Back to GetFilings.com

Use these links to rapidly review the document
SEALED AIR CORPORATION AND SUBSIDIARIES Table Of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 1-12139

SEALED AIR CORPORATION
(Exact name of registrant as specified in its charter)

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 ý    NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ý    NO o

There were 84,976,620 shares of the registrant's common stock, par value $0.10 per share, issued and outstanding as of October 31, 2003.

SEALED AIR CORPORATION AND SUBSIDIARIES
Table Of Contents

2

PART I
FINANCIAL INFORMATION

SEALED AIR CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2003 and 2002
(In millions, except for per share data)
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

3

SEALED AIR CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
(In millions of dollars, except share data)
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

4

SEALED AIR CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2003 and December 31, 2002 (Continued)
(In millions of dollars, except share data)
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

5

SEALED AIR CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2003 and 2002
(In millions of dollars)
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

6

SEALED AIR CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2003 and 2002 (Continued)
(In millions of dollars)
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

7

SEALED AIR CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30, 2003 and 2002
(In millions of dollars)
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

8

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

(1)

Basis of Consolidation

The condensed consolidated financial statements include the accounts of Sealed Air Corporation and its subsidiaries (the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. In management's opinion, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the condensed consolidated financial position as of September 30, 2003 and the condensed consolidated results of operations for the three and nine months ended September 30, 2003 and 2002 have been made. The results set forth in the condensed consolidated statement of operations for the nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year. All amounts are approximate due to rounding.

The condensed consolidated financial statements were prepared following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP (accounting principles generally accepted in the United States of America) can be condensed or omitted.

The Company is responsible for the unaudited condensed consolidated financial statements included in this document. As these are condensed financial statements, they should be read in conjunction with the consolidated financial statements and notes included in the Company's latest Annual Report on Form 10-K.

(2)

Business Segment Information

⁽¹⁾

Includes a credit of $2.6 for Food Packaging and a charge of $1.3 for Protective and Specialty Packaging for the three and nine months ended September 30, 2002.

In accordance with SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131") the Company has allocated all of its goodwill to the corporate level rather than the individual segments since the Company's management views goodwill as a corporate asset. However, in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), the Company has allocated goodwill to each reportable segment in order to perform its annual impairment review of goodwill, which is done during the fourth quarter of each year.

9

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

The allocation of goodwill in accordance with SFAS No. 142 at September 30, 2003 and December 31, 2002 was as follows:

(3)

Accounts Receivable Securitization

The Company has an accounts receivable securitization program (the "Receivables Facility") with a bank (the "Bank") and an issuer of commercial paper administered by the Bank (the "ICP"). Under the Receivables Facility, the Company's two primary operating subsidiaries, Cryovac, Inc. and Sealed Air Corporation (US) (the "Originators"), sell all of their eligible U.S. accounts receivable to Sealed Air Funding Corporation ("SA Funding Corp."), an indirectly wholly owned subsidiary that the Company formed for the sole purpose of entering into the Receivables Facility. SA Funding Corp. in turn may sell undivided ownership interests in these receivables ("Receivables Interests") to the Bank and the ICP, subject to certain conditions, up to a maximum of $125.0 million of Receivables Interests outstanding from time to time.

The Bank has extended its commitment to make purchases of Receivables Interests from SA Funding Corp. to January 26, 2004. The scheduled expiration date for the Receivables Facility is December 7, 2004. During the first nine months of 2003, no Receivables Interests were sold under this facility and no such amounts were removed from the condensed consolidated balance sheets.

The Receivables Facility was amended on April 2, 2003 to provide that SA Funding Corp. may sell Receivables Interests aggregating up to $60.0 million, originated only by Sealed Air Corporation (US), to the Bank or the ICP until a definitve asbestos settlement agreement, satisfactory to the Bank, has been entered into. Subject to the Bank's determination that the asbestos settlement agreement that has been signed (see Note 10) is satisfactory, the Company expects that this facility will again become available for the sale of Receivables Interests originated by Cryovac, Inc. as well as Sealed Air Corporation (US) up to the maximum of $125.0 million of Receivables Interests provided for by the Receivables Facility.

The Receivables Facility was also amended on April 2, 2003 to exclude the charge for the asbestos litigation settlement that was reflected in the Company's condensed consolidated statement of operations for the year ended December 31, 2002 from the calculation of the interest coverage and leverage ratios provided for in the Receivables Facility. The Company was in compliance with these ratios at September 30, 2003.

10

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

(4)

Inventories

At September 30, 2003 and December 31, 2002, the components of inventories by major classification were as follows:

At September 30, 2003 and December 31, 2002, the cost of most U.S. inventories was determined by the last-in, first-out ("LIFO") inventory method. The cost of U.S. inventories determined by that method amounted to $141.3 million and $131.4 million, respectively. If the first-in, first-out ("FIFO") inventory method, which approximates replacement cost, had been used for these inventories, they would have been $20.7 million and $17.2 million higher at September 30, 2003 and December 31, 2002, respectively.

(5)

Income Taxes

The Company's effective income tax rates were 36.5% and 39.5% for the three months ended September 30, 2003 and 2002, respectively, and 36.5% and 40.5% for the nine months ended September 30, 2003 and 2002, respectively. Such rates were higher than the statutory U.S. federal income tax rate primarily due to state income taxes.

