0–150.0

 

 

 

$

14.2

 

 

Associated Costs

 

 

$

90.0–100.0

 

 

 

$

15.6

 

 

 

The associated costs include such items as equipment relocation, facility start-up and severance. The Company expects the capital expenditures and charges for associated costs to occur between 2007 and 2008, although the actual timing of these expenditures is subject to change due to a variety of factors. The Company’s estimated savings resulting from implementing this strategy are expected to range from $55 to $65 million annually starting in 2009. A portion of these savings will be realized starting in 2007.

During 2006, all charges for the associated costs related to the food packaging segment and consisted of the following:

Employee termination costs

 

$

11.6

 

FAS 88 curtailment and settlements

 

0.2

 

Equipment relocations and facility start-up

 

3.8

 

Total

 

$

15.6

 

 

The components of the associated costs appear in the 2006 consolidated statement of operations on the following line items:

Restructuring charges

 

$

11.8

 

Cost of sales

 

3.8

 

Total

 

$

15.6

 

 

The Company has accrued $11.6 million in severance costs in connection with this strategy. These costs will be future cash expenditures that will be incurred for one-time termination benefits. At the time the severance was accrued, the Company expected to eliminate 242 full-time positions. Since that time, the Company revised the number of positions to be eliminated to 245. During 2006, 36 positions were eliminated and the remaining positions are expected to be eliminated in 2007. The Company expects these benefits will be paid out before the end of 2009. The Company expects to add approximately 120 full-time employees at other facilities as production is transferred, so the net reduction in positions is expected to be 125. The Company reflected the $11.6 million of severance costs in its consolidated statement of operations for 2006 in restructuring charges.

28




The components of the restructuring charges, spending and other activity through December 31, 2006 and the remaining accrual balance at December 31, 2006 were as follows:

 

 

Employee
Termination Costs

 

Original provision in 2006

 

 

$

11.6

 

 

Cash payments during 2006

 

 

(0.4

)

 

Effect of changes in currency rates

 

 

(0.3

)

 

Restructuring accrual at December 31, 2006

 

 

$

10.9

 

 

 

The Company expects to pay $5.7 million of the remaining accrual balance at December 31, 2006 in 2007. This amount is reflected in other current liabilities on the Company’s consolidated balance sheet at December 31, 2006. The remaining accrual of $5.2 million is expected to be paid in 2008 and 2009 and is reflected in other liabilities on the Company’s consolidated balance sheet at December 31, 2006.

Other 2006 Restructuring Activities

During 2006, the Company accrued severance costs of $0.6 million related to the Company’s consolidation of its food packaging customer service activities in Canada. Such amount was reflected in the consolidated statement of operations on the restructuring charges line. The Company expects to eliminate 9 full-time positions. No cash payments were made during 2006 related to this accrual. The accrual balance at December 31, 2006 was $0.6 million which was reflected in other current liabilities on the Company’s consolidated balance sheet.

2004 Restructuring Program

During the fourth quarter of 2004, the Company announced a series of separate profit improvement plans in various geographic regions in order to complement the Company’s long-term growth programs and financial goals, improve the Company’s operating efficiencies and lower its overall cost structure. The plans principally reduced the number of employees and consolidated or relocated operations in both of the Company’s reportable business segments.

At December 31, 2004, the Company expected to eliminate 473 full-time positions, which was increased to 475 during 2005. As an element of the program, the Company expected to add approximately 100 positions in connection with the Company’s realignment or relocation of some of its manufacturing activities, so that the net reduction in positions was approximately 375. These actions affected principally production workers and members of the Company’s sales force, primarily in Europe. The Company has completed its reduction in headcount related to its 2004 restructuring program.

The charges for the year ended December 31, 2004 consisted of the following:

 

 

Year Ended December 31, 2004

 

 

 

Food
Packaging

 

Protective
Packaging

 

Total Cost

 

Employee termination costs

 

 

$

17.5

 

 

 

$

4.1

 

 

 

$

21.6

 

 

Long-lived asset impairments

 

 

10.2

 

 

 

0.1

 

 

 

10.3

 

 

Facility exit costs

 

 

1.1

 

 

 

 

 

 

1.1

 

 

FAS 88 curtailment and settlements

 

 

0.3

 

 

 

 

 

 

0.3

 

 

Total

 

 

$

29.1

 

 

 

$

4.2

 

 

 

$

33.3

 

 

 

The long-lived asset impairment of $10.3 million consisted of write-downs and write-offs of property and equipment. The impairments related to decisions to rationalize and realign production of some of the Company’s smaller product lines and to close several smaller European manufacturing facilities. Since the undiscounted cash flows associated with these asset groups, including estimated salvage value, were less

29




than the carrying values of these asset groups, they were written down to their estimated fair value. The Company disposed of these facilities and much of the equipment during the first six months of 2006.

The components of the restructuring charges, spending and other activity through December 31, 2006 and the remaining accrual balance at December 31, 2006 were as follows:

 

 

Employee
Termination Costs

 

Facility
Exit Costs

 

Total Cost

 

Original provision in 2004

 

 

$

21.6

 

 

 

$

1.1

 

 

 

$

22.7

 

 

Cash payments during 2004

 

 

(0.6

)

 

 

 

 

 

(0.6

)

 

Effect of changes in currency rates

 

 

0.2

 

 

 

 

 

 

0.2

 

 

Restructuring accrual at December 31, 2004

 

 

21.2

 

 

 

1.1

 

 

 

22.3

 

 

Cash payments during 2005

 

 

(16.5

)

 

 

(0.3

)

 

 

(16.8

)

 

Adjustment to restructuring liability, net

 

 

0.4

 

 

 

 

 

 

0.4

 

 

Effect of changes in currency rates

 

 

(0.4

)

 

 

(0.1

)

 

 

(0.5

)

 

Restructuring accrual at December 31, 2005

 

 

4.7

 

 

 

0.7

 

 

 

5.4

 

 

Cash payments during 2006

 

 

(3.8

)

 

 

(0.3

)

 

 

(4.1

)

 

Adjustment to restructuring liability, net

 

 

(0.1

)

 

 

 

 

 

(0.1

)

 

Effect of changes in currency rates

 

 

0.2

 

 

 

 

 

 

0.2

 

 

Restructuring accrual at December 31, 2006

 

 

$

1.0

 

 

 

$

0.4

 

 

 

$

1.4

 

 

 

The Company expects to pay $1.3 million of the remaining $1.4 million accrual balance in 2007 and $0.1 million in 2008.

