Sealed Air Corporation - Texas Tech University

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Sealed Air Corporation Equity Analysis and

Valuation

Project Group Members:

Austin Robertson [email protected]

Katie Kniess [email protected]

Megan Wilson [email protected]

Colin DuBois [email protected]

Justin Matthews [email protected]

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Table of Contents

Executive Summary 7

Business and Industry Analysis 14

Company Overview 14

Industry Overview 15

Five Forces Model 17

Rivalry Among Existing Firms 18

Industry Growth 18

Concentration of Competitors 20

Level of Differentiation 22

Economies of Scale 22

Degree of Switching Costs 23

Excess Capacity 24

Exit Barriers 25

Conclusion 25

Threat of New Entrants 25


First Mover Advantage 27

Access to Channels of Distribution 28

Legal Barriers 28

Conclusion 29

Threat of Substitute Products 30

Relative Price and Performance 30

Customers Willingness to Switch 31

Conclusion 31

Bargaining Power of Customers 32

Price Sensitivity 32

Relative Bargaining Power 32

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Bargaining Power of Suppliers 33

Price Sensitivity 34

Relative Bargaining Power 34

Key Success Factors 36

Cost Leadership 36

Simpler Product Designs 37

Cost Control 37

Lower Input Costs 37

Economies of Scale and Efficient Production 38

Differentiation 38

Research and Development 39

Brand Image 40

Product Appearance 40

Quality 41

Delivery 41

Conclusion 41

Competitive Advantage Analysis 42


Cost Control/Input Costs: 43

Simpler Product Design 44


Quality and Brand Imaging 45

Delivery 46

Conclusion 46

Formal Accounting Analysis 46

Key Accounting Policies 47

Research & Development 48

Operating and Capital Leases 50

Pension Liabilities 51

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Goodwill 53

Currency Risk 56

Accounting Flexibility 57

Research & Development 58


Pension Plans 60

Goodwill 62

Currency 63

Evaluate Accounting Strategy 64



Pension Plans 67

Goodwill 69

Currency 71

Quality of Disclosure 71



Pensions 73

Goodwill 74

Currency 74

Quantitative Analysis 75

Sales Manipulation Diagnostic 76

Net Sales/Cash from Sales 76

Net Sales/Accounts Receivables 77

Net Sales/Inventory 79

Conclusion 81

Expense Manipulation Diagnostic 81

Asset Turnover 81

CFFO/OI 83

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CFFO/NOA 85

Total Accruals/Sales 87

Conclusion 88

Potential Red Flags 88

Undoing Accounting Distortion or Irregularities 89

Financial Analysis, Forecasting Financials and Cost of Capital Estimation 95

Financial Analysis 95

Liquidity Ratio Analysis 95

Current Ratio 96

Quick Asset Ratio 97

Working Capital Turnover 98

Accounts Receivables Turnover 99

Days Sales Outstanding 100

Inventory Turnover 101

Days Supply Inventory 102

Cash to Cash Cycle 103

Conclusion 104

Profitability Analysis 105

Gross Profit Margin 105

Operating Expense Ratio 106

Operating Profit Margin 107

Net Profit Margin 108

Asset Turnover 109

Return on Assets 110

Return on Equity 111

Internal Growth Rate 112

Sustainable Growth Rate 113

Conclusion 115

Capital Structure Analysis 116

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Debt to Equity 116

Times Interest Earned 118

Debt Service Margin 120

Z-score 121

Conclusion 122

Estimating Cost of Capital 123

Cost of Equity 123

Alternative Cost of Equity 125

Cost Of Debt 125

Weighted Average Cost of Capital 126

Financial Statement Forecasting 127

Income Statement 127

Income Statement (Revised) 134

Balance Sheet 137

Balance Sheet (Revised) 141

Statement of Cash Flows 145

Statement of Cash Flows (Revised) 149

Conclusion 153

Valuation Analysis 153

Method of Comparables 153

Price/Earnings Trailing 154

Price/Earnings Forecast 155

Price/Book 156

Price Earnings Growth (P.E.G.) 157

Price/EBITDA 158

Enterprise Value/EBITDA 158

Price/Free Cash Flows 160

Dividends/Price 161

Conclusion 162

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Intrinsic Valuation Models 162

Discounted Dividends Model 162

Discounted Free Cash Flows Model 164

Residual Income Model 167

Abnormal Earnings Growth Model (A.E.G.) 170

Long Run Residual Income Model 172

Analyst Recommendations 174

Appendices 178

References 209

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Executive Summary

Investment Recommendation: Overvalued Sell as of June 1st, 2008

SEE ‐ NYSE (6/1/2008) $24.36 Altman Z‐scores 52 Week Range: $ 19.62 ‐ $ 31.51 2003 2004 2005 2006 2007Revenue: $ 4.65 Billion Initial Scores: 7.73 6.28 7.42 9.02 6.68 Market Capitalization: $ 3.94 Billion Revised Scores: 7.64 6.21 7.37 8.97 6.64 Shares Outstanding: 161,624,030

Current Market Share Price (6‐1‐08) $24.36

Initial Revised

Book Value Per Share: $12.50 $3.63 Financial Based Valuations Return on Equity: 21.33% 14.70% Initial Revised Return on Assets: 7.03% 5.88% Trailing P/E: $28.96 17.95 Forward P/E: $30.98 $30.98 Dividends to Price: $10.46 N/A

Cost of Capital Price to Book $33.24 $9.65

Estimated R‐Squared Beta Ke P.E.G. Ratio $14.37 $8.91 2 ‐Year ‐0.004 0.44 8.07% Price to EBITDA: $21.79 N/A 3 ‐Year 0.011 0.46 8.18% Enterprise Value/ EBITDA: $41.43 $16.69 4 ‐ Year 0.093 0.78 10.45% Price to Free Cash Flows: $7.52 N/A 5‐Year 0.139 0.87 11.07%

6 ‐ Year 0.105 1.85 17.93% Intrinsic Valuations Initial Revised Discounted Dividends: $6.87 N/A Back Door Ke: 16.21% Free Cash Flows: $14.29 $14.21 Published Beta: 0.47 Residual Income: $18.58 $18.09 Cost of Debt: 4.76% Long Run Residual Income: $21.30 $18.17 WACC (BT): 7.10% Abnormal Earnings Growth: $17.13 $17.21

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Industry Analysis

Sealed Air was founded in 1960, and has since become a global leader in the

food packaging and containers industry. Through the years, they have expanded their

business by acquiring different brands such as Instapak and Cryovac. SEE operates in

over fifty countries worldwide and has more than 17,000 employees.

Sealed Air has four main competitors within the industry: Pactiv, Bemis, Greif,

and Packaging Corp. of America. These firms produce very similar products, which

creates a challenge for firms to gain a competitive advantage. Employing a cost

leadership strategy is crucial for success in this industry, because most packaging

products are considered commodities rather than highly differentiated. Firms focus on

simpler product designs, tighter cost control, and more efficient production methods.

Differentiation techniques are harder to locate within the industry, however they do

exist. For example, most firms in the industry do not invest heavily in R&D. However,

Sealed Air’s R&D budget is over twice the industry average, thus distinguishing them

from their competitors. The analysis of the five forces model gives an idea of the

degree of competition in each segment of the industry:

Competitive Force Degree of Competition

Rivalry Among Existing Firms High

Threat of New Entrants Low

Threat of Substitute Products Moderate

Bargaining Power of Customers High

Bargaining Power of Suppliers Low

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Due to the small amount of differentiation in the industry, there is a high level of

competition among existing rival firms. Conversely, the threat of new entrants is low for

a couple of reasons. The industry is already fairly well established and the large amount

of capital needed becomes a deterrent for new firms. Legal barriers also keep the threat

of new entrants to a minimum. The lack of high switching costs results in a moderate

threat of substitute products. Customers are generally willing to switch between

products for a small change in price. Consequently, the high price sensitivity in the

industry gives customers the power, not the suppliers.

Accounting Analysis

The main objective for this section is to identify Sealed Air’s key accounting

policies, and assess whether or not these policies accurately portray the firm. The level

of disclosure in a firm’s financial statements is vital for evaluation purposes. Full

disclosure gives shareholders and analysts the most accurate and faithful “snapshot” of

a firm. In an effort to hide or skew numbers, many firms will only disclose the bare

minimum that is required by the SEC, which leads to numerous distortions within the

report.

Some of the key accounting policies for the packaging and containers industry

include R&D, goodwill, and pension plans, to name a few. SEE’s level of disclosure in

these areas varies but generally remains consistent with industry trends. Sealed Air

does a poor job of disclosing their R&D, despite having considerably more invested than

the other firms. Greif doesn’t even attach a numerical value to their R&D, which

indicates the overall lack of disclosure in the industry. Sealed Air had a moderate

amount of disclosure for their pensions. However, other firms disclosed more

information regarding how they formulated their discount rates. Other policies, such as

currency and leases, are consistent with industry norms.

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Quality of

Disclosure

Research &

Development

Pension

Plans

Goodwill Currency Leases

Sealed Air Low Moderate Low Moderate High

Packaging

Industry

Low Moderate Low Moderate High

*Packaging Industry: Greif, Pactiv, Sealed Air, Bemis, & Packaging Co. of America

Sealed Air has a very large amount of goodwill, and unfortunately, did a poor job

of disclosing it. GAAP regulations require that if the book value of goodwill exceeds the

fair market value, then the excess amount should be impaired and expensed

throughout the income statement. SEE provided some allocation tables of goodwill in

their 10-k, but failed to explain how the goodwill was acquired or how the quantitative

analysis of these values were reached. Furthermore, there is insufficient information

regarding the impairment of goodwill over the past four years. Goodwill seems to be

Sealed Air’s only KSF that likely contains some distortions from their lack of disclosure.

Throughout this report, we adjusted the income statement and balance sheet to reflect

the changes if goodwill had been properly written off. Overall, Sealed Air needs to

improve their disclosure to give investors a more accurate estimate of the firm’s value.

Financial Analysis, Cost of Capital Estimation, and Forecasting

In order to get a better comprehension of a company’s true performance, we

find and compare financial ratios to measure certain operations of the firm and how it

performed in relation to their competitors. Some of the financial ratios that we

measured were liquidity, profitability, capital structure and firm growth. Liquidity ratios

measure a company’s ability to meet short-term financial obligations. These ratios are

commonly used by lenders because they show a company’s credit risk. Overall, Sealed

Air’s liquidity was on par with the industry average. Profitability ratios on the other hand

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measure how well a firm’s revenue covers their expenses or how effectively a company

generates profit. Each of the following ratios is shown as a percentage of sales; where

sales (the denominator) equals 100%. In this regard, Sealed Air has consistently

outperformed the packaging and container industry. Rather than measure performance,

capital structure analysis shows the financing of the firm and its operations. There are

two ways a company can finance their assets, either through borrowing money from a

lender (debt) or selling shares of their company as stock (equity). These capital

structure ratios can be used to measure firms’ credit worthiness, financial leverage,

ability to cover interest charges, and the ability to pay off liabilities. By closely

examining the capital structure of Sealed Air, we can see that the firm lags behind its

competitors. From there, we examined the potential growth rates of the firm to get an

idea of future profitability. The two growth rates we discussed were the sustainable

growth rate and the internal growth rate, which both estimate potential growth

opportunities for the firm.

The next step in our prospective analysis was the cost of capital estimation. In

order to find the appropriate discount rate for our valuations, we had to find the

weighted average rates of both debt and equity financing. To find the equity cost of

capital, we first calculated beta from a regression analysis. We then decided to use the

10-year interest rate on a U.S. Treasury Bill for our risk free rate. By taking an average

of S&P 500 returns, we were able to find our market risk premium. By using the capital

asset pricing model (CAPM), we found the cost of equity for Sealed Air to be 11.07%.

When comparing this figure to the 16.21% backdoor cost of equity, we see that our

estimation somewhat resembles the backdoor method. Next, we found our cost of debt

by taking a weighted average of all the interest rates on debt instruments. With a cost

of debt of 4.76% and a cost of equity of 11.07%, we found a weighted average cost of

capital (before tax) of 7.1% and a WACC after restatement of 5.86%.

The final and most crucial step in financial analysis is the prospective forecasting

of financial statements. Perhaps the single most import figure we forecasted was the

total sales growth rate, which we decided was 8%, only slightly higher than their past 5

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year average. Another key assumption that was made was the growth rate for cost of

goods sold, which we predicted would be greater than the sales growth rate (8.5%)

since most of the input costs have been rising lately. This would explain why both gross

profit and operating profit decrease by greater amounts on an annual basis. It is also

important to note that many of the main assumptions that we used when making our

calculations were results from our liquidity and profitability ratios. For instance, to

forecast out our total assets we simply took our forecasted sales and divided it by our

asset turnover ratio to get the forecasted total assets of that year. This method was

applied to numerous other line items such as accounts receivables and inventory. We

should also point out the degree of accuracy in forecasting. While we are extremely

confident in the income statement estimations as well as the balance sheet, the

statement of cash flows was extremely difficult to predict; mainly due to the lack of

reasonable trends and that many line items were one time only transactions.

Valuations

The final step in the financial statement analysis is the valuation of the firm. The

ultimate goal of the valuation process is to assign a market share price, given certain

operating factors that range anywhere from free cash flows to book values. The

valuations are broken up into two sections, methods of comparables and intrinsic

valuation models. The end result of each formula is to present an expected stock price

per share. We then compare the estimated share price with the quoted share price of

$24.36 on June 1st, 2008, and then set upper and lower limits by a 20% margin of

error. If the estimated price exceeds $29.23 we state the firm is currently undervalued.

If the expected price falls below $19.49 we claim that the company is overvalued.

Our first valuation measure was the method of comparables. Essentially, this is

an implied stock price based on the performance of competitors within the industry. In

these models, the competitors’ ratios are calculated and used to find an industry

average. Any firm with a figure drastically different than the industry norm is classified

as an outlier, and excluded from the average. Once the industry average is calculated,

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it is then multiplied by Sealed Air’s corresponding factor to find the implied price per

share. It should be noted that these formulas are not entirely reliable; these estimates

that are given are dependent upon how other companies are doing, not Sealed Air

itself. Therefore, these comparables can only serve as a guide to merely suggest

industry expectations.

The second measure we used was the intrinsic valuation models. These models

offer the most insight into the true economic value of Sealed Air. Unlike comparables,

these models take into account current financial conditions but also prospective

information about potential profitability, which is backed by a solid foundation in

financial theory. The intrinsic valuations use the forecasted financial statements to

predict company performance, and then are discounted back to present day terms.

When given a certain discount rate and perpetuity growth rate, the models offer an

expected share price which can be compared to the observed share price which is

benchmarked at $24.36. Through sensitivity analysis, we can see how subtle changes in

the cost of capital and growth rates can impact the valuation share price. Perhaps the

only potential flaw with these models is the fact that many of the forecasted statements

are based off of the project team’s assumptions, which are nothing more than educated

guesses.

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Business and Industry Analysis

Company Overview

Sealed Air Corporation was founded in 1960 by inventors Alfred Fielding and

Marc Chavannes who were trying to create textured wallpaper by capturing air in

between thin sheets of plastic. The wallpaper idea did not work out but they realized

their invention would make excellent packaging; which evolved into Bubble Wrap. Now

Sealed Air Corp. is a leading global innovator and manufacture of a broad range of

protective packaging, performance-based materials, and equipment systems that are

essential to many food, industrial, medical, and consumer applications. Since 1976

Sealed Air Corp. has acquired different brands including Instapak, Sentinel, Shanklin,

Jiffy Mailer, and Cryovac. With headquarters in Elmwood Park, New Jersey and

operating in over 50 countries, Sealed Air Corp. demonstrates how better packaging can

make the world a better place.

The company’s Food Packaging division offers industrial food packaging, which

include shrink bags that vacuum package a variety of food products, packaging

materials for applications that can be cooked in, and coextruded and laminated rollstock

packaging materials. Some of their protecting packaging includes bubble wrap,

inflatable packaging and cushioning systems, paper packaging, and foam-in-place

packaging systems. Sealed Air Corp. also produces shrink packaging, specialty materials

and products, including solar pool heating, and medical products, including films for

pharmaceutical bags and ostomy products.

Sealed Air Corp. is a fairly large company with over 100 manufacturing facilities

worldwide and more than 17,000 employees. Sealed Air Corp. is traded on the NYSE

and has a current market cap of $3.80 billion. Their primary competitors include Pactiv

Co. (PTV), Bemis Co. Inc. (BMS), Greif Inc. (GEF), and Packaging Corp. of America

(PKG).

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2003 2004 2005 2006 2007

Total Assets* 4,704.10 4,855.00 4,864.20 5,020.90 5,438.30

Net Sales* 3,531.90 3,798.10 4,085.10 4,327.90 4,651.20

Sales Growth 10.22 % 7.53 % 7.56 % 5.94 % 7.47 %

* in millions

Industry Overview

Sealed Air competes in the packaging and containers industry, which makes up

over a $124 billion market in the U.S. alone. The majority of the market comes from

paperboard and plastic product sales. However, companies often compete in more than

one area of the industry because of the fragmented nature of the market. Some of the

firms include Johnson and Johnson, Bemis, Pactiv, Owens-Illinois, AEP Industries, Greif,

and many more. The firms vary in size, segment of concentration, and profit margins.

Some of these factors help determine the most immediate competitors for each firm in

the industry.

For example, companies such as AEP Industries and Owens-Illinois specialize in

two separate areas of the packaging industry. AEP Industries produces over 15,000

different types of flexible packaging films. This has allowed them to become a leading

producer of silage bale wrap in agriculture packaging (www.aepinc.com). Conversely,

Owens-Illinois is the largest manufacturer of glass containers in the world. Its

innovative packaging products are found in households and businesses, and its

customers manufacture and market many of the best-known consumer-products around

the globe (www.o-i.com). “Packaging specialist Christopher Manuel at KeyBanc Capital

Markets in Cleveland, a unit of KeyCorp, racked up a 168% return on glass-container

maker Owens Illinois Inc., which saw shares surge last year amid a stunning

turnaround under new management” (Wall Street Journal).