(6)

Restructuring and Other Charges

2001 Restructuring Program

The Company's restructuring liability, which arose out of a restructuring undertaken during 2001, amounted to $1.8 million at September 30, 2003 and $6.6 million at December 31, 2002. The components of the restructuring charges, spending and other activity through September 30, 2003 and the remaining liability balance at September 30, 2003 were as follows:

The cash outlays during the nine months ended September 30, 2003 included primarily severance and other personnel-related costs as well as lease and other contractual arrangement termination costs. The 2001 restructuring program was substantially completed at December 31, 2002. As of September 30, 2003, all of the 677 positions estimated to be eliminated under this program had been eliminated. The remaining cash outlays as of September 30, 2003 are primarily for severance-related costs that are expected to be paid in the remainder of 2003 and in future years.

11

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

(7)

Debt

The Company allowed its $525.0 million principal revolving credit facility to expire in accordance with its terms on March 30, 2003. Such facility had not been replaced as of September 30, 2003.

On April 14, 2003, the Company issued $300.0 million aggregate principal amount of 5.375% senior notes due April 2008 (the "5.375% Senior Notes") in transactions exempt from registration under Rule 144A and Regulation S under the Securities Act of 1933, as amended (the "Securities Act"). Accrued interest on these senior notes is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 2003. The net proceeds from the issuance of these senior notes after deducting the initial purchasers' discount, unamortized bond discount and other offering expenses were $296.1 million. The carrying value of these notes at September 30, 2003 was $295.4 million, net of unamortized discount and an adjustment to record a decrease in the fair value of the 5.375% Senior Notes due to changes in interest rates of $3.2 million related to certain interest rate swaps the Company has entered into with respect to these notes (see Note 8).

During the three months ended September 30, 2003, the Company entered into interest rate swaps related to the 8.75% Senior Notes due July 2008 which resulted in an adjustment to record an increase in the fair value of the 8.75% Senior Notes due to changes in interest rates of $6.4 million (see Note 8).

In July 2003, the Company issued a total of $1,281.25 million of senior notes in transactions that were exempt from registration under Rule 144A and other available exemptions under the Securities Act. On July 18, 2003, the net proceeds from these offerings and additional cash on hand were used to redeem the Company's Series A convertible preferred stock at the redemption price of $51.00 per share, for which the Company used $1,298.1 million of cash, plus an amount equal to dividends accrued from July 1, 2003 through July 17, 2003, for which the Company used $2.4 million of cash. The offerings included the following:

•

$400.0 million aggregate principal amount of 5.625% senior notes due July 15, 2013 (the "5.625% Senior Notes"). Accrued interest on the 5.625% Senior Notes is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2004. The net proceeds from this issuance, after deducting the initial purchasers' discount, unamortized bond discount and other offering expenses, were $395.6 million. The carrying value of these notes at September 30, 2003 was $398.7 million, net of unamortized discount.



•

$450.0 million aggregate principal amount of 6.875% senior notes due July 15, 2033 (the "6.875% Senior Notes"). Accrued interest on the 6.875% Senior Notes is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2004. The net proceeds from this issuance, after deducting the initial purchasers' discount, unamortized bond discount and other offering expenses, were $444.0 million. The carrying value of these notes at September 30, 2003 was $448.4 million, net of unamortized discount.



•

$431.25 million aggregate principal amount of 3% convertible senior notes due June 30, 2033 (the "3% Convertible Senior Notes"), after giving effect to the initial purchasers' exercise of an option on July 16, 2003 to purchase additional 3% Convertible Senior Notes. Accrued interest on the 3% Convertible Senior Notes is payable semi-annually in arrears on June 30 and December 30 of each year, commencing on December 30, 2003. The net proceeds from this issuance, after deducting the initial purchasers' discount and other offering expenses were, $421.5 million. The carrying value of these notes at September 30, 2003 was $431.25 million.

Holders of the 3% Convertible Senior Notes may convert those notes into shares of the Company's common stock at a conversion rate of 14.2857 shares per $1,000 principal amount of the notes (which is equal to a conversion price of $70.00 per share), subject to anti-dilution

12

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

adjustments (the "Conversion Rate"), before the close of business on June 30, 2033 only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2003, if the closing sale price of the Company's common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) during any period in which (i) the long-term credit rating assigned to the notes by Standard & Poor's Rating Services, a division of the McGraw-Hill Companies ("Standard and Poor's") or Moody's Investors Services, Inc. ("Moody's") is lower than BB+ or Ba2, respectively, (ii) either Standard & Poor's or Moody's no longer rates the notes or has withdrawn or suspended such rating, or (iii) the notes are not assigned a rating by both Standard & Poor's and Moody's; (3) during the five business day period immediately after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each day of that period was less than 98% of the product of the closing sale price of the Company's common stock and the Conversion Rate; (4) if the notes have been called for redemption; or (5) upon the occurrence of specified corporate events.

The Company has the option to redeem the 3% Convertible Senior Notes beginning July 2, 2007 at a price equal to 101.286% of their aggregate principal amount declining ratably to 100% of their aggregate principal amount on June 30, 2010.

