Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1 Organization and Basis of Presentation
Organization
We are a leading global provider of packaging solutions integrating high-performance materials, automation, equipment and services. Sealed Air Corporation designs and delivers packaging solutions that protect goods, preserve food, automate packaging processes, enable eCommerce and digital connectivity for packaged goods. Our packaging solutions help customers automate their operations to be increasingly touchless and more resilient, safer, less wasteful, and enhance brand engagement with consumers. We deliver our packaging solutions to an array of end markets including fresh proteins, foods, fluids, medical and healthcare, eCommerce, logistics and omnichannel fulfillment operations, and industrials.
Our portfolio of packaging solutions includes CRYOVAC® brand food packaging, SEALED AIR® brand protective packaging, AUTOBAG® brand automated packaging, BUBBLE WRAP® brand packaging and SEE Touchless Automation™ solutions. We have established leading market positions through our differentiated packaging solutions, well-established customer relationships, iconic brands, and global scale and market access.
We conduct substantially all of our business through two wholly-owned subsidiaries, Cryovac, LLC and Sealed Air Corporation (US). Throughout this report, when we refer to “Sealed Air,” “SEE,” the “Company,” “we,” “our,” or “us,” we are referring to Sealed Air Corporation and all of our subsidiaries, except where the context indicates otherwise.
Basis of Presentation
Our Condensed Consolidated Financial Statements include all of the accounts of the Company and our subsidiaries. We have eliminated all significant intercompany transactions and balances in consolidation. In management’s opinion, all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of our Condensed Consolidated Balance Sheet as of March 31, 2022 and our Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021 have been made. The results set forth in our Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and in our Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year. The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. All amounts are in millions, except per share amounts, and approximate due to rounding. All amounts are presented in U.S. dollar, unless otherwise specified.
Our Condensed Consolidated Financial Statements were prepared in accordance with the interim reporting requirements of the SEC. As permitted under those rules, annual footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted. The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ from these estimates.
We are responsible for the unaudited Condensed Consolidated Financial Statements and notes included in this report. As these are condensed financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (“2021 Form 10-K”), which was filed with the SEC on February 22, 2022, and with the information contained in our other publicly-available filings with the SEC.
When we cross reference to a “Note,” we are referring to our “Notes to Condensed Consolidated Financial Statements,” unless the context indicates otherwise.
There were no significant changes to our significant accounting policies as disclosed in “Note 2 – Summary of Significant Accounting Policies and Recently Issued Accounting Standards” of our audited consolidated financial statements and notes thereto included in our 2021 Form 10-K.
Impact of Inflation and Currency Fluctuation
Argentina
Economic and political events in Argentina have continued to expose us to heightened levels of foreign currency exchange risk. As of July 1, 2018, Argentina was designated as a highly inflationary economy under U.S. GAAP, and the U.S. dollar replaced the Argentine peso as the functional currency for our subsidiaries in Argentina. All Argentine peso-denominated monetary assets and liabilities were remeasured into U.S. dollars using the current exchange rate available to us. The impact of any changes in the exchange rate are reflected within Other (expense) income, net on the Condensed Consolidated Statements of Operations. The Company recorded $1.0 million and $1.4 million of remeasurement losses for the three months ended March 31, 2022 and 2021, respectively.
Note 2 Recently Adopted and Issued Accounting Standards
Recently Adopted Accounting Standards
In July 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments (“ASU 2021-05”). ASU 2021-05 requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at commencement if the lease would have been classified as a sales-type or direct financing lease and the lessor would have recognized a selling loss at lease commencement. The Company adopted ASU 2021-05 on January 1, 2022. The adoption did not have a material impact on the Company's Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance ("ASU 2021-10"). ASU 2021-10 requires business entities to disclose information about certain types of government assistance received in the notes to the financial statements. ASU 2021-10 is effective for annual periods beginning after December 15, 2021. We do not believe that the adoption of ASU 2021-10 will have an impact on the Company's Condensed Consolidated Financial Statements with the exception of new disclosures, if government assistance provided to the Company were to be material in the future.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Topic 606, Revenue from Contracts with Customers. The standard will not impact acquired contract assets or liabilities from business combinations occurring prior to the adoption date. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The impact of adoption on the Company's Condensed Consolidated Financial Statements will be prospective only and will depend on the magnitude of any future business acquisitions.
Note 3 Revenue Recognition, Contracts with Customers
Description of Revenue Generating Activities
We employ sales, marketing and customer service personnel throughout the world who sell and market our equipment and systems, products, and services to and/or through a large number of distributors, fabricators, converters, eCommerce and mail order fulfillment firms, and contract packaging firms as well as directly to end-users such as food processors, food service businesses, supermarket retailers, pharmaceutical companies, healthcare facilities, medical device manufacturers, and other manufacturers.
As discussed in Note 6, “Segments,” our reporting segments are Food and Protective. Our Food applications are largely sold directly to end customers, while our Protective products are sold through business supply distributors and directly to end customers.
Food:
Food solutions are sold to food processors in fresh red meat, smoked and processed meats, poultry, seafood, plant-based and dairy (solid and liquids) markets worldwide. Food offers integrated packaging materials and automated equipment solutions to
increase food safety, extend shelf life, reduce food waste, automate processes and optimize total cost. Its materials, automated equipment and service enables customers to reduce costs and enhance their brands in the marketplace.
Food solutions are utilized by food service businesses (such as restaurants and entertainment venues) (“food service”) and food retailers (such as grocery stores and supermarkets) (“food retail”), among others. Solutions serving the food service market include products such as barrier bags and pouches, and are primarily marketed under the CRYOVAC® trademark and other highly recognized trade names including CRYOVAC® brand Barrier Bags, CRYOVAC® brand Form-Fill-Seal Films, and CRYOVAC® brand Auto Pouch System. Solutions serving the food retail market include products such as barrier bags, film, and trays, and are primarily marketed under the CRYOVAC® trademark and other highly recognized trade names including CRYOVAC® brand Grip & TearTM, CRYOVAC® brand Darfresh®, OptiDure™, Simple Steps®, and CRYOVAC® brand Barrier Bags.
Protective:
Protective packaging solutions are utilized across many global markets to protect goods during transit and are especially valuable to eCommerce, consumer goods, pharmaceutical and medical devices and industrial manufacturing. Protective solutions are designed to increase our customers' packaging velocity, minimize packaging waste, reduce labor dependencies and address dimensional weight challenges.
Protective solutions are sold through a strategic network of distributors as well as directly to our customers, including, but not limited to, fabricators, original equipment manufacturers, contract manufacturers, logistics partners and eCommerce/fulfillment operations. Protective solutions are marketed under SEALED AIR® brand, BUBBLE WRAP® brand, AUTOBAG® brand and other highly recognized trade names and product families including BUBBLE WRAP® brand inflatable packaging, SEALED AIR® brand performance shrink films, AUTOBAG® brand bagging systems, Instapak® polyurethane foam packaging solutions and Korrvu® suspension and retention packaging. In addition, we provide temperature assurance packaging solutions under the KevothermalTM and TempGuardTM brands.
Other Revenue Recognition Considerations:
Charges for rebates and other allowances are recognized as a deduction from revenue on an accrual basis in the period in which the associated revenue is recorded. Revenue recognized from performance obligations satisfied in previous reporting periods was an increase of $0.2 million and a reduction of $0.2 million for the three months ended March 31, 2022 and 2021, respectively.
The Company does not adjust consideration in contracts with customers for the effects of a significant financing component if the Company expects that the period between transfer of a good or service and payment for that good or service will be one year or less. This is expected to be the case for the majority of the Company's contracts.
Lease components within contracts with customers are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 842.
Disaggregated Revenue
For the three months ended March 31, 2022 and 2021, revenues from contracts with customers summarized by Segment and Geography were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2022 |
(In millions) | | | | | | | | Food | | Protective | | Total |
Americas | | | | | | | | $ | 524.9 | | | $ | 399.9 | | | $ | 924.8 | |
EMEA | | | | | | | | 166.6 | | | 123.8 | | | 290.4 | |
APAC | | | | | | | | 110.4 | | | 84.6 | | | 195.0 | |
| | | | | | | | | | | | |
Topic 606 Segment Revenue | | | | | | | | 801.9 | | | 608.3 | | | 1,410.2 | |
Non-Topic 606 Revenue (Leasing: Sales-type and Operating) | | | | | | | | 5.8 | | | 1.6 | | | 7.4 | |
Total | | | | | | | | $ | 807.7 | | | $ | 609.9 | | | $ | 1,417.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2021 |
(In millions) | | | | | | | | Food | | Protective | | Total |
Americas | | | | | | | | $ | 434.8 | | | $ | 348.1 | | | $ | 782.9 | |
EMEA | | | | | | | | 151.9 | | | 128.5 | | | 280.4 | |
APAC | | | | | | | | 109.9 | | | 86.8 | | | 196.7 | |
Topic 606 Segment Revenue | | | | | | | | 696.6 | | | 563.4 | | | 1,260.0 | |
Non-Topic 606 Revenue (Leasing: Sales-type and Operating) | | | | | | | | 5.6 | | | 1.5 | | | 7.1 | |
Total | | | | | | | | $ | 702.2 | | | $ | 564.9 | | | $ | 1,267.1 | |
Contract Balances
The time when a performance obligation is satisfied and the time when billing and payment occur are generally closely aligned, subject to agreed payment terms, with the exception of equipment accruals, which can be used to purchase both automated and standard range equipment. An equipment accrual is a contract offering, whereby a customer is incentivized to use a portion of the materials transaction price for future equipment purchases. Long-term contracts that include an equipment accrual create a timing difference between when cash is collected and when the performance obligation is satisfied, resulting in a contract liability (unearned revenue). The following contract assets and liabilities are included within Prepaid expenses and other current assets and Other current liabilities, or Other non-current liabilities on our Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021: | | | | | | | | | | | | | | |
(In millions) | | March 31, 2022 | | December 31, 2021 |
Contract assets | | $ | 0.7 | | | $ | 1.2 | |
| | | | |
| | | | |
Contract liabilities | | $ | 19.3 | | | $ | 20.2 | |
The contract liability balances represent deferred revenue, primarily related to equipment accruals. Revenue recognized in the three months ended March 31, 2022 and 2021 that was included in the contract liability balance at the beginning of the period was $4.4 million and $5.8 million, respectively. This revenue was driven primarily by equipment performance obligations being satisfied.
Remaining Performance Obligations
The following table summarizes the estimated transaction price from contracts with customers allocated to performance obligations or portions of performance obligations that have not yet been satisfied as of March 31, 2022 and December 31, 2021, as well as the expected timing of recognition of that transaction price. | | | | | | | | | | | | | | |
(In millions) | | March 31, 2022 | | December 31, 2021 |
Short-Term (12 months or less)(1) | | $ | 15.7 | | | $ | 15.9 | |
Long-Term | | 3.6 | | | 4.3 | |
Total transaction price | | $ | 19.3 | | | $ | 20.2 | |
(1) Our enforceable contractual obligations tend to be short term in nature. The table above does not include the transaction price of any remaining performance obligations that are part of the contracts with expected durations of one year or less.