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Sealed Air is a leading global manufacturer of a wide range of fresh food,

protective, and specialty packaging products. However, they heavily concentrate in

plastic packaging, including owning the patent of industry leader Bubble Wrap. In

addition to these product differences, the three companies used in this example vary

greatly in size (in both total assets and sales). For these reasons they are not

considered direct competitors of Sealed Air.

Total Assets (in millions) 2003 2004 2005 2006 2007 AEP Industries 457,325 451,950 311,323 336,080 329,028 Sealed Air 4,704,100 4,855,000 4,864,200 5,020,900 5,438,300 Owens - Illinois 9,531,300 10,736,700 9,521,800 9,320,700 9,324,600 Total Sales (in millions) 2003 2004 2005 2006 2007 AEP Industries 558,496 608,228 732,724 802,109 786,015 Sealed Air 3,531,900 3,798,100 4,085,100 4,327,900 4,651,200 Owens - Illinois 4,975,600 6,128,400 6,266,900 6,650,400 7,566,700

The companies that compete most directly with Sealed Air include: Greif, Bemis,

Pactiv, and Packaging Corporation of America. Globally, food packaging accounts for

nearly 40% of all packaging services, and therefore represents a large portion of the

total industry (www.packagingtoday.com).

Johnson & Johnson and Sealed Air are among the industry leaders in research

and development. Companies that highly invest in R&D force other companies in the

industry to focus on factors such as product quality and differentiation to maintain and

grow their market share. Growth rates within the packaging industry range from 3.2%-

5% (www.packagingtoday.com). Overall, a majority of firms in the packaging industry

enjoy reasonable success and steady annual profits. "Packaging stocks are generally

defensive stocks, so when the economy slows these stocks tend to do pretty well," he

(Manuel) says. "You could almost put a 'buy' on any of the stocks and do okay” (Wall

Street Journal).

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Ultimately, this specific industry requires numerous challenges to overcome for

every firm. Competition for Sealed Air’s packaging products is based primarily on

packaging performance characteristics, service and price, and innovations in packaging

technology (Sealed Air, 200710-k). This analysis will provide accurate and useful

information when the companies in this industry are further compared to one another.

Five Forces Model

During the initial phases of valuing a firm it is important to thoroughly

understand the complexity of the industry. The five forces model allows analysts to

apply five key components for measuring the degree of competition among a specific

industry. According to Michael E. Porter, the creator of the five forces model, each of

the five forces is a driver that potentially and actually influences industry profitability.

The model allows analysts to have a clear view of the level of competition which in turn

relates to ability to produce profits. Determining if a firm will be profitable or not in an

industry is key; firm value is based on the potential to generate excess returns on

capital minus the expenditure of capital. Rivalry among existing firms, threat of new

entrants, and the threat of substitute products measure the level of possible

competition. The other part of the five forces model analyzes actual influences of profits

by addressing the industry’s bargaining power in relation to customers and suppliers.

When each of these diverse five elements is pieced together it allows analysts to have a

clear understanding of the grade of competition in the firm’s industry. The following is a

table summarizing our analysis of the five forces and the degree of competition

produced by each segment.

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Rivalry among Existing Firms

When measuring potential sources of competition within an industry, it is

important to consider rivalry amongst existing firms. If an industry is said to be highly

competitive, then the firms that compete in that industry will engage in an aggressive

pricing strategy (the main focus being on cost). If an industry is low on competition

between firms, then firms will pursue other aspects of their products such as brand

image or innovation. Rivalry among existing firms can be broken down into different

fundamentals such as industry growth, concentration of competitors, level of

differentiation, switching costs, economies of scale, excess capacity and exit barriers.

Industry Growth:

If an industry is rapidly expanding, competing firms do not tend to focus on

capturing market share from each other. On the other hand, if an industry is

contracting, then firms will engage in heavy pricing strategies in an attempt to capture

more market share for themselves. A good measure of industry growth is to examine

the net sales of each firm within the industry.

Competitive Force Degree of CompetitionRivalry Among Existing Firms High

Threat of New Entrants Low Threat of Substitute Products Moderate

Bargaining Power of Customers High

Bargaining Power of Suppliers Low

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% Change in Sales

2003 2004 2005 2006 2007

SEE 10.23% 7.54% 7.56% 5.94% 7.47%

PTV 8.96% 7.78% ‐18.51% 5.84% 11.52%

BMS 11.23% 7.57% 22.56% 4.76% 0.27%

GEF 17.37% 15.28% 9.73% 8.42% 26.40%

PKG ‐0.02% 8.91% 5.48% 9.70% 5.90%

Industry 9.55% 9.41% 5.36% 6.93% 10.31%

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As the graph above indicates, total revenues for the packaging and container industry

have been steadily increasing an average of 10.31% during the past fiscal year and a

full 33% over the past five years. Given that the industry has grown by over 10 percent

in 2007, it would be reasonable to assume that the packaging and container industry is

experiencing excellent industrial growth and therefore faces little price competition in

this regard.

Concentration of Competitors:

The level of concentration in an industry is determined by the number of

competing firms as well as their relative size. If the sizes of the firms are fairly similar

and the balances of the firms’ market share are relatively equal, then the firms will

typically coordinate pricing strategies to match one another. However, if the industry is

relatively fragmented, then firms will engage in aggressive pricing tactics.

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Market Share (as a % of Total Industry Sales)

2003 2004 2005 2006 2007

SEE 27% 27% 28% 28% 27%

PTV 24% 24% 19% 19% 19%

BMS 20% 20% 24% 23% 21%

GEF 15% 16% 16% 17% 19%

PKG 13% 13% 14% 14% 13%

Industry Sales $12,956,893,000 $ 14,113,861,000 $ 14,733,005,000 $ 15,699,784,000 $ 17,191,781,000

The market share of each firm displays a simple representation of the concentration

levels of the industry. As the table above shows, we can see that for the most part all

competing firms in the industry maintain their respective market share with the

exception of Bemis surpassing Pactiv since 2005. With each competitor maintaining a

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reasonable market for an extended period of time, we can conclude that the packaging

and container industry is of low concentration and relatively highly price competitive.

Level of Differentiation:

If the product lines of competing firms are very similar in nature, then the

industry would be classified as having low degrees of differentiation, meaning that

customers would readily switch from one competitor to another strictly on basis of

price. In industries where we see a lack of product diversification, we typically find the

business to be highly price competitive. Since the products that these firms offer the

same function and are generally a commodity in nature, the packaging and container

industry is characterized as having low levels of differentiation, thus making the

industry highly price competitive.

Economies of Scale:

If an industry usually has a steep learning curve or has a high scale economy,

then firms that are typically bigger are generally more profitable in that industry. This is

due to the fact that greater production capacity allows firms to decrease the average

cost per unit, which in turn leads to aggressive pricing competition amongst firms. Since

most of the firms’ production assets in the packaging industry are extremely specialized

and require an expensive initial investment, it would be hard for small to medium range

firms to succeed in this industry. A good measurement for production assets would be

the total property, plant, and equipment found on the firms’ balance sheets.

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As the table indicates, contending firms must invest heavily in their production

assets to compete in this industry. At one point, a few firms had about 70% of total

assets invested in their production resources. It is also important to note that a slightly

declining trend has been emerging in this industry. This is explained through Sealed

Air’s annual financial report that the technology is rapidly improving productivity and

thus allowing PP&E to become less and less of the firms total assets. Therefore, the

packaging industry would exhibit large economies of scale and therefore would display

characteristics of high price competition.

Degree of Switching Costs:

Much like the economies of scale, the degrees of switching costs for firms helps

measure the level of specialization within an industry. If the production assets perform

a specific function that requires highly customized equipment, that means that those

assets cannot be sold to buyers in other industries. If switching costs for firms are very

high, then that increases the commit of the firm to the industry; therefore that

increases the risk of the industry overall. Since the packaging and container industry

generally has a heavy investment in plant and equipment, we can generally assume

that Sealed Air exits in an industry with high switching costs.

Total PP&E (in thousands)

2003 2004 2005 2006 2007

SEE $ 1,042,400 $ 1,008,600 $ 911,200 $ 970,100 $ 1,080,100

PTV $ 1,522,000 $ 1,445,000 $ 1,141,000 $ 1,093,000 $ 1,264,000

BMS $ 1,615,308 $ 1,687,001 $ 1,143,539 $ 1,175,959 $ 1,248,456

GEF $ 912,375 $ 880,682 $ 862,056 $ 940,949 $ 1,125,437

PKG $ 1,345,154 $ 1,345,154 $ 1,320,511 $ 1,252,291 $ 1,215,298

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Excess Capacity:

“If the capacity in an industry is larger than customer demand, there is a strong

incentive for firms to cut prices to fill capacity” (Palepu and Healy). Therefore, if there is

high excess capacity within an industry, firms must cut prices in order to avoid too

much excess inventory. On the other hand, if demand far exceeds what the industry

can supply, then firms generally avoid competitive pricing strategies. Although there

might be many firms that compete in the packaging and containers industry, global

demand does not seem to be slowing down, which is evident by the growth in net sales

for the industry the past 5 years. A good way to measure this is by taking the years

sales and dividing them by the company’s total PP&E.

Sales / Total PP&E

2003 2004 2005 2006 2007

SEE 3.39 3.77 4.48 4.46 4.31

PTV 2.06 2.34 2.42 2.67 2.57

BMS 1.63 1.68 3.04 3.09 2.92

GEF 2.10 2.51 2.81 2.79 2.95

PKG 1.29 1.41 1.51 1.75 1.91

As the graph above indicates, most of the industry’s ratios are relatively

increasing; meaning that growing sales are able to cover more and more of the firms

fixed assets. It is from this information that we can conclude that the industry lacks

excess capacity, which in turn lowers price competition between existing firms.

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Exit Barriers:

If firms have highly specialized resources or many fixed/long-term assets that

are essential to production, exit barriers are said to be high in this industry. The higher

the exit barriers are, the higher the fixed to variable costs ratio, which therefore has a

significant influence on price. If firms are highly invested in their property, plant, and

equipment (which is evident by the high economies of scale discussed earlier), the

competing firms will continue to operate even at a loss since exiting the industry is

perceived to be even more costly. Since nearly all of the production assets within the

packaging industry are highly specialized, this industry is classified as having high

barriers to exit and thus highly competitive.

Conclusion:

Since rivalry amongst firms is a significant tool when measuring an industry’s

degree of actual and potential competition, it is imperative to evaluate the

characteristics that comprise competing firm rivalry. Given that concentration of

competitors, level of differentiation, degree of switching costs, economies of scale and

exit barriers all lead to high price competition while only industry growth and excess

capacity lead to low competition, we can conclude that the packaging and container

industry is heavily price competitive in regards to rivalry amongst competing firms.

Threat of New Entrants

Every industry faces the threat of new entrants. The degree of this threat

depends on five components; economies of scale, first mover advantage, distribution

access, consumer and supplier relationships, and legal barriers. Each of these elements

serves as a building block to the threat of entrances into the packaging and

containment industry as a whole. Threat of entry is an important part of the five forces

model that helps analyze industries. If a new entrant thinks that profitable abnormal

returns are easily attainable then the firm may not be hesitant to enter the industry.

However, when new entrants consider entering an industry they may conclude that the

Sealed Air 27

difficulty of entry is too great based on barriers such as distribution access, consumer

and supplier relationships, first mover advantage, legal barriers, and economies of

scale. It is important for not only new entrants to consider all of these building blocks,

but also existing firms in the industry because it could lead to loss of market share or

worse loss profits to new entrants. The following are the analysis and conclusions that

we composed of the threat to new entry on the packaging and containment industry.

Economies of Scale:

Economies of scale consistently seem to be large barriers of entry for new firms

in the packaging and containing industry. Economies of scale refer to the decrease in

cost per unit as production reaches optimal output levels. Common economies of scale

deal with firms that buy large quantities of commodities, handle materials in bulk, and

are cost efficient. One typical characteristic of economies of scale is that they have high

fixed cost and constant lesser marginal cost. New entrants in the packaging and

containment production industry will face large cost drawbacks in an already well

established industry. This arises from the considerable cost of capital that entrants in

this industry need to have in order to develop expert research and development teams,

physical plants, property, and manufacturing equipment. To illustrate this high level of

capital the following is Sealed Air’s asset balance of pp&e for 2007 which was a total of

1936.1 (Sealed Air 2007 10-k). In addition to substantial sums of capital to fund

research and development teams, plant, property, and equipment firms will also incur

the upward surging costs of raw materials needed to produce products. Although raw

materials and production can be outsourced, it is still extremely costly to establish the

start up phase of creating a new packaging and container firm.

In regards to outsourcing and the price of raw materials, it is important for any

U.S. domicile company to take into consideration the rising cost in commodities, rise in

inflation, and the recent overall fall in the strength of the dollar to foreign currency. To

illustrate this concern the following is a quote from the Wall Street Journal after a

recent announcement from head chairman of the Fed Ben Bernanke, “Mr. Bernanke,

Sealed Air 28

speaking via satellite to the conference in Spain, stressed that the weak dollar has

contributed to an ‘unwelcome rise in import prices and consumer-price inflation.’"

The cost of capital is an important obstacle to overcome for many new entrants

because it determines if they plan to enter the market by taking a larger or smaller role.

As with many new entrants into any industry it is difficult to attain the mass amounts of

capital needed to take a large role in the market. This is important to us because we

know this causes a disadvantage for new entrants into the packaging industry. New

entrants have to take a smaller role in the market due to the lack of capital needed for

economies of scale. New entrants taking the smaller role can lead them to be deterred

from entering the packaging and containment industry all together; thus leaving ample

room for expansion in the market for already well established industry firms such as

Sealed Air, Pactiv, Bemis, Packaging Corporation, and Greif Inc.

First Mover Advantage:

Entering into a market where a firm has already established exclusive rights,

industry standards, and contracts with suppliers proves to be another large deterrent

for many new entrants; this is called first mover advantage. First mover advantage is

when substantive firms in the industry are able to discourage new entrants in saying

that the first well established businesses in the field have already staked their claim and

already determined industry conventions. A new entrant will likely suffer from having to

pay higher prices for raw materials compared to an already established firm with

selective ties to raw material suppliers. First mover advantage not only can defer

entrants due to supplier relations, but the first mover advantage also creates brand

loyalty with consumers. Consumers may not deviate to new products by new producers

in fear of quality control or price control. After all aspects of first mover advantage are

taken into consideration, it would be difficult for new entrants into the packaging and

containment industry to obtain this advantage and thus would not pose a threat of

entry for already existing firms.

Sealed Air 29

Access to Channels of Distribution and Relationships:

Strict management of channel distribution is a common way for established firms

to cut cost and produce a less expensive good giving the firm a cost advantage.

However, establishing these channels of distribution for a new entrant can be a

daunting task. New entrants can incur high fees, limited capacity, and suffer from a lack

of knowledge in negotiating contracts with distributors. In the packaging industry,

channels of distribution play a key role on both demand and supply. Other industries

such as food, shipping, and medical greatly demand and rely on the packaging products

produced by firms such as Sealed Air, Pactiv, and Bemis. On the other hand, without

excellent channels of distribution access and communications through intermediaries

packaging firms would not be able to meet the supply to the demand. The following is a

quote from the Wall Street Journal about the importance pertaining to the need to keep

strong relationships with all suppliers in distribution channels, “The biggest players in

the world can’t function without smaller ones to keep them supplied, technologically-

sound, and otherwise ticking” (Wall Street Journal). New entrants must be wise and

careful when creating connections to channels of distribution as they can be extremely

detrimental or beneficial in the long run. Although access to channels of distribution can

produce itself as a barrier for some, it is not an impossible obstacle for new entrants to

overcome. New entrants would not see this as a threat of entry due to the low level of

difficulty to access channels or maintain healthy relations with suppliers. Therefore,

when analyzing the packaging and containment industry access to channels of

distribution and relationships with suppliers is not a strong threat to new entrants.

Legal Barriers:

Legal barriers do act as a powerful restraint to new entrants into the packaging

and containment industry. For example, patents for new packaging technology,

trademarks, exclusive selling contracts, licensing agreements, real estate and zoning

permits for manufacturing plants, and health and safety regulations are just some of

Sealed Air 30

legal barriers that new entrants into the packaging and containment industry must

consider. Legal barriers not only present political red tape problems, but also normally

need large sums of capital to adhere by. Companies are having difficulty negotiating

outsourcing overseas due to lack of communication and lack of knowledge of the

overseas legal environment are having to spend extra capital on hiring people who have

expertise in both domicile and overseas relations. “Managers must know, for example,

the differences in legal and economic environments and trade practices in different

countries, and they must have the ability to communicate across cultural barriers. Or, if

they can't do all that themselves, they must hire people who can do the job for them”

(The Wall Street Journal).

In addition, environmental protection, conservatism, and ordinances are a few

other legalities that must be abided by when operating a manufacturing plant and

dealing with hazardous raw materials in any industry. U.S. domicile firms in the

packaging industry must also follow mandated laws and policies of other countries and

careful of political turmoil when outsourcing raw materials and production. In our

opinion, legal barriers in the packaging and containment industry would greatly hinder

the ability of new entrants to successfully infringe on the packaging market.

Conclusion:

In conclusion we feel that the threat of new entrants to the packaging and

containment industry is low. Although entry into the industry is not impossible, it does

pose a great threat of failure to new firms attempting to encroach on the already

established industry. We believe that the large amounts of capital needed for start ups

in this industry is one of the main deterrents to new entrants. For example, as

mentioned earlier in the economies of scope section, the ability alone to attain the

capital and financing needed for the physical manufacturing plant, property, equipment,

and raw materials poses a monumental obstacle for new entrants. Furthermore, we

believe that the legal barriers in the packaging and containment industry are another

strong impediment that makes the threat of new entrants minimal.

Sealed Air 31

Threat of Substitute Products

The threat of substitute products depends on some key factors including the

price, performance, and the customers’ overall willingness to substitute. Not all

companies in this industry provide the same products. However, they all perform similar

functions as far as packaging is concerned. The slight variations from company to

company provide a fairly broad range of competitive products for the customer to

choose from. For example, paper and glass goods could be considered substitute

products to a company like Sealed Air, who uses primarily plastic bubble wrap for their

packaging. The companies that are most profitable combine this innovation with a price

that attracts value-seeking customers.