The holders of the 3% Convertible Senior Notes have the option to require the Company to repurchase the 3% Convertible Senior Notes on June 30 of 2010, 2013, 2018, 2023 and 2028 or upon the occurrence of a fundamental change in or a termination of trading of the Company's common stock at a price equal to 100% of their principal amount, plus accrued and unpaid interest.

In connection with the issuance of the 3% Convertible Senior Notes, on September 5, 2003 the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission to register for resale the 6,160,708 shares of the Company's common stock issuable, subject to anti-dilution adjustments, upon conversion of such notes (the "Registration Statement"). As of the date hereof, the Registration Statement has not yet been declared effective.

Each issue of the Company's outstanding senior notes and the Company's outstanding Euro Notes impose certain limitations on the Company's operations and those of certain of the Company's subsidiaries, including limitations on liens, sale and leaseback transactions and certain acquisitions and dispositions. The Company was in compliance with these limitations at September 30, 2003.

The amount outstanding at September 30, 2003 under the Company's Australian dollar 175.0 million (U.S. $117.9 million at September 30, 2003) dual-currency revolving credit facility that expires on March 12, 2005 (the "ANZ Facility") was U.S. $47.5 million. The ANZ Facility imposes certain limitations on the operations of certain of the Company's Australian and New Zealand subsidiaries, and such subsidiaries were in compliance with these limitations at September 30, 2003.

At September 30, 2003, the Company had available committed and uncommitted lines of credit of $346.6 million of which $264.9 million were unused. Such credit lines included amounts available under the ANZ Facility as well as other lines of credit available to various subsidiaries. As of September 30, 2003, the total available lines of credit included committed lines of credit of $118.7 million and uncommitted lines of credit of $227.9 million. The ANZ Facility is the Company's principal committed line of credit. The Company is not subject to any material compensating balance requirements in connection with its lines of credit.

13

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

(8)

Derivatives and Hedging Activities

Foreign Currency Forward Contracts:

The Company is exposed to market risk, such as fluctuations in foreign currency exchange rates. The Company's subsidiaries have foreign currency exchange exposure from buying and selling in currencies other than their functional currencies. The primary purpose of the Company's foreign currency hedging activities is to manage the potential changes in value associated with the amounts receivable or payable on transactions denominated in foreign currencies. At September 30, 2003, the Company was party to foreign currency forward contracts with an aggregate notional amount of $68.0 million maturing through April 2004. Such contracts qualified and were designated as cash flow hedges and had original maturities of less than twelve months.

Interest Rate Swaps:

From time to time, the Company may use interest rate swaps to manage its exposure to fluctuations in interest rates. During the nine months ended September 30, 2003, the Company entered into interest rate swaps with a total notional amount of $500.0 million that qualify and were designated as fair value hedges. The interest rate swaps were entered into in order to convert a portion of the 5.375% Senior Notes and 8.75% Senior Notes into floating rate debt. At September 30, 2003, the Company recorded the following adjustments to long-term debt:

•

an adjustment to record a decrease in the fair value of the 5.375% Senior Notes due to changes in interest rates of $3.2 million and an adjustment to other liabilities to record the fair value of the interest rate swaps of $3.2 million; and



•

an adjustment to record an increase in the fair value of the 8.75% Senior Notes due to changes in interest rates of $6.4 million and an adjustment to other assets to record the fair value of the interest rate swaps of $6.4 million.

The Company also reduced interest expense $2.0 million and $2.1 million for the three and nine months ended September 30, 2003, respectively, due to the impact of these interest rate swaps.

U.S. Treasury Locks:

During the three months ended June 30, 2003, the Company entered into U.S. Treasury lock agreements with a total notional amount of $700.0 million that qualified and were designated as cash flow hedges. U.S. Treasury lock agreements are instruments used to manage the risks associated with the movements in U.S. Treasury rates. The Company entered into such agreements to manage interest rate risks arising from the planned issuance of the 5.375% Senior Notes in April 2003 and the planned issuance of the 5.625% Senior Notes and the 6.875% Senior Notes in July 2003 (see Note 7). The Company terminated these U.S. Treasury lock agreements prior to June 30, 2003 and received net cash proceeds of $13.9 million. Such amount has been reflected in other comprehensive income and is being amortized and reflected as a net reduction of interest expense over the life of the respective senior note issue. At September 30, 2003, the Company was not party to any of these types of contracts.

14

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

(9)

Earnings Per Common Share

The following table sets forth the reconciliation of the basic and diluted earnings per common share computations for the three and nine months ended September 30, 2003 and 2002:

⁽¹⁾

On July 18, 2003, the Company redeemed all of its outstanding shares of Series A convertible preferred stock at a redemption price of $51.00 per share and paid dividends accrued thereon from July 1, 2003 through July 17, 2003 in the aggregate amount of $2.40 million. The $51.00 per share redemption price included a $1.00 per share premium amounting to $25.45 million in the aggregate.

⁽²⁾

The basic earnings per common share calculations for the nine months ended September 30, 2003 include $0.01 and, for the three and nine months ended September 30, 2002 include $0.07 and $0.11, respectively, per share gains attributable to the repurchase of preferred stock. There was no such gain recognized for the three months ended September 30, 2003, since no shares of preferred stock were repurchased during that period but rather all outstanding shares of Series A convertible preferred stock were redeemed at a premium on July 18, 2003 (see note 1 above).