Note 4 Leases
Lessor
SEE has contractual obligations as a lessor with respect to some of our automated and equipment solutions including "free on loan" equipment and leased equipment, both sales-type and operating. The consideration in a contract that contains both lease and non-lease components is allocated based on the standalone selling price.
Our contractual obligations for operating leases can include termination and renewal options. Our contractual obligations for sales-type leases tend to have fixed terms and can include purchase options. We utilize the reasonably certain threshold criteria in determining which options our customers will exercise.
All lease payments are primarily fixed in nature and therefore captured in the lease receivable. Our sales-type lease receivable balances at March 31, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | | | | |
(In millions) | | March 31, 2022 | | December 31, 2021 |
Short-Term (12 months or less) | | $ | 5.9 | | | $ | 5.7 | |
Long-Term | | 17.7 | | | 18.8 | |
Lease receivables | | $ | 23.6 | | | $ | 24.5 | |
Sales-type and operating lease revenue was less than 1% of net trade sales for the three months ended March 31, 2022 and year ended December 31, 2021.
Lessee
SEE has contractual obligations as a lessee with respect to warehouses, offices and manufacturing facilities, IT equipment, automobiles, and material production equipment.
The following table details our lease obligations included in our Condensed Consolidated Balance Sheets. | | | | | | | | | | | | | | |
(In millions) | | March 31, 2022 | | December 31, 2021 |
Other non-current assets: | | | | |
Finance leases - ROU assets | | $ | 58.2 | | | $ | 58.0 | |
Finance leases - Accumulated depreciation | | (28.8) | | | (27.3) | |
Operating lease right-of-use-assets: | | | | |
Operating leases - ROU assets | | 139.8 | | | 133.5 | |
Operating leases - Accumulated depreciation | | (74.3) | | | (69.7) | |
Total lease assets | | $ | 94.9 | | | $ | 94.5 | |
Current portion of long-term debt: | | | | |
Finance leases | | $ | (9.2) | | | (10.2) | |
Current portion of operating lease liabilities: | | | | |
Operating leases | | (21.2) | | | (21.2) | |
Long-term debt, less current portion: | | | | |
Finance leases | | (18.9) | | | (19.2) | |
Long-term operating lease liabilities, less current portion: | | | | |
Operating leases | | (45.8) | | | (44.5) | |
Total lease liabilities | | $ | (95.1) | | | $ | (95.1) | |
At March 31, 2022, estimated future minimum annual rental commitments under non-cancelable real and personal property leases were as follows: | | | | | | | | | | | | | | |
(In millions) | | Finance leases | | Operating leases |
Remainder of 2022 | | $ | 8.2 | | | $ | 18.6 | |
2023 | | 7.8 | | | 19.6 | |
2024 | | 3.0 | | | 13.6 | |
2025 | | 2.1 | | | 9.6 | |
2026 | | 2.0 | | | 6.9 | |
Thereafter | | 10.0 | | | 6.8 | |
Total lease payments | | 33.1 | | | 75.1 | |
Less: Interest | | (5.0) | | | (8.1) | |
Present value of lease liabilities | | $ | 28.1 | | | $ | 67.0 | |
The following lease cost is included in our Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
Lease cost(1) | | | | | | | | |
Finance leases | | | | | | | | |
Amortization of ROU assets | | | | | | $ | 2.7 | | | $ | 2.6 | |
Interest on lease liabilities | | | | | | 0.3 | | | 0.4 | |
Operating leases | | | | | | 8.5 | | | 7.7 | |
Short-term lease cost | | | | | | 0.4 | | | 1.1 | |
Variable lease cost | | | | | | 1.6 | | | 1.9 | |
Total lease cost | | | | | | $ | 13.5 | | | $ | 13.7 | |
(1) With the exception of Interest on lease liabilities, we record lease costs to Cost of sales or Selling, general and administrative expenses on the Condensed Consolidated Statements of Operations, depending on the use of the leased asset. Interest on lease liabilities is recorded to Interest expense, net on the Condensed Consolidated Statements of Operations.
The following table details cash paid related to operating and finance leases included in our Condensed Consolidated Statements of Cash Flows and new ROU assets included in our Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(In millions) | | 2022 | | 2021 |
Other information: | | | | |
| | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows - finance leases | | $ | 1.1 | | | $ | 1.8 | |
Operating cash flows - operating leases | | $ | 8.7 | | | $ | 8.0 | |
Financing cash flows - finance leases | | $ | 2.7 | | | $ | 2.6 | |
| | | | |
ROU assets obtained in exchange for new finance lease liabilities | | $ | 1.4 | | | $ | 1.1 | |
ROU assets obtained in exchange for new operating lease liabilities | | $ | 9.2 | | | $ | 2.4 | |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Weighted average information: | | | | |
Finance leases | | | | |
Remaining lease term (in years) | | 5.9 | | 6.1 |
Discount rate | | 4.6 | % | | 4.8 | % |
Operating leases | | | | |
Remaining lease term (in years) | | 4.3 | | 4.5 |
Discount rate | | 4.5 | % | | 5.0 | % |
Note 5 Acquisition and Divestiture Activity
Acquisition of Foxpak Flexibles Ltd.
On February 2, 2022, SEE acquired Foxpak Flexibles Ltd. (“Foxpak”), a privately-owned Irish packaging solutions company. Foxpak is a digital printing pioneer that partners with brands to deliver highly decorated packaging solutions; stand-up and spout pouches, and sachets that serve a variety of markets including food retail, pet food, seafood, and snacks. This transaction resulted in a purchase price paid of $9.1 million. The Company allocated the consideration transferred to the fair value of assets acquired and liabilities assumed, resulting in an allocation to goodwill of $5.0 million and $2.5 million to identifiable intangible
assets. The acquisition is included in our Food reporting segment. Goodwill is not deductible for tax purposes. A deferred tax liability of $0.3 million on identifiable intangible assets was recorded on the opening balance sheet.
Divestiture of Reflectix, Inc.
On November 1, 2021, the Company completed the sale of Reflectix, Inc. (“Reflectix”), a wholly-owned subsidiary that sells branded reflective insulation solutions, with operations located in Markleville, Indiana. The decision to sell this business was consistent with the Company's overall strategic priorities focused on packaging solutions. Reflectix was previously included within the Protective reporting segment.
The disposal does not represent a strategic shift that will have a major effect on our operations and financial results and therefore did not qualify as a discontinued operation.
The selling price of the business was $82.5 million, paid in cash during the fourth quarter 2021. We recorded a $45.3 million pre-tax gain on the sale of the business, within Gain (Loss) on sale of businesses and property and equipment on the Consolidated Statements of Operations for the year ended December 31, 2021. The business had a net carrying value of $35.8 million, which included inventory of $6.8 million, trade receivables of $6.6 million, property and equipment of $1.0 million, and goodwill of $23.2 million. The goodwill is not deductible for tax purposes. The assets were partially offset by accrued liabilities which were individually immaterial. We recorded $17.3 million in tax expense related to the gain from the sale of Reflectix within Income tax provision on the Consolidated Statements of Operations for the year ended December 31, 2021.
The sales price is subject to final and customary purchase price true-ups. We maintain no on-going investment or relationship that would result in the sold business becoming a related party.
Note 6 Segments
The Company’s segment reporting structure consists of two reportable segments as follows and a Corporate category:
•Food
•Protective
The Company’s Food and Protective segments are considered reportable segments under FASB ASC Topic 280. Our reportable segments are aligned with similar groups of products. Corporate includes certain costs that are not allocated to the reportable segments. The Company evaluates performance of the reportable segments based on the results of each segment. The performance metric used by the Company's chief operating decision maker to evaluate performance of our reportable segments is Segment Adjusted EBITDA. The Company allocates expense to each segment based on various factors including direct usage of resources, allocation of headcount, allocation of software licenses or, in cases where costs are not clearly delineated, costs may be allocated on portion of either net trade sales or an expense factor such as cost of sales.
We allocate and disclose depreciation and amortization expense to our segments, although depreciation and amortization are not included in the segment performance metric Segment Adjusted EBITDA. We also allocate and disclose restructuring charges by segment, although they are not included in the segment performance metric Segment Adjusted EBITDA since restructuring charges are categorized as Special Items (as identified below). The accounting policies of the reportable segments and Corporate are the same as those applied to the Condensed Consolidated Financial Statements.
The following tables show Net sales and Segment Adjusted EBITDA by reportable segment:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
Net sales: | | | | | | | | |
Food | | | | | | $ | 807.7 | | | $ | 702.2 | |
As a % of Consolidated net sales | | | | | | 57.0 | % | | 55.4 | % |
Protective | | | | | | 609.9 | | | 564.9 | |
As a % of Consolidated net sales | | | | | | 43.0 | % | | 44.6 | % |
Consolidated Net sales | | | | | | $ | 1,417.6 | | | $ | 1,267.1 | |
| | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
Segment Adjusted EBITDA: | | | | | | | | |
Food | | | | | | $ | 200.4 | | | $ | 156.9 | |
Adjusted EBITDA Margin | | | | | | 24.8 | % | | 22.3 | % |
Protective | | | | | | 127.4 | | | 109.9 | |
Adjusted EBITDA Margin | | | | | | 20.9 | % | | 19.5 | % |
Total Segment Adjusted EBITDA | | | | | | $ | 327.8 | | | $ | 266.8 | |
| | | | | | | | |
The following table shows a reconciliation of Segment Adjusted EBITDA to Earnings before income tax provision:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
Food Adjusted EBITDA | | | | | | $ | 200.4 | | | $ | 156.9 | |
Protective Adjusted EBITDA | | | | | | 127.4 | | | 109.9 | |
Corporate Adjusted EBITDA | | | | | | (0.9) | | | 1.4 | |
Interest expense, net | | | | | | (38.9) | | | (43.1) | |
Depreciation and amortization(1) | | | | | | (63.2) | | | (56.9) | |
Special Items: | | | | | | | | |
Restructuring charges(2) | | | | | | (0.5) | | | — | |
Other restructuring associated costs(3) | | | | | | (3.1) | | | (5.3) | |
Foreign currency exchange loss due to highly inflationary economies | | | | | | (1.0) | | | (1.4) | |
Loss on debt redemption and refinancing activities | | | | | | (0.7) | | | — | |
| | | | | | | | |
Impairment of equity investment | | | | | | (15.5) | | | — | |
Charges related to acquisition and divestiture activity | | | | | | 0.9 | | | (0.3) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other Special Items(4) | | | | | | 4.1 | | | (0.8) | |
Pre-tax impact of Special Items | | | | | | (15.8) | | | (7.8) | |
Earnings before income tax provision | | | | | | $ | 209.0 | | | $ | 160.4 | |
(1)Depreciation and amortization by segment were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
Food | | | | | | $ | 36.5 | | | $ | 31.7 | |
Protective | | | | | | 26.7 | | | 25.2 | |
| | | | | | | | |
Total Company depreciation and amortization(i) | | | | | | $ | 63.2 | | | $ | 56.9 | |
| | | | | | | | |
| | | | | | | | |
(i) Includes share-based incentive compensation of $17.9 million and $11.5 million for the three months ended March 31, 2022 and 2021, respectively.