Relative Price and Performance:

In industries with low product differentiation between competitors the prices will

tend to be very similar, causing a high level of price competition. Conversely, industries

that feature high product differentiation between products have lower price competition

and thus greater leeway in the prices that each company sets.

Obviously, the packaging industry falls in between this wide spectrum.

Companies offer different products and materials depending on the specific packaging

desired, thus, allowing for some price variation. Companies must still be price sensitive

against their competitors. If a customer is purchasing a food item that needs to stay

fresh for a long period of time they will most likely value the best materials, regardless

of price to a certain degree. On the other hand, if the customer plans on using the

packaging for a very short period, they will be more willing to substitute a cheaper

paper bag for a plastic one.

Performance is vital for a customer who expects a quality product. Many

companies in the foodservice and packaging portion of the industry rely on products to

perform to their satisfaction. If the product failed they could lose a tremendous amount

of business from their loyal customers. Choosing the right packaging option is

paramount for these particular companies.

Sealed Air 32

Customers Willingness to Switch:

When competing firms in a given industry offer similar products, the customers’

willingness to switch can result from a miniscule price difference such as five cents or

less. A company must succeed in providing customers with additional benefits that

separate it from the competitors, and ultimately strive for the concept of brand loyalty.

Competition is based primarily on packaging performance characteristics, service, and

price, as well as innovations in packaging technology, and the ongoing research and

development programs to enable it to maintain technological leadership (Sealed Air 10-

k 2007).

The packaging industry can have a moderate amount of switching costs for customers,

especially for those in the foodservice segment. This requires them to spend some time

and money to research different companies within the industry to find the best fit for

their packaging need.

Conclusion:

In order to succeed in an industry where customers are willing to substitute

products, firms must focus on their core competencies. They must continue to attract

new customers to remain profitable and to reach future growth expectations. As

mentioned before, companies can keep some loyal customers from brand loyalty to a

certain degree. However, with the absence of high switching costs, a customer will

always be subject to look elsewhere for substitute products when the need arises.

Overall, the threat of substitute products in the packaging industry is moderate.

Sealed Air 33

Bargaining Power of Customers

(Thousands) of packages are shipped daily around the world today, containing

anything from a glass vase for a friend to a truck load of meat from a supplier to a

restaurant or grocery store. Packing material, from bubble wrap to case-ready meats,

are used by a great deal people in today’s world. With many companies in the package

and container industry, producers should have a competitive price.

Price Sensitivity:

Price sensitivity of a customer is determined by their perceived value of the

product and its cost. When there are few switching costs, when they can easily take

their money elsewhere, and when the product is undifferentiated, then the customers

have a tendency to be more price sensitive. Due to the number of companies in the

packaging and container industry, there are low switching costs which lead to higher

price sensitivity of the customer. Customers decided to buy from one packaging

company than another based on the price of the product. If one packaging company

were to raise their prices then it would not be unreasonable to say that their customers

would take their business elsewhere.

Another aspect to be noted is that the customers of the package and container

industry do not look at quality because the products in this industry are not meant to be

used for long amounts of time. For example, bubble wrap does not have a long lifetime

and meat packaging trays will not be used over and over. And since there is not much

differentiation in packaging materials, the customer wants something that will do the

job at the lowest price possible.

Relative Bargaining Power:

The customers’ relative bargaining power determines the extent to which they

can force a drop in prices. In any transaction, the bargaining power depends on the

cost to each party of not doing business with the other party. So, the bargaining power

Sealed Air 34

of the customer would be decided by the cost to the industry of the customer not doing

business with them.

In the case of the packaging and container industry, the major consumers are

other companies, such as FedEx and UPS. Now, if these companies were to take their

business from one packaging company to the next, then that would have a large impact

on the packaging company. As discussed earlier, a customer would be able to switch

from one company to the next with ease. One thing to look at would be alternative

products available to the customer; for instance, whether they want bubble wrap or

recycled paper padding, or regular vs. easy-open bags. With countless alternative

products available to the customer in this industry the bargaining power is in their

hands.

Conclusion:

The customers in the packaging and container industry have large amounts of

bargaining power over the companies. Since there is little product differentiation and

low switching costs, a customer could easily take their business elsewhere if they did

not like the cost of the products. Also, given that the majority of the industries’

customers are other companies, which buy in bulk, the loss of their business would be

hard on the packaging company; giving the customers, again, the power to bargain.

Bargaining Power of Supplier

The bargaining power of the supplier is based upon the supply and demand from

the customers. The more supplies demanded from the market will directly increase the

number of suppliers. In the packaging industry there is a large demand, therefore

there are a large number of suppliers for the materials used to make the products. With

this large quantity of suppliers to choose from it leaves the supplier with a very low

amount of bargaining power. The fact that the majority of the suppliers are equal in

price and quality also decreases their power.

Sealed Air 35

Price Sensitivity:

The packaging industry tends to be very price sensitive due to the large number

of suppliers with very little differentiation. In many cases in the industry a supplier will

compete for the contract of the companies by offering a slightly lower price. To renew

these contracts the supplier must be willing to compete in price along with maintaining

quality and dependable delivery. Part of this competition comes from the lack of

switching cost in the industry which increases their price sensitivity. Switching cost is

the cost that a company would incur if they were to switch their supplier. This increases

their price sensitivity because the company does not have to worry about additional

cost and can focus on the bottom line price of the product. Plastic is the main

component of the packaging industry’s products. This is important because, since the

cost of plastic is the main cost of the company, it causes the company to strengthen

their search for the best price. For example in a glass bottling company would be very

concerned with the price of glass considering the impact it has on their total cost. On

the other hand, they would not be very concerned with how much they spend on

cleaning products because it would be such a minute cost. The fact that there is very

little differentiation among products, small switching cost, and a majority of cost

focused on main products makes the packaging industry very price sensitive.

Relative Bargaining Power:

The amount of relative bargaining power is based on the opportunity costs that

the buyer and supplier will have if they do business. The more profit that they can

make from doing business with each other will result in less bargaining power they will

have over the other. Another factor is that of switching cost. Switching cost is the cost

a company incurs when going through the process of changing to a different supplier.

The higher the switching cost the more power the supplier will have over the company.

In the packaging industry the switching cost for a company is relatively low,

which does not contribute to the bargaining power of the supplier. A main contributing

aspect for the bargaining power of the supplier is the possibility for use of an alternate

Sealed Air 36

product. The suppliers in this industry have to worry about the ability for the packaging

industry to alter the materials used based upon what suppliers are willing to offer. For

example if plastic suppliers were to raise their prices beyond a certain amount then the

foam cushions would be predominantly used over the air cushion type products, which

are made of plastic, in packaging. Since there are areas in which the packaging industry

could alter their product, this causes the suppliers to not have as much power in fear of

losing business.

The number of suppliers compared to the number of customers has a large

affect on the strength of bargaining power the supplier holds over the companies in the

industry. Suppliers of the packaging industry lack bargaining power because there are

many alternative suppliers to choose from at any given time. An example is the option

of packaging industries to switch to recycled plastic. “Boosted recycling rates in states”

shows that companies are actually moving towards recycled plastic (Wall Street

journal). This will directly decrease the bargaining power of the supplier of non

recycled plastic in the packaging industry. Forward integration is a form of integration

which involves the purchase of a company by the supplier. The fact that a supplier who

is so close to the industry could take over your business is a serious threat to the

company; this increases the bargaining power that the supplier possesses over the

company. An example in the packaging industry would be if CP Polymers (a plastic

manufacturer) where to purchase Bemis Company Inc. The threat of forward

integration is the only factor that helps the suppliers of the packaging industry gain

bargaining power. Other factors related to relative bargaining power such as the

amount of suppliers, lack of switching cost, and the possibility of another product being

used has greatly limited the power that the supplier has over the packaging industry.

Number of

suppliers Switching Cost

Differentiation Volume Per Supplier

Forward Integration

Price Sensitivity

Price Sensitive

Price Sensitive

Price Sensitive N/A N/A

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Relative Bargaining Power

Low Low Low Low High

High price sensitivity and a small amount of bargaining power has left the

suppliers of the packaging industry at the mercy of the industry. This means that

suppliers will compete for the business of the companies in the industry. The industry

will help choose the price of the product along with when and how it will be delivered.

This allows companies in the packaging industry to lower their price and have reliable

sources of supplies.

Analysis of Key Success Factors for Value Creation in the Industry

Much in the way that the key success factors identified industry structure and

potential for profitability, analysis of those factors is imperative to measure a firm’s

competitive business strategy, or how firms position themselves within a particular

industry. The two prominent strategies are cost leadership and differentiation. It is

essential for firms to identify their competitive strategy in order to remain successful

within that industry and to create value for their respective shareholders. Although the

main focus of the packaging and container business is cost leadership, the industry still

displays characteristics of both strategies and therefore is important to discuss both

perspectives and how each factor plays a role in the market.

Cost Leadership

Since the packaging and container industry manufactures very similar products

that perform the same purpose, switching costs for consumers is extremely low and

thus making the industry heavily price competitive. To succeed in this environment,

rival firms must pursue a cost leadership business strategy in order to remain

successful. A few characteristics of the industry that display cost leadership are simpler

Sealed Air 38

product designs, tight cost control, lower input costs, economies of scale, and efficient

production.

Simpler Product Designs:

Packaging containers are generally thought of as commodities rather than highly

differentiated products. Firms in this industry typically avoid too much creativity in

product design. Although firms in this industry spend capital on research and

development, it pales in comparison to other industries such as the technology sector or

the automobile industry. This simple approach to product design facilitates the mass-

production of products.

Cost Control:

Given that the packaging and container business is heavily price competitive,

firms must cut cost wherever possible in order to maintain a competitive advantage in

the industry. This is a difficult task in this industry since most of the product line is

mass-produced through highly specialized machines that leads to a higher fixed to

variable cost ratio. In order for firms in this industry to succeed, they must eliminate

any discretionary spending that is not essential to the firm’s core competencies, such as

investments in brand advertising.

Lower Input Costs:

Another way in which firms can lower their costs is though exercising price

control over suppliers. Since the main resource used in the industry is plastic, which

happens to be supplied by many chemical manufacturing companies, the packaging and

container industry can dictate both price and terms of their purchases. However, there

have been major inconsistencies for this rule. Recently, the price of petroleum (the

main ingredient in plastic polymers) has rapidly increased to record highs. This causes

many suppliers of plastics, namely major chemical companies such as Dow and

Huntsman, have increased their prices by nearly 20%. “Dow said the price increases

Sealed Air 39

will take effect on June 1 for all its chemicals and plastics, used in thousands of

products from paints and adhesives to insecticides and packaging. The move came as

little surprise to industry watchers since prices for natural gas, a key chemical industry

feedstock, have jumped by 56 percent since the end of 2007, and crude oil prices have

risen 32 percent to above $125 per barrel” (Reuters via yahoo finance). If this price

surge continues, then the bargaining power of firms of suppliers might shift for this

industry.

Economies of Scale and Efficient Production:

Packaging and container materials are generally mass-produced through an

efficient and mechanical process. Since this production method is highly automated, the

industry exhibits steep learning curves and high economies of scale which both serve as

barriers to potential competitors. This manufacturing process offers a large volume of

production with very little input. This enables firms in the packaging industry to lower

their average costs per unit, which in turn serves as a savings to the customer without

harming the firm’s profit margins. This advantage is imperative in order to succeed in a

cost leadership strategy.

Differentiation

Firms following the differentiation strategy look for a way to distinguish

themselves from the rest of the industry. For firms to compete with differentiated

products, they must first figure out how to improve the current products to appeal to a

group of customers. While accomplishing this they must appeal to the customer

through reputation or advertising. Then the firms must find a price low enough that the

consumer will purchase the product but the company will still make a profit. Companies

will use many tools to gain an advantage through differentiation such as providing a

high quality product, a variety of products, bundled or bulk orders, and a special

characteristic in their delivery of the product. All of these tools are used to set the

Sealed Air 40

company apart from the industry and fit the special needs of the consumers. This is

important because the company will gain the customers who need over night deliveries

due to the fact that they have special orders to fill. Another example is Lexus car

dealers providing a higher quality vehicle in order to attract customers. Another tool

that Lexus car manufacturers have used to differentiate themselves is by making

consumers aware of the quality of their vehicles. Lexus has a brand image and

reputation of selling high quality vehicles, which attracts a special segment of

consumers who value quality in their vehicle. These high standards were accomplished

through the work done in research and development to make these cars, as well as the

marketing strategies that provided the information about the quality to the customers.

A good example of a company that strives to be the front runner in research and

development is Apple. They focus on research and development which in turn helps

spur their continued growth in new products. This strategy has differentiated them

from companies such as Microsoft, and has gained them an advantage in their industry.

Research and Development:

Research and development is not a very popular strategy in the packaging

industry. However, this has left an opening for a manufacturer, in the packaging

industry, to use R&D to distinguish itself from competitors. In the packaging industry

the company that puts the most emphasis into their research and development is

Sealed Air Corp. “With an annual R&D budget twice the industry average,” they

differentiate themselves from their competitors (www.sealedair.com). Differentiating

themselves has allowed them to expand in the food packaging industry. For example,

they have developed new ways to package perishable foods to make them last longer.

Along with the revenue that a new product brings to a company, it also brings

more brand imaging and recognition to the differentiated company. The larger the size

of the market a company can serve will result in more people hearing about their

products. This allows a company to be better prepared to meet customers’ needs. One

way this is possible is to have a variety of products or services. An example of this is

Sealed Air 41

since RIM has improved the BlackBerry line of products they have gained credibility in

consumers’ eyes.

Brand Image:

Brand imaging is the impression held by consumers on a certain brand. This is of

minimal importance in the packaging industry due to the majority of sales being in bulk.

Large corporations, such as UPS, who purchase packaging materials, are not very

concerned with the popularity of the brand of plastic air cushions or cardboard. This is

important to evaluate because it reflects on how much advertising and marketing would

be necessary to be effective in an industry. Since brand image is not that important,

neither will marketing nor advertising play a large role.

Product Appearance:

Product appearance deals with how consumers respond to viewing products.

Product appearance can be very important in the packaging industry because packaging

is usually tied to the appearance of that particular good. The customers of the

packaging industry will not be pleased if the packaging material does not flatter their

product. An example is the packaging of meat in meat markets. If hamburger meat is

covered in discolored plastic it will most likely cause the consumer to buy from

elsewhere. After the meat company figures out that this is the problem, they will be

forced to find another packaging supplier. This means that if product appearance is

better than another packaging company they will gain an advantage through this

differentiation.

Sealed Air 42

Quality:

Quality deals with how high of grade a product rates. There is room for all types

of quality in the packaging industry. The quality of the package is dependent on the

use of materials in the packaging. Some packaging is used just for shipping products,

but others are used for different needs. To illustrate, manufactures of foam coolers,

such as Koldtogo, must compete in quality to make sure they will keep the products

cold enough for their entire exposure to outside elements. If Koldtogo coolers do not

keep the product at a cold enough temperature, then the customer will be forced to

find another cooler supplier. On the other hand, some companies want manufacture

lesser quality items in order to produce a lower cost of good.

Delivery:

A company with a flexible delivery schedule will have a competitive advantage

over a company that delivers on company terms rather than consumers’ terms.

Delivery flexibility deals with having enough products in inventory to provide the

customer with the products at a consumer’s designated time. Many firms in the

packaging industry, such as Sealed Air, have factories spread throughout the world so

that they can be close to customers allowing them to have a quick delivery.

Conclusion:

Cost leadership is the most important strategy for creating a competitive

advantage in the packaging industry. Customers of the packaging industry require low

cost of supplies, along with expected standards of quality. Although cost leadership is

extremely important in the packaging industry, differentiation plays a key role as well.

The key to success is to differentiate while keeping a low cost. Many companies have

found areas to differentiate themselves in and have been very successful.

Sealed Air 43

Firm Competitive Advantage Analysis

Although there are numerous ways to characterize a firm’s business strategy,

they generally fall into two distinct, mutually exclusive categories; Cost leadership and

Differentiation. After examining the industry’s key success factors of profitability and

analyzing the business’ competitive strategy, we have concluded that the Sealed Air

Corporation follows a cost leadership business strategy. Now that we have defined

which category it falls into, we will now discuss how well Sealed Air follows its identified

business plan for success.

Economies of Scale:

Sealed Air, much like the rest of its competitors, produces nearly all of their

products through an advanced automated machinery process. Therefore, it is

imperative that firms in this industry invest heavily in their fixed assets in order to

compete.

As the table above indicates, Sealed Air has lagged behind in this regard. However, due

to advancements in technology, the new production assets are more efficient and

require less maintenance. This in turn lowers both operating expenses and the price

charged to consumers and therefore leads to higher profit margins for the firm.

Property, Plant & Equipment (in thousands)

2003 2004 2005 2006 2007

SEE $ 1,042,400 $ 1,008,600 $ 911,200 $ 970,100 $ 1,080,100

PTV $ 1,522,000 $ 1,445,000 $ 1,141,000 $ 1,093,000 $ 1,264,000

BMS $ 1,615,308 $ 1,687,001 $ 1,143,539 $ 1,175,959 $ 1,248,456

GEF $ 912,375 $ 880,682 $ 862,056 $ 940,949 $ 1,125,437

PKG $ 1,345,154 $ 1,345,154 $ 1,320,511 $ 1,252,291 $ 1,215,298

Sealed Air 44

Cost Control/ Input Costs:

Sealed Air has thus far performed on par with the industry when it comes to

control cost, which is apparent when you consider that the growth in operating

expenses has been steady the past 5 years. However, that might change with respect

to input costs. Petroleum, the key ingredient to manufacturing plastic polymers, has

been increasing at an abnormal rate. Chemical manufacturers, the main suppliers of

plastic polymers to Sealed Air, have increased their prices by 20% since June 1st. As the

graph below indicates, the price of petroleum resources has increased by 56% in just

2008 alone. With the out of control input costs, we could potentially see Sealed Air’s

expenses increase exponentially.

Source: Wikipedia.org

Aside from rising resource prices, Sealed Air does compensate for this rise in input costs

by limiting their expenditure on discretionary items, such as adverting and

selling/administrative expenses.