15

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

⁽³⁾

In calculating diluted earnings per common share, the weighted average number of common shares for the three and nine months ended September 30, 2003 assumes the issuance of nine million shares of common stock reserved for the asbestos settlement (see Note 10) and the exercise of dilutive stock options, net of assumed treasury stock repurchases. For the three and nine months ended September 30, 2002, the weighted average number of common shares assumes the effect of the weighted average conversion of repurchased shares of preferred stock and the effect of the assumed conversion of outstanding preferred stock.

⁽⁴⁾

For the purpose of calculating diluted earnings per common share for the three and nine months ended September 30, 2002, net earnings ascribed to common shareholders have been adjusted to exclude the gains attributable to the repurchase of preferred stock and to add back dividends attributable to such repurchased preferred stock, and the weighted average common shares outstanding have been adjusted to assume conversion of the shares of preferred stock repurchased during such periods in accordance with the Financial Accounting Standards Board's Emerging Issues Task Force Topic D-53 guidance.

(10)

Commitments and Contingencies

Asbestos Settlement and Related Costs

On November 27, 2002, the Company reached an agreement in principle with the appropriate parties to resolve all current and future asbestos-related claims made against the Company and its affiliates in connection with the Cryovac Transaction. The settlement will also resolve the fraudulent transfer claims, as well as indemnification claims by Fresenius, that had been made against the Company in connection with the Cryovac Transaction. On December 3, 2002, the agreement in principle was approved by the Company's Board of Directors. The Company was advised that both of the Committees had approved the agreement in principle as of December 5, 2002. For a description of the Cryovac Transaction, asbestos-related claims and the parties involved, see "Cryovac Transaction" and "Contingencies Related to the Cryovac Transaction" below.

The Company recorded a charge of $850.1 million as a result of the asbestos settlement in its condensed consolidated statement of operations as of December 31, 2002, which consisted of the following items:

•

a non-cash charge of $512.5 million covering 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. (referred to below as "New Grace"). Because it is uncertain when such a plan of reorganization may become effective, this liability was recorded as a current liability on the condensed consolidated balance sheet at December 31, 2002. Under the terms of the settlement, this amount accrues interest at a 5.5% annual rate from December 21, 2002 to the date of payment. Such interest is included in interest expense in the condensed consolidated statement of operations and in other current liabilities in the condensed consolidated balance sheets.



•

a non-cash charge of $321.5 million representing the fair market value of 9 million shares of the Company's common stock reserved for issuance pursuant to such settlement upon the effectiveness of New Grace's plan of reorganization. Such shares are subject to customary anti-dilution provisions (including the effects of stock splits, stock dividends and certain other events affecting the Company's common stock.) Such fair market value was $35.72 per common share as of the close of business on December 5, 2002. Such amount was recorded in the condensed consolidated balance sheet at December 31, 2002 as follows: $0.9 million representing the aggregate par value of such shares has been recorded in common stock reserved for issuance related to the asbestos settlement and the remaining $320.6 million, representing the excess of the aggregate fair market value over the aggregate par value of such common shares, has been recorded in additional paid-in capital. The shares of common stock reserved for issuance related to the asbestos settlement are reflected in the September 30, 2003 diluted earnings per common share calculation.

16

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

•

$16.1 million of legal and related fees as of December 31, 2002.

Other expense, net, included legal and related fees for asbestos-related matters for the three and nine months ended September 30, 2003 of $0.7 million and $2.5 million, respectively, and for the three and nine months ended September 30, 2002 of $5.6 million and $8.9 million, respectively.

Cryovac Transaction

On March 31, 1998, the Company completed a multi-step transaction (the "Cryovac Transaction"), which brought the Cryovac packaging business and the former Sealed Air Corporation ("old Sealed Air") under the common ownership of the Company. These businesses operate as subsidiaries of the Company, and the Company acts as a holding company. As part of that transaction, the Cryovac packaging business, held by various direct and indirect subsidiaries of the Company, was separated from the remaining businesses of the Company. Such remaining businesses were then contributed to a company now known as W. R. Grace & Co. ("New Grace"), whose shares were distributed to the Company's stockholders. As a result, New Grace became a separate publicly owned company. The Company recapitalized its outstanding shares of common stock into a new common stock and a new convertible preferred stock. A subsidiary of the Company then merged into old Sealed Air, which changed its name to Sealed Air Corporation (US). The agreements pursuant to which the Cryovac Transaction was carried out are referred to below as the "Transaction Agreements."

Contingencies Related to the Cryovac Transaction

In connection with the Cryovac Transaction, New Grace and its subsidiaries retained all liabilities arising out of their operations before the Cryovac Transaction, whether accruing or occurring before or after the Cryovac Transaction, other than liabilities arising from or relating to Cryovac's operations. The liabilities retained by New Grace include, among others, liabilities relating to asbestos-containing products previously manufactured or sold by New Grace's subsidiaries prior to the Cryovac Transaction, including its primary U.S. operating subsidiary, W. R. Grace & Co.—Conn., which has operated for decades and has been a subsidiary of New Grace since the Cryovac Transaction. The Transaction Agreements provided that, should any claimant seek to hold the Company, including any of its subsidiaries, responsible for liabilities of New Grace or its subsidiaries, including such asbestos-related liabilities, New Grace and its subsidiaries would indemnify and defend the Company.