For the year ended December 31, 2006, the Company recorded in its consolidated statement of operations an additional restructuring charge of $0.6 million which was related to the 2004 program. This amount includes additional costs related to the relocation of employees and assets from closed facilities which were completed in 2006. The Company also recorded in its consolidated statement of operations a net credit of $0.1 million related to employee termination costs that were accrued as part of the 2004 restructuring program. The modifications to the originally recorded amounts resulted from increases in the amounts due to terminated employees of $0.1 million and reductions based upon certain employees no longer being eligible for the termination benefits of $0.2 million.

For the year ended December 31, 2005, the Company recorded $1.7 million of additional charges related to the 2004 restructuring program. This amount includes $1.3 million of costs incurred in 2005 related to the relocation of assets and employees from facilities that were closed as part of the restructuring program. The Company also recorded a net charge of $0.4 million related to the employee termination costs that were accrued as part of the 2004 restructuring program. The modifications to the originally recorded amounts resulted from increases in the amounts due to terminated employees of $0.9 million and reductions based upon certain employees no longer being eligible for the termination benefits of $0.5 million.

The Company estimates that the cost savings realized in 2006 were $25.0 to $30.0 million.

Operating Profit

Operating profit increased 3% in 2006 and 1% in 2005. The increase in 2006 was due to an increase in net sales partially offset by higher petrochemical-based raw material and other energy-related costs, an increase of $55.2 million in marketing, administrative and development expenses and an increase of $11.2 million in restructuring charges in 2006.

The increase in 2005 was due to an increase in net sales and a decrease of $31.3 million in restructuring and other charges, partially offset by higher petrochemical-based raw material and other energy-related costs and an increase of $19.8 million in marketing, administrative and development expenses. As a percentage of net sales, operating profit was 12.2% in 2006, 12.5% in 2005 and 13.2% in 2004.

30




Operating profit by business segment for 2006, 2005 and 2004 was as follows (dollars in millions):

 

 

Year Ended December 31,

 

 

 

2006

 

2005

 

2004

 

Food Packaging Segment

 

$

311.0

 

$

324.1

 

$

319.3

 

Protective Packaging Segment

 

228.7

 

189.0

 

217.6

 

Total segments

 

539.7

 

513.1

 

536.9

 

Restructuring and other charges

 

(12.9

)

(1.7

)

(33.0

)

Unallocated corporate operating expenses

 

(0.7

)

(1.0

)

(0.9

)

Total

 

$

526.1

 

$

510.4

 

$

503.0

 

 

The food packaging segment contributed 58%, 63% and 59% of the Company’s operating profit in 2006, 2005 and 2004, respectively, before taking into consideration restructuring and other (charges) credits and unallocated corporate operating expenses. The Company’s protective packaging segment contributed the balance of operating profit.

Food Packaging Operating Profit

Food packaging operating profit was 11.5%, 12.8% and 13.6% of food packaging net sales in 2006, 2005 and 2004, respectively. The decline in operating profit as a percentage of net sales in 2006 compared with 2005 was primarily due to higher raw material costs, particularly specialty resins, higher energy-related costs, the higher marketing, administrative and development expenses referenced above and expenses related to the implementation of the Company’s global manufacturing strategy also referenced above, offset by the improved contribution from increased net sales.

The decline in operating profit as a percentage of net sales in 2005 compared with 2004 was due to higher raw material and energy-related costs combined with an unfavorable shift in product mix, partially offset by selling price increases.

Protective Packaging Operating Profit

Protective packaging operating profit was 14.1%, 12.2% and 15.0% of protective packaging net sales in 2006, 2005 and 2004, respectively. The increase in operating profit as a percentage of net sales in 2006 compared with 2005 was due to selling price increases, primarily in North America and to a lesser extent in Europe, and improved performance in North America and Europe based on management actions taken to improve profitability, which helped offset higher raw material and energy-related costs.

The decline in operating profit as a percentage of net sales in 2005 compared with 2004 was due to higher raw material and energy-related costs combined with an unfavorable shift in product mix, partially offset by selling price increases.

Interest Expense

Interest expense includes the effects of interest rate swaps and the amortization of capitalized senior debt issuance costs, bond discounts and terminated treasury locks. These expenses were $148.0 million in 2006, $149.7 million in 2005, and $153.7 million in 2004.

The decrease in interest expense in 2006 compared with 2005 was primarily due to the following:

·       a $7.5 million decrease due to the retirement of the Company’s 5.625% euro notes in July 2006 discussed below; and

·       a decrease of $1.8 million related to higher capitalized interest during the construction of capital investment projects in 2006 compared with the 2005 period;

31




partially offset by;

·       $5.0 million due to the impact of higher interest rates on the Company’s $300.0 million of outstanding interest rate swaps entered into to effectively convert its 5.375% senior notes due April 2008 into floating rate debt; and

·       an increase of $1.7 million caused by additional expense related to the compounding of interest on the amount payable pursuant to the asbestos settlement agreement.

The decrease in interest expense in 2005 compared with 2004 was primarily due to the following:

·       a $12.5 million decrease due to the redemption of the entire outstanding principal amount, $177.5 million, of the Company’s 8.75% senior notes due July 2008, the repurchase of $22.7 million face amount of its 6.95% senior notes due May 2009, and the termination of related interest rate swaps with a total notional amount of $150 million, all in the fourth quarter of 2004;

partially offset by;

·       an increase of $4.7 million due to the impact of higher interest rates on the Company’s $300.0 million of outstanding interest rate swaps entered into to effectively convert its 5.375% senior notes due April 2008 into floating rate debt;

·       an increase of $1.6 million caused by additional expense related to the compounding of interest on the amount payable pursuant to the asbestos settlement agreement; and

·       an increase of $1.4 million related to lower capitalized interest during the construction of capital investment projects in 2005 compared with the 2004 period.