Sealed Air 45

Simpler Product Design:

Sealed Air, contrary to the rest of the industry, tends to utilize research and

development activities to create new and innovative products. Although this approach

does not coincide with the established cost leadership strategy, it does however tend to

offer many benefits. To be successful in any industry, all firms must invest in future

products. Sealed Air has definitely taken this into account when they decided to

increase their expenditures on R&D, nearly double of any other competitor in the

industry (Sealed Air Homepage).


Sealed Air is the main research and development company in the packaging

industry. They pride themselves in finding the newest ways to package their

customers’ products. Last year Sealed Air spent 90.8 million dollars on research and

development. These costs not only included R&D of products but also the development

of customer service. This improvement has led to increased customer satisfaction,

which has helped Sealed Air gain an advantage in the industry. Another contribution of

Sealed Air’s research and development is to develop patents and trademarks. These

patents and trademarks include Bubble Wrap, Cryovac, Instapak, and Jiffy Mailer.

These products have assisted them in finding their role in the industry although

research and development is not considered an important factor of the packaging

industry. As the table below shows, even though Sealed Air is a leader in R&D in the

packaging and container industry, R&D is still a very small percentage of their sales.

Because of this, one can come to the conclusion that in packaging and container

industry R&D is not very important.

Sealed Air's R&D Percent of Sales

2003 2004 2005 2006 2007

1.95% 1.93% 1.86% 1.81% 1.95%

Sealed Air 46

Quality and Brand Imaging:

Sealed Air considers quality a way for them to differentiate themselves among

their competitors. The high quality of their products have gained them business

throughout the food industry. Many food companies around the world have chosen

Sealed Air because the way the product looks in their packaging and the quality of

freshness the food keeps. The quality of their product has positively influenced the

brand imaging of Sealed Air. Although brand imaging is not very important in the

packaging industry, Sealed Air holds a slight advantage. Another source of their

positive brand imaging is the trademarks they have on their products. A good example

of this is Bubble Wrap. The majority of our culture refers to small plastic air pockets as

Bubble Wrap. Since Sealed Air makes Bubble Wrap, people automatically think of

Sealed Air when they see any kind of sealed air pockets used for shipping. Quality and

brand imaging is a key factor in Sealed Airs attempt to differentiate from the industry.

Sealed Air's Marketing Cost / Sales

2003 2004 2005 2006 2007

16.21% 16.48% 15.81% 16.20% 16.13%

Furthermore, in references to quality and brand image, Sealed Air continues to

promote their ‘excellence approach’. For example, as SEE continues to expand, they do

so in manner that benefits their image globally. The following is a quote from SEE’s

footnotes of their 2008 10-k which proves that they continually increase their capital

expenditures with “investments in capacity expansion and in new technologies related

to the Company's centers of excellence approach as well as global manufacturing

strategy” (SEE 2008 10-K).

Sealed Air 47

Delivery:

Flexible delivery has been a key success factor for Sealed Air. More flexibility in

their delivery has allowed them to serve more customers throughout the world in a

timely fashion. The fact that they manufacture in over 50 countries and have 121

manufacturers allows them to be close to their customers. This is important because

this gives them a timing advantage against competitors who are not close to their

customers. If a customer in Europe needs packaging supplies sent over night then

there are 36 manufacturers dispersed throughout Europe to send them the supplies.

The flexibility in delivery that Sealed Air possesses has helped differentiate them from

their competitors.

Conclusion:

In summary, Sealed Air has gained a competitive advantage in both cost

leadership and differentiation. Although the main focus of this industry is cost

leadership, they have found areas to differentiate themselves from their competitors.

They have accomplished this through extensive research and development, high brand

imaging, dependable quality, and flexible delivery. Sealed Air has achieved several cost

leadership objectives by maintaining tight cost control, large economies of scale, high

investment in efficient production assets, and maintaining a simple product design. In

conclusion, we feel that Sealed Air gained and advantage through cost leadership and

differentiation, leading us to believe that they follow a mixed strategy.

Sealed Air 48

Accounting Analysis

Accounting analysis is used to “evaluate the degree to which a firm’s accounting

captures its underlying business reality” (Palepu & Healy book). An accurate accounting

analysis is imperative when properly valuing a company because it eliminates

distortions caused by inaccurate accounting numbers. There are six steps in performing

the accounting analysis that will insure a suitable analysis. First, the analyst must

identify key accounting policies based upon the industry and the firm’s specific business

strategy. Next, the analyst assesses the amount of flexibility that was used in the firms

accounting procedures. The third step is to identify how they used this flexibility and

what the benefits are from performing their accounting procedures this way. Fourth,

the analyst must evaluate how detailed and fair a company’s disclosures have been

reported. After that, red flags need to be located and examined. The last step is to

make the proper adjustments that have been incurred due to management’s decision

and accounting policies. This is important because of the flexibility given to the

managers in accounting can distort the numbers that are analyzed. Once they have

realized what numbers are incorrect then, the analyst can adjust the numbers

accordingly.

Key Accounting Policies

A company’s key success factors can add value by giving the firm an advantage

over its competitors. However, these factors can also be misrepresented by the

company to give the company a better picture for the stockholders. A company’s key

success factors help the firm decide which key accounting policies they are going to

use. As mentioned above, Sealed Air’s key success factors are cost leadership and

differentiation. These factors show where distortions are likely to exist. Some of the

accounting policies that could potentially distort the actual value of the firm by the way

they are recorded are: research and development, capital and operating leases, pension

liabilities, goodwill, and currency risk. The GAAP allows some flexibility in reporting

financials while only placing a minimum requirement on disclosure. This gives

Sealed Air 49

companies the opportunity to distort their financial statements. A company’s key

success factors and key accounting policies should be looked at and analyzed to see if a

company has distorted their financials.


Research and Development is a key factor for many companies to gain a

competitive advantage. R&D has a large risk due to the chances that the research will

never result in anything or their competitor will cause their research to be useless or

obsolete. Due to the uncertainty of gain that R&D will produce, GAAP rules state that

R&D should be treated as an expense. The expensing of R&D causes expenses to be

overstated and net income to be understated. This will affect the balance sheet by

understating equity and assets. This affects some industries a great deal more than

others. An example of an industry that contains large R&D expenses is the

pharmaceutical industry. Their large expenses of R&D cause net income to appear

lower when compared to other industries.

On the other hand, the packaging industry on the whole does not expense very

much R&D. Sealed Air prides their company on being a leader in the R&D sector of the

packaging industry. On Sealed Air’s website they state that they have “annual R&D

budget twice the industry average” (Sealed Air 10K). As the table below confirms,

Sealed Air spends a huge sum more than their competitors on R&D in the past five

years alone. This is important because it will cause their expenses to be higher than

their competitors’ in the industry. Since R&D expenses will be higher, it will cause net

income to appear lower when compared to the industry (derived from net

income=revenue-expenses). When net income appears lower it may cause investors to

steer away from the company even though R&D has proven to benefit companies.

Sealed Air 50

(In millions) 2003 2004 2005 2006 2007

Sealed Air $ 69 $ 73.2 $ 75.8 $ 78.2 $ 90.8

Pactiv $ 32 $ 28 $ 33 $ 33 $ 34

Bemis $ 21.45 $ 21.14 $ 23.53 $ 25.02 $ 25.98

Packaging Co. of Amer.

$ 6.1 $ 6.1 $ 6.8 $ 6.9 $ 7.6

Sealed Air can confirm their R&D expenses by arguing that it will raise revenue

for them in future years. The problem with their argument is that it will only account for

products that are completely developed and sold. It does not consider the items that

are currently being developed. Some companies will attempt to adjust this problem by

capitalizing certain sectors of their developing R&D to intangible assets. They base this

capitalization on the progress they have made in their development of future assets.

Future assets from R&D can include patents, trademarks, product lines, and intangible

assets.

The information provided by the companies in the packaging industry about what

their R&D includes is very limited. A large part of these R&D expenses deal with finding

efficient production and delivery methods. Sealed Air has gone as far to include

“technical support for customers and facility occupancy” in their R&D (Sealed Air 10K).

This controversial call, to include these expenses in R&D when they used to be

expensed to marketing and administrative expenses, has resulted in a $12.6 million

increase in R&D expenses (Sealed Air 10K).

In conclusion, the fact that GAAP requires companies to expense R&D can cause

net income to be understated. Considering Sealed Air has the highest R&D expense in

the industry then, they also have the most understated net income in the industry.

Although potential investors will not like the low net income, Sealed Air has chosen R&D

to gain a competitive advantage on their industry.

Sealed Air 51

Operating and Capital Leases:

Capital leases act as an asset to the lessee, and shares the risks and benefits of

ownership. Operating leases, on the other hand, are treated like rent, where the lessee

only has the right to use the property. Differentiating between capital and operating

leases is important because operating leases can, in some instances, severely

understate liabilities and assets of a company. Understanding balance sheet items can

cause inaccurate decisions by investors. Capital and Operating leases are accounted for

differently. As said above, capital leases are treated like an asset, but also like a liability

because of the lease payments. They are also amortized over the economic life or asset

life, depending on the length of time on the lease. Operating leases are not recorded on

the balance sheet which helps to reduce liabilities the company may have. Also,

operating leases avoid such expenses as depreciation and interest, which are taken into

consideration in a capital lease. Having understated expenses leads to an overstated

net income, this in turn overstates equity.

Looking at the package and container industry, most companies use both types

of leases. However, operating leases are used most often; and when companies use

capital leases, they also use operating leases. Pactiv, Bemis Co. Inc. and Packaging

Corp. of America are some of the companies in the industry that use both capital and

operating leases. On the other hand, Greif Inc. and Sealed Air Corp. only use operating

leases. Sealed Air Corp. even states in their 10K that the majority of their leases are

operating leases.

Since Sealed Air Corp. only uses operating leases vs. capital leases, their asset

and/or liabilities are understated due to the fact that operating leases are not reported

on the balance sheet. But given that their leases only make up a minute portion of their

total liabilities, 3.67%, the company would not gain much by switching to capital leases

(Sealed Air 2007 10-k). Their liabilities would not be greatly affected and in conclusion

neither would their balance sheet.

Sealed Air 52

Pension Liabilities:

As identified as one of the Key Success Factors, cost leadership places a heavy

focus on keeping costs low so that those savings can be passed on to consumers, thus

making the firm more price competitive. Many firms often expense these costs instead

of capitalizing them in order to deflate liabilities and overstate both equity and price per

share. This tactic of failing to record this liability is often called “off balance-sheet

financing” (investopedia.com). Since pension liabilities and other retirement obligations

can become a substantial burden, it is important for companies to disclose not only the

amount of the pension liability but also the forecasted prospective expenses and the

manner in which they formulated those assumptions.

Sealed Air Corporation maintains what they call a “non-contributory thrift and

retirement savings plan” which they have outlined in their most recent annual report.

During the past three years, charges made to pension payments amounted to $30

million, $30.4 million, and $32.8 million in 2005, 2006, and 2007 respectively.

Management of Sealed Air have explicitly stated the methods for accounting of pensions

by declaring that “the principle assumptions concern the discount rate used to measure

future obligations, the expected future rate of return on plan assets, the expected rate

of future compensation increases and various other actuarial assumptions” (Sealed Air

2008 10-K). As the statement clarified, the main concern when estimating future

pension expense is the estimated discount rate.

Discount Rates for Pension Liabilities

2003 2004 2005 2006 2007

SEE 6.75% 6.00% 5.80% 5.50% 5.80%

GEF 6.00% 6.00% 5.50% 5.25% 5.88%

BMS 6.75% 6.25% 5.75% 5.50% 5.75%

PTV 6.75% 6.25% 5.70% 5.75% 6.39%

PKG 6.25% 6.00% 5.50% 5.75% 6.00%

Sealed Air 53

As the table above indicates, Sealed Air seems to strictly follow industry averages

when determining the appropriate discount rate for pension plan assets. It is important

to note that the industry is currently experiencing a downward trend in their discounts

rates. A possible explanation could be the added need for conservative accounting that

yields less aggressive estimates. However, Sealed Air briefly explains that projections

are updated annually “with respect to the company’s asset allocation, historical returns,

and the current economic environment” (Sealed Air 2008 10-K). It is important to note

that although there appears to be an industry-wide consensus over the appropriate

discount rate, there is a fundamental flaw with this figure. Most of these discount rates

are merely man-made assumptions based on uncertain future events; therefore giving

the managers of the firm a considerable amount of flexibility. Despite the fact that

Sealed Air uses an industry-level discount rate, it is their rate of compensation-increases

that is a cause for concern. The rate of compensation-increases is the expected growth

rate of future liability expenses in order to keep up with both inflation cost and potential

rises in the costs of medical care. Currently, Sealed Air only has a 3.5% rate of

compensation. Given that medical costs have nearly tripled within the past decade, we

assume that serious changes must be made in the way Sealed Air values the present

value of future pension liability expenses.

Overall, it appears through the amount of disclosure Sealed Air has presented in

their 10-K that the firm has made a consistent effort in identifying the costs of pension

liabilities. As mentioned earlier, the packaging and container industry follows a cost

leadership business strategy that must reduce costs wherever possible. In regards to

pension expenses, it would appear that the firm has not done a good job when it comes

to estimating future liabilities and would therefore leave a considerable amount of room

for possible distortion.

Sealed Air 54

Goodwill:

When a firm’s market value is higher than the fair value of net assets of the firm

the difference in price is attributed to an intangible asset called goodwill. The value of

goodwill is important to look at because it can be key to determining the acquisition

price of a firm. The value of goodwill is not predetermined by a company; it often stems

directly from the difference in the purchase price of a company and the book value of

the acquired firms assets. No firm in their right mind would be willing to state that it

purely overpaid for an acquisition so the variation in market price to book value is

chalked up to goodwill. Once the purchasing firm adds the difference in values to the

books, the initial value of goodwill has been created. However, the value of goodwill on

the financial statements is not the same year to year. Intangible assets are subject to

deprecation and impairment.

Firms carrying goodwill on their books are required to test it annually for

impairment. Impairment results from having a market value less than the carrying value

of the asset. When impairment occurs, assets must be written down to market value on

the financial statements. If impairment of the asset has occurred then the impaired

value is subject to a write down and expensed on the income statement. In previous

years goodwill was depreciated or amortized, but after a change in the generally

accepted accounting principles in 2002 goodwill is now only tested for impairment and

is no longer allowed to be amortized. If impairment test are done correctly and

accurately then benefits arise because over exaggerated asset values decrease giving

analyst a more realistic view of true asset value of the firm. However, GAAP does allow

for management to make judgment calls when it comes to the impairment of intangible

assets. Managers may face the challenge of meeting expectations and may not write

down the proper amount on assets, such as goodwill, leaving financial statements

overvalued. Industry standards are significant in deeming if a firm is on par in

valuations of goodwill since companies are not mandated by GAAP to disclose what

they determine as fair market value of goodwill. Industry benchmarks therefore will

help us in our accounting analysis of the goodwill of Sealed Air.

Sealed Air 55

GOODWILL 2007 2006 2005 2004 2003 2002

Sealed Air 1969.7 1957.7 1908.8 1918 1939.5 1926.2

Bemis 642.5 603.6 581.4 442 450.6 448

Pactiv 1123 525 527 462 643 612

Greif 493.2 286.5 236.7 237.8 252.3 232.5

Package Corp. 3716.3 3720 3418.7 3691 2286 1789

The first table above compares the amount of goodwill reported on Sealed Air,

Bemis, Pactiv, Greif, and Package Corp.’s 10-ks for the past six years. When analyzing

the packaging industry, Sealed Air continues to be above average in their reporting of

goodwill. Although Sealed Air does not have the highest amount of goodwill reported, it

is enough to raise concern for many analysts. The large amount of goodwill compared

to other net assets could be causing the firm to be overvalued severely. This is in

reference to the second stated table above and will be talked about in further detail in

the undo accounting section. Furthermore, another issue at hand is there is lack of

stable decline in the amount of goodwill. The following graph shows that although there

is not a steady decline in the balance of goodwill assets, the volatility in Sealed Air’s

goodwill value is less volatile than all of its competitors. Sealed Air’s goodwill varies by

1-3% over the past six years; where as other competitors have experienced over 50%

Sealed Air's Goodwill as a Percent of Total Assets

Year 2002 2003 2004 2005 2006 2007

Percent of Total Assets* 46.31 41.23 39.51 39.23 38.99 36.22*Before Impairment

Sealed Air 56

increases in goodwill. The Y-axis represents the value assigned to goodwill on each

company’s 10-k, and the X-axis represents the year that the assets were reported in.

Our analysis of this leads us to the conclusion that management may not be

correctly valuing or impairing the amount of goodwill on its financials due to man-made

error or management manipulation. We are concerned that this could lead to overstated

asset values on the balance sheet and understated expenses on the income statement.

Since the disclosure of fair market value of goodwill is not required by the SEC or GAAP,

it is difficult to determine what the true value of goodwill should be. By conventional

wisdom, one would think that if goodwill is being correctly impaired (and without large

Sealed Air 57

acquisitions of other firms) then the value of goodwill should be declining over time;

however that does not seem to be the case for Sealed Air or its competitors. Due to the

nature of goodwill’s flexibility and the ability to be easily exploited by managers is

consistent with our inconsistent findings of the accountability of Sealed Airs goodwill

asset value.

Currency Risk:

For international corporations such as Sealed Air, it is important for such firms to

address the market risk of currency when making sales in foreign countries. According

to Sealed Air’s most recent annual report $2.533 billion was made in sales overseas,

which comprises 54.5% of total net sales for all of 2007. Given that a majority of their

income comes from abroad, it would be imperative for firms to discuss how they

account for such transactions. It is well known that firms that compete overseas face a

tremendous risk when selling their products in foreign markets. Multinational

corporations consider currency risk not only when it comes to sales but when it comes

to their international production facilities. Aside from owning manufacturing factories in

foreign countries, they also do a heavy amount of outsourcing as well, about $180.7

million in 2007 to be exact. Since most of Sealed Air’s business is performed abroad, it

would be essential for the company to have a business strategy when it comes to the

volatile currency market.