Since the beginning of 2000, the Company has been served with a number of lawsuits alleging that, as a result of the Cryovac Transaction, the Company is responsible for alleged asbestos liabilities of New Grace and its subsidiaries, certain of which were also named as co-defendants in some of these actions. These actions include several purported class actions and a number of personal injury lawsuits. Some plaintiffs seek damages for personal injury or wrongful death, while others seek medical monitoring, environmental remediation or remedies related to an attic insulation product. Neither old Sealed Air nor Cryovac ever produced or sold any of the asbestos-containing materials that are the subjects of these cases. None of these cases has been resolved through judgment, settlement or otherwise. All such cases have been stayed in connection with New Grace's Chapter 11 bankruptcy proceeding discussed below.

While the allegations in these actions directed to the Company vary, these actions all appear to allege that the transfer of the Cryovac business as part of the Cryovac Transaction was a fraudulent transfer or gave rise to successor liability. Under a theory of successor liability, plaintiffs with claims against New Grace and its subsidiaries may attempt to hold the Company liable for liabilities that arose with respect to activities conducted prior to the Cryovac Transaction by W. R. Grace & Co. — Conn. or other New Grace subsidiaries. A transfer would be a fraudulent transfer if the transferor received less than reasonably equivalent value and the transferor was insolvent or was rendered insolvent by the transfer, was engaged or was about to engage in a business for which its assets constitute unreasonably small capital, or intended to incur or believed that it would incur debts beyond its ability to pay as they

17

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

mature. A transfer may also be fraudulent if it was made with actual intent to hinder, delay or defraud creditors. If any transfers in connection with the Cryovac Transaction were found by a court to be fraudulent transfers, the Company could be required to return the property or its value to the transferor or could be required to fund certain liabilities of New Grace or its subsidiaries for the benefit of their creditors, including asbestos claimants. The Company has signed a settlment agreement, described below, that will resolve all such claims. Previously, the Company was unable to estimate the loss or range of loss in the event that there had been a finding that the Cryovac Transaction was a fraudulent transfer or gave rise to successor liability.

In the Joint Proxy Statement furnished to their respective stockholders in connection with the Cryovac Transaction, both Sealed Air and Grace stated that it was their belief that New Grace and its subsidiaries were adequately capitalized and would be adequately capitalized after the Cryovac Transaction and that none of the transfers contemplated to occur in the Cryovac Transaction would be a fraudulent transfer. They also stated their belief that the Cryovac Transaction complied with other relevant laws. However, if a court applying the relevant legal standards had reached conclusions adverse to the Company, such determinations could have had a materially adverse effect on the Company's condensed consolidated results of operations and financial position.

On April 2, 2001, New Grace and certain of its subsidiaries filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in the District of Delaware. New Grace stated that the filing was made in response to a sharply increasing number of asbestos claims since 1999.

In connection with its Chapter 11 filing, New Grace filed an application with the Bankruptcy Court seeking to stay, among others, all actions brought against the Company (including certain of its subsidiaries) related to alleged asbestos liabilities of New Grace and its subsidiaries or alleging fraudulent transfer claims. The court issued an order dated May 3, 2001, which was modified on January 22, 2002, under which all such filed or pending actions against the Company were stayed and all such future actions are stayed upon filing and service on the Company. No further proceedings involving the Company can occur in the actions that have been stayed except upon further order of the Bankruptcy Court.

Committees appointed to represent asbestos claimants in New Grace's bankruptcy case received the court's permission to pursue fraudulent transfer and other claims against the Company and its subsidiary Cryovac, Inc. and against Fresenius, as discussed below. The claims against Fresenius are based upon a 1996 transaction between Fresenius and W. R. Grace & Co. — Conn. Fresenius is not affiliated with the Company. In March 2002, the court ordered that the issues of the solvency of New Grace following the Cryovac Transaction and whether New Grace received reasonably equivalent value in the Cryovac Transaction would be tried on behalf of all creditors of New Grace. The proceeding is pending in the U.S. Bankruptcy Court for the District of Delaware (Adv. No. 02-02210).

In June 2002, the court permitted the U.S. government to intervene as a plaintiff in the fraudulent transfer proceeding, so that the U.S. government could pursue allegations that remediation expenses at certain sites were underestimated or omitted in the solvency analyses of New Grace that were conducted at the time of the Cryovac Transaction. The court also permitted New Grace, which asserted that the Cryovac Transaction was not a fraudulent transfer, to intervene in the proceeding. In July 2002, the court issued an interim ruling on the legal standards to be applied in the trial, holding, among other things, that, subject to certain limitations, post-1998 claims should be considered in the solvency analysis of New Grace. The Company believes that only claims and liabilities that were known or reasonably should have been known at the time of the 1998 Cryovac Transaction should be considered pursuant to the applicable standard. The trial was scheduled to commence December 9, 2002.