(2)Restructuring charges by segment were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
Food | | | | | | $ | 0.6 | | | $ | (0.2) | |
Protective | | | | | | (0.1) | | | 0.2 | |
Total Company restructuring charges | | | | | | $ | 0.5 | | | $ | — | |
(3)Restructuring associated costs for the three months ended March 31, 2022 primarily relate to fees paid to third-party consultants in support of the Reinvent SEE business transformation. Restructuring associated costs for the three months ended March 31, 2021, primarily relate to a one-time, non-cash cumulative translation adjustment (CTA) loss recognized due to the wind-up of one of our legal entities as well as fees paid to third-party consultants in support of the Reinvent SEE business transformation.
(4)Other Special Items for the three months ended March 31, 2022 primarily relate to a one-time gain on the disposal of land in the United Kingdom (UK).
Assets by Reportable Segments
The following table shows assets allocated by reportable segment. Assets allocated by reportable segment include: trade receivables, net; inventory, net; property and equipment, net; goodwill; intangible assets, net; and leased systems, net.
| | | | | | | | | | | | | | |
(In millions) | | March 31, 2022 | | December 31, 2021 |
Assets allocated to segments: | | | | |
Food | | $ | 2,309.8 | | | $ | 2,169.0 | |
Protective | | 2,901.8 | | | 2,844.3 | |
Total segments | | 5,211.6 | | | 5,013.3 | |
Assets not allocated: | | | | |
Cash and cash equivalents | | $ | 278.2 | | | $ | 561.0 | |
Non-current assets held for sale | | — | | | 1.5 | |
Income tax receivables | | 17.1 | | | 28.8 | |
Other receivables | | 80.8 | | | 83.7 | |
Deferred taxes | | 138.2 | | | 138.4 | |
Other | | 391.1 | | | 402.6 | |
Total | | $ | 6,117.0 | | | $ | 6,229.3 | |
Note 7 Inventories, net
The following table details our inventories, net:
| | | | | | | | | | | | | | |
(In millions) | | March 31, 2022 | | December 31, 2021 |
Raw materials | | $ | 197.7 | | | $ | 167.6 | |
Work in process | | 177.7 | | | 158.0 | |
Finished goods | | 468.3 | | | 400.1 | |
Total | | $ | 843.7 | | | $ | 725.7 | |
Note 8 Property and Equipment, net
The following table details our property and equipment, net. | | | | | | | | | | | | | | |
(In millions) | | March 31, 2022 | | December 31, 2021 |
Land and improvements | | $ | 47.8 | | | $ | 47.0 | |
Buildings | | 792.1 | | | 790.2 | |
Machinery and equipment | | 2,594.2 | | | 2,554.0 | |
Other property and equipment | | 124.6 | | | 124.2 | |
Construction-in-progress | | 197.0 | | | 200.8 | |
Property and equipment, gross | | 3,755.7 | | | 3,716.2 | |
Accumulated depreciation and amortization | | (2,503.4) | | | (2,484.2) | |
Property and equipment, net | | $ | 1,252.3 | | | $ | 1,232.0 | |
The following table details our interest cost capitalized and depreciation and amortization expense for property and equipment and finance lease ROU assets.
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
Interest cost capitalized | | | | | | $ | 1.7 | | | $ | 1.5 | |
Depreciation and amortization expense(1) | | | | | | $ | 35.9 | | | $ | 35.9 | |
(1)Includes amortization expense of finance lease ROU assets of $2.7 million and $2.6 million for the three months ended March 31, 2022 and 2021, respectively.
Note 9 Goodwill and Identifiable Intangible Assets, net
Goodwill
The following table shows our goodwill balances by reportable segment. We review goodwill for impairment on a reporting unit basis annually during the fourth quarter of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Since the date of our last annual goodwill impairment assessment, we have not identified any changes in circumstances that would indicate the carrying value of goodwill is not recoverable.
Allocation of Goodwill to Reporting Segment
The following table shows our goodwill balances by reportable segment:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | Food | | Protective | | Total |
Gross Carrying Value at December 31, 2021 | | $ | 576.6 | | | $ | 1,803.0 | | | $ | 2,379.6 | |
Accumulated amortization(1) | | (49.3) | | | (140.9) | | | (190.2) | |
Carrying Value at December 31, 2021 | | $ | 527.3 | | | $ | 1,662.1 | | | $ | 2,189.4 | |
Acquisition(2) | | 5.0 | | | — | | | 5.0 | |
Currency translation | | (0.1) | | | (2.1) | | | (2.2) | |
| | | | | | |
Carrying Value at March 31, 2022 | | $ | 532.2 | | | $ | 1,660.0 | | | $ | 2,192.2 | |
(1)There was no change to our accumulated amortization balance during the three months ended March 31, 2022.
(2)Represents the allocation of goodwill related to our acquisition of Foxpak. See Note 5, "Acquisition and Divestiture Activity," for further details.
Identifiable Intangible Assets, net
The following tables summarize our identifiable intangible assets, net with definite and indefinite useful lives. As of March 31, 2022, there were no impairment indicators present.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
(In millions) | Gross Carrying Value | | Accumulated Amortization | | | | Net | | Gross Carrying Value | | Accumulated Amortization | | | | Net |
Customer relationships | $ | 102.9 | | | $ | (43.9) | | | | | $ | 59.0 | | | $ | 102.7 | | | $ | (42.4) | | | | | $ | 60.3 | |
Trademarks and tradenames | 31.3 | | | (12.3) | | | | | 19.0 | | | 31.2 | | | (11.5) | | | | | 19.7 | |
Software | 130.6 | | | (95.9) | | | | | 34.7 | | | 125.5 | | | (90.5) | | | | | 35.0 | |
Technology | 67.4 | | | (40.1) | | | | | 27.3 | | | 64.9 | | | (38.3) | | | | | 26.6 | |
Contracts | 11.5 | | | (9.5) | | | | | 2.0 | | | 11.5 | | | (9.4) | | | | | 2.1 | |
Total intangible assets with definite lives | 343.7 | | | (201.7) | | | | | 142.0 | | | 335.8 | | | (192.1) | | | | | 143.7 | |
Trademarks and tradenames with indefinite lives | 8.9 | | | — | | | | | 8.9 | | | 8.9 | | | — | | | | | 8.9 | |
Total identifiable intangible assets, net | $ | 352.6 | | | $ | (201.7) | | | | | $ | 150.9 | | | $ | 344.7 | | | $ | (192.1) | | | | | $ | 152.6 | |
The following table shows the remaining estimated future amortization expense at March 31, 2022.
| | | | | | | | |
Year | | Amount (In millions) |
Remainder of 2022 | | $ | 26.3 | |
2023 | | 27.2 | |
2024 | | 21.1 | |
2025 | | 15.0 | |
2026 | | 9.3 | |
Thereafter | | 43.1 | |
Total | | $ | 142.0 | |
Expected future cash flows associated with the Company's intangible assets are not expected to be materially affected by the Company's intent or ability to renew or extend the arrangements. Based on our experience with similar agreements, we expect to continue to renew contracts held as intangibles through the end of their remaining useful lives.
Note 10 Accounts Receivable Securitization Programs
U.S. Accounts Receivable Securitization Program
We and a group of our U.S. operating subsidiaries maintain an accounts receivable securitization program under which they sell eligible U.S. accounts receivable to a wholly-owned subsidiary that was formed for the sole purpose of entering into this program. The wholly-owned subsidiary in turn may sell an undivided fractional ownership interest in these receivables to two banks and issuers of commercial paper administered by these banks. The wholly-owned subsidiary retains the receivables it purchases from the operating subsidiaries. Any transfers of fractional ownership interests of receivables under the U.S. receivables securitization program to the two banks and issuers of commercial paper administered by these banks are considered secured borrowings with the underlying receivables as collateral and will be classified as short-term borrowings on our Condensed Consolidated Balance Sheets. These banks do not have any recourse against the general credit of the Company. The net trade receivables that served as collateral for these borrowings are reclassified from trade receivables, net to prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. There were no borrowings or corresponding net trade receivables maintained as collateral as of March 31, 2022 or December 31, 2021.
As of March 31, 2022, the maximum purchase limit for receivable interests was $50.0 million, subject to the availability limits described below.
The amounts available from time to time under this program may be less than $50.0 million due to a number of factors, including but not limited to our credit ratings, trade receivable balances, the creditworthiness of our customers and our receivables collection experience. As of March 31, 2022, the amount available to us under the program was $50.0 million. Although we do not believe restrictions under this program presently materially restrict our operations, if an additional event occurs that triggers one of these restrictive provisions, we could experience a decline in the amounts available to us under the program or termination of the program.
The program expires annually and is renewable.
European Accounts Receivable Securitization Program
We and a group of our European subsidiaries maintain an accounts receivable securitization program with a special purpose vehicle, or SPV, two banks, and issuers of commercial paper administered by these banks. The European program is structured to be a securitization of certain trade receivables that are originated by certain of our European subsidiaries. The SPV borrows funds from the banks to fund its acquisition of the receivables and provides the banks with a first priority perfected security interest in the accounts receivable. We do not have an equity interest in the SPV. We concluded the SPV is a variable interest entity because its total equity investment at risk is not sufficient to permit the SPV to finance its activities without additional subordinated financial support from the bank via loans or via the collections from accounts receivable already purchased. Additionally, we are considered the primary beneficiary of the SPV since we control the activities of the SPV and are exposed to the risk of uncollectible receivables held by the SPV. Therefore, the SPV is consolidated in our Condensed Consolidated Financial Statements. Any activity between the participating subsidiaries and the SPV is eliminated in consolidation. Loans from the banks to the SPV will be classified as short-term borrowings on our Condensed Consolidated Balance Sheets. The net trade receivables that served as collateral for these borrowings are reclassified from trade receivables, net to prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. There were no borrowings or corresponding net trade receivables maintained as collateral as of March 31, 2022 or December 31, 2021.
As of March 31, 2022, the maximum purchase limit for receivable interests was €80.0 million ($89.3 million equivalent at March 31, 2022), subject to availability limits. The terms and provisions of this program are similar to our U.S. program discussed above. As of March 31, 2022, the amount available under this program before utilization was €80.0 million ($89.3 million equivalent as of March 31, 2022).
This program expires annually and is renewable.