Other Income, Net

Other income, net, was $22.0 million in 2006, $15.9 million in 2005, and $5.8 million in 2004. Included in these amounts are primarily interest and dividend income of $16.8 million, $11.1 million and $7.7 million and net foreign exchange transaction losses of $4.1 million, $4.7 million and $9.0 million in 2006, 2005 and 2004, respectively.

Loss On Debt Redemption and Repurchases

In 2004 the Company incurred losses of $32.2 million due to debt redemptions and repurchases. These losses were reflected in the statement of operations in “Loss on debt redemption and repurchases.” See below under the caption “Analysis of Historical Cash Flows—Debt Redemption and Repurchases” for further discussion of these transactions.

Income Taxes

The Company’s effective income tax rate was 31.5% in 2006, 32.1% in 2005 and 33.3% in 2004. The decrease in the 2006 effective income tax rate compared with 2005 was primarily due to a shift in the mix of foreign earnings. The Company currently expects an effective income tax rate of approximately 31.5% for 2007.

The decrease in the 2005 effective income tax rate compared with 2004 was primarily due to the reversal of reserves for tax matters for periods that closed in the relevant jurisdictions.

In 2006 and 2005 the effective income tax rate was lower than the statutory U.S. federal income tax rate of 35.0% primarily due to the lower net effective income tax rate on foreign earnings, partially offset by the effect of state income taxes.

32




Net Earnings

As a result of the factors noted above, net earnings were $274.1 million in 2006, $255.8 million in 2005 and $215.6 million in 2004.

Earnings per Common Share

Basic earnings per common share were $3.38 for 2006, $3.09 for 2005 and $2.56 for 2004. Diluted earnings per common share were $2.93 for 2006, $2.69 for 2005 and $2.25 for 2004.

In calculating diluted earnings per common share, the Company’s calculation of the weighted average number of common shares for 2006, 2005 and 2004 provides for the conversion of the Company’s 3% convertible senior notes due June 2033, the assumed issuance of nine million shares of common stock reserved for the Company’s previously announced asbestos settlement and the exercise of dilutive stock options, net of assumed treasury stock repurchases. See Note 18, “Earnings Per Common Share,” of the Notes to the Consolidated Financial Statements, which is contained in Item 8 of Part II of this Annual Report on Form 10-K and is incorporated herein by reference.

Liquidity and Capital Resources

The discussion that follows contains:

·       a description of the Company’s material commitments and contingencies,

·       a description of the Company’s principal sources of liquidity,

·       a description of the Company’s outstanding indebtedness,

·       an analysis of the Company’s historical cash flows,

·       a description of the Company’s derivative financial instruments, and

·       a description of the Company’s shareholders’ equity.

Material Commitments and Contingencies

Asbestos Settlement; Commitments Related to the Cryovac Transaction

The Company recorded a charge of $850.1 million in the fourth quarter of 2002, of which $512.5 million covers a cash payment that the Company is required to make upon the effectiveness of a plan of reorganization in the bankruptcy of W. R. Grace & Co. The Company did not use cash in any period with respect to this liability, and the Company cannot predict when it will be required to make this payment. The Company currently expects to fund this payment by using a combination of accumulated cash and future cash flows from operations and funds available under its $500 million senior unsecured multi-currency credit facility or its accounts receivable securitization program, both described below, or a combination of these alternatives. The cash payment of $512.5 million accrues interest at a 5.5% annual rate, which is compounded annually, from December 21, 2002 to the date of payment. The Company has recorded this accrued interest in other current liabilities in its consolidated balance sheets, and these amounts were $123.5 million and $90.3 million at December 31, 2006 and 2005, respectively.

The Company is subject to other contingencies related to the Cryovac transaction. Note 16, “Commitments and Contingencies,” of the Notes to the Consolidated Financial Statements, which is contained in Item 8 of Part II of this Annual Report on Form 10-K, describes these contingencies under “Contingencies Related to the Cryovac Transaction” and is incorporated herein by reference.

33




Compliance Matters

The information set forth in Item 8 of Part II of this Annual Report on Form 10-K in Note 16, “Commitments and Contingencies,” of the Notes to the Company’s Consolidated Financial Statements under the caption “Compliance Matters” is incorporated herein by reference.

Contractual Commitments

The following table summarizes the Company’s principal contractual obligations and sets forth the amounts of required cash outlays in 2007 and future years (amounts in millions):

 

 

Payments Due by Period

 

 

 

Total

 

2007

 

2008-2009

 

2010-2011

 

Thereafter

 

Short-term borrowings

 

$

20.2

 

$

20.2

 

 

$

 

 

 

$

 

 

 

$

 

 

Current portion of long-term debt exclusive of debt discounts

 

5.5

 

5.5

 

 

 

 

 

 

 

 

 

 

Long-term debt, exclusive of debt discounts and interest rate swap adjustments

 

1,839.0

 

 

 

547.1

 

 

 

441.3

 

 

 

850.6

 

 

Total debt(1)(2)

 

1,864.7

 

25.7

 

 

547.1

 

 

 

441.3

 

 

 

850.6

 

 

Operating leases

 

103.6

 

25.6

 

 

31.3

 

 

 

19.4

 

 

 

27.3

 

 

Cash portion of the asbestos settlement, including accrued interest as of December 31, 2006(3)

 

636.0

 

636.0

 

 

 

 

 

 

 

 

 

 

Declared 2007 first quarter quarterly cash dividend

 

16.1

 

16.1

 

 

 

 

 

 

 

 

 

 

Other principal contractual obligations

 

168.5

 

79.4

 

 

65.3

 

 

 

18.3

 

 

 

5.5

 

 

Total contractual cash obligations

 

$2,788.9

 

$

782.8

 

 

$

643.7

 

 

 

$

479.0

 

 

 

$

883.4

 

 


(1)          Includes principal maturities (at face value) only.

(2)          The 2010 period includes the 3% convertible senior notes since the holders of these notes have the option to require the Company to repurchase the senior notes on June 30 of 2010, 2013, 2018, 2023 and 2028. See Note 10, “Debt and Credit Facilities,” to the Consolidated Financial Statements.