According to Sealed Air’s 10-K, the company invests in derivative financial

instruments to offset some of the currency risk. Such financial derivatives include

foreign currency forward contracts to lock-in fixed exchange rates, which help prevent

the firm from experiencing any liquidity problems when conducting foreign transactions.

Another hedging activity they perform are foreign exchange options that help diversify

away potential foreign interest rate fluctuations when conducting business overseas.

These options become very useful since Seal Air currently has $49.2 million in

outstanding debt denominated in foreign currency. Aside from using options and

Sealed Air 58

forwarding contracts, the company also uses “currency swaps, interest rate swaps,

caps, collars, and U.S. treasury lock agreements” (Sealed Air 2007 10-K).

Now that we know of the numerous derivative tools at their disposal, it is now

time to discuss how management accounts for such assets. Sealed Air, as does nearly

every other corporation, records their hedging and derivative assets at fair market value

as permitted by rules and conventions set by GAAP. Currently Sealed Air carries and

aggregate of $385.1 million in derivative securities and contracts aimed at currency

risks that are set to expire in October 2008. When estimating the appropriate value for

purchasing such assets, Sealed Air states that “the company identifies the specific

financial risk it faces, the appropriate hedging instrument to use to reduce the risk, and

the correlation between the financial risk and the hedging instruments. The company

also uses purchase orders and historical data as the basis for determining the

anticipated values of the transactions to be hedged” (Sealed Air 2007 10-K). Given the

current economic environment, it is important to note that the currency exchanges have

tremendously benefited the company. Due a slowing domestic economy and a weak

U.S. dollar, Sealed Air were able of overcompensate losses in domestic sales by

favorable exchange rates. For instance, out of the 7.5% company growth, 4.1% of that

was largely due to foreign currency translations, thus making currency risk a key

success factor for this firm.

Accounting Flexibility

Flexibility in accounting refers to the amount of room a manager has to show the

true value of their company in their financial statements. The information contained in

these statements should be appropriate, reliable, and consistent. However, the GAAP

allows the managers some flexibility for the financial statements, which is designed to

give managers the opportunity to portray their firm’s financial information in a more

informative way. The down side is that this flexibility can lead to a company’s financials

being distorted and misrepresented to make the firm look more appealing to likely

investors. Below, we will identify the flexibility of the key accounting policies, as they

Sealed Air 59

are relevant to the key success factors, of Sealed Air Corp. and the packaging and

container industry.


GAAP strictly states that research and development should be expensed despite

the critical role that it performs as a key success factor for companies. This regulation

results in companies overvaluing their expenses. When companies overvalue their

expenses then they will undervalue their net income. Another regulation is that the R&D

must be expensed at the time it occurs. This is important because it places the

expenses at a time when a company is not receiving any revenue from their R&D

benefits. To help solve this problem a company can gradually capitalize their R&D to

intangible assets. The flexibility of capitalizing R&D is only performed by Pactiv in the

packaging industry due to the small amount of funds that are expensed to R&D in the

industry. Pactiv capitalizes in-process research and development at a fair value as an

indefinite-lived intangible asset at the acquisition date (Pactiv 10K).

The small amount of flexibility in the accounting of R&D expenses within the

packaging industry is what items are included as R&D expenses. An example of this is

how Sealed Air has decided to include technical customer support and facility occupancy

cost in their R&D expenses in 2007 (Sealed Air 10K). These costs were previously

stated in the marketing and administrative expenses. Sealed Air did this because an

increase in R&D is better accepted by analysts than a jump in marketing and

administrative expenses. By removing these costs from their marketing and

administrative expenses it allowed these expenses to remain at 16% of their total net

sales (Sealed Air 10K).

Disclosure of the companies R&D expenses is somewhat limited amongst Sealed

Air’s competitors in the packaging industry. The only details about what some of the

R&D expenses were (for 2007), for Sealed Air, is that they included, technical support

and facility occupancy cost (Sealed Air 10K). Pactiv only goes as far as to say that 30%

of their R&D is devoted to reducing costs and distribution efficiency (Pactiv 10K). While

Sealed Air 60

Bemis is the most disclosed company by breaking the R&D expenses into flexible

packaging and pressure sensitive materials (Bemis 10K), an analyst can conclude that

the packaging industry has a low disclosure when it comes to R&D expenses.

In conclusion, there is limited flexibility of recording R&D expenses in the

packaging industry. Areas of accounting that lack flexibility such as R&D leave us with

little knowledge about the motivation of the managers and the company’s personal

economic standpoint. This concludes that the flexibility of R&D expenses is not an

important factor to analyze when valuing a firm in the packaging industry.


A company can choose between two different types of leases. A capital lease,

which as discussed above, is treated like ownership. With a capital lease, the company

assumes ownership and all the risk associated with that. These risks would include such

things as taxes and payments. But on the plus side, the company gains certain benefits

related with ownership, such as deduction of interest expenses and depreciation. A

capital lease is recorded as an asset and liability (lease payments) on the balance sheet.

The other type of lease is an operating lease, which is treated like rent. They are

recorded on the income statement as operating expenses but are kept off the

company’s balance sheet. With these expenses not being recorded on the balance

sheet, the company’s assets and liabilities can be somewhat understated. This, in turn,

causes the firm’s expenses to be understated, their net income to be overstated, and

the company’s retained earnings to be overstated as well.

In the case of Sealed Air Corp., their leases do not account for enough of their

liabilities to matter if one type of lease is used over the other. Sealed Air’s leases

account for 7.47% of long term liabilities which is not a substantial amount compared

to total liabilities. Sealed Air Corp. has chosen to use operating leases which, if they

were to be capitalized would only affect their balance sheet ever so slightly. Since there

would be only a slight change to their balance sheet depending on the type of leases

Sealed Air 61

used, Sealed Air Corp. has all the flexibility it wants when deciding on which type of

lease to use. 7.47%

Pension Plans:

Pension plans are recognized as a key accounting policy in the packaging

industry. Similar to other accounting policies such as capital leases and goodwill, there

can be significant flexibility with how a company estimates their pension plans. The

majority of this flexibility stems from the discount rate a firm chooses. Ultimately, the

discount rate is an estimation used to discount future payments to the present value.

An increase in the discount rate leads to a decrease in these payments, and vice versa.

The discount rate is also related to a firm’s net income. For example, a reduction in the

rate would cause the firm’s expenses to increase. Naturally, this leads to lower net

income and the firm’s liabilities would also be overstated.

However, managers do not enjoy the same level of flexibility that they once did

regarding pension plans. The FASB recently issued a new mandatory policy which

requires a company to recognize the overfunded or underfunded status of a defined

benefit postretirement plan (other than a multiemployer plan) as an asset or liability in

its statement of financial position and to recognize changes in that funded status in the

year in which the changes occur through comprehensive income of a business entity or

changes in unrestricted net assets of a not-for-profit organization (FASB, SFAS 158).

This is important for a variety of reasons. Prior to this policy, accounting standards did

not require firms to fully recognize the financial impact of certain events affecting the

plan’s funded status when they occurred. This allowed companies to delay the

recognition of economic events that affected the cost of the pension plan’s benefits to

their employees. Companies were only required to record the prepaid pension costs;

meaning they only accounted for the actual cash being deposited into the pension fund.

This severely understated the liabilities for a large percentage of firms.

Sealed Air 62

The following table summarizes the incremental effects of SFAS No. 158

adoption on the individual line items in Sealed Air’s consolidated balance sheet at

December 31, 2006 (Sealed Air 10-K, 2007):

(Amounts in millions) Pre-SFAS No. 158

Adoption SFAS No. 158 Adjustment

Post SFAS No. 158 Adoption

Assets

Deferred Tax Assets 152.8 22.6 175.4

Other Assets 224.4 -62.8 161.6

Liabilities

Other Current Liabilities 573.9 2.3 576.2

Other Liabilities 112.5 13.3 125.8

Shareholders' Equity

Minimum Pension Liability, net of tax -4.4 4.4 N/A

Unamortized Pension Items, net of tax N/A -60.2 -60.2

Since the policy’s implementation, users of a firm’s financial statements can more

easily evaluate a company’s financial position. “This Statement improves financial

reporting because the information reported by a sponsoring employer in its financial

statements is more complete, timely, and, therefore, more representationally faithful

(FASB, SFAS 158).” Liabilities are significantly larger because firms are now required to

account for both the actual cash deposited and the accrual of necessary funds that will

satisfy the workers pension plans. Companies are forced to report the increase in

liabilities on the balance sheet rather than disguising them in the footnotes of the

financial statements. The final section of the policy also states that companies must

disclose any additional information (in the notes to financial statements) regarding

effects on net periodic benefit cost for the next fiscal year that arise from delayed

recognition from gains/losses or prior service costs or credits.

Discount rates within the packaging industry are fairly similar. Discount rates

have generally decreased during the past five years. The average rate for Sealed Air

and their competitors has gone from 6.5% in 2003 to 5.964% in 2007. For example,

Sealed Air’s discount rate has steadily decreased from 2003-2006, from 6.75% to 5.5%,

Sealed Air 63

respectively (before finally rebounding to 5.8% in 2007). Sealed Air’s discount rate is

slightly lower than the industry average which causes their expenses to be a shade

higher (forcing net income slightly down).

Ultimately, the flexibility of pension plans is an important factor for any firm. The

industry has experienced some dramatic change in recent years with the addition of

FASB’s new policy. Firms can expect widespread impact throughout their financial

statements by adjusting the discount rate they use.

Goodwill:

Companies carrying goodwill on their books are granted a large amount of

flexibility in reported values of goodwill due to the structure created by GAAP. In 2002

GAAP changed the rules for the way goodwill is reported on the balance sheet. In

previous years goodwill was subject to amortization like any other asset. However,

GAAP changed the rules in regards to goodwill saying that it was no longer allowed to

be amortized but now must be tested for impairment annually. GAAP changed this rule

in hopes that companies would take more aggressive steps in writing down goodwill’s

value on financial statements, thus creating less inflated asset, equity, and net income

values. However, after a six year respective look at Sealed Air and its competitors we

have not found data to support the type of write off activity that GAAP was hoping to

accomplish by the change in accounting standards. Although annual testing for

impairment is mandated by GAAP, managers are still allowed a great deal of discretion

in the impairment test procedure, “it is possible for the allocation process to be

manipulated for the purpose of avoiding flunking the impairment test. As managements’

attempt to avoid these charge-offs, more accounting shenanigans will undoubtedly

result” (investopedia.com).

The allocation process and the determined amount of fair market value (used to

determine impairment) are not required to be reported on financial statements. The

large amount of flexibility in the accounting procedures for goodwill can be verified by

these nondisclosure policies. Policies such as these easily allow companies to

Sealed Air 64

manipulate and hide things from investors. Managers are often given compensation or

incentives to boost higher earnings. One way managers can achieve higher earnings is

to avoid taking the write offs of goodwill and expensing it through the income

statement. Managers’ ability to delay expensing these over inflated assets creates

overstated equity and net income.

In reference to Sealed Air’s goodwill impairment, it is stated in the 10-k that “The

Company completed its annual testing for impairment for 2006, 2005 and 2004 during

the fourth quarter of each year and determined that no impairment charge was

necessary on a reporting unit basis in any of the periods.” (Sealed Air’s 2007 10-k).

From analysts prospective, one could be concerned that Sealed Air is finding no room

for impairment, and could be leading to over estimated firm value. Furthermore, there

seems to be a lack of disclosure as to what quantitative measures are taken when

comparing goodwill assets to fair market value of goodwill. The only findings that could

rival these concerns is the fact that Sealed Air has had a constant reported value of

goodwill over the past six years. Constant reporting value could be positive for Sealed

Air, but we feel that it does not overshadow the lack of impairment write offs or the

lack of disclosure in the 10-k. Overall, goodwill’s reporting nature allows there to be a

large amount of flexibility and tendency to be manipulated as seen in Sealed Air’s

financial records.

Currency:

In regards to currency exchanges, there is very little room for accounting

flexibility. Potential manipulation by management is very remote given that most

overseas transactions are all recorded under GAAP principles and are monitored

through the SEC, meaning that all sales are translated into domestic currency terms and

are verifiable through the company’s bank statements. Although currency market

securities and derivatives are booked at fair market value, this technique still follows the

proscribed method dictated by GAAP when recording such an asset. Not only are there

transactions through their income statements, but the fact that exchanges rates and

Sealed Air 65

foreign interest rates are all publicly available information that can verify the company’s

estimates. Therefore, we can reasonably assume that Sealed Air follows stringent

guidelines in terms of foreign currency exchanges.

Evaluate Actual Accounting Strategy

Actual accounting strategies used by companies are important to review because

it will help assess the disclosure and choice of a firm’s specific accounting policies.

There are two types of disclosure, high and low. High disclosure means that firms

thoroughly discuss relevant information helping investors make accurate decisions of

firm value. High disclosure goes above and beyond the requirements of the Securities

and Exchange Commission and the standards of generally accepted accounting policies.

Firms that have a high amount of disclosure tend to limit the extent of the use of

flexibility in accounting procedures. Low disclosure firms barely meet SEC and GAAP

standards. Low disclosure can lead to misinterpretations of earnings, asset values, and

liabilities. Firms that maximize the allowance of flexibility in accounting practices are

generally considered to have low disclosure. There are a few main components that

help determine if a company’s accounting strategy is high or low disclosure such as if a

company is using segment reporting, and the levels of dis-aggregation. Another

important key to actual accounting strategies is determining if a firm is practicing

aggressive or conservative accounting procedures. Aggressive accounting procedures

lead to higher earnings, and conservative accounting procedures lead to low earnings.

Through evaluating these two basic dimensions investors should be able to accurately

evaluate a firm’s actual accounting strategy.


Research and development is not emphasized very heavily in the packaging

industry. R&D reporting lacks disclosure and flexibility. The lack of flexibility is due to

the strict regulations enforced by GAAP. These regulations state that a company must

expense their R&D, when it could be argued that R&D is an asset. Expensing R&D leads

to overvalued expenses and an undervalued net income. This inaccuracy results as a

Sealed Air 66

decrease in the credibility of the numbers reported on the financial statements of a

company. As previously discussed, the only way to partially fix this problem is to

capitalize the developing products to assets over the progress of the R&D. With this

said, Pactiv is the only company who has slightly participated in this capitalization of

R&D in the packaging industry (Pactiv 10K). This shows us that generally in the

packaging industry the firm’s expenses will be overvalued and this will cause their net

income to be undervalued.

As previously stated, R&D expenses have a very low amount of disclosure in the

packaging industry. Greif packaging does not even include an actual amount that they

spend on R&D. They state that “research and development projects are important to

the Company’s continued growth, the amount expended in any year is not material in

relation to the results of operations of the company” (Greif 10K). This is all that was

included in Greif’s 10K pertaining to R&D information. This is a prime example of how

the packaging industry has a low level of disclosure. This is important because it

reduces the amount of economic information one can pull from their financial

statements. Packaging Corporation of America is another one of Sealed Air’s

competitors that has a small amount of information disclosed about their R&D. They

only provide us with the amount of R&D expenses that were reported for 2007

(Packaging Corp. of America 10K). It is normal for little or no description of the specific

details or segments of the R&D to be provided in the packaging industry.

In conclusion, the small amount of flexibility due to GAAP regulations and low

disclosure in the industry has lead to a standard practice amongst the packaging

industry. This also makes it difficult to tell from R&D accounting practices whether a

company is aggressive or conservative. The only aggressive accounting tactic that

Sealed Air could use is to capitalize some of their developing products to assets, but

they do not. If they did this it would appear to make their assets larger. Considering

they could boost the appearance of their assets and they are not leads us to believe

that they are slightly conservative in the recording of their R&D.

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As discussed above, there are two kinds of leases and the way those leases are

reported on a company’s financial statements are different. A capital lease is treated

like an asset and liability and therefore is recorded on the balance sheet. Conversely, an

operating lease is treated like rent and kept off the balance sheet. In the packaging and

container industry, both types of leases are used, but operating leases are the more

common of the two. This allows companies to avoid the risk associated with capital

leases, which understates assets and liabilities. This would suggest an aggressive

accounting strategy on the company’s part. However, since capitalizing a lease for

Sealed Air Corp. would have little effect on the company’s balance sheet because leases

are a small percentage of their total liabilities, then we conclude that Sealed Air Corp.

does not have an aggressive accounting strategy for leases.

The industry as a whole uses operating leases over capital leases. If a company

in the industry chose to only use capital leases, then just by looking at the surface and

comparing them to the other companies in the industry, they would not add up. To stay

somewhat competitive in this industry it is key that the company uses operating leases.

All of the companies that we looked at, including Sealed Air Corp., gave charts that

explained how much was owed for operating and capital leases, their payments for the

next 5 years and a group sum after that. Most companies, however, did not give a

discount rate for the loans.

As in the case of Sealed Air Corp. we have come to the conclusion that their

discount rate is .7. We figured that their leases were for 15 years. For that length of

time, the only discount rate that would average out was .7.

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Pension Plans:

Since GAAP regulations provide firms with some flexibility concerning the

discount rate used on pension plans, it is important to examine the level of disclosure

and disaggregation in this area. Investors seek information that shows how each

company within the industry came up with their rates. As previously stated, most of

these discount rates are purely assumptions based on uncertain future events. This

gives managers a significant amount of flexibility in their level of disclosure. Since all of

Sealed Air’s competitors have some form of a pension plan, it is important to examine

each firm’s disclosure approach relative to the packaging industry.

Generally, it appears that the industry is leaning toward defined contribution

plans rather than defined benefit plans. However, firms still tend to differ with their

exact methods. For example, Bemis states that “our U.S. defined benefit plans were

amended for approximately two-thirds of the participant population. For those

employees impacted, future pension benefits were replaced with a defined benefit

contribution plan” (Bemis 10-K, 2007). On the other hand, Sealed Air uses a “non-

contributory thrift and retirement savings plan” which they have outlined in their most

recent annual report. “The contributory thrift and retirement savings plan generally

provides for Company contributions in cash based upon the amount contributed to the

plan by the participants. Company contributions to or provisions for its profit-sharing

plan and thrift and retirement savings plan are charged to operations” (Sealed Air 10-K,

2007). This could perhaps be used to explain why Sealed Air uses a slightly lower

discount rate than their competitors.