Utilization of Our Accounts Receivable Securitization Programs
As of March 31, 2022 and December 31, 2021, there were no outstanding borrowings under our U.S. or European programs. We continue to service the trade receivables supporting the programs, and the banks are permitted to re-pledge this collateral. There was no interest paid for these programs in the three months ended March 31, 2022 or 2021.
Under limited circumstances, the banks and the issuers of commercial paper can end purchases of receivables interests before the above expiration dates. A failure to comply with debt leverage or various other ratios related to our receivables collection experience could result in termination of the receivables programs. We were in compliance with these ratios at March 31, 2022.
Note 11 Accounts Receivable Factoring Agreements
The Company has entered into factoring agreements and customers' supply chain financing arrangements to sell certain trade receivables to unrelated third-party financial institutions. These programs are entered into in the normal course of business. We account for these transactions in accordance with ASC 860, "Transfers and Servicing" ("ASC 860"). ASC 860 allows for the ownership transfer of accounts receivable to qualify for true-sale treatment when the appropriate criteria is met, which permits the Company to present the balances sold under the program to be excluded from Trade receivables, net on the Condensed Consolidated Balance Sheets. Receivables are considered sold when (i) they are transferred beyond the reach of the Company and its creditors, (ii) the purchaser has the right to pledge or exchange the receivables, and (iii) the Company has no continuing involvement in the transferred receivables. In addition, the Company provides no other forms of continued financial support to the purchaser of the receivables once the receivables are sold.
Gross amounts factored under this program for the three months ended March 31, 2022 and 2021 were $172.1 million and $155.9 million, respectively. The fees associated with transfer of receivables for all programs were approximately $1.3 million and $0.9 million for the three months ended March 31, 2022 and 2021, respectively.
Note 12 Restructuring Activities
For the three months ended March 31, 2022, the Company incurred $0.5 million of restructuring charges and $3.1 million of other costs associated with our restructuring program. These charges were incurred in connection with the Company’s Reinvent SEE business transformation.
In December 2018, the Board of Directors approved our Reinvent SEE business transformation, which included the related three-year restructuring program (“Program”). Spend associated with our previously existing restructuring programs at the time of Reinvent SEE’s approval was substantially completed as of December 31, 2020, and is no longer included in the restructuring program totals below.
The Board of Directors originally approved cumulative restructuring spend up to $220 million. In December 2021, the Board of Directors approved a six-month extension to the original three-year estimate. The six-month extension does not expand the original total Program spend and is primarily related to on-going initiatives, including those related to SEE's continued digital transformation. We now expect restructuring activities associated with the Program to be substantially complete by June 30, 2022.
Restructuring spend is estimated to be incurred as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Total Restructuring Program Range | | Less Program Spend to Date | | Remaining Restructuring Spend |
| | Low | | High | | | | Low | | High |
Costs of reduction in headcount as a result of reorganization | | $ | 75 | | | $ | 80 | | | $ | (75) | | | $ | — | | | $ | 5 | |
Other expenses associated with the Program | | 110 | | | 120 | | | (104) | | | 6 | | | 16 | |
Total expense | | $ | 185 | | | $ | 200 | | | $ | (179) | | | $ | 6 | | | $ | 21 | |
Capital expenditures | | 15 | | | 20 | | | (13) | | | 2 | | | 7 | |
Total estimated cash cost(1) | | $ | 200 | | | $ | 220 | | | $ | (192) | | | $ | 8 | | | $ | 28 | |
(1) Total estimated cash cost excludes the impact of proceeds expected from the sale of property and equipment and foreign currency impact.
The following table details our aggregate restructuring activities incurred under the Program as reflected in the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
| | | | | | | | |
Other associated costs | | | | | | $ | 3.1 | | | $ | 5.3 | |
Restructuring charges | | | | | | 0.5 | | | — | |
| | | | | | | | |
| | | | | | | | |
Total charges | | | | | | $ | 3.6 | | | $ | 5.3 | |
Capital expenditures | | | | | | $ | 1.9 | | | $ | 1.2 | |
The aggregate restructuring accrual, spending and other activity for the three months ended March 31, 2022 and the accrual balance remaining at March 31, 2022 related to the Program were as follows: | | | | | |
(In millions) | |
| |
| |
| |
| |
| |
Restructuring accrual at December 31, 2021 | $ | 11.3 | |
Accrual and accrual adjustments | 0.5 | |
Cash payments during 2022 | (2.8) | |
| |
| |
Restructuring accrual at March 31, 2022 | $ | 9.0 | |
We expect to pay $8.6 million of the accrual balance remaining at March 31, 2022 within the next twelve months. This amount is included in accrued restructuring costs on the Condensed Consolidated Balance Sheets at March 31, 2022. The remaining accrual of $0.4 million is expected to primarily be paid in 2023. These amounts are included in other non-current liabilities on our Condensed Consolidated Balance Sheets at March 31, 2022.
One of the components of the Reinvent SEE business transformation was to enhance the operational efficiency of the Company by acting as “One SEE”. The program was approved by our Board of Directors as a consolidated program benefiting both Food and Protective, and accordingly the expected program spend by reporting segment is not available. However, of the total remaining restructuring accrual of $9.0 million as of March 31, 2022, $2.3 million was attributable to Food and $6.7 million was attributable to Protective.
Note 13 Debt and Credit Facilities
Our total debt outstanding consisted of the amounts set forth in the following table:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | Interest rate | | March 31, 2022 | | December 31, 2021 |
Short-term borrowings(1) | | | | $ | 1.1 | | | $ | 1.3 | |
Current portion of long-term debt(2) | | | | 9.2 | | | 487.2 | |
Total current debt | | | | 10.3 | | | 488.5 | |
| | | | | | |
Term Loan A due July 2023 | | | | — | | | 34.6 | |
Term Loan A due March 2027 | | | | 509.4 | | | — | |
| | | | | | |
Senior Notes due April 2023 | | 5.250 | % | | 424.0 | | | 423.8 | |
Senior Notes due September 2023 | | 4.500 | % | | 445.4 | | | 451.9 | |
Senior Notes due December 2024 | | 5.125 | % | | 423.0 | | | 422.8 | |
Senior Notes due September 2025 | | 5.500 | % | | 398.3 | | | 398.2 | |
Senior Secured Notes due October 2026 | | 1.573 | % | | 595.2 | | | 595.0 | |
Senior Notes due December 2027 | | 4.000 | % | | 421.5 | | | 421.4 | |
Senior Notes due July 2033 | | 6.875 | % | | 446.3 | | | 446.2 | |
Other(2) | | | | 26.4 | | | 25.7 | |
Total long-term debt, less current portion(3) | | | | 3,689.5 | | | 3,219.6 | |
Total debt(4) | | | | $ | 3,699.8 | | | $ | 3,708.1 | |
(1)Short-term borrowings of $1.1 million and $1.3 million at March 31, 2022 and December 31, 2021, respectively, were comprised of short-term borrowings from various lines of credit.
(2)As of March 31, 2022, current portion of long-term debt included finance lease liabilities of $9.2 million. As of December 31, 2021, current portion of long-term debt included $475 million related to the Term Loan A due August 2022, finance lease liabilities of $10.2 million and $2.0 million related to a portion of Term Loan A due 2023. Other debt includes long-term liabilities associated with our finance leases of $18.9 million and $19.2 million at March 31, 2022 and December 31, 2021, respectively. See Note 4, "Leases," for additional information on finance and operating lease liabilities.
(3)Amounts are shown net of unamortized discounts and issuance costs of $18.9 million as of March 31, 2022 and $19.0 million as of December 31, 2021.
(4)As of March 31, 2022, our weighted average interest rate on our short-term borrowings outstanding was 3.6% and on our long-term debt outstanding was 4.1%. As of December 31, 2021, our weighted average interest rate on our short-term borrowings outstanding was 3.6% and on our long-term debt outstanding was 4.1%.
Lines of Credit
The following table summarizes our available lines of credit and committed and uncommitted lines of credit, including our revolving credit facility, and the amounts available under our accounts receivable securitization programs.
| | | | | | | | | | | | | | |
(In millions) | | March 31, 2022 | | December 31, 2021 |
Used lines of credit(1) | | $ | 1.1 | | | $ | 1.3 | |
Unused lines of credit | | 1,290.8 | | | 1,309.0 | |
Total available lines of credit(2) | | $ | 1,291.9 | | | $ | 1,310.3 | |
(1)Includes total borrowings under the accounts receivable securitization programs, the revolving credit facility and borrowings under lines of credit available to several subsidiaries.
(2)Of the total available lines of credit, $1,139.3 million was committed as of March 31, 2022.
Amended and Restated Senior Secured Credit Facility
2022 Activity
On March 25, 2022, the Company and certain of its subsidiaries entered into a fourth amended and restated syndicated facility agreement whereby its existing senior secured credit facility was amended and restated (the “Fourth Amended and Restated Credit Agreement”) with Bank of America, N.A., as agent, and the other financial institutions party thereto. The changes include (i) the refinancing of the term loan A facilities and revolving credit facilities with a new U.S. dollar term loan A facility in an aggregate principal amount of approximately $475.0 million, a new pounds sterling term loan A facility in an aggregate principal amount of approximately £27.2 million, and revolving credit facilities of $1.0 billion (including revolving facilities available in U.S. dollars, euros, pounds sterling, Canadian dollars, Australian dollars, Japanese yen, New Zealand dollars and Mexican pesos), (ii) the conversion of the facilities rate from a London Interbank Offered Rate ("LIBOR")-based rate to a Secured Overnight Financing Rate ("SOFR")-based rate, (iii) improved pricing terms which will range from 100 to 175 basis points (bps) in the case of SOFR loans, subject to the achievement of certain leverage tests, (iv) the extension of the final maturity of the term loan A facilities and revolving credit commitment to March 25, 2027, (v) the release of all non-U.S. collateral previously pledged by the Company's subsidiaries and the release of all existing guarantees for non-U.S., non-borrower Company subsidiaries, (vi) the adjustment of certain covenants to provide flexibility to incur additional indebtedness and take other actions and (vii) other amendments.
As a result of the Fourth Amended and Restated Credit Agreement, we recognized a $0.7 million loss on debt redemption and refinancing activities in other (expense) income, net in our Condensed Consolidated Statements of Operations during the first quarter of 2022. This amount includes $0.4 million of accelerated amortization of original issuance discount related to the term loan A and lender and non-lender fees related to the entire credit facility. Also included in the loss on debt redemption and refinancing activities was $0.3 million of non-lender fees incurred in connection with the Fourth Amended and Restated Credit Agreement. In addition, we incurred $1.2 million of lender and third-party fees that are included in the carrying amounts of the outstanding debt under the credit facility. We also capitalized $3.0 million of fees that are included in other assets on our Condensed Consolidated Balance Sheets. The amortization expense related to original issuance discount and lender and non-lender fees is calculated using the effective interest rate method over the lives of the respective debt instruments.