(3)          This liability is reflected as a current liability due to the uncertainty of the timing of payment. Interest accrues on this amount at a rate of 5.5% per annum, compounded annually, until it becomes due and payable.

Current Portion of Long-Term Debt and Long-Term DebtThe debt shown in the above table excludes unamortized bond discounts and interest rate swap adjustments as of December 31, 2006 and therefore represents the principal amount of the debt required to be repaid in each period.

Operating LeasesIn addition to the obligation to pay the principal amount of the debt obligations discussed above, the Company is obligated under the terms of various operating leases covering some of the facilities that it occupies and some production equipment, most of which are accounted for as operating leases. The contractual operating lease obligations listed in the table above represent estimated future minimum annual rental commitments under non-cancelable real and personal property leases as of December 31, 2006.

Asbestos SettlementThe asbestos settlement is described more fully in “Asbestos Settlement; Commitments Related to the Cryovac Transaction,” above.

Cash DividendOn February 16, 2007, the Company’s Board of Directors increased the Company’s quarterly cash dividend by 33% to $0.20 per common share, declaring a quarterly cash dividend payable on the pre-split shares of the Company’s common stock on March 16, 2007 to stockholders of record at the close of business on March 2, 2007. The estimate of this liability is $16.1 million and was calculated using 80,672,810 shares of common stock that were issued and outstanding as of January 31, 2006.

34




Other Principal Contractual ObligationsOther principal contractual obligations include agreements to purchase an estimated amount of goods, including raw materials, or services in the normal course of business that are enforceable and legally binding and specify all significant terms, including fixed or minimum quantities to be purchased, minimum or variable price provisions and the approximate timing of the purchase.

Off-Balance Sheet Arrangements

The Company has reviewed its off-balance sheet arrangements and has determined that none of those arrangements have or are reasonably likely to have a material current or future effect on the Company’s consolidated financial statements, liquidity, capital expenditures or capital resources.  For a discussion of one such arrangement that may have a future effect that is material to investors, see “Accounts Receivable Securitization Program,” below.

Interest Payments

During 2006 and 2005, the Company paid $121.9 million and $117.0 million, respectively, in interest payments. The Company currently expects to pay from $105.0 million to $115.0 million in interest payments in 2007, including the impact of interest rate swap transactions. The actual interest paid in 2007 may be different from this amount if interest rates change or if the Company repurchases existing indebtedness or incurs indebtedness under its existing lines of credit or otherwise. This 2007 expected interest payment does not reflect payment of any accrued interest related to the asbestos settlement.

Income Tax Payments

During 2006 and 2005, the Company paid $152.6 million and $152.2 million, respectively, in income taxes. The Company currently expects to pay between $187.0 million and $197.0 million in income taxes in 2007, assuming it does not make the asbestos settlement payment in that year.

Contributions to Defined Benefit Pension Plans

The Company maintains defined benefit pension plans for a limited number of its U.S. employees and for some of its non-U.S. employees. During 2006 and 2005, the Company paid $7.8 million and $8.6 million, respectively, in employer contributions to these defined benefit pension plans. The Company currently expects employer contributions to be $6.8 million in 2007.

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. The Company does not believe that it is reasonably possible that its liability in excess of the amounts that it has accrued for environmental matters will be material to its consolidated statements of operations, balance sheets or cash flows. The Company reassesses environmental liabilities whenever circumstances become better defined or it can better estimate remediation efforts and their costs. The Company evaluates these liabilities periodically based on available information, including the progress of remedial investigations at each site, the current status of discussions with regulatory authorities regarding the methods and extent of remediation and the apportionment of costs among potentially responsible parties. As some of these issues are decided (the outcomes of which are subject to uncertainties) or new sites are assessed and costs can be reasonably estimated, the Company adjusts the recorded accruals, as necessary. The Company believes that these exposures are not material to its consolidated results of operations, balance sheets and cash flows. The Company believes that it has adequately reserved for all probable and estimable environmental exposures.

35




Principal Sources of Liquidity

The Company’s principal sources of liquidity are accumulated cash and short-term investments, cash flows from operations and amounts available under its existing lines of credit described below, including the credit facility, the ANZ facility and its accounts receivable securitization program.

Accumulated Cash and Cash Equivalents and Short-Term Investments

As of December 31, 2006 and 2005, the Company had accumulated cash and cash equivalents of $373.1 million and $455.8 million, respectively, and short-term investments of $33.9 million and $44.1 million, respectively. The Company’s short-term investments consist of auction rate securities, all of which are classified as available-for-sale securities. See Note 4, “Short Term Investments—Available for Sale Securities,” to the Company’s Consolidated Financial Statements, which describes these short-term investments.

Cash Flows from Operations

The Company expects that it will continue to generate significant cash flows from operations. See “Analysis of Historical Cash Flows” below.

Lines of Credit

The following table summarizes the Company’s available lines of credit and committed and uncommitted lines of credit, including the credit facity and the ANZ facility discussed below, at December 31, 2006 and 2005:

 

 

December 31,
2006

 

December 31,
2005

 

Used lines of credit

 

 

$

30.4

 

 

 

$

27.2

 

 

Unused lines of credit

 

 

810.6

 

 

 

797.6

 

 

Total available lines of credit

 

 

$

841.0

 

 

 

$

824.8

 

 

Available lines of credit—committed

 

 

$

632.9

 

 

 

$

624.7

 

 

Available lines of credit—uncommitted

 

 

208.1

 

 

 

200.1

 

 

Total available lines of credit

 

 

$

841.0

 

 

 

$

824.8

 

 

 

The Company’s principal credit lines were all committed and consisted of the credit facility and the ANZ facility. The Company is not subject to any material compensating balance requirements in connection with its lines of credit.

Revolving Credit Facilities

The Credit Facility—The Company has not borrowed under its $500.0 million unsecured multi-currency revolving credit facility since its inception in July 2005. This facility contains a provision under which the Company may request, prior to each of the first and second anniversaries of the facility, a one-year extension of the termination of the facility. The Company requested an extension effective on the first anniversary, July 26, 2006, and lenders with commitments for $457.0 million under the facility consented to the extension. Accordingly, on July 26, 2006 this extension became effective, as a result of which $43.0 million of the facility will terminate on July 26, 2010, and $457.0 million of the facility will terminate on July 26, 2011.