Sealed Air’s discount rate has been declining over the past five years and was

slightly below the industry average in 2007. This suggests they have used a

conservative accounting structure, thus reporting slightly higher expenses and a lower

net income than their competitors. Generally, the packaging industry seems to have a

moderate level of disclosure. Other firms break down the pension costs into sections

such as service costs, interest costs, and employee contributions. However, Sealed Air

is limited in their explanation of how they formulated their discount rate. Factors such

Sealed Air 69

as asset allocation, historical returns, and current economic environment, are all

revisited on an annual basis to adjust the rate.

Sealed Air still provides an adequate amount of data supporting their pension

plan expenses. The following table shows the components of the Company's net

periodic benefit cost for the three years ended December 31, 2007, for its U.S. pension

plans charged to operations (Sealed Air 10-K, 2007):

(Amounts in millions) 2007 2006 2005 Components of net periodic benefit cost

Service Cost 1.4 1.2 1.2 Interest Cost 2.5 2.1 1.9

Expected return on plan assets -2.8 -2.6 -2.4 Amortization of prior service cost 0.7 0.7 0.7 Amortization of net actuarial loss 1.1 0.9 0.7

Net periodic pension cost 2.9 2.3 2.1

Sealed Air also provides data for estimated future benefit payments, which

reflect expected future service, for the next five years. Overall, the industry has a

moderate rate of disclosure and disaggregation with regards to pension plans. Sealed

Air is generally on par with other firms in the industry.

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Segment 2003 2004 2005 2006 2007Food Packaging N/A 538.4 549.8 386.3 388Protective Packaging N/A 1365.7 1386 1270.9 1275.2Food Solutions N/A 0 0 154.1 149.7Other N/A 0 0 145.8 156.8Total N/A 1904.1 1935.8 1957.1 1969.7

Goodwill Allocation

Goodwill:

In terms of goodwill, Sealed Air’s disclosure on its financial statements is moderate. Sealed Air provides investors with detailed segmented reporting in the allocation of goodwill. For example, the following is a table taken from the 2007 10-k from Sealed Air that shows the segmented allocation of goodwill in accordance of SFAS No. 142.

The table above allows investors to see which segment of the firm the goodwill is

being allocated to, i.e. food packaging or protective packaging. Segmented disclosure

such as this is a characteristic of high disclosure. Although Sealed Air does provide this

segmented allocation table of goodwill, it does not thoroughly explain how the goodwill

was acquired or the quantitative analysis of how these values were reached. This lack

of information could lead to some ambiguity among potential or current investors.

Furthermore, in assessing the level of disclosure of Sealed Air’s financial

statements investors are faced with insufficient information regarding the impairment of

goodwill over the past four years. The firm does not disclose values or procedures for

the impairment testing of goodwill. GAAP states that if the book value of goodwill

exceeds the fair market value of goodwill then the excess amount is considered the

impaired amount and should be expensed out through the income statement. In Sealed

Air’s financials all that is stated in the protocol for good will is the following, “The

Company derives an estimate of fair values for the Company as a whole and for each of

the Company’s reporting units using an income approach, which uses forecasted

earnings and cash flows, and a market approach, which uses comparisons to other

businesses.” (2007 Sealed Air 10-K) Investors may feel that better information such as

which business the 10-K is referencing, or the values or the aforementioned cash flows

Sealed Air 71

could be extremely beneficial in the degree of disclosure. In conclusion of assessing the

level of disclosure for Sealed Air, we feel that since both characteristics of high and low

disclosure can be seen in the financial statements that the degree of disclosure seems

to be moderate.

In addition to assessing the level of disclosure in evaluating the actual

accounting strategies it is important to consider the type of accounting polices enacted

in a firm. For example, a firm may exercise a conservative type of policy. Conservative

accounting is normally characterized by policies leading to lower earnings. An example

of something a firm could do to practice conservative accounting would be to

continuously state assets at historical cost. In contrast to conservative accounting

practices there are also aggressive accounting policies. Aggressive accounting policies

generally have the tendency to inflate assets and delay expenses leading to higher

earnings. In reference to Sealed Air’s goodwill accounting, we feel that the policies

exercised in the past six years have been very aggressive.

To illustrate this analysis the following is a quote from Sealed Air’s 2007 10-K

relating to the impairment of goodwill. “The Company completed its annual testing for

impairment for 2006, 2005 and 2004 during the fourth quarter of each year and

determined that no impairment charge was necessary on a reporting unit basis in any

of the periods” (Sealed Air’s 2007 10-K) Since no impairment charges were expensed

during any of these years one could be led to the conclusion that income could be

overstated if expenses really were understated due to the lack of impairment write offs.

The final analysis tool in evaluating the actual accounting strategy of a company

is to compare the level of disclosure and accounting policies to other firms in the same

industry. Sealed Air’s competitors are Bemis, Pactiv, Package Corporation, and Greif. In

industry standards, the degree of disclosure is on par with Sealed Air’s competition. All

of the competitive firms allocate the segmentation of goodwill just as Sealed Air’s does.

Moreover, the aforementioned competitors take an aggressive stance on accounting

policies. BMS, PCT, GRF, and PKG all do not impair any amount of goodwill over the

past four years according to their most recent 10-K’s. We feel that Sealed Air is on par

Sealed Air 72

with the type of actual accounting strategies implemented in the packaging industry.

Finally, we believe that Sealed Air will not deviate from their accounting strategy until

the rest of the industry takes a more conservative stance as well.

Currency:

As stated earlier, an overwhelmingly majority of Sealed Air’s business is

conducted overseas. Despite the fact that these transactions comprise a large share of

the company’s operations, there is relatively little room for management to distort

foreign income figures. Many of the estimates and assumptions made by management

are publicly available information, such as currency exchange rates, foreign interest

rates, and prices for typically currency hedging derivatives. In regards to disclosure,

Sealed Air has done a fairly excellent job of providing information pertaining to foreign

operations, both fiscally and qualitatively. Not only have they stated the amortization of

foreign outstanding debt and net sales, but they have also informed shareholders of the

current assets overseas and the manner in which they were financed. Nearly all of their

sales made abroad are channeled through currency financial instruments such as

options, forward contracts, caps, U.S. lock agreements, interest rate swaps, collars and

currency swaps. Given the level of high disclosure and the simple accounting principles

provided by GAAP, we can reasonably conclude that Sealed Air follows a relatively

conservative accounting measure when it comes to foreign currency transactions.

Quality of Disclosure

The principles stated by GAAP are a bottom barrier to the amount and kind of

information companies must disclose in their statements. They also state that a

company must back up ambiguous quantitative data with qualitative analysis. GAAP will

allow the companies to provide as much information as they want. Firms can decide to

provide more information than required to allow a better evaluation of the company. If

a firm discloses the bare minimum that GAAP requires than it becomes more difficult to

find the value of a firm and may be a warning sign of poor information. Evaluating a

Sealed Air 73

company’s disclosure can help to value the company, along with aiding in the spotting

of red flags.


Research and development expenses are poorly disclosed within the packaging

industry. Some of the firms such as Greif packaging have decided not to even give a

numerical amount for their R&D. Instead, they state that although “research and

development projects are important to the Company’s continued growth, the amount

expended in any year is not material in relation to the results of operations of the

company” (Greif 10K). This means that the amount spent on Greif’s R&D is so small

that they think the information on it would be useless in looking at the big picture of

their company.

While Greif has extremely low disclosure about their R&D, there are no

companies in the packaging industry who have a high disclosure of R&D. The most

disclosure found in the industry is from Bemis, where they break their R&D into flexible

packaging and pressure sensitive materials. But, this is still a very minimal amount of

disclosure.

Sealed Air has an average amount of disclosure in comparison with the industry.

They simply state the amount of R&D for the year (90.8 million), and what expenses

were added from the previous year. As previously stated, Sealed Air prides their

company on spending a large amount of R&D compared to their competitors, but they

poorly explain what their R&D entitles within their 10K. The poor amount of disclosure

within the industry, and specifically Sealed Air, makes their R&D information a weak

basis of evaluation.

Sealed Air 74

Quality of Disclosure

Research & Development

Pension Plans

Goodwill Currency Leases

Sealed Air Low Moderate Low Moderate High

Packaging Industry

Low Moderate Low Moderate High

*Packaging Industry: Greif, Pactiv, Sealed Air, Bemis, & Packaging Co. of America


Sealed Air Corp. has an average disclosure rate compared with the industry. The

company gave the information needed on their operating leases, including what they

were for, how much they were for, and the payments for the next 5 years (broken

down, with a total number after that). The only thing that was not provided was the

discount rate. But all of the other companies that we looked at did not give this

information either. So, like stated above, Sealed Air has an average disclosure rate.

Therefore, we conclude that the information about Sealed Air Corp. leases is valid and

useful, even without the discount rate.

Pensions:

Sealed Air’s level of qualitative disclosure for pensions is consistent with their

competitors in the industry. Overall, Sealed Air’s competitors did a fairly good job in

discussing the different methods used to form their estimations. However, other firms

disclosed more information regarding how they estimated their discount rates and the

specific factors they used as criteria. These companies also did a slightly better job of

disclosing how much they expect the pension plans to grow over the next year. This

information can be used to estimate the future expenditures over future periods in time,

and determine if firms are properly accounting for future growth in the costs. The

overall disclosure provided by Sealed Air is sufficient, but perhaps they could have

included some more specific discount rate data.

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Goodwill:

The main elements in the quality of disclosure are the transparency of

information, and the decision usefulness stated in the financial reports of a company.

The quality of disclosure of goodwill in Sealed Air’s financial reports is poor. For

example, in note 20 of the 2007 10-K referencing acquisitions it is stated that Sealed Air

purchased Nelipak Holdings for $41.2 million, net of cash, and said that the cost of this

acquisition was, “not material to the Company’s consolidated financial statements”

(Sealed Air’s 2007 10-K). However, most investors would consider an acquisition of this

size to the relative size of the acquiring firm definitely material enough to be stated on

the consolidated financial statements. $25.7 million dollars of this acquisition was

credited to goodwill. By omitting the acquisition of this firm to the consolidated financial

statements Sealed Air is leaving out the fact that they overpaid extensively for Nelipak

Holdings. In addition to the omission of the aforementioned acquisition on the

consolidated financial statements, another issue in the quality of disclosure is the

derived ‘estimate’ used to value the company as whole in regards to the fair market

value of goodwill used in the testing of goodwill impairment. It is actions such as these

where the quality of disclosure is distorted and transparency of the financial statements

is weak. Poor disclosure of goodwill and acquisitions can lead to misinterpretation

among investors and convey no usefulness if items such as $25.7 allocations to goodwill

are not presented on the consolidated financial reports.

Currency:

Sealed Air has a moderate amount of disclosure for currency. Their primary

purpose is “to manage the potential changes in value associated with the amounts

receivable or payable on transactions denominated in foreign currencies” (Sealed Air

10-K). They explain how they are affected by market risk and the fluctuations in foreign

currency exchange rates. The maturity of euro notes is accounted for in the financial

notes, and a breakdown of the cash and interest payable for retiring these debts is also

Sealed Air 76

provided. Sealed Air also does a good job in disclosing the estimated fair values of

foreign currency forward contracts. These were designated as cash flow hedges and

have original maturities of less than one year.

Quantitative Analysis

The quantitative accounting disclosures are intended for the managers to more

effectively communicate the company’s financial statements’ numbers. These

statements can give outsiders crucial information regarding the value of the company

along with the accounting policies they have in place. GAAP allows managers to have

some flexibility when reporting the company’s finances. The flexibility permits the

managers to choose how much information is disclosed and how the format in which it

is disclosed. This flexibility is meant to give managers the opportunity to better portray

the performance of their companies using their inside knowledge about the company.

However, most managers today choose to use their flexibility to help make their

company better looking for outsiders, such as shareholders and investors. Since

managers have numerous incentives to distort the company’s actual performance, it is

important for investors and shareholders alike to understand accounting techniques and

how they can be used to decipher more information about the company that is not

given. With diagnostic ratios, an analyst can potentially better determine the true value

of a company and potentially be able to spot red flags in the policies that would show

signs of number manipulations.

There are two key quantitative measures in order to determine if a company is

accurately stating their business activities or distorting them. The first measure is to

look at the sales manipulation diagnostics. These ratios involve dividing net sales by

different factors, cash from sales, accounts receivables, and inventory. This will help

isolate the irregularities in the company’s accounting, if indeed the company has

manipulated numbers. The second measure is to look at the expense side of

accounting. These ratios will help to determine if the company has unexplained

variances in their reported expenses. If they do, then that would raise red flags. These

Sealed Air 77

ratios will be used to determine the integrity and accuracy of the numbers in the

company’s financial statements.

Sales Manipulation Diagnostics:

To determine whether any manipulation has occurred in altering the outlook of

Sealed Air’s revenues, we analyzed the balance sheets and income statements of

Sealed Air and their main competitors for the past five years. This is helpful to illustrate

the patterns between Sealed Air and the industry. The similarities and differences can

be quickly spotted by comparing the following ratios. Through ratio analysis we can

examine the impact of current assets and liabilities on net sales and compare this

information to industry norms. Ultimately, this gives the reader a good visual tool to

discover any possible red flags.

Net Sales / Cash from Sales:

The first sales manipulation ratio we calculated is net sales divided by cash from

sales. This ratio allows us to determine the actual amount of cash the company has

received from their sales compared to the amount of revenue recognized from sales

during the period. This ratio, for any company, should always end up around 1,

because when a company sells their goods or services they want to receive

compensation. If this number were to be far from 1 then a ‘red flag’ would be raised,

for either recognizing too much sales or not recognizing enough. Also, if there are large

variances in the company’s number from year to year, a ‘red flag’ would be raised.

Sealed Air 78

As the chart above shows, Sealed Air Corp. and its competitors, net sales to cash

from sales ratios all stay around 1 and do not change drastically from year to year.

Industry (packaging and container) wide, all the companies’ ratios seem to be

coinciding. This cancels out the need for ‘red flags’ to be raised. The quality of

accounting disclosure is acceptable. Overall, Sealed Air Corp. is average among its

competitors.

Net Sales / Net Accounts Receivables:

To measure how much credit sales consist of a company’s total sales, we can

use a Net Sales to Net Accounts Receivables ratio. The method is calculated by taking

the firms total sales for that period and dividing that number by the amount of

receivables the company has on the books. This sales to receivables ratio is

“an accounting measure used to quantify a firm's effectiveness in extending

credit as well as collecting debts. By maintaining accounts receivable, firms are

indirectly extending interest-free loans to their clients. A high ratio implies either

that a company operates on a cash basis or that its extension of credit and

collection of accounts receivable is efficient. A low ratio implies the company

Sealed Air 79

should re-assess its credit policies in order to ensure the timely collection of

imparted credit that is not earning interest for the firm” (investopedia.com).

Since the packaging and container industry do not typically have storefronts to sell their

products, it is generally assumed that all orders are made through credit transactions.

Firms generally will want a high sales to receivables ratio since that is an indicator of

how fast the company is converting its sales into cash. Not only does this figure

determine cash collections, but this ratio is also a good measure of the firm’s liquidity,

which would help potential creditors determine the firm’s credit risk. As the graph below

shows, the industry generally follows the same methodology. However, Sealed Air

seems to be the exception by having substantially lower sales to receivables ratio,

meaning that more and more of the company’s sales are still tied up in the collections

process.

Given the data that was presented through the company’s 10-K, we can see that

Sealed Air has a higher amount of receivables relative to their sales. This indicates that

the firm probably offers more terms for collection than most of its competitors and also

shows us that the firm is not converting transactions into cash as fast as their

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competitors. While these relaxed credit terms might entice prospective customers, this

could potentially cause Sealed Air serious problems when it comes to estimating

allowance for doubtful accounts. By examining the company’s common-sized financial

statements, we can see that the firm has consistently kept nearly 40% of current assets

in accounts receivables; an amount that far exceeds its competitors. Perhaps the only

factor that is preventing this ratio from becoming a potential red flag is the fact the

industry participates in an overwhelmingly credit transaction environment.

Net Sales/Inventory:

The Net Sales/Inventory ratio shows if a firm’s sales are supported by their

inventory levels. Both an increase in net sales and a decrease in inventory would lead to

higher ratios (which firms strive for). Firms with smaller inventory levels are generally

doing a better job at managing their costs and avoiding excess quantities of unsold

product to build up. Firms who are experimenting with new materials and products will

be losing money if they fail to use their large inventory and convert it into revenue for

the company. The packaging industry shows a mixture of results, indicating that firms

are struggling to reduce their inventory levels, or at least prevent their inventory growth

from exceeding their increase in net sales.

Sealed Air 81

The graph indicates that Greif, Packaging Corp. of America, and Pactiv have all

gradually increased during the past five years. These firms have accomplished this by

holding their inventory levels relatively constant while steadily increasing their sales.

Conversely, Sealed Air and Bemis have both gradually decreased over this time period.

It is also interesting to note that Sealed Air’s ratio has steadily decreased over the past

two years. There are a few possible reasons for why this may have occurred. A

decrease in net sales and/or an increase in a firm’s inventory are the two most obvious

explanations. However, in Sealed Air’s case, their ratio dropped because inventory has

risen sharply since 2006 while their net sales has only increased gradually. Due to the

lack of volatility from these ratios, there are no red flags to report. Although Sealed Air’s

ratio has decreased, it has been gradual and has remained relatively close to the

industry norm.

Sealed Air 82

Conclusion:

Overall, Sealed Air is average when compared to other firms’ sales manipulation

diagnostics. The one exception is their net sales/receivables ratio, which is significantly

lower than their competitors. Sealed Air does not convert their transactions into cash as

quickly as other firms. However, the packaging industry is primarily a credit transaction

environment, thus reducing the possibility for this to become a red flag. After looking at

the firms’ other sales ratios, there are no red flags to report within the industry. In the

net sales/cash from sales ratio, all the firms are hovering around 1, indicating that the

packaging industry is receiving their cash payments fairly quickly after sales.

Additionally, the net sales/inventory ratio measures how each firm’s inventory supports

their net sales. Sealed Air is comparable with other firms and the industry average for

this category. There are no abnormal fluctuations among the firms, and therefore no

cause for red flags.