Total amortization expense related to the senior secured credit facility was $0.4 million for the three months ended March 31, 2022 and is included in interest expense, net in our Condensed Consolidated Statements of Operations.
Senior Notes
2022 Activity
On April 19, 2022, the Company issued $425 million aggregate principal amount of 5.000% senior notes due 2029 (the "2029 Notes"). The 2029 Notes will mature on April 15, 2029. Interest is payable on April 15 and October 15 of each year, commencing on October 15, 2022. The 2029 Notes are guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly owned domestic subsidiaries that guarantee its senior secured credit facilities, subject to release under certain circumstances.
The net proceeds from the offering were used to repurchase the 5.25% senior notes due 2023 (the “2023 Notes”) tendered pursuant to the tender offer commenced by the Company on April 5, 2022 and satisfy and discharge all remaining 2023 Notes in accordance with the terms of the indenture governing the 2023 Notes.
2021 Activity
On September 29, 2021, Sealed Air issued $600 million aggregate principal amount of 1.573% Senior Secured Notes due 2026 (the “2026 Notes”). The 2026 Notes will mature on October 15, 2026. Interest is payable on April 15 and October 15 of each year, commencing April 15, 2022. The 2026 Notes and related guarantees are secured on a first-priority basis by liens on substantially all of the Company's and the Guarantors' personal property securing obligations that the Company owes to lenders under the Company's senior secured credit facilities on a pari passu basis, in each case excluding certain property and subject to certain other exceptions.
Prior to the date that is one month prior to the scheduled maturity date of the 2026 Notes (the “Par Call Date”), Sealed Air may redeem the 2026 Notes, in whole or in part, at any time, at a redemption price equal to the greater of (i) 100% of the principal amount of such 2026 Notes or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on such 2026 Notes (assuming for this purpose that interest accrued to the Par Call Date is scheduled to be paid on the Par Call
Date) from the redemption date to the Par Call Date discounted to the redemption date on a semiannual basis, plus in either (i) or (ii), any interest accrued but not paid to the date of redemption.
At any time on or after the Par Call Date, Sealed Air may redeem the 2026 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount thereof, plus any interest accrued but not paid to, but not including, the date of redemption.
We capitalized $5.3 million of non-lender fees incurred in connection with the 2026 Notes which are included in long-term debt, less current portion on our Condensed Consolidated Balance Sheets.
The net proceeds from the offering of the 2026 Notes were used (i) to repurchase the outstanding 4.875% Senior Notes due 2022 (the “2022 Notes”) tendered pursuant to the tender offer commenced by the Company on September 15, 2021, (ii) to satisfy and discharge all of the remaining outstanding 2022 Notes in accordance with the terms of the indenture governing the 2022 Notes, and (iii) to repay a portion of the U.S. dollar tranche of Term Loan A due 2023. A pre-tax loss of $18.6 million was recognized on the repurchase and cancellation of the 2022 Notes, including a premium of $17.0 million and accelerated amortization of non-lender fees of $1.6 million, within Other (expense) income, net on our Condensed Consolidated Statements of Operations during the year ended December 31, 2021.
Additionally, the Company repaid an aggregate principal amount of $177.2 million of the U.S. dollar tranche of Term Loan A due 2023, plus accrued interest of $0.2 million.
Covenants
Each issue of our outstanding senior notes imposes limitations on our operations and those of specified subsidiaries. Our Senior Secured Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations on our indebtedness, liens, investments, restricted payments, mergers and acquisitions, dispositions of assets, transactions with affiliates, amendment of documents and sale leasebacks, and a covenant specifying a maximum leverage ratio to EBITDA. We were in compliance with the above financial covenants and limitations at March 31, 2022.
Note 14 Derivatives and Hedging Activities
We report all derivative instruments on our Condensed Consolidated Balance Sheets at fair value and establish criteria for designation and effectiveness of transactions entered into for hedging purposes.
As a global organization, we face exposure to market risks, such as fluctuations in foreign currency exchange rates and interest rates. To manage the volatility relating to these exposures, we enter into various derivative instruments from time to time under our risk management policies. We designate derivative instruments as hedges on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments offset in part or in whole corresponding changes in the fair value or cash flows of the underlying exposures being hedged. We assess the initial and ongoing effectiveness of our hedging relationships in accordance with our policy. We do not purchase, hold or sell derivative financial instruments for trading purposes. Our practice is to terminate derivative transactions if the underlying asset or liability matures or is sold or terminated, or if we determine the underlying forecasted transaction is no longer probable of occurring.
We record the fair value positions of all derivative financial instruments on a net basis by counterparty for which a master netting arrangement is utilized.
Foreign Currency Forward Contracts Designated as Cash Flow Hedges
The primary purpose of our cash flow hedging activities is to manage the potential changes in value associated with the amounts receivable or payable on equipment and raw material purchases that are denominated in foreign currencies in order to minimize the impact of the changes in foreign currencies. We record gains and losses on foreign currency forward contracts qualifying as cash flow hedges in Accumulated Other Comprehensive Loss (“AOCL”) to the extent that these hedges are effective and until we recognize the underlying transactions in net earnings, at which time we recognize these gains and losses in cost of sales, on our Condensed Consolidated Statements of Operations. Cash flows from derivative financial instruments designated as cash flow hedges are classified as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows. These contracts generally have original maturities of less than 12 months.
Net unrealized after-tax gains/losses related to cash flow hedging activities that were included in AOCL were a $1.5 million loss and a $2.2 million gain for the three months ended March 31, 2022 and 2021, respectively. The unrealized amount in AOCL will fluctuate based on changes in the fair value of open contracts during each reporting period.
We estimate that $0.1 million of net unrealized gains related to cash flow hedging activities included in AOCL will be reclassified into earnings within the next twelve months.
Foreign Currency Forward Contracts Not Designated as Hedges
Our subsidiaries have foreign currency exchange exposure from buying and selling in currencies other than their functional currencies. The primary purposes of our foreign currency hedging activities are to manage the potential changes in value associated with the amounts receivable or payable on transactions denominated in foreign currencies and to minimize the impact of the changes in foreign currencies related to foreign currency-denominated interest-bearing intercompany loans and receivables and payables. The changes in fair value of these derivative contracts are recognized in other (expense) income, net, on our Condensed Consolidated Statements of Operations and are largely offset by the remeasurement of the underlying foreign currency-denominated items indicated above. Cash flows from derivative financial instruments not designated as hedges are classified as cash flows from investing activities in the Condensed Consolidated Statements of Cash Flows. These contracts generally have original maturities of less than 12 months.
Interest Rate Swaps
From time to time, we may use interest rate swaps to manage our fixed and floating interest rates on our outstanding indebtedness. At March 31, 2022 and December 31, 2021, we had no outstanding interest rate swaps.
Net Investment Hedge
The €400.0 million 4.50% notes issued in June 2015 are designated as a net investment hedge, hedging a portion of our net investment in a certain European subsidiary against fluctuations in foreign exchange rates. The decrease in the translated value of the debt was $3.6 million ($2.7 million, net of tax) as of March 31, 2022 and is reflected in AOCL on our Condensed Consolidated Balance Sheets.
For derivative instruments that are designated and qualify as hedges of net investments in foreign operations, changes in fair values of the derivative instruments are recognized in unrealized net gain or loss on derivative instruments for net investment hedge, a component of AOCL, net of taxes, to offset the changes in the values of the net investments being hedged. Any portion of the net investment hedge that is determined to be ineffective is recorded in other (expense) income, net on the Condensed Consolidated Statements of Operations.
Other Derivative Instruments
We may use other derivative instruments from time to time to manage exposure to foreign exchange rates and to access international financing transactions. These instruments can potentially limit foreign exchange exposure by swapping borrowings denominated in one currency for borrowings denominated in another currency.
Fair Value of Derivative Instruments
See Note 15, “Fair Value Measurements, Equity Investments and Other Financial Instruments,” for a discussion of the inputs and valuation techniques used to determine the fair value of our outstanding derivative instruments.
The following table details the fair value of our derivative instruments included on our Condensed Consolidated Balance Sheets. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash Flow Hedge | | | | Non-Designated as Hedging Instruments | | Total |
(In millions) | March 31, 2022 | | December 31, 2021 | | | | | | March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 |
Derivative Assets | | | | | | | | | | | | | | | |
Foreign currency forward contracts and options | $ | 1.0 | | | $ | 2.0 | | | | | | | $ | 3.7 | | | $ | 1.7 | | | $ | 4.7 | | | $ | 3.7 | |
| | | | | | | | | | | | | | | |
Total Derivative Assets | $ | 1.0 | | | $ | 2.0 | | | | | | | $ | 3.7 | | | $ | 1.7 | | | $ | 4.7 | | | $ | 3.7 | |
| | | | | | | | | | | | | | | |
Derivative Liabilities | | | | | | | | | | | | | | | |
Foreign currency forward contracts | $ | (1.8) | | | $ | (0.6) | | | | | | | $ | (4.2) | | | $ | (1.0) | | | $ | (6.0) | | | $ | (1.6) | |
| | | | | | | | | | | | | | | |
Total Derivative Liabilities(1) | $ | (1.8) | | | $ | (0.6) | | | | | | | $ | (4.2) | | | $ | (1.0) | | | $ | (6.0) | | | $ | (1.6) | |
Net Derivatives(2) | $ | (0.8) | | | $ | 1.4 | | | | | | | $ | (0.5) | | | $ | 0.7 | | | $ | (1.3) | | | $ | 2.1 | |
(1)Excludes €400.0 million of euro-denominated debt ($445.4 million equivalent at March 31, 2022 and $451.9 million equivalent at December 31, 2021), which is designated as a net investment hedge.
(2)The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Current Assets | | Other Current Liabilities | | | | |
(In millions) | March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 | | | | | | | | |
Gross position | $ | 4.7 | | | $ | 3.7 | | | $ | (6.0) | | | $ | (1.6) | | | | | | | | | |
Impact of master netting agreements | (3.3) | | | (0.9) | | | 3.3 | | | 0.9 | | | | | | | | | |
Net amounts recognized on the Condensed Consolidated Balance Sheets | $ | 1.4 | | | $ | 2.8 | | | $ | (2.7) | | | $ | (0.7) | | | | | | | | | |
The following table details the effect of our derivative instruments on our Condensed Consolidated Statements of Operations. | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Amount of Gain (Loss) Recognized in Earnings on Derivatives |
| Location of Gain (Loss) Recognized on | | | | Three Months Ended March 31, |
(In millions) | Condensed Consolidated Statements of Operations | | | | | | 2022 | | 2021 |
Derivatives designated as hedging instruments: | | | | | | | | | |
Cash Flow Hedges: | | | | | | | | | |
Foreign currency forward contracts | Cost of sales | | | | | | $ | 1.9 | | | $ | (3.4) | |
| | | | | | | | | |
| | | | | | | | | |
Treasury locks | Interest expense, net | | | | | | 0.1 | | | — | |
Sub-total cash flow hedges | | | | | | | 2.0 | | | (3.4) | |
| | | | | | | | | |
| | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | |
Foreign currency forward and option contracts | Other (expense) income, net | | | | | | (0.1) | | | 2.2 | |
Total | | | | | | | $ | 1.9 | | | $ | (1.2) | |
Note 15 Fair Value Measurements, Equity Investments and Other Financial Instruments
Fair Value Measurements
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels to the fair value hierarchy as follows:
Level 1 - observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and
Level 3 - unobservable inputs for which there is little or no market data, which may require the reporting entity to develop its own assumptions.