The credit facility is available for general corporate purposes including the payment of a portion of the $512.5 million cash payment, plus accrued interest (which was $123.5 million at December 31, 2006), required to be paid upon the effectiveness of an appropriate plan of reorganization in the

36




W. R. Grace & Co. bankruptcy. See Note 10, “Debt and Credit Facilities” of the Notes to the Company’s Consolidated Financial Statements for further information on this credit facility.

ANZ Facility—The Company has an Australian dollar 170 million, dual-currency revolving credit facility, known as the ANZ facility, equivalent to U.S. $132.9 million at December 31, 2006, due March 2010. A syndicate of banks made this facility available to a group of the Company’s Australian and New Zealand subsidiaries for general corporate purposes including refinancing of previously outstanding indebtedness. The Company may re-borrow amounts repaid under the ANZ facility from time to time prior to the expiration or earlier termination of the facility.

The Company borrowed under the ANZ facility during the second quarter of 2006, but it repaid those amounts in full and did not borrow further under the ANZ facility during 2006. There were no amounts outstanding under this facility at December 31, 2006 or at December 31, 2005. See Note 10, “Debt and Credit Facilities” of the Notes to the Company’s Consolidated Financial Statements for further discussion on this facility.

Other Lines of Credit

Substantially all the Company’s short-term borrowings of $20.2 million and $21.8 million at December 31, 2006 and 2005, respectively, were outstanding under lines of credit available to several of the Company’s foreign subsidiaries. The weighted average interest rate on these outstanding lines of credit was 12.5% and 12.3% at December 31, 2006 and 2005, respectively. Amounts available under these credit lines as of December 31, 2006 and 2005 were approximately $198.0 million and $200.1 million, respectively, of which approximately $177.8 million and $178.3 million, respectively, were unused.

Accounts Receivable Securitization Program

The Company’s $125.0 million receivables program has an expiration date of December 7, 2007. The receivables program contains financial covenants relating to interest coverage and debt leverage. The Company was in compliance with these covenants at December 31, 2006.

The Company’s receivables funding subsidiary did not sell any receivables interests under the receivables program during 2006, and therefore the Company did not remove any related amounts from the consolidated assets reflected on the Company’s consolidated balance sheet at December 31, 2006.

During 2005, the Company’s receivables funding subsidiary sold an undivided ownership interest in $35 million of eligible receivables under the receivables program. Payments on the Company’s receivables that were applied to these receivables interests in accordance with the terms of the program reduced the amount of receivables interests held by the bank or the issuer of commercial paper that are parties to the program to zero during 2005. Therefore, as of December 31, 2005, neither the bank nor the issuer of commercial paper held any receivables interests, and the Company did not remove any related amounts from the assets reflected on its consolidated balance sheet at December 31, 2005.

See Note 5, “Accounts Receivable Securitization Program,” of the Notes to the Consolidated Financial Statements for additional information concerning this program.

Debt Ratings

The Company’s cost of capital and ability to obtain external financing may be affected by its debt ratings, which the credit rating agencies review periodically. The Company’s long-term senior unsecured debt is currently rated Baa3 (stable outlook) by Moody’s Investors Service, Inc. and BBB (negative outlook) by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. These ratings are among the ratings assigned by each of these organizations for investment grade long-term senior unsecured debt. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or

37




withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.

Outstanding Indebtedness

At December 31, 2006 and 2005, the Company’s total debt outstanding consisted of the amounts set forth on the following table:

 

 

December 31,
2006

 

December 31,
2005

 

Short-term borrowings

 

 

$

20.2

 

 

 

$

21.8

 

 

Current portion of long-term debt

 

 

5.5

 

 

 

241.4

 

 

Total current debt

 

 

25.7

 

 

 

263.2

 

 

Total long-term debt, less current portion

 

 

1,826.6

 

 

 

1,813.0

 

 

Total debt

 

 

$

1,852.3

 

 

 

$

2,076.2

 

 

 

5.625% Euro Notes

On July 19, 2006, the Company’s 5.625% euro notes with a face value of 200.0 million matured. These notes were included in the current portion of long-term debt at December 31, 2005. The Company used available cash of $251.7 million to retire this debt. Interest on the 5.625% euro notes was payable annually in arrears, with the final payment of $14.2 million made upon maturity of the euro notes.

Senior Notes

Included in the Company’s long-term debt is approximately $1,796.2 million of senior notes with various maturities. The next maturity will be the Company’s 5.375% senior notes which mature in April 2008. See Note 10, “Debt and Credit Facilities” of the Notes to the Company’s Consolidated Financial Statements for additional information on the Company’s debt.

Analysis of Historical Cash Flows

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $432.9 million in 2006, $363.3 million in 2005 and $436.2 million in 2004. The increase in net cash provided by operating activities in 2006 was due to various factors:

·       an increase in cash generated from accounts receivable in 2006 compared with 2005 due to an increase in cash collections during 2006 that exceeded the increase in net sales. In addition, during the 2006 period there was increased cash received from vendor rebates receivable;

·       an increase in accrued restructuring costs in 2006 due to the recording of $11.8 million of restructuring charges related to the global manufacturing strategy, partially offset by $4.5 million in cash payments in 2006 related to the 2004 restructuring program and 2006 global manufacturing charge. Cash payments related to the 2004 restructuring program made in 2005 were $16.8 million;

·       an increase in income taxes payable in the 2006 period due to higher income tax expense;

·       an increase in accrued payroll in the 2006 period partially due to higher management incentive compensation; and

·       the timing of other receipts and payments in the ordinary course of business;

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partially offset by;

·       an increase in cash used for inventory in the 2006 period due to higher resin costs affecting all categories of inventory and higher raw material quantities in the 2006 period. Raw material inventory quantities were lower in the 2005 period in part due to the storm-related depletion of the Company’s resin supplies. In addition, higher inventories were needed in 2006 to support the Company’s global manufacturing strategy as projects got underway to shift production consistent with the Company’s centers of excellence approach.