18

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

On November 27, 2002, the Company reached an agreement in principle with the Committees prosecuting the claims against the Company and Cryovac, Inc., to resolve all current and future asbestos-related claims arising from the Cryovac Transaction. On the same day, the court entered an order confirming that an amicable resolution of the disputes among the parties had been reached and that counsel for the Company and the Committees had agreed and bound the parties to the terms of the agreement in principle. As discussed above, the agreement in principle calls for payment of 9 million shares of Sealed Air common stock and $512.5 million in cash, plus interest on the cash payment at a 5.5% annual rate starting on December 21, 2002 and ending on the effective date of the New Grace plan of reorganization, when payment must be made. Such shares are subject to customary anti-dilution provisions (including the effects of stock splits, stock dividends and certain other events affecting the Company's common stock). On December 3, 2002, the agreement in principle was approved by the Company's Board of Directors. The Company was advised that both of the Committees had approved the agreement in principle as of December 5, 2002. The parties signed a definitive settlement agreement as of November 10, 2003 consistent with the terms of the agreement in principle. On or before December 10, 2003, the settlement agreement will be presented to the court for approval and will eventually be incorporated into New Grace's plan of reorganization and, assuming approval by New Grace's creditors as part of the approval of the plan of reorganization, will then be implemented.

The settlement, upon approval and implementation in the New Grace bankruptcy, will provide that, upon the effective date of New Grace's plan of reorganization and payment of the shares and cash, all present and future asbestos-related claims against the Company and its affiliates that arise from alleged asbestos liabilities of New Grace and its affiliates (including former affiliates that became affiliates of the Company through the Cryovac Transaction) will be channeled to and become the responsibility of one or more trusts to be established under Section 524(g) of the Bankruptcy Code as part of New Grace's plan of reorganization. The settlement will also resolve all fraudulent transfer claims against the Company and its affiliates arising from the Cryovac Transaction as well as the claims of Fresenius described below. The settlement will provide that the Company and its affiliates will receive releases of all such claims upon payment. As a condition to the Company's obligation to make the payments required by the settlement, New Grace's plan of reorganization must be consistent with the terms of the settlement, including provisions for the trusts and releases referred to above and for an injunction barring the prosecution of any asbestos-related claims against the Company and its affiliates. Pursuant to the agreement, the Company cannot seek indemnity from New Grace for the Company's payments required by the settlement. It is expected that the order approving the settlement agreement will also provide that the stay of proceedings involving the Company described above will continue through the effective date of New Grace's plan of reorganization, after which the Company will be released from the liabilities asserted in those proceedings and their continued prosecution against the Company will be enjoined.

In January 2002, the Company filed a declaratory judgment action against Fresenius Medical Care Holdings, Inc., its parent, Fresenius AG, a German company, and certain of its affiliates (collectively, "Fresenius") in New York State court asking the court to resolve a contract dispute between the parties. Fresenius contended that the Company was obligated to indemnify Fresenius for certain liabilities that Fresenius might incur as a result of the 1996 Fresenius transaction mentioned above. Fresenius's contention was based on its interpretation of the agreements between Fresenius and W. R. Grace & Co. — Conn. in connection with the 1996 Fresenius transaction. In February 2002, Fresenius announced that it had accrued a charge of $172.0 million for such potential liabilities, which include pre-transaction tax liabilities of New Grace and the costs of defense of litigation arising from New Grace's Chapter 11 filing. The Company believed that it was not responsible to indemnify Fresenius under the 1996 agreements and filed the action in order to proceed to a resolution of Fresenius's claims. In April 2002, Fresenius filed a motion to dismiss the action and for entry of declaratory relief in its favor. The Company opposed the motion, and in July 2003, the court denied the motion without prejudice in view of the November 27, 2002 agreement in principle referred to above. As noted above, under the settlement agreement,

19

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

there will be mutual releases exchanged between Fresenius and the Company releasing any and all claims related to the 1996 Fresenius transaction. In view of New Grace's Chapter 11 filing, the Company may receive additional claims asserting that the Company is liable for obligations that New Grace had agreed to retain in the Cryovac Transaction and for which the Company may be contingently liable. To date, no material additional claims have been asserted or threatened against the Company.

Final determinations and accountings under the Transaction Agreements with respect to matters pertaining to the Cryovac Transaction had not been completed at the time of New Grace's Chapter 11 filing. The Company has filed claims in the bankruptcy proceeding that include all of the costs and liabilities that it has incurred or may incur that New Grace and its affiliates agreed to retain or that are subject to indemnification by New Grace and its affiliates under the Transaction Agreements other than payments to be made under the settlement agreement. New Grace has alleged that the Company is responsible for certain amounts under the Transaction Agreements. Any amounts for which the Company may be liable to New Grace may be used to offset the liabilities of New Grace and its affiliates to the Company. Costs and liabilities for which the Company intends to seek indemnification by New Grace and its affiliates include certain defense costs related to asbestos and fraudulent transfer litigation and the Fresenius claims and approximately $8.0 million paid by the Company on account of its guaranty of debt issued by W. R. Grace & Co. — Conn. Except to the extent of any potential setoff or similar claim, the Company expects that its claims will be as an unsecured creditor of New Grace. Since certain portions of the Company's claims against New Grace and its affiliates are contingent or unliquidated, it is not currently possible to determine the amount of the Company's claims, the extent to which such claims may be secured by setoff, how much of the claims may be allowed, or the amount of the Company's recovery on such claims, if any, in the bankruptcy proceeding.