The fair value, measured on a recurring basis, of our financial instruments, using the fair value hierarchy under U.S. GAAP, are included in the table below. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
(In millions) | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
Cash equivalents | | $ | 25.5 | | | $ | 25.5 | | | $ | — | | | $ | — | |
| | | | | | | | |
Derivative financial and hedging instruments net liability: | | | | | | | | |
Foreign currency forward contracts | | $ | (1.3) | | | $ | — | | | $ | (1.3) | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(In millions) | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
Cash equivalents | | $ | 290.0 | | | $ | 290.0 | | | $ | — | | | $ | — | |
| | | | | | | | |
Derivative financial and hedging instruments net asset: | | | | | | | | |
Foreign currency forward contracts | | $ | 2.1 | | | $ | — | | | $ | 2.1 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
Cash equivalents - Our cash equivalents consisted of bank time deposits. Since these are short-term highly liquid investments with remaining maturities of 3 months or less, they present negligible risk of changes in fair value due to changes in interest rates and are classified as Level 1 financial instruments.
Derivative financial instruments - Our foreign currency forward contracts, foreign currency options, interest rate swaps and cross-currency swaps are recorded at fair value on our Condensed Consolidated Balance Sheets using a discounted cash flow analysis that incorporates observable market inputs. These market inputs include foreign currency spot and forward rates, and various interest rate curves, and are obtained from pricing data quoted by various banks, third-party sources and foreign currency dealers involving identical or comparable instruments. Such financial instruments are classified as Level 2.
Counterparties to these foreign currency forward contracts have at least an investment grade rating. Credit ratings on some of our counterparties may change during the term of our financial instruments. We closely monitor our counterparties’ credit ratings and, if necessary, will make any appropriate changes to our financial instruments. The fair value generally reflects the estimated amounts that we would receive or pay to terminate the contracts at the reporting date.
Foreign currency forward contracts and options are included in Prepaid expenses and other current assets and Other current liabilities on the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021.
Equity Investments
SEE maintains equity investments in companies which are accounted for under the measurement alternative described in ASC 321-10-35-2 ("ASC 321") for equity investments that do not have readily determinable fair values. We do not exercise significant influence over these companies. The following carrying value of these investments were included within Other non-current assets in our Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
(In millions) | | March 31, 2022 | | December 31, 2021 |
Carrying value at the beginning of period | | $ | 45.8 | | | $ | 25.4 | |
Purchases | | — | | | 14.7 | |
Impairments or downward adjustments | | (15.5) | | | — | |
Upward adjustments | | — | | | 6.6 | |
Currency translation on investments | | (0.2) | | | (0.9) | |
Carrying value at the end of period | | $ | 30.1 | | | $ | 45.8 | |
We hold an equity investment in an investee that was valued at $31.6 million as of December 31, 2021, which included our cash investments of $7.5 million and $9.0 million made in 2018 and 2021, respectively. Additionally, an upward fair value adjustment of $15.1 million was recorded in the fourth quarter of 2020 based on the valuation of additional equity issued by the investee which was deemed to be an observable transaction of a similar investment under ASC 321. In late March 2022, an impairment indicator was identified based on the announced termination of a planned merger between the investee and a special purpose acquisition company due to unfavorable capital market conditions and the resulting liquidity constraints of the investee. We performed a quantitative assessment, including engaging a third party valuation firm, to determine the fair value of the equity investment. Based on discounted cash flow and market participant data as of March 25, 2022, we concluded that the fair value of the investment was $16.1 million. Key assumptions used to estimate the fair value of the equity investment include the investee’s continued revenue growth and the normalization of facility expansion and other operating expenses. We believe the assumptions utilized in the projections are appropriate and in-line with industry estimates. SEE recorded an impairment loss of $15.5 million equal to the difference between the current fair value of the investment and its carrying value at December 31, 2021. The impairment loss in the first quarter of 2022 associated with the equity investment was recorded within Other (expense) income, net on the Condensed Consolidated Statements of Operations. Subsequent to our March 25, 2022 valuation date, the investee obtained additional financing early in the second quarter of 2022.
During the third quarter of 2021, SEE recorded an upward adjustment of $6.6 million based on the valuation of additional equity issued by an investee which was deemed to be an observable transaction of a similar investment under ASC 321. The gain was recorded within Other (expense) income, net on the Condensed Consolidated Statements of Operations.
During the fourth quarter of 2020, SEE made an additional investment in one of our investees of $5.7 million, based on the balance sheet foreign exchange rate as of December 31, 2020. The equity issuance by the investee was subject to customary regulatory and statutory approval which was received during the first quarter of 2021. Upon approval, this investment converted to equity and is held as an equity investment valued under the measurement alternative in ASC 321.
As of March 31, 2022, cumulative upward adjustments to our equity investments were $21.7 million and cumulative impairments or downward adjustments were $15.5 million, resulting in net cumulative upward adjustments of $6.2 million. As of December 31, 2021, cumulative upward adjustments to our equity investments were $21.7 million and there were no cumulative impairments or downward adjustments.
Other Financial Instruments
The following financial instruments are recorded at fair value or at amounts that approximate fair value: (1) trade receivables, net, (2) certain other current assets, (3) accounts payable and (4) other current liabilities. The carrying amounts reported on our Condensed Consolidated Balance Sheets for the above financial instruments closely approximate their fair value due to the short-term nature of these assets and liabilities.
Other liabilities that are recorded at carrying value on our Condensed Consolidated Balance Sheets include our credit facilities and senior notes. We utilize a market approach to calculate the fair value of our senior notes. Due to their limited investor base and the face value of some of our senior notes, they may not be actively traded on the date we calculate their fair value. Therefore, we may utilize prices and other relevant information generated by market transactions involving similar securities, reflecting U.S. Treasury yields to calculate the yield to maturity and the price on some of our senior notes. These inputs are provided by an independent third party and are considered to be Level 2 inputs.
We derive our fair value estimates of our various other debt instruments by evaluating the nature and terms of each instrument, considering prevailing economic and market conditions, and examining the cost of similar debt offered at the balance sheet date. We also incorporated our credit default swap rates and currency specific swap rates in the valuation of each debt instrument, as applicable.
These estimates are subjective and involve uncertainties and matters of significant judgment, and therefore we cannot determine them with precision. Changes in assumptions could significantly affect our estimates.
The table below shows the carrying amounts and estimated fair values of our debt, excluding our lease liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2022 | | December 31, 2021 |
(In millions) | | Interest rate | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Term Loan A Facility due August 2022 | | | | $ | — | | | $ | — | | | $ | 474.9 | | | $ | 474.9 | |
Term Loan A Facility due July 2023(1) | | | | — | | | — | | | 37.1 | | | 37.1 | |
Term Loan A due March 2027(1) | | | | 509.4 | | | 509.4 | | | — | | | — | |
| | | | | | | | | | |
Senior Notes due April 2023 | | 5.250 | % | | 424.0 | | | 431.4 | | | 423.8 | | | 441.9 | |
Senior Notes due September 2023(1) | | 4.500 | % | | 445.4 | | | 462.2 | | | 451.9 | | | 479.1 | |
Senior Notes due December 2024 | | 5.125 | % | | 423.0 | | | 440.4 | | | 422.8 | | | 455.8 | |
Senior Notes due September 2025 | | 5.500 | % | | 398.3 | | | 418.0 | | | 398.2 | | | 443.3 | |
Senior Secured Notes due October 2026 | | 1.573 | % | | 595.2 | | | 545.7 | | | 595.0 | | | 581.3 | |
Senior Notes due December 2027 | | 4.000 | % | | 421.5 | | | 415.3 | | | 421.4 | | | 443.8 | |
Senior Notes due July 2033 | | 6.875 | % | | 446.3 | | | 515.9 | | | 446.2 | | | 571.9 | |
Other foreign borrowings(1) | | | | 1.1 | | | 1.1 | | | 1.3 | | | 1.3 | |
Other domestic borrowings | | | | 7.4 | | | 7.4 | | | 6.7 | | | 6.7 | |
Total debt(2) | | | | $ | 3,671.6 | | | $ | 3,746.8 | | | $ | 3,679.3 | | | $ | 3,937.1 | |
(1)Includes borrowings denominated in currencies other than U.S. dollars.
(2)The carrying amount and estimated fair value of debt exclude lease liabilities.
Included among our non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis are inventories, property and equipment, goodwill, intangible assets and asset retirement obligations.
Note 16 Defined Benefit Pension Plans and Other Post-Employment Benefit Plans
The following tables show the components of net periodic benefit (income) cost for our defined benefit pension plans for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
(In millions) | | U.S. | | International | | Total | | U.S. | | International | | Total |
Components of net periodic benefit (income) cost: | | | | | | | | | | | | |
Service cost | | $ | — | | | $ | 1.1 | | | $ | 1.1 | | | $ | — | | | $ | 1.3 | | | $ | 1.3 | |
Interest cost | | 1.0 | | | 3.0 | | | 4.0 | | | 0.9 | | | 2.2 | | | 3.1 | |
Expected return on plan assets | | (2.2) | | | (5.0) | | | (7.2) | | | (2.2) | | | (4.7) | | | (6.9) | |
Amortization of net prior service cost | | — | | | 0.1 | | | 0.1 | | | — | | | 0.1 | | | 0.1 | |
Amortization of net actuarial loss | | 0.4 | | | 1.0 | | | 1.4 | | | 0.6 | | | 1.3 | | | 1.9 | |
Net periodic (income) cost | | (0.8) | | | 0.2 | | | (0.6) | | | (0.7) | | | 0.2 | | | (0.5) | |
Net settlement (credit) cost | | — | | | (0.1) | | | (0.1) | | | — | | | 0.1 | | | 0.1 | |
Total benefit (income) cost | | $ | (0.8) | | | $ | 0.1 | | | $ | (0.7) | | | $ | (0.7) | | | $ | 0.3 | | | $ | (0.4) | |
The following table shows the components of net periodic benefit cost for our other post-retirement employee benefit plans for the three months ended March 31, 2022 and 2021: | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
Components of net periodic benefit cost: | | | | | | | | |
| | | | | | | | |
Interest cost | | | | | | $ | 0.2 | | | $ | 0.1 | |
Amortization of net prior service credit and net actuarial gain | | | | | | (0.1) | | | (0.1) | |
| | | | | | | | |
Net periodic benefit cost | | | | | | $ | 0.1 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
Note 17 Income Taxes
U.S. Legislation
The American Rescue Plan Act of 2021 (“Rescue Act”) was signed into law on March 11, 2021 and includes additional COVID-19 related tax relief for some individuals and businesses.