The reduction in net cash provided by operating activities in 2005 compared with 2004 was due to various factors:

·       a reduction in cash generated from accounts payable balances. The cash generated in 2005 was $16.7 million compared with $48.5 million in 2004;

·       cash used of $16.8 million in 2005 compared with cash used of $0.6 million in 2004 for employee termination and facility exit cost payments related to its 2004 restructuring program;

·       an increase in cash used for income tax payments in 2005. The Company made cash payments of $152.2 million in 2005 compared with $141.9 million in 2004; and

·       an increase in notes and accounts receivable due to higher net sales in 2005, partially offset by an increase in cash collections during 2005;

partially offset by;

·       a reduction in cash used for inventory due to higher inventory turnover in the 2005 period, partially offset by higher raw material costs; and

·       a change in accrued interest of $11.3 million. Accrued interest increased $31.8 million in 2005 compared with an increase of $20.5 million in 2004. The increase in the 2005 period was primarily due to an increase of $31.4 million due to additional accrued interest related to the Company’s liability under the asbestos settlement agreement, which is compounded annually. The increase in 2004 was primarily due to an increase in accrued interest of $29.8 million related to the asbestos settlement agreement, partially offset by a reduction of $6.3 million in accrued interest related to the 8.75% senior notes, which were repurchased in 2003.

Net Cash Used in Investing Activities

Net cash used in investing activities amounted to $202.5 million in 2006, $88.9 million in 2005 and $91.0 million in 2004. The increase in net cash used for investing activities in 2006 compared with 2005 was primarily due to the following:

·       $53.3 million of cash used to complete acquisitions in 2006 of which $41.2 million was for the previously announced acquisition of Nelipak Holdings B.V. on January 3, 2006; and

·       an increase of $71.0 million in capital expenditures. Capital expenditures were $167.9 million in 2006 compared with $96.9 million in 2005.

The decrease in net cash used in 2005 compared with 2004 was primarily due to the following:

·       a decrease in capital expenditures. Capital expenditures in 2005 were $96.9 million compared with $102.7 million in 2004; and

·       lower levels of cash used for businesses acquired. In 2005 cash used was $0.2 million compared with $6.4 million in 2004;

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partially offset by;

·       lower net proceeds from the sale of available-for-sale securities in 2005 compared with 2004. See Note 4, “Short Term Investments—Available for Sale Securities,” of the Notes to the Consolidated Financial Statements, which is contained in Item 8 of Part II of this Annual Report on Form 10-K, which describes these available-for-sale securities.

Acquisitions

Cash used to complete acquisitions was $53.3 million in 2006, $0.2 million in 2005 and $6.4 million in 2004. In each year, cash used for acquisitions was net of cash acquired in those acquisitions. The cash acquired in those acquisitions was immaterial. The Company assumed $9.6 million of debt related to the Nelipak Holdings B.V. acquisition in 2006. In 2005 and 2004, the Company did not assume any debt related to acquisitions.

Capital Expenditures

Capital expenditures were $167.9 million in 2006, $96.9 million in 2005 and $102.7 million in 2004. Capital expenditures for the Company’s food packaging segment amounted to $142.4 million, $80.7 million and $81.3 million and for the protective packaging segment amounted to $25.5 million, $16.2 million and $21.4 million in 2006, 2005 and 2004, respectively.

The increase in capital expenditures in 2006 compared with 2005 was due to investments in capacity expansion and in new technologies related to the Company’s centers of excellence approach as well as global manufacturing capital expenditures of $14.2 million.

The decrease in capital expenditures in 2005 compared with 2004 was primarily due to the completion of two new production facilities, one in the United States and one in Hungary, which the Company initiated in 2003 and completed in the early part of 2004. The improved productivity of existing assets allowed the Company to defer spending on incremental capacity in 2005.

The Company expects to continue to invest capital as it deems appropriate to expand its business, to replace depreciating property, plant and equipment, to acquire new manufacturing technology and to improve productivity. Taking into account capital expenditures in 2007 of $60.0 to $80.0 million on the Company’s global manufacturing strategy, the Company expects total capital expenditures in 2007 to range between $175.0 million and $200.0 million. This projection is based upon the Company’s capital expenditure budget for 2007, the status of approved but not yet completed capital projects, anticipated future projects including the implementation of the Company’s global manufacturing strategy and historic spending trends.

Net Cash Used in Financing Activities

Net cash used in financing activities amounted to $350.0 million in 2006, $118.4 million in 2005 and $300.3 million in 2004.

The increase in net cash used in financing activities in 2006 compared with 2005 was primarily due to the following:

·       $251.7 million of cash used to retire the Company’s 5.625% euro notes on July 19, 2006; and

·       $48.6 million of cash used in 2006 to pay dividends on the Company’s common stock;

partially offset by;

·       a decrease in cash used in 2006 for the repurchase of shares of the Company’s common stock, as discussed in “Repurchases of Capital Stock” below. Cash used in 2006 was $52.4 million compared with $116.4 million of cash used in 2005.

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The decrease in net cash used in financing activities in 2005 compared with 2004 was primarily due to the following:

·       $232.3 million of cash used in 2004 for the debt repurchases and redemptions made in the fourth quarter of 2004;

partially offset by;

·       an increase in 2005 of $30.2 million in net cash used to repurchase shares of the Company’s common stock, as discussed below. In 2005, the Company used $116.4 million to repurchase its common stock compared with $86.2 million in 2004; and

·       a decrease of $20.3 million in proceeds from long-term debt in 2005 compared with 2004.

Repurchases of Capital Stock

In 2006, the Company repurchased 1,049,200 shares of its common stock, par value $0.10 per share, in open market purchases at a cost of $52.4 million. The average price per share of these common stock repurchases in 2006 was $49.90.

In 2005, the Company repurchased 2,430,200 shares of its common stock, par value $0.10 per share, in open market purchases at a cost of $116.4 million in 2005. The average price per share of these common stock repurchases in 2005 was $47.88.

In 2004, the Company repurchased 1,781,000 shares of its common stock, par value $0.10 per share, in open market purchases, at a cost of $86.2 million in 2004. The average price per share of the common stock repurchases in 2004 was $48.38.