On September 15, 2003, the case of Senn v. Hickey, et al. (Case No. 03-CV-4372) was filed 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 "Class Period"). The lawsuit names the Company and certain current and former officers and directors of the Company as defendants. The Company has not received service of process in this lawsuit. The lawsuit makes a number of allegations against the defendants, including allegations that during the Class 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 GAAP by failing to accrue for the Company's contingent liability for asbestos claims arising from past operations of New Grace. The plaintiffs seek compensatory damages and other relief. The Company intends to vigorously defend the lawsuit, since the Company believes that it properly disclosed its contingent liability for New Grace's asbestos claims. Although the Company believes that it should have no liability in this lawsuit, until the Company has had the opportunity to evaluate the claims made in the lawsuit, it cannot estimate the likelihood or potential costs of an unfavorable outcome.

(11)

Acquisitions

During the first nine months of 2003, the Company made acquisitions in exchange for cash in the aggregate amount of approximately $1.5 million. The Company did not acquire or assume any cash or debt of the acquired companies. These acquisitions were not material to the Company's consolidated results of operations and financial position.

(12)

New Accounting Pronouncements

On January 1, 2003, the Company adopted SFAS No. 143, "Asset Retirement Obligations" ("SFAS No. 143"), which provides the accounting requirements for retirement obligations associated with tangible long-lived assets. This statement requires entities to record the fair value of a liability for an asset

20

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

retirement obligation in the period in which it is incurred. The adoption of SFAS No. 143 did not have a material impact on the Company's consolidated financial statements.

In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3") and requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value in the period in which the liability is incurred. Under EITF 94-3, a liability for an exit cost was required to be recognized at the date of an entity's commitment to an exit plan. The adoption of SFAS No. 146 is expected to result in delayed recognition for certain types of costs as compared to the provisions of EITF 94-3. SFAS No. 146 is effective for new exit or disposal activities that are initiated after December 31, 2002, and does not affect amounts currently reported in the Company's condensed consolidated financial statements. SFAS No. 146 will affect the types and timing of costs included in future restructuring programs, if any.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation — Transition and Disclosure" ("SFAS No. 148"), which provides alternative methods of transition for companies that choose to switch to the fair value method of accounting for stock options. SFAS No. 148 also makes changes in the disclosure requirements for stock-based compensation, regardless of which method of accounting is chosen. The Company had terminated all previously maintained stock option plans effective March 31, 1998 in connection with the Cryovac Transaction, except with respect to options that were still outstanding as of such date. SFAS No. 148 did not have an impact on the Company's consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation No. 45"). Interpretation No. 45 requires the disclosure of certain guarantees existing at December 31, 2002. In addition, Interpretation No. 45 requires the recognition of a liability for the fair value of the obligation of qualifying guarantee activities that are initiated or modified after December 31, 2002. The Company had no material guarantees meeting the requirements of Interpretation No. 45 at September 30, 2003.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("Interpretation No. 46"). Interpretation No. 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has the controlling financial interest. Interpretation No. 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interests or significant financial support provided to it. Interpretation No. 46 was effective for the Company on February 1, 2003 for variable interest entities created after January 31, 2003, and on October 9, 2003, the FASB deferred the effective date for variable interest entities created prior to February 1, 2003 until December 31, 2003. Based on its preliminary analysis of Interpretation No. 46, the Company does not currently expect the adoption of Interpretation No. 46 to have a material impact on its 2003 consolidated financial statements.

In January 2003, the Emerging Issues Task Force issued EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the condensed consolidated statements of operations. That presumption is overcome when the consideration is either a reimbursement of specific, incremental, identifiable costs incurred to sell the vendor's products, or a payment for assets or services delivered to the vendor. EITF 02-16 is effective for arrangements entered into after December 31, 2002. The

21

SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts in millions of dollars, except per share data)
(Unaudited)

adoption of EITF 02-16 did not have a material impact on the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 became effective for the Company on July 1, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements.

22

Item 2.    Management's Discussion and Analysis of Results of Operations and Financial Condition

The information in Management's Discussion and Analysis of Results of Operations and Financial Condition should be read together with the Company's condensed consolidated financial statements and related notes set forth in Item 1 of Part I of this quarterly report on Form 10-Q. All amounts and percentages are approximate due to rounding.

Net Sales

Net sales for the third quarter of 2003 increased 10% to $908.7 million compared to $825.8 million in the third quarter of 2002. The components of the increase in net sales for the third quarter were as follows (dollars in millions):

Net sales for the first nine months of 2003 increased 10% to $2,597.1 million compared to $2,358.2 million in the first nine months of 2002. The components of the increase in net sales for the first nine months were as follows (dollars in millions):

Foreign currency translation had a favorable impact on net sales of $39.7 million in the third quarter of 2003. Excluding the positive effect of foreign currency translation, net sales would have increased 5% compared to the third quarter of 2002. Foreign currency translation also had a favorable impact on net sales of $129.1 million in the first nine months of 2003. Excluding the positive effect of foreign currency translation, net sales would have increased 5% compared to the first nine months of 2002. This favorable foreign currency translation impact in the third quarter and first nine months was primarily due to the strengthening of foreign currencies in Europe and the Asia-Pacific region against the U.S. dollar and in the first nine months of 2003 was partially offset by the weakness of the Brazilian real. Net sales from Brazilian operations were approximately 2% of the Company's net sales for the third quarters and first nine months of 2003 and 2002.