The enactment of the Rescue Act did not result in any material adjustments to our income tax provision for the three months ended March 31, 2022 or March 31, 2021.
Effective Income Tax Rate and Income Tax Provision
For interim tax reporting, we estimate one annual effective tax rate for tax jurisdictions not subject to a valuation allowance and apply that rate to the year-to-date ordinary income/(loss). Tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
State income taxes, foreign earnings subject to higher tax rates and non-deductible expenses increase the Company's effective income tax rate compared to the U.S. statutory rate of 21.0%. Research and development credits decrease the Company's effective tax rate compared to the U.S. statutory rate of 21.0%.
Our effective income tax rate was 28.4% for the three months ended March 31, 2022. In addition to the above referenced items, the Company's effective income tax rate for the three months ended March 31, 2022 was favorably impacted by share price accretion in equity compensation and unfavorably impacted by accruals for unresolved controversy and nonrecurring intercompany dividend distributions.
Our effective income tax rate was 34.0% for the three months ended March 31, 2021. In addition to the above referenced items, the Company's effective income tax rate for the three months ended March 31, 2021 was unfavorably impacted by changes to foreign statutes.
There was no significant change in our valuation allowances for the three months ended March 31, 2022 and 2021.
We reported a net increase in unrecognized tax positions of $6.3 million and $5.0 million, respectively, for the three months ended March 31, 2022, and March 31, 2021 primarily related to interest accruals on existing uncertain tax positions. We are not currently able to reasonably estimate the amount by which the liability for unrecognized tax positions may increase or decrease as a result of future tax controversy developments or resolution. Interest and penalties on tax assessments are included in Income tax provision on our Condensed Consolidated Statements of Operations.
The IRS completed its field examination of the U.S. federal income tax returns for the 2011-2014 tax years in the third quarter of 2020. As previously disclosed, the IRS has proposed to disallow, for the 2014 taxable year, the entirety of the deduction of the approximately $1.49 billion settlement payment made pursuant to the Settlement agreement (as defined in Note 18, “Commitments and Contingencies”) and the resulting reduction of our U.S. federal tax liability by approximately $525 million. We continue to believe that we have meritorious defenses to the proposed disallowance and have filed a protest with the IRS. The proposed disallowance is being reviewed by the IRS Independent Office of Appeals and we cannot predict the outcome of such review or when it will be concluded. It is possible that future developments in this matter could have a material impact on the Company's uncertain tax position balances and results of operations, including cash flows, within the next twelve months.
We have no outstanding liability with respect to the one-time mandatory tax on previously deferred foreign earnings of foreign subsidiaries provision (“Transition Tax”) associated with the Tax Cuts and Jobs Act of 2017.
Note 18 Commitments and Contingencies
Settlement Agreement Tax Deduction
On March 31, 1998, the Company completed a multi-step transaction (the “Cryovac transaction”) involving W.R. Grace & Co. (“Grace”) which brought the Cryovac packaging business and the former Sealed Air’s business under the common ownership of the Company. As part of that transaction, Grace and its subsidiaries retained all liabilities arising out of their operations before the Cryovac transaction (including asbestos-related liabilities), other than liabilities relating to Cryovac’s operations, and agreed to indemnify the Company with respect to such retained liabilities. Beginning in 2000, we were served with a number of lawsuits alleging that the Cryovac transaction was a fraudulent transfer or gave rise to successor liability or both, and that, as a result, we were responsible for alleged asbestos liabilities of Grace and its subsidiaries. On April 2, 2001, Grace and a number of its subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). In connection with Grace’s Chapter 11 case, the Bankruptcy Court granted the official committees appointed to represent asbestos claimants in Grace’s Chapter 11 case (the “Committees”) permission to pursue against the Company and its subsidiary Cryovac, Inc. fraudulent transfer, successor liability, and other claims based upon the Cryovac transaction. In November 2002, we reached an agreement in principle with the Committees to resolve all current and future asbestos-related claims made against us and our affiliates, as well as indemnification claims by Fresenius Medical Care Holdings, Inc. and affiliated companies, in each case, in connection with the Cryovac transaction. A definitive settlement agreement was entered into in 2003 and approved by the Bankruptcy Court in 2005 (such agreement, the "Settlement agreement"). The Settlement agreement was subsequently incorporated into the plan of reorganization for Grace (the "Plan") and the Plan was confirmed by the Bankruptcy Court in 2011 and the U.S. District Court in 2012.
On February 3, 2014 (the “Effective Date”), the Plan implementing the Settlement agreement became effective with Grace emerging from bankruptcy and the injunctions and releases provided by the Plan becoming effective. On the Effective Date, the Company’s subsidiary, Cryovac, Inc., made the payments contemplated by the Settlement agreement, consisting of aggregate cash payments in the amount of $929.7 million to the WRG Asbestos PI Trust (the “PI Trust”) and the WRG Asbestos PD Trust (the “PD Trust”) and the transfer of 18 million shares of Sealed Air common stock (the “Settlement Shares”) to the PI Trust, in each case, reflecting adjustments made in accordance with the Settlement agreement.
The IRS completed its field examination of our U.S. federal income tax returns for the years 2011 through 2014 in the third quarter of 2020. As previously disclosed, the IRS has proposed to disallow for the 2014 taxable year the entirety of the deduction of the approximately $1.49 billion settlement payments made pursuant to the Settlement agreement and the resulting reduction of our U.S. federal tax liability by approximately $525 million. We continue to believe that we have meritorious defenses to the proposed disallowance and have filed a protest with the IRS. The proposed disallowance is being reviewed by the IRS Independent Office of Appeals and we cannot predict the outcome of such review or when it will be concluded. It is
possible that future developments in this matter could have a material impact on the Company's uncertain tax position balances and results of operations, including cash flows, within the next twelve months.
Environmental Matters
We are subject to loss contingencies resulting from environmental laws and regulations, and we accrue 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 are not reduced by potential insurance recoveries, if any. We do not believe that it is reasonably possible that our liability in excess of the amounts that we have accrued for environmental matters will be material to our Condensed Consolidated Balance Sheets or Statements of Operations. Environmental liabilities are reassessed whenever circumstances become better defined or remediation efforts and their costs can be better estimated.
We evaluate 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, we adjust the recorded accruals, as necessary. We believe that these exposures are not material to our Condensed Consolidated Balance Sheets or Statements of Operations. We believe that we have adequately reserved for all probable and estimable environmental exposures.
Guarantees and Indemnification Obligations
We are a party to many contracts containing guarantees and indemnification obligations. These contracts primarily consist of:
•indemnities in connection with the sale of businesses, primarily related to the sale of Diversey in 2017. Our indemnity obligations under the relevant agreements may be limited in terms of time, amount or scope. As it relates to certain income tax related liabilities, the relevant agreements may not provide any cap for such liabilities, and the period in which we would be liable would lapse upon expiration of the statute of limitation for assessment of the underlying taxes. Because of the conditional nature of these obligations and the unique facts and circumstances involved in each particular agreement, we are unable to reasonably estimate the potential maximum exposure associated with these items;
•product warranties with respect to certain products sold to customers in the ordinary course of business. These warranties typically provide that products will conform to specifications. We generally do not establish a liability for product warranty based on a percentage of sales or other formula. We accrue a warranty liability on a transaction-specific basis depending on the individual facts and circumstances related to each sale. Both the liability and annual expense related to product warranties are immaterial to our consolidated financial position and results of operations; and
•licenses of intellectual property by us to third parties in which we have agreed to indemnify the licensee against third-party infringement claims.
As of March 31, 2022, the Company has no reason to believe a loss exceeding amounts already recognized would be incurred.
Other Matters
We are also involved in various other legal actions incidental to our business. We believe, after consulting with counsel, that the disposition of these other legal proceedings and matters will not have a material effect on our consolidated financial condition or results of operations including potential impact to cash flows.
Note 19 Stockholders’ Equity
Repurchase of Common Stock
On August 2, 2021, the Board of Directors approved a new share repurchase program of $1.0 billion. This current program has no expiration date and replaced all previous authorizations. As of March 31, 2022, there was $696.4 million remaining under the current authorized program. Share repurchases made prior to August 2, 2021 were under previous Board of Directors share repurchase authorizations, specifically the $1.5 billion authorization made in July 2015, the $1.5 billion authorization made in March 2017 and the $1.0 billion authorization made in May 2018.
During the three months ended March 31, 2022, we repurchased 3,042,696 shares, for approximately $200.0 million, with an average share price of $65.74.
During the three months ended March 31, 2021, we repurchased 3,925,034 shares for approximately $175.4 million, with an average share price of $44.70. Cash outlay for share repurchases during the three months ended March 31, 2021 also includes $1.6 million for 35,100 shares purchased in the fourth quarter 2020 and settled in the first quarter 2021.
These repurchases were made under open market transactions, including through plans complying with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, and pursuant to the share repurchase program previously authorized by our Board of Directors.
Dividends
On February 25, 2022, our Board of Directors declared a quarterly cash dividend of $0.20 per common share, or $29.4 million, which was paid on March 25, 2022, to stockholders of record at the close of business on March 11, 2022.
The dividends paid during the three months ended March 31, 2022 were recorded as a reduction to cash and cash equivalents and retained earnings on our Condensed Consolidated Balance Sheets. Our credit facility and our senior notes contain covenants that restrict our ability to declare or pay dividends. However, we do not believe these covenants are likely to materially limit the future payment of quarterly cash dividends on our common stock. From time to time, we may consider other means of returning value to our stockholders based on our Condensed Consolidated Statements of Operations. There is no guarantee that our Board of Directors will declare any future dividends.
Share-based Compensation
In 2014, the Board of Directors adopted, and our stockholders approved, the 2014 Omnibus Incentive Plan (“Omnibus Incentive Plan”). Under the Omnibus Incentive Plan, the maximum number of shares of Common Stock authorized was 4,250,000, plus total shares available to be issued as of May 22, 2014 under the 2002 Directors Stock Plan and the 2005 Contingent Stock Plan (collectively, the “Predecessor Plans”). The Omnibus Incentive Plan replaced the Predecessor Plans and no further awards were granted under the Predecessor Plans. The Omnibus Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance share units known as PSU awards, other stock awards and cash awards to officers, non-employee directors, key employees, consultants and advisors.
In 2018, the Board of Directors adopted, and our shareholders approved, an amendment and restatement to the Omnibus Incentive Plan. The amendment added 2,199,114 shares of common stock to the share pool previously available under the Omnibus Incentive Plan.