The share repurchases described above were made under a program previously adopted by the Company’s Board of Directors. The share repurchase program authorized the repurchase of up to 16,977,147 shares of common stock, which included the Series A convertible preferred stock on an as-converted basis prior to its redemption. As of December 31, 2006, the Company had repurchased 15,376,571 shares of common stock and preferred stock on an as-converted basis, and the remaining repurchase authorization covered 1,600,576 shares of common stock. The Company may from time to time continue to repurchase its common stock.

Debt Redemption and Repurchases

2004 Debt Redemption:

On November 26, 2004, the Company used net cash of $211.8 million to redeem the entire outstanding aggregate principal amount, $177.5 million, of its 8.75% senior notes due July 1, 2008 and terminated interest rate swaps on the 8.75% senior notes having a total notional amount of $150.0 million. The Company issued the senior notes on June 26, 2001 under Rule 144A and Regulation S of the Securities Act of 1933. The Company determined the redemption price in accordance with the indenture governing the notes. The net cash used of $211.8 million consisted of cash used to purchase the senior notes at a premium plus accrued interest of $213.4 million and cash received of $1.6 million related to the termination of the interest rate swaps. The Company completed the redemption, funded with available cash, at a premium to the face amount of the notes, which resulted in a loss of $29.6 million, which the Company reflected in the statement of operations as “Loss on debt redemption and repurchases.” The annual interest expense on the redeemed notes was approximately $15.5 million, without giving effect to any interest rate swaps and the amortization of amounts related to the senior notes.

2004 Debt Repurchases

In November and December 2004, the Company used available cash of $25.2 million to repurchase in the open market $22.7 million face amount of its 6.95% senior notes due May 2009, which included accrued interest and related fees. Since the Company completed these repurchases at a premium to the face amount of the notes, it incurred a loss of $2.6 million, which the Company reflected in the statement of operations as “Loss on debt redemption and repurchases.”

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The Company may from time to time continue to repurchase or otherwise retire its outstanding indebtedness.

Changes in Working Capital

At December 31, 2006, working capital (current assets less current liabilities) was $350.6 million compared with $161.9 million at December 31, 2005. The $188.7 million increase in the Company’s working capital during 2006 arose primarily from the following changes:

·       an increase of $100.3 million in inventory. This increase was due to various factors which included the following:

·        $46.6 million from the Company’s application on January 1, 2006 of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” known as SAB 108. See Note 21 to the Consolidated Financial Statements for further information on this new accounting standard;

·        $16.1 million from the effects of foreign currency translation;

·        an increase in raw materials inventory due to lower raw material inventory quantities in the 2005 period in part due to the storm-related depletion of the Company’s resin supplies; and

·        higher inventories in 2006 needed to support the Company’s global manufacturing strategy for projects began during 2006 to shift production consistent with the centers of excellence approach.

·       a decrease of $235.9 million in the current portion of long-term debt of which $251.7 million was due to the retirement of the 5.625% euro notes in July 2006;

·       an increase of $47.3 million in accounts receivable. This increase was primarily due to $30.9 million from the effects of foreign currency translation and, to a lesser extent, due to an increase in net sales in 2006, partially offset by increased cash collections which includes cash received from vendor rebates receivable;

partially offset by;

·       a decrease of $92.9 million in cash and cash equivalents and short-term investments due to $251.7 million of cash used to retire the Company’s 5.625% euro notes as noted above, $48.6 million of cash used in 2006 to pay dividends on the Company’s common stock, $53.3 million of cash used in 2006 for businesses acquired of which $41.2 million was due to the the previously announced acquisition of Nelipak Holdings B.V. on January 3, 2006, and $52.4 million of cash used to repurchase the Company’s common stock discussed above, partially offset by cash flow generated from operations;

·       an increase of $33.6 million in accounts payable, which includes $10.9 million from the effects of foreign currency. The balance of the increase was primarily due to the increased levels of inventory;

·       an increase of $28.1 million in accrued interest primarily due to an additional $33.2 million of accrued interest during 2006 related to the Company’s liability under the asbestos settlement agreement, partially offset by a decrease of $6.7 million due to the retirement of the Company’s 5.625% euro notes in July 2006; and

·       an increase of $25.5 million in accrued payroll. This increase was primarily due to increased payroll-related costs, including an increase in the accrual for management incentive compensation in 2006 since the Company met most of its 2006 performance objectives and $6.2 million from the effects of foreign currency translation.

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Current and Quick Ratios

The ratio of current assets to current liabilities, known as the current ratio, was 1.2 at December 31, 2006 and 1.1 at December 31, 2005. The ratio of current assets less inventory to current liabilities, known as the quick ratio, was 0.9 at December 31, 2006 and 0.8 at December 31, 2005.

Derivative Financial Instruments

Interest Rate Swaps

The information set forth in Item 8 of Part II of this Annual Report on Form 10-K in Note 11, “Derivatives and Hedging Activities,” of the Notes to the Company’s Consolidated Financial Statements under the caption “Interest Rate Swaps” is incorporated herein by reference.

Foreign Currency Forward Contracts

At December 31, 2006, the Company was party to foreign currency forward contracts, which did not have a significant impact on the Company’s liquidity.

The information set forth in Item 8 of Part II of this Annual Report on Form 10-K in Note 11, “Derivatives and Hedging Activities,” of the Notes to the Company’s Consolidated Financial Statements under the caption “Foreign Currency Forward Contracts” is incorporated herein by reference.

For further discussion about these contracts and other financial instruments, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”

Shareholders’ Equity

The Company’s shareholders’ equity was $1,654.8 million at December 31, 2006, $1,392.1 million at December 31, 2005 and $1,333.5 million at December 31, 2004.

Shareholders’ equity increased in 2006 primarily due to the following:

·       net earnings of $274.1 million;

·       a reduction in foreign currency translation adjustment of $99.0 million; and

·       $31.8 million due to the impact of the Company’s application of SAB 108. See Note 21 to the Consolidated Financial Statements for further information.

partially offset by;

·       $55.8 million from the impact of the Company’s adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” See Note 14 to the Consolidated Financial Statements for further information;

·       repurchases of the Company’s common stock, at a cost of $52.4 million; and

·       dividends paid on common stock of $48.6 million.