Net sales of the Company's food packaging segment, which consists primarily of the Company's Cryovac® food packaging products, constituted 63% and 62% of net sales in the third quarter and first nine months of 2003, respectively, and 61% in both the third quarter and first nine months of 2002.

Net sales of the Company's protective and specialty packaging segment, which includes the aggregation of the Company's protective packaging products, engineered products and shrink packaging products, all of which are used principally for non-food packaging applications, constituted the balance of net sales.

23

Food Packaging Segment Sales

Net sales of food packaging products increased 13% in the third quarter of 2003 to $568.7 million compared to $502.9 million in the third quarter of 2002. Foreign currency translation had a favorable impact on this segment of $27.5 million in the third quarter of 2003. Excluding the positive foreign currency translation effect, net sales for this segment would have increased 8%.

Net sales of food packaging products increased 12% in the first nine months of 2003 to $1,605.8 million compared to $1,436.3 million in the first nine months of 2002. Foreign currency translation had a favorable impact on this segment of $83.8 million in the first nine months of 2003. Excluding the positive foreign currency translation effect, net sales for this segment would have increased 6%.

Protective and Specialty Packaging Segment Sales

Net sales of protective and specialty packaging products increased 5% in the third quarter of 2003 to $340.0 million compared to $322.9 million in the third quarter of 2002. Foreign currency translation had a favorable impact on this segment of $12.2 million in the third quarter of 2003. Excluding the positive foreign currency translation effect, net sales for this segment would have increased 2%.

Net sales of protective and specialty packaging products increased 8% in the first nine months of 2003 to $991.3 million compared to $921.9 million in the first nine months of 2002. Foreign currency translation had a favorable impact on this segment of $45.3 million in the first nine months of 2003. Excluding the positive foreign currency translation effect, net sales for this segment would have increased 3%.

Sales by Geographic Region

The components of the increase in net sales by geographic region for the third quarter of 2003 were as follows (dollars in millions):

Net sales from operations in the United States represented 53% of net sales in the third quarter of 2003 and 55% in the third quarter of 2002. Net sales from U.S. operations increased 7% in the third quarter of 2003 to $485.0 million compared with $453.5 million in the third quarter of 2002. Net sales from international operations increased 14% in the third quarter of 2003 to $423.7 million compared to $372.3 million for the third quarter of 2002. Excluding the $39.7 million positive foreign currency translation effect, international net sales would have increased 3% compared to the third quarter of 2002.

The components of the increase in net sales by geographic region for the first nine months of 2003 were as follows (dollars in millions):

Net sales from operations in the United States represented 53% of net sales in the first nine months of 2003 and 55% in the first nine months of 2002. Net sales from U.S. operations increased 6% in the first nine months of 2003 to $1,375.2 million compared with $1,299.5 million in the first nine months

24

of 2002. Net sales from international operations increased 15% in the first nine months of 2003 to $1,221.9 million compared to $1,058.7 million for the first nine months of 2002. Excluding the $129.1 million positive foreign currency translation effect, international net sales would have increased 3% compared to the first nine months of 2002.

Costs and Margins

Gross profit was $288.9 million or 31.8% of net sales and $817.9 million or 31.5% of net sales in the third quarter and first nine months of 2003, respectively, compared to $264.1 million or 32.0% of net sales and $774.7 million or 32.9% of net sales in the third quarter and first nine months of 2002, respectively. The decrease as a percentage of net sales in the first nine months of 2003 compared to the 2002 period was primarily due to increased petrochemical-based raw materials costs in the first nine months of 2003 compared to the 2002 period.

Marketing, administrative and development expenses increased 7% in the third quarter of 2003 to $145.6 million compared to $136.7 million in the third quarter of 2002 and increased 8% in the first nine months of 2003 to $426.4 million compared to $395.8 million in the first nine months of 2002. As a percentage of net sales, these expenses were 16.0% and 16.6% of net sales in the third quarters of 2003 and 2002, respectively, and 16.4% and 16.8% in the first nine months of 2003 and 2002, respectively.

Operating Profit

Operating profit increased 11% in the third quarter of 2003 to $143.3 million compared to $128.7 million in the third quarter of 2002 and increased 3% in the first nine months of 2003 to $391.5 million compared to $380.2 million in the first nine months of 2002. The increase in the third quarter and first nine months of 2003 was primarily due to increased gross profit, partially offset by an increase in marketing, administrative and development expenses. As a percentage of net sales, operating profit was 15.8% and 15.6% in the third quarters of 2003 and 2002, respectively, and 15.1% and 16.1% in the first nine months of 2003 and 2002, respectively.

Operating profit by business segment for the 2003 and 2002 periods was as follows (dollars in millions):