Additionally, in 2021, the Board of Directors adopted, and at the 2021 Annual Stockholders' Meeting our shareholders approved, an additional amendment and restatement to the Omnibus Incentive Plan. The amended plan added 2,999,054 shares of common stock to the share pool previously available under the Omnibus Incentive Plan.
We record share-based incentive compensation expense in selling, general and administrative expenses and cost of sales on our Condensed Consolidated Statements of Operations for both equity-classified and liability-classified awards. We record a corresponding credit to additional paid-in capital within stockholders’ equity for equity-classified awards, and to either other current liabilities or other non-current liabilities for liability-classified awards based on the fair value of the share-based incentive compensation awards at the date of grant. Total expense for the liability-classified awards continues to be remeasured to fair value at the end of each reporting period. We recognize an expense or credit reflecting the straight-line recognition, net of estimated forfeitures, of the expected cost of the program. The number of PSUs earned may equal, exceed or be less than the targeted number of shares depending on whether the performance criteria are met, surpassed or not met.
The table below shows our total share-based incentive compensation expense: | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
Total share-based incentive compensation expense(1) | | | | | | $ | 17.9 | | | $ | 11.5 | |
(1)The amounts presented above do not include the expense related to our U.S. profit sharing contributions made in the form of our common stock, however, the amounts include the expense related to share based awards that are settled in cash.
Performance Share Units (“PSU”) Awards
During the first 90 days of each year, the Organization and Compensation (“O&C”) Committee of our Board of Directors approves PSU awards for our executive officers and other selected employees, which include for each participant a target number of shares of common stock and the performance goals and measures that will determine the percentage of the target award that is earned following the end of the three-year performance period. Following the end of the performance period, in addition to shares earned, participants will also receive a cash payment in the amount of the dividends (without interest) that would have been paid during the performance period on the number of shares that they have earned. Each PSU is subject to forfeiture if the recipient terminates employment with the Company prior to the end of the three-year award performance period for any reason other than death, disability or retirement. In the event of death, disability or retirement, a participant will receive a prorated payment based on such participant’s number of days of service during the award performance period, further adjusted based on the achievement of the performance goals during the award performance period. PSUs are classified as equity in the Condensed Consolidated Balance Sheets, with the exception of awards that are required by local laws or regulations to be settled in cash. These are classified as either other current liabilities or other non-current liabilities in the Condensed Consolidated Balance Sheets.
2022 Three-year PSU Awards
During the first quarter 2022, the O&C Committee approved awards with a three-year performance period beginning January 1, 2022 and ending December 31, 2024 for executive officers and other selected employees. The O&C Committee established performance goals, which are (i) three-year cumulative average growth rate (“CAGR”) of consolidated Adjusted EBITDA weighted at 50%, and (ii) Return on Invested Capital (“ROIC”) weighted at 50%. Calculation of final achievement on each performance metric is subject to an upward or downward adjustment of up to 25% of the overall combined achievement percentage, based on the results of a relative total shareholder return (“TSR”) modifier. The comparator group for the relative TSR modifier is S&P 500 component companies as of the beginning of the performance period. Shareholder return in the top quartile of the comparator group increases overall achievement of performance metrics by 25%, while shareholder return in the bottom quartile of the comparator group decreases overall achievement of the performance metrics by 25%. The total number of shares to be issued, including the modifier, for these awards can range from zero to 250% of the target number of shares.
The target number of PSUs granted and the grant date fair value of the PSUs are shown in the following table: | | | | | | | | | | | | | | |
| | Adjusted EBITDA CAGR | | ROIC |
February 24, 2022 grant date | | | | |
Number of units granted | | 72,308 | | | 72,308 | |
Fair value on grant date (per unit) | | $ | 70.92 | | | $ | 70.92 | |
March 1, 2022 grant date | | | | |
Number of units granted | | 16,766 | | | 16,766 | |
Fair value on grant date (per unit) | | $ | 69.71 | | | $ | 69.71 | |
The assumptions used to calculate the grant date fair value of the PSUs are shown in the following table:
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| February 24, 2022 grant date | March 1, 2022 grant date |
Expected price volatility | 37.4 | % | 37.7 | % |
Risk-free interest rate | 1.7 | % | 1.5 | % |
2019 Three-year PSU Awards
In February 2022, the O&C Committee reviewed the performance results for the 2019-2021 PSUs. Performance goals for these PSUs were based on Adjusted EBITDA margin, ROIC and the Company's TSR ranking relative to a group of peer companies. Based on overall performance for 2019-2021 PSUs, these awards paid out at 132.5% of target or 274,296 units. Of this, 110,529 units were withheld to cover employee tax withholding and 2,478 units were designated as cash-settled awards, resulting in net share issuances of 161,289.
Note 20 Accumulated Other Comprehensive Loss
The following table provides details of comprehensive (loss) income for the three months ended March 31, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Unrecognized Pension Items | | Cumulative Translation Adjustment(1) | | Unrecognized Losses on Derivative Instruments for net investment hedge | | Unrecognized Gains on Derivative Instruments for cash flow hedge | | | | Accumulated Other Comprehensive Loss, Net of Taxes |
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Balance at December 31, 2021 | | $ | (137.5) | | | $ | (760.5) | | | $ | (38.3) | | | $ | 2.4 | | | | | $ | (933.9) | |
Other comprehensive (loss) income before reclassifications | | (0.2) | | | 3.5 | | | 5.0 | | | 0.2 | | | | | 8.5 | |
Less: amounts reclassified from accumulated other comprehensive loss | | 1.0 | | | — | | | — | | | (1.7) | | | | | (0.7) | |
Net current period other comprehensive income (loss) | | 0.8 | | | 3.5 | | | 5.0 | | | (1.5) | | | | | 7.8 | |
Balance at March 31, 2022 | | $ | (136.7) | | | $ | (757.0) | | | $ | (33.3) | | | $ | 0.9 | | | | | $ | (926.1) | |
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Balance at December 31, 2020 | | $ | (172.5) | | | $ | (721.7) | | | $ | (67.5) | | | $ | (1.8) | | | | | $ | (963.5) | |
Other comprehensive (loss) income before reclassifications | | (1.7) | | | (25.2) | | | 17.5 | | | (0.2) | | | | | (9.6) | |
Less: amounts reclassified from accumulated other comprehensive loss | | 1.5 | | | — | | | — | | | 2.0 | | | | | 3.5 | |
Net current period other comprehensive (loss) income | | (0.2) | | | (25.2) | | | 17.5 | | | 1.8 | | | | | (6.1) | |
Balance at March 31, 2021 | | $ | (172.7) | | | $ | (746.9) | | | $ | (50.0) | | | $ | — | | | | | $ | (969.6) | |
(1)Includes gains and losses on intra-entity foreign currency transactions. The intra-entity currency translation adjustment was $16.9 million and $19.9 million for the three months ended March 31, 2022 and 2021, respectively.
The following table provides detail of amounts reclassified from AOCL: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | |
(In millions) | | | | | | 2022 | | 2021 | | Location of Amount Reclassified from AOCL |
Defined benefit pension plans and other post-employment benefits: | | | | | | | | | | |
Net settlement credit (cost) | | | | | | $ | 0.1 | | | $ | (0.1) | | | |
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Actuarial losses | | | | | | (1.4) | | | (1.9) | | | |
Total pre-tax amount | | | | | | (1.3) | | | (2.0) | | | Other (expense) income, net |
Tax benefit | | | | | | 0.3 | | | 0.5 | | | |
Net of tax | | | | | | (1.0) | | | (1.5) | | | |
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Net gains (losses) on cash flow hedging derivatives:(1) | | | | | | | | | | |
Foreign currency forward contracts | | | | | | 1.9 | | | (3.4) | | | Cost of sales |
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Treasury locks | | | | | | 0.1 | | | — | | | Interest expense, net |
Total pre-tax amount | | | | | | 2.0 | | | (3.4) | | | |
Tax (expense) benefit | | | | | | (0.3) | | | 1.4 | | | |
Net of tax | | | | | | 1.7 | | | (2.0) | | | |
Total reclassifications for the period | | | | | | $ | 0.7 | | | $ | (3.5) | | | |
(1)These accumulated other comprehensive components are included in our derivative and hedging activities. See Note 14, “Derivatives and Hedging Activities,” for additional details.
Note 21 Other (Expense) Income, net
The following table provides details of other (expense) income, net: | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions) | | | | | | 2022 | | 2021 |
Net foreign exchange transaction (loss) gain | | | | | | $ | (0.5) | | | $ | 1.0 | |
Bank fee expense | | | | | | (1.1) | | | (1.3) | |
Pension income other than service costs | | | | | | 1.3 | | | 1.2 | |
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Impairment of equity investment(1) | | | | | | (15.5) | | | — | |
Foreign currency exchange loss due to highly inflationary economies | | | | | | (1.0) | | | (1.4) | |
Loss on debt redemption and refinancing activities | | | | | | (0.7) | | | — | |
Other income | | | | | | 4.7 | | | 2.7 | |
Other (expense) | | | | | | (1.4) | | | (1.2) | |
Other (expense) income, net | | | | | | $ | (14.2) | | | $ | 1.0 | |
(1)For the three months ended March 31, 2022, SEE recorded an impairment loss of $15.5 million on an equity investment. See Note 15, "Fair Value Measurements, Equity Investments and Other Financial Instruments," for further details.
Note 22 Net Earnings Per Common Share
The following table shows the calculation of basic and diluted net earnings per common share: | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In millions, except per share amounts) | | | | | | 2022 | | 2021 |
Basic Net Earnings Per Common Share: | | | | | | | | |
Numerator: | | | | | | | | |
Net earnings | | | | | | $ | 149.2 | | | $ | 110.1 | |
Distributed and allocated undistributed net earnings to unvested restricted stockholders | | | | | | — | | | — | |
Net earnings available to common stockholders | | | | | | $ | 149.2 | | | $ | 110.1 | |
Denominator: | | | | | | | | |
Weighted average number of common shares outstanding - basic | | | | | | 147.6 | | | 154.1 | |
Basic net earnings per common share: | | | | | | | | |
Basic net earnings per common share | | | | | | $ | 1.01 | | | $ | 0.71 | |
Diluted Net Earnings Per Common Share: | | | | | | | | |
Numerator: | | | | | | | | |
Net earnings available to common stockholders | | | | | | $ | 149.2 | | | $ | 110.1 | |
Denominator: | | | | | | | | |
Weighted average number of common shares outstanding - basic | | | | | | 147.6 | | | 154.1 | |
Effect of dilutive stock shares and units | | | | | | 1.9 | | | 1.3 | |
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Weighted average number of common shares outstanding - diluted under treasury stock | | | | | | 149.5 | | | 155.4 | |
Diluted net earnings per common share | | | | | | $ | 1.00 | | | $ | 0.71 | |