Shareholders’ equity increased in 2005 principally due to the following:

·       net earnings of $255.8 million;

partially offset by;

·       repurchases of the Company’s common stock, at a cost of $116.4 million; and

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·       an increase in foreign currency translation adjustment of $91.9 million.

Recently Issued Statements of Financial Accounting Standards, Accounting Guidance and Disclosure Requirements

The Company is subject to numerous recently issued statements of financial accounting standards, accounting guidance and disclosure requirements. Note 22, “New Accounting Pronouncements—Recently Issued Statements of Financial Accounting Standards, Accounting Guidance and Disclosure Requirements,” of the Notes to the Consolidated Financial Statements, which is contained in Item 8 of Part II of this Annual Report on Form 10-K, describes these new accounting pronouncements and is incorporated herein by reference.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, known as US GAAP. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Estimates and assumptions are evaluated on an ongoing basis and are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates, and while any differences may be material to the Company’s consolidated financial statements, the Company does not believe that the differences, taken as a whole, will be material.

The Company believes the following accounting policies are critical to its business operations and the understanding of results of operations and affect the more significant judgments and estimates used in the preparation of its consolidated financial statements:

Accounts Receivable—In the normal course of business, the Company extends credit to customers that satisfy pre-defined credit criteria. Accounts receivable, as shown on the consolidated balance sheets, are net of allowances for doubtful accounts. The Company maintains accounts receivable allowances for estimated losses resulting from the inability of its customers to make required payments. Additional allowances may be required if the financial condition of the Company’s customers deteriorates.

Commitments and Contingencies—Litigation—On an ongoing basis, the Company assesses the potential liabilities related to any lawsuits or claims brought against it. While it is typically very difficult to determine the timing and ultimate outcome of these actions, the Company uses its best judgment to determine if it is probable that it will incur an expense related to the settlement or final adjudication of these matters and whether a reasonable estimation of the probable loss, if any, can be made. In assessing probable losses, the Company makes estimates of the amount of insurance recoveries, if any. The Company accrues a liability when it believes a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recovery, it is possible that disputed matters may be resolved for amounts materially different from any provisions or disclosures that the Company has previously made. The Company expenses legal costs, including those legal costs expected to be incurred in connection with a loss contingency, as incurred.

Impairment of Long-Lived Assets—The Company periodically reviews long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Goodwill, in accordance with SFAS No. 142, is reviewed for possible impairment at least annually during the fourth quarter of each fiscal year. A review of goodwill

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may be initiated prior to conducting the annual analysis if events or changes in circumstances indicate that the carrying value of goodwill may be impaired. Assumptions and estimates used in the determination of impairment losses, such as future cash flows and disposition costs, may affect the carrying value of long-lived assets and possible impairment expense in the Company’s consolidated financial statements.

Self-Insurance—The Company retains the obligation for specified claims and losses related to property, casualty, workers’ compensation and employee benefit claims. The Company accrues for outstanding reported claims, claims that have been incurred but not reported, and projected claims based upon management’s estimates of the aggregate liability for uninsured claims using historical experience, insurance company estimates and the estimated trends in claim values. Although management believes it has the ability to adequately project and record estimated claim payments, actual results could differ significantly from the recorded liabilities.

Pensions—The Company maintains a non-contributory profit sharing plan and contributory thrift and retirement savings plan in which most U.S. employees of the Company are eligible to participate. For a limited number of its U.S. employees and for some of its non-U.S. employees, the Company maintains defined benefit pension plans. The Company accounts for these pension plans in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Under this accounting standard, the Company makes assumptions regarding the valuation of benefit obligations and performance of plan assets. The principal assumptions concern the discount rate used to measure future obligations, the expected future rate of return on plan assets, the expected rate of future compensation increases and various other actuarial assumptions. The measurement date used to determine the benefit obligations and the plan assets is December 31. In general, changes to these assumptions could have a significant impact on the costs and liabilities recorded under SFAS No. 158.

Income Taxes—The Company’s deferred tax assets arise from net deductible temporary differences and tax benefit carry forwards. The Company evaluates whether its taxable earnings during the periods when the temporary differences giving rise to deferred tax assets become deductible or when tax benefit carry forwards may be utilized should be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration dates of tax benefit carry forwards or the projected taxable earnings indicate that realization is not likely, the Company provides a valuation allowance.

In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of ongoing tax planning strategies and the realizability of tax benefit carry forwards, to determine which deferred tax assets are more likely than not to be realized in the future. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. In the event that actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance, which could materially impact the Company’s consolidated financial statements.

In calculating its worldwide provision for income taxes, the Company also evaluates its tax positions for years where the statutes of limitations have not expired. Based on this review, the Company may establish reserves for additional taxes and interest that could be assessed upon examination by relevant tax authorities. The Company adjusts these reserves in light of changing facts and circumstances, including the results of tax audits and changes in tax law.

Educational Donation

During the second quarter of 2006, the Company donated $1.5 million to the Harvard Business School in partial funding of a professorship in the name of T. J. Dermot Dunphy. Mr. Dunphy, a director of the Company, was Chief Executive Officer of the Company from March 1971 until his retirement in February 2000. He received a Master’s degree in Business Administration from the school in 1956.

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Non-GAAP Information

The Company’s management from time to time presents information that does not conform to U.S. Generally Accepted Accounting Principles, including changes in net sales excluding the effects of foreign currency translation. The Company’s management uses changes in net sales excluding the effects of foreign currency translation to measure the performance of the Company’s operations. Thus, management believes that this information may be useful to investors. Such measures are also among the criteria upon which performance-based compensation may be determined.

Item 7A.                Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates and commodity prices, which may adversely affect its financial condition and results of operations. 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

From time to time, the Company may use interest rate swaps, collars or options to manage its exposure to fluctuations in interest rates.

The Company’s interest rate swaps are described in Note 11, “Derivatives and Hedging Activities,” of the Notes to the Company’s Consolidated Financial Statements, which is contained in Part II, Item 8 of this Annual Report on Form 10-K and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Derivative Financial Instruments—Interest Rate Swaps” contained in Part II, Item 7 of this Annual Report on Form 10-K.