Expense Manipulation Diagnostics:

Expense diagnostics are another useful way to analyze trends in the packaging

industry. These ratios take a closer look at a firm’s income statement and cash flows

and provide some visual correlations between the two. Some of the criteria used to

evaluate and benchmark competing firms include: firm’s total accruals, operating

income, and cash flows from various activities. By comparing the firms within the

packaging industry, we can quickly spot any irregularities or potential red flags using

expense diagnostics.

Asset Turnover:

Asset turnover is computed by simply dividing a firm’s net sales over total assets.

This ratio is useful to determine the amount of sales that are generated from each

dollar of assets, thus the higher the ratio the better. A growing firm will naturally

expand their activities and acquire more total assets. It is important to compare the

Sealed Air 83

firms within the packaging industry to determine if they are generating enough sales to

compensate for their increasing asset levels. Any major deviations in the ratio

from year-to-year need to be examined carefully to ensure firms are properly writing off

their assets. If there is a failure to impair assets correctly, such as goodwill or PP&E, the

ratio will increase dramatically.

According to the graph, there has been a consistent increasing trend for the

industry. However, Sealed Air has the lowest asset turnover of its competitors. Unlike

Pactiv who has a sharp decline from 2006-2007, Sealed Air shows very a subtle change

on an annual basis. The fact that their ratio is well under 1 indicates a possible lack of

production efficiency within the firm. Sealed Air’s significant amount of goodwill also

leads to much higher total assets than its competitors. Other firms in the industry have

significantly smaller amounts of goodwill, which is reflected in their higher ratios. SEE’s

lower ratio is also supported by our restatement of their financials. When we began to

depreciate goodwill and capitalize the useful value of R&D, the value of total assets

changed relative to sales.

Sealed Air 84

CFFO/OI:

One way to assess the quality of a company’s earnings is by measuring the

difference between the firm’s operating income and cash flows from operations. This

method can help link together the operating cash flows from the statement of cash

flows to the operating profit on the income statement. Generally, firms with a 1 to 1

ratio show that operating cash flows are mainly derived from earnings from operations.

In the chart below, we can see how the industry widely fluctuates from 2003 and 2004,

but generally settles back to nearly 1 during the last few years.

Sealed Air 85

As the graphs above indicate, Sealed Air has had a more consistent trend than

its competitors have. During the last 2 years we start to see a trend of the industry

reverting back to 1. As for Sealed Air, they have generally been to closest to 1 despite

the fact that they consistently have the lowest ratios in the packaging and container

industry. This reason this is due to cash inflows coming from other activities. However,

it should be noted that there was a drastic -10.54 point decrease that occurred in 2005.

By looking at both the operating profit and operating cash flows of that year, we see

the main component that was responsible for the dramatic dip was largely due to an

18% drop in operating cash flows. By closely examining the statement of cash flows

presented in the company’s 10-K, we see that Sealed Air had greatly reduced their

accounts payable and notes payables during that year. This would explain the sharp

decline in the CFFO/OI Change graph in 2005.

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CFFO/NOA:

The ratio of cash flow from operations to net operating assets shows how well a

company is utilizing their net assets and how much cash is coming from the day to day

operations of the company. Net operating assets include the company’s plant, property,

and equipment. The larger this ratio is, the better the company is making use of their

PP&E. This is an important ratio to analyze because it demonstrates how efficiently a

company uses operating equipment as it feeds back into operating cash flow. In

essence, for every one dollar spent on operating assets, how much flows directly back

into the firm. If a firm was struggling in asset affiance they would most likely either

inflate the cash flow from operations or deflate the net operating assets. A possible way

to create these adjustments is to look for large sell offs of pp&e or inconsistent

variations of cash flow from operations. These would be two key signifiers of skewed

accounting numbers that have been modified in order to create a more presentable

CFFO/NOA ratio.

Sealed Air 87

As the first graph shows, in the raw form, Sealed Air Corp. is making the best

use of their net assets, by a landslide, compared with their competitors. They are

getting the best return from their operating assets, being the closest to 1 out of their

competitors. Although, Sealed Air Corp. does not have a consistent ratio over these 5

years; the drop of from 2006 to 2007 in this ratio can be explained by a loss in net cash

flow from operations. The loss in CFFO is from a loss on a sale of small product line and

an increase in current liabilities on their statement of cash flows.

The second graph, in the change form, shows that Sealed Air Corp. has either

stayed above or with the packaging and container industry average. The drop off from

2003 to 2004 is because from 2002 to 2003 when Sealed Air Corp. had positive

increases in both CFFO and NOA, but from 2003 to 2004, the company had major

decrease in both CFFO and NOA. The reason Sealed Air had an increase from 2002 to

2003 is that their net earning went from a loss to a gain and because accounts payable

dropped largely from 2002 to 2003. On the other side of things, the large drop from

2003 to 2004 can be explained by the huge increase of accounts payable and the net

loss of the company.

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Total Accruals / Sales:

To determine how well a company’s sales are derived from receivables, we used

an accrual to sales ratio. This ratio is calculated by taking the firms cash flows from

operations and subtracting out the net earnings of that period. We then take that

amount and divide it by the company’s total sales for that year. If the ratio is high, we

can conclude that a majority of the firm’s transactions are made on account. On the

other hand, if the ratio is relatively low, then we can assume that sales are made

through other means than credit accounts. Generally, it is preferred that the ratio be as

close to 1 as possible. Below, we can see that the industry fluctuates dramatically, thus

making it extremely difficult to plot any practical trend line; however, we can

reasonably assume that the industry gravitates towards 5%.

As the graph above shows, Sealed Air’s accruals to sales ratio seems to

erratically head downward to a ratio of nearly zero. By looking at the company’s

financials, we can see that the company’s total accruals have been declining at a rapid

rate. By further inspecting Sealed Air’s statement of cash flows, we can observe that

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the firm’s net earnings are rising at a faster rate relative to their operating cash flows.

The reason for such a sluggish growth in operating cash flows is explained by the facts

that Sealed Air used much of its cash resources to pay off partial balances on deferred

taxes. This steadily increased their accounts receivables, purchased more current

assets, and paid off a substantial portion of its current liabilities; which would in turn

suggest that less and less sales are supported through accruals.

Expense Diagnostics Conclusion:

As identified earlier as a major key success factor, firms in the packaging and

container industry must follow a strict cost leadership business strategy with a heavy

emphasis on maintaining a tight control on costs and lowering input costs as much as

possible. Given the expense diagnostics presented above, we can see that Sealed Air

has a mixed performance in this regard. In both CFFO/OI and CFFO/NOA, Sealed Air

has consistently outperformed the industry. However, in the asset turnover and accruals

over sales, we can see that the firm has lagged in these categories. Despite the mixed

performance, we cannot see any potential red flags that would cause us to restate any

financials.

Potential Red Flags

While performing the previous steps in the accounting analysis, several red flags

were located within Sealed Air’s accounting. Red flags are indicators that can

potentially point out questionable accounting. These signs help capture the attention of

the analysts so that they know what aspects of a company’s accounting they need to

examine closer. It is important to fully examine past and present financial statements

in order to locate the red flags. Once red flags have been located and examined, the

analyst can make proper adjustments to the financial statements to aid in accurately

valuing the company.

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Sealed Air’s research and development raised a potential red flag because of the

sudden 16% ($12.6 million) increase in R&D expenses between 2006 and 2007. The

reason for this sudden increase in R&D was due to the relocation of certain expenses.

The company decided to include “certain expenses for technical customer support and

facility occupancy costs in research and development expenses.” (Sealed Air 10K) This

expense was previously located in marketing and administrative expenses. This

concludes that the red flag was a false alarm and the cause for the large increase in

R&D was due to the addition of these expenses.

Another red flag that was raised pertained to the impairment of Sealed Air’s

goodwill. Sealed Air has not impaired any goodwill in the last six years. By not

impairing their goodwill, they overstate their assets and understate their expenses.

Understated expenses results in the overstatement of net income and equity.

Companies commonly do not impair their goodwill in order to appear more profitable to

analyst. Sealed Air would have reported negative earnings from 2002-2004 if they

would have properly impaired twenty percent of their goodwill. After 2004 it would

have seriously hindered the amount of earnings shown on the financial statements. In

conclusion, we can see that Sealed Air was attempting to trick analyst into believing

that they had received higher earnings than actually occurred. To accurately account

for Sealed Air’s lack of impairment we must restate the financials to aid in getting a true

value of the company.

Undoing accounting

It is important to take the steps to restating a firms’ financials because it can

help reverse distorted reported financials and create a clearer picture of asset values,

earnings, liabilities, expenses, and revenues. Companies often understate expenses in

order to overstate earnings. In addition to this, companies may choose to overstate

depreciation or impairment in order to over state expenses and understate earnings.

When a firm chooses to understate earnings this is known as taking a ‘big bath’. Taking

a big bath may seem irrational to a novice investor but in the long run it will make the

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next periods’ reported earnings often look substantially better than the previous large

loss. Therefore, it is important to undo the distorted accounting numbers of firms and

create more transparent financial records to allow investors to accurately value a firm’s

earning potential.

Goodwill:

In the case of Sealed Air, goodwill assets consisted of upward of 45% of asset

values and therefore needed to be restated. The table below shows the percent of

assets that are composed of goodwill over the past six years.

The process we took to restating goodwill extends back to 2002 when GAAP

changed from the standard amortization of goodwill to the mandated annual

impairment test of goodwill. Although companies are required to check annual for

goodwill there is a lot of flexibility and lack of disclosure in this procedure. The first step

in restating the financials for Sealed Air begins with the correct impairment of goodwill

since Sealed Air stated that over the past six years no impairment was needed. For an

accurate impairment value of goodwill, we chose to impair the asset by 20% over six

years. The following is a table that demonstrates the difference in the values of

goodwill before and after initial impairment.

Sealed Air's Goodwill as a Percent of Total Assets

Year 2002 2003 2004 2005 2006 2007

Percent of Total Assets* 46.31 41.23 39.51 39.23 38.99 36.22*Before Impairment

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When impairing the asset value of goodwill, investors can see that goodwill is

greatly reduced, thus lowering the total amount of assets. The following table will show

the difference in total asset amounts before goodwill was impaired and the total value

of assets after goodwill was impaired.

Total Asset Value

2002 2003 2004 2005 2006 2007

Total Asset Value Before Impairment 4,960 4,704 4,885 4,864 5,021 5,438

Total Asset Value After Impairment 4,575 4,393 4,641 4,670 4,856 5,304

(In millions)

Total asset value after impairment was derived by taking the total assets of each

year (stated on Sealed Air’s balance sheets on 2002-2007 10-Ks) and subtracting the

impairment value of goodwill. Although it may not initially seem substantial in

comparison to total asset values, the consequences of not expensing impairment values

will make up for this lack in magnitude.

The first step in impairing goodwill was to decrease the asset value on the

balance sheet. The next step in restating the financials of Sealed Air was to include the

expense of impairment to the income statement. The expenses of each year increased

Sealed Air's Impairment of Goodwill

2002 2003 2004 2005 2006 2007 Goodwill Before Impairment 1926.2 1939.5 1918.1 1908.8 1957 1969.7Goodwill After Impairment 1540.9 1243.4 977.5 774.6 658.3 536.8(In millions)

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on the income statement at the same rate of goodwill’s decline from impairment. The

numeric value of these impairment expenses can be seen in the following table relating

to the expense per year that should have been included on the income statement.

When evaluating impairment expense that was nonexistent before, it is key to

realize that expenses were severally understated prior to goodwill write offs.

Consequentially to increasing expenses, net income will decrease.

Theoretically net income should be a simple computation. However, when

thoroughly evaluating the technicalities of net income a key factor is corporate tax.

After extensive review of Sealed Air’s financials there was no disclosure of the tax rate

used year by year. Taxable income varies year by year based on increases and

decreases of sales and expenses. The following table demonstrates the differences in

each year’s pre-tax income, actual tax expensed, and the tax rate used to compute

taxes.

Tax Table

Year 2002 2003 2004 2005 2006 2007

Taxable Income* -392 377 323 377 400.1 456

Taxes* -82.8 137 107 121 126 103

Corporate Tax Rate Estimate** 21.1 36.2 33.2 32.1 31.5 22.6

*In millions, **In percentages

Sealed Air's Impairment Expense Year 2002 2003 2004 2005 2006 2007

Dollar Amount* 385.2 310.8 224.3 193.6 164.5 134.2*In Millions

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In restating Sealed Air’s financials we found it difficult to place exact tax expense

on income due to the fact that we were altering the expenses and thus changing the

taxable income. Therefore we found it suitable to estimate taxes based on an average

of the previous six years corporate tax rate. The estimated tax expense that we

calculated was 29.46%. Restated net income was calculated by taking previously stated

income before tax and expensing impairment values and multiplying this value by our

estimated tax rate. The following table shows the difference in not including the

impairment expense in the income statement and including it.

By including the impairment expense in the income statement, there is a large

difference in net earnings. There could be several factors that influence this difference

in income such as human error, over estimation of impairment expense, or true

overstatement of earnings when impairment expenses are not taken. It is important for

each investor to evaluate each of these reasons on an individual basis. Large

differences such as the ones stated in the above table could sway investment decisions.

That is why it is key to take the steps to undo the accounting of most firms.

Furthermore, net income values feed directly into retained earnings on the

balance sheet. This is how the altered goodwill asset values on the left hand of the

balance sheet will equal the right hand side of liabilities and owners equity. The same

problem of an inaccurate tax rate made it difficult to accurately portray the changed

Net Income

Year 2002 2003 2004 2005 2006 2007

Before Impairment Expense* -309.1 240.4 215.6 225.8 274.1 353

After Impairment Expense* -694.3 -70.8 -28.78 80.44 109.53 219

*In millions

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values in equity due to the fact that changes in equity stem from changes in net income

(a product of tax computations). The table below best describes our estimates in the

values of retained earnings that the impairing goodwill would have altered.

Retained Earnings

Year 2002 2003 2004 2005 2006 2007

Before Impairment* -309.1 240.4 215.6 255.8 274 353

After Impairment* -694.3 -70.75 -28.8 80.4 109.5 219

*In millions

After reviewing all of the restated financials of the past six years, the values

found would indicate that expenses were greatly understated leading to a large

misinterpretation of net earnings. However, due to taxes and human error these

numbers could be misleading. Impairing goodwill is a difficult procedure to undertake

due to the low disclosure and lack of industry standards. Despite the differences in

values of impairment, it is important to understand that goodwill is truly a way to over

inflate asset amounts to offset liabilities and equity and vice versa.

It is our conclusion that Sealed Air’s asset values are truly overstated and

impairment expenses need to be shown on the income statement. The effect of

restating financials greatly lowered the value of net income and hinders possible

profitable earnings in the future, enough to raise several red flags and show an

inaccurate financial description.

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Financial Analysis, Forecast Financials, and Cost of Capital Estimation

In order to effectively analyze a company, investors and analysts must look at

the financial information of the company and their industry competitors. This is a three

step process, including ratio analysis, financials forecasting, and finding the cost of

capital of the company. The first step is calculating a variety of ratios that deal with

liquidity, profitability, and the capital structure. With these ratios, one would be able to

see trends in the company and in their competitors. These ratios will also help with

forecasting the company’s financials, which is step two. We will be forecasting Sealed

Air’s financials, income statement, balance sheet, and statement of cash flows, out ten

years to see where they might be and to get a better picture of the company. Finally we

will compute the cost of capital for the firm in order to study the value of the company.

Financial Analysis

Analysts, over time, have developed a series of ratios to breakdown a company’s

financial statements into numbers that can be easily compared to those of their

competitors, the industry average, and the acceptable ratios determined through time.

These ratios help to accurately evaluate a company’s overall financial profitability and

health. There are 16 ratios broken down into 3 categories: liquidity, profitability, and

capital structure. Analysts can use these ratios to see trends in a company and an

industry. With financial analysis, we will be able to see how Sealed Air stacks up against

their competitors. These ratios will also be used later on to help forecast the company’s

financials.

Liquidity Ratio Analysis:

Liquidity ratios measure a company’s ability to meet short-term financial

obligations. These ratios include current ratio, quick asset ratio, accounts receivable

turnover, days sales outstanding, inventory turnover, days supply inventory, and

working capital turnover. These ratios are commonly used by lenders because they

show a company’s, potential borrower’s, credit risk. The higher the liquidity ratio the

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better, because it demonstrates that the company has the resources to pay off their

short-term financial obligations, should they have to. (Managers might feel pressured to

keep these ratios at the right level in order to adhere to debt contract.)

Current Ratio:

The current ratio is found by dividing the current assets by the current liabilities.

This ratio shows how much money the company has for every $1 incurred in short-term

liabilities. It shows the company’s ability to pay off their short-term obligations with

cash or assets that can be converted quickly into cash, without losing value. The higher

this ratio is the more able a company will be in paying off their short-term obligations.

Even though Sealed Air’s ratio is the lowest out of their competitors, their ratio is still

above one. Also, Sealed Air’s ratio has maintained a consent rate, with no abnormal

changes over the past five years. This cannot be said about their competitors, how

ratios seem to fluctuate. Sealed Air would be able to pay off their short-term obligations

without problems should the need arise.

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Quick Asset Ratio:

The quick asset ratio, otherwise known as the acid test ratio, is the relationship

between a company’s current assets, minus inventory (cash, cash equivalents, short-

term investments, and receivables), and its current liabilities. This ratio shows the

company’s ability to cover their current obligations. Inventory has been removed for

this ratio so the measure of liquidity can be portrayed more accurately. Inventories may

or may not be able to be converted into cash as quickly as necessary without losing

value due to obsolesce or newer technology. The ideal ratio for a company would be 1

or above. This would indicate that the company has more assets that can be converted

to cash (excluding inventory), than liabilities. Sealed Air, has not only stayed over the

industry average all five years, but also is one of the few firms that have stayed above

1.0 as well. All the other competitors, not including Bemis, have all dropped below 1.0

at some point in the last five years. The significance of this is that it shows that Sealed

Air would be able to cover their debt without the need of their inventory.

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Working Capital Turnover:

The working capital turnover ratio compares the depletion of working capital to

the generation of sales. It is formulated by taking sales over the working capital

(current assets minus current liabilities). This ratio is used to analyze the relationship

between the money used to fund operations and the sales produced from it. These

operations and inventory are then converted into sales revenue for the company. A high

ratio implies that a firm generated a large amount of sales compared to the money

required to fund the sales.

According to the past five years, Sealed Air has done a significantly better job in

this regard than its competitors. Sealed Air’s working capital is much lower than the

industry average which drives their ratios well above the norm. The impact of their

sales is maximized because of their relatively low amount of funding. In 2006, Sealed

Air’s working capital was nearly double the amount in 2005, causing the dramatic drop

to just over 12 turns. However, this was still the highest ratio among its competitors for

2006.

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A/R Turnover:

The accounts receivable turnover ratio measures how efficiently a firm uses its

assets, and how quickly they collect their accounts receivables. More specifically, it

measures firms’ effectiveness in extending credit as well as collecting debts. The

quicker a company collects its receivables, the higher their ratio will be. A lower ratio

indicates that more cash is due to a firm floating for longer periods of time.

This graph shows a wide disparity between Sealed Air and its competitors.

Sealed Air’s ratio has remained constant over the past five years and is significantly

lower than the other firms. Their amounts of sales and receivables have both increased

at virtually the same rate over this time period. Bemis also has a remarkably constant

ratio over the past five years, which is also very consistent with the industry average.

However, the other firms have a moderate amount of volatility from year-to-year. For

example, Pactiv has a very large increase from 2006-2007. This is due to their steady

increase in sales while keeping their receivables level 50 million less than 2006. Sealed

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Air’s low ratio indicates that they collect receivables less often than the other firms,

leading to a level of inefficiency.

Days Sales Outstanding:

This ratio measures the number of days that a company takes to collect revenue

after a sale has been made. Due to the high importance of cash in running a business,

it is in a company's best interest to collect receivables as quickly as possible. By quickly

turning sales into cash, a company has the chance to put the cash to use again, which

is later illustrated in the cash to cash cycle. Analysts use the DSO to determine whether

a company is trying to disguise weak sales, or is generally being ineffective at bringing

money in, thus leading to a high DSO ratio.

This graph is directly related to the A/R turnover ratio. The dramatic spike in

Pactiv’s A/R turnover in 2007 is mirrored by the sharp decline in its DSO ratio in the

same year. Similarly, Sealed Air’s low A/R turnover ratio is indicated by its extremely

high DSO ratio, which has fluctuated slightly between 60-65 days over the past five

years. By examining the graph, Sealed Air has taken roughly 15 more days to collect its

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receivables over this time period than the industry average. They are at a severe

disadvantage to its competitors because it takes so much longer to put its cash to use

again. It is also important to note that the industry as a whole is experiencing a

downward trend. This could make it even more difficult for Sealed Air to “catch up” to

the industry, as most firms seem to be making strides in reducing their DSO.

Inventory Turnover:

The inventory turnover ratio shows how many times a company's inventory is

sold and replaced in a given year. It is computed by dividing your COGS over the

inventory (sometimes average inventory is used to minimize seasonal factors). A low

turnover ratio implies poor sales and, therefore, excess inventory. High inventory levels

are undesirable because they represent an investment with a rate of return of zero.

Conversely, a high ratio indicates either strong sales or ineffective buying.

Sealed Air is slightly below the industry average; however the annual fluctuations

are nearly identical to the industry average line on the graph. From 2003-2005, Sealed

Air’s COGS rose at a faster rate than its inventory levels, causing a gradual rise in their

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ratio. However, over the last couple of years their inventory level has increased sharply

enough to cause their ratio to come down slightly. In fact Sealed Air’s turnover ratio

was the lowest among its competitors in 2007, at just under 6 turns. This could be a

cause for concern because too much excess inventory is being held compared to other

firms within the industry. Sealed Air’s sales have steadily rose over the past five years,

indicating that this is not the culprit for their relatively low ratio.

Days’ Supply in Inventory:

The DSI is simply the number of days it takes for a firm to turnover its total

inventory. The amount of days has a direct correlation with inventory ratio, because we

know intuitively that the quicker your inventory gets turned over, the fewer amount of

days it spends in inventory.

This relationship between the DSI and the inventory turnover ratio is illustrated

in this graph. Greif and Packaging Co. of America had the highest inventory turnover,

and thus the lowest DSI. Sealed Air is somewhat consistent with the industry average,

however the gap has widened over the past few years. In 2003, Sealed Air was

identical to the industry average, but in 2007 their DSI was over 10 days more than the

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average, and became the highest among its competition. Once again, this is troubling

for Sealed Air because there is clearly a growing trend in the inefficiency of its inventory

management.

Cash To Cash Cycle:

In order to fully comprehend how long it takes for a firm to realize the profits

from their inventory, we use the cash to cash cycle to determine the amount of time

that is needed to turn assets into cash flows. This cash conversion cycle is calculated by

taking the Days Supply Inventory (time for inventory to turn over) and adding that

amount to the Days Sales Outstanding (time it takes to collect on sold inventory). Firms

that have a relatively lower number when compared with competitors are generally

more efficient in their overall liquidity and therefore are deemed more credit worthy.

As the figure above shows, Sealed Air has a very serious problem with their cash

conversion cycle. For the past 4 years, Sealed Air has consistently far exceeded the

industry average by at least 20 days. It would appear that Sealed Air offers more

flexible credit terms to its customers. While this practice might attract potential clients,

this is considered somewhat risky due to certain factors such as currency risk and the

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lower probability of estimating allowance for doubtful accounts. These risks would

therefore translate into an unfavorable liquidity concern.

Conclusion

By examining the various liquidity ratios, we can compare the efficiency of

Sealed Air to other firms within the industry. The liquidity ratio analysis shows that

Sealed Air’s current ratio is significantly lower than the industry average at just over 1.

However, their quick asset ratio of approximately 1.1-1.2 slightly over-performs the

industry average. Sealed Air’s operating efficiency is measured by its inventory turnover

and receivables turnover. Their low receivables turnover indicates a level of inefficiency

when compared to its competitors. On the other hand, Sealed Air’s cash-to-cash cycle is

strong which allows them to convert their products into cash more quickly than other

firms. Despite some variations, Sealed Air maintains a similar level of liquidity to its

competitors. Their trends are also fairly stable with the exception of working capital

turnover.

Ratio Performance Trend

Current Ratio Under‐performed Stable

Quick Asset Ratio Over‐performed Stable

Working Capital T/O Over‐performed Increasing trend

Accounts Receivables T/O Under‐performed Stable

Inventory T/O Under‐performed Decreasing trend

Cash‐to‐Cash Cycle Over‐performed Increasing trend

Overall Average Stable

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Profitability Ratio Analysis:

The profitability ratio analysis shows how well a firm’s revenue covers their

expenses. In essence, how effective a company is at generating profit. Each of the

following ratios is shown as a percentage of sales, where sales equal 100% with the

‘common size income statement’. The higher the percentage is, the more efficient a

company is at generating profit. There are nine profitability ratios: gross profit margin,

operating profit margin, net profit margin, asset turnover, return on assets, return on

equity, Z-Scores, sustainable growth rates, and internal growth rates.

Gross Profit Margin:

Gross profit margin ratio is gross profit, sales minus cost of goods sold, divided

by sales. This ratio provides information to see how profitable a company is after they

have deducted their fixed and overhead costs, which are involved in managing

inventory. This is the first of four that show the operating efficiency of the company.

The higher this ratio is the better and more efficient a company is at covering their

expenses, which could lead to greater profitability. Although the following graph will

show a wide spread in the packaging industry, Sealed Air and Pactiv are more proficient

in maintaining a lower cost of goods sold. Sealed Air has kept an above industry

average, 5% and more, for all five years.

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Operating Expense Ratio:

The operating expense ratio is computed by taking selling and administration

expenses divided by sales. This ratio shows that for every dollar of SG&A expenses

there are X amount of dollars from sales that will cover these expenses. Sealed Air is a

leader in maintaining operating expense efficiency above the rest of the packaging

industry. SEE also has had a steady operating expense ratio over the past five years as

showed on the graph below.

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Operating Profit Margin:

Operating profit margin is found by dividing a company’s operating income

(gross profit minus selling and administrative expenses) by total sales. The higher a

company’s percentage of sales that operating income is, the more profitable the

company becomes after accounting for their operating expenses. As the graph shows,

Sealed Air has one of the top percentages in the packaging industry. Again, Sealed Air

beats the industry average all five years.

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Net Profit Margin:

A firm’s net profit margin is calculated as net income divided by sales.

Essentially, it measures how much out of every dollar of sales a company actually keeps

in earnings. Firms strive for a high profit margin because this indicates that they have

superior control over their costs compared to competitors. Increased earnings are

obviously desirable, but an increase does not automatically translate into an increasing

profit margin. For example, if a company has costs that have increased at a greater rate

than sales, it leads to a lower profit margin. This suggests that a firm does not have

costs under control.

The packaging and containers industry has seen a steady rise in profit margins

over the past five years. During this time period, Sealed Air has remained near the top

of the chart in relation to its competitors. Not only have they stayed at or above the

industry average, but SEE’s margin has increased steadily with no drastic fluctuations.

This indicates that Sealed Air has consistently managed their costs at a more efficient

rate than most firms in the industry. On the other hand, Pactiv has experienced a

tremendous amount of volatility in their net profit margin. In 2005 they bottomed out

near 2%, only to rebound to over 9% the following year, which proved to be the

highest margin within the packaging industry in 2006.

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Asset Turnover:

Asset turnover is a useful means of measuring the productivity of asset use, and

is computed by dividing sales over total assets from the previous year. The ratio shows

the amount of dollars of sales generated for every $1 invested in assets. The higher the

ratio, the more profitable a firm’s assets will be. For manufacturing companies such as

Sealed Air, asset turnover ratios are very important in evaluating the profitability of a

company. Firms within the industry tend to use expensive machinery to manufacture

their products, so it is important to compare how much revenue they are able to

produce from expensive assets.

As an industry, the average asset turnover increased to 1.2 in 2007. This

indicates that firms within the industry are relatively successful in generating more sales

than they are investing in assets. However, Sealed Air has consistently under-performed

in this area over the past five years. It has slowly increased over this time period, but

was still the only firm in the industry with a ratio under one in 2007. For every dollar of

assets they generated only $.93 of sales. Conversely, Greif generated over $1.50 of

Sealed Air 111

sales per dollar invested in assets. Sealed Air’s low ratio could possibly be explained by

their high R&D costs.

Return on Assets:

Perhaps the greatest indicator of profitability potential is the return on assets,

which is determined by the firm’s net income of that period divided by the company’s

total assets of the year before. The reason that we use the previous year’s total assets

instead of the current one is that it is last year’s assets that are being implemented in

producing the current year’s income.

By looking at graph presented above, we can see that the packaging and

container industry has been steadily increasing their overall productivity and growing

their return on assets by an average of 5.4% over the last 5 years. While Sealed Air

has consistently had positive growth on their return on assets we can see that the

company is starting to lag behind its competitors in this regard, especially over the past

2 years. This could potentially be attributed to a lost in asset utilization or perhaps a

Sealed Air 112

lack in investments of new assets. This below par level of productivity could potentially

hurt Sealed Air’s bottom line in the long run unless immediate action is taken.

Return on Equity:

Return on equity is crucial ratio for firm systematic analysis. ROE measures how

well a company can turn capital from shareholders into returns for the firm. ROE is

measures by taking net income and dividing it by total shareholder’s equity. In essence

return on equity is the key measure of overall profitability for a firm. “ROE is affected

by two factors: how profitably it employs its assets and how big the firm’s asset base is

relative to shareholders’ investments” (Palepu and Healy). This statement indicates that

ROE can be further broken down to demonstrate its relationship between return on

assets and financial leverage. Leverage is the amount of debt a firm has in relation to

its equity. ROE is often compared to the cost of equity capital. Analysis compares these

two values because it helps determine that ROEs in the long run create an equilibrium

with the cost of equity capital.

In our analysis of Sealed Air’s and competitors return on equities, SEE showed up

to three times higher than the industry average in some years. Overall, SEE was above

industry average each year from 2003-2007. However, once return on equity was

calculated using revised financial statement values there was a large decrease and the

firm’s ROE dropped to extreme industry lows for the same time period. We believe that

SEE should not be at either extreme but due to accounting flexibility the values are not

valid. The restated financials took created extreme detriment to net income because

such large portions of goodwill were expensed. When the impaired goodwill was

expensed it caused net income to decrease significantly thus leading to the lower net

income values in turn lowering ROE. If a more conservative approach to the impairment

of goodwill was taken the values of ROE from 2003-2007 would be on par with industry

average. When comparing the slope of SEE’s return on equity in both the stated and

revised format, investors can see that although the values differ significantly the

upward trend is constant. It is important to note the upward slope of this line because

Sealed Air 113

of its correlation to an upward slope of profitability. The following is a graph presenting

SEE and competitors return on equity computations.

Firm Growth Rate Ratios:

In order to evaluate the sustainability for future profits of a firm, we must

calculate the potential growth rates for both the company and its competitors. By

analyzing prospective growth rates, we can estimate the future economic condition of

the firm relative to its industry. The two growth rates that we will be using are the

Internal Growth Rate (IGR) and the Sustainable Growth Rate (SGR).

Internal Growth Rate:

When attempting to measure potential growth within a firm, many use the

Internal Growth Rate to get a general idea of what to expect for company growth. This

method hypothetically presumes what the potential growth could be assuming no

outside financing is used, meaning that nearly all new capital is taken directly from the

firms cash flows. This figure is calculated by taking the firms Return on Assets (income

Sealed Air 114

divided by the previous year’s total assets) and multiplying it by the company’s

plowback ratio (1-dividend payout ratio). However, there is a slight drawback to this

figure. If the company has no dividend policy, then that company’s IGR would simply be

their Return on Assets rate. For many companies like Pactiv, their IGR is their ROA.

As the graph above shows, much of the industry stays in between 3% and 5%. With

Sealed Air, we can see that this firm gravitates more towards the industry average and

also consistently stays slightly above that rate. By having an internal growth rate that

consistently outperforms the industry average, one can conclude that Sealed Air

exhibits a positive operating efficiency.

Sustainable Growth Rate:

Another measure of estimating a firm’s potential growth is by finding the

company’s sustainable growth rate which is calculated by taking the firms’ return on

equity and multiplying it by the company’s plowback ratio. This calculation is a growth

rate that assumes the firm does not alter their current capital structure of debt and

equity. Much like the internal growth rate, if the firm does not have a dividend payment

policy, then their SGR would simply be their ROE.

Sealed Air 115

As the diagram illustrates, we can see that Sealed Air’s performance of their SGR

matches their IGR. With the exception of 2006-07, Sealed Air has held the highest rates

for sustainable growth over all their competitors and industry average. With such a high

SGR, we can estimate that the firm has much potential for future growth within this

industry.

Overall, we can estimate that the potential growth for the packaging and

container industry is exhibiting positive growth rates over the past 5 years which shows

great future potential for this industry. By comparing Sealed Air’s growth rates to their

competitors, we see that the company is definitely one of the top performers in this

business.

Sealed Air 116

Conclusion

After comparing the profitability ratios for the different firms, we are able to

determine Sealed Air’s effectiveness compared to industry levels. Sealed Air’s gross

profit margin, operating expense ratio, operating profit margin, net profit margin, and

return on equity were all higher than the industry average. This is a strong indication

that Sealed Air has been able to maximize profits and control their operating expenses

more effectively than most firms within the industry. Asset turnover was the only ratio

that was below the industry average, which is largely due to their high amount of total

assets. Overall, Sealed Air’s performance is above average compared to other firms,

and still indicates a slightly increasing trend for future years.


Gross Profit Margin Over‐performed Decreasing trend

Operating Expense Ratio Over‐performed Stable

Operating Profit Margin Over‐performed Decreasing trend

Net Profit Margin Over‐performed Increasing trend

Asset Turnover Under‐performed Increasing trend

Return on Assets Average Increasing trend

Return on Equity Over‐performed Stable

Overall Over‐performed

Slightly increasing

trend

Sealed Air 117

Capital Structure Ratios:

Capital structure ratios are used to show how a company finances their assets,

shown by the liabilities and owner’s equity section of the balance sheet. There are two

ways a company can finance their assets, either through borrowing money from a

lender (debt) or selling shares of their company as stock (equity). These ratios measure

whether a company is financed through debt or equity. These ratios can be used to

measure the credit worthiness of a company, financial leverage, ability to cover interest

charges, and the ability to pay off liabilities. The three ratios that we will be calculating

are the debt to equity ratio, times interest earned, and the debt service margin.

Debt to Equity:

Capital structure of a company is the framework of how a company finances its

activities. A firm may have some debt and some equity financing. The debt to equity

ratio measures this form of capital structure analysis. It is important to understand the

differences between debt financing and equity financing, because it determines the

amount of default risk there is associated with a firm. The more debt a company has in

their capital structure the higher the chances of default. Furthermore, financial lending

institutions will most likely give firms with very low debt-to-equity structure lower

Sealed Air 118

interest rates on future borrowing. A firm acquires debt financing through long-term

notes payable or by issuing bonds of some type. Equity financing is created through

stock issuance. Debt financing does have both positive and negative aspects, such as

having debt in capital structure gives tax shield benefits. Disadvantages of having debt

is that it may become a struggle to be constantly paying off debtors.

In the case of the packaging industry, according to the graph above, Sealed Air

had the highest rate of debt to equity in its financial structure. However, between 2004

and 2005 there seems to be a shift in the industry to lower the amount of debt used to

finance activities. This shift can be seen in the industry average curve decline. Bemis,

one of Sealed Air’s main competitors, continues to take a very conservative stance on

its debt to equity capital structure. We believe that Sealed Air will continue to down

size their debt to equity financing in future years. The following information is the

numerical data presented from the chart above in table format.

Debt to equity

2003 2004 2005 2006 2007SEE 3.1 2.6 2.4 2 1.6PTV 2.5 2.5 2.4 2.2 2.1PKG 1.5 1.5 1.9 1.9 1.7GEF 2.1 1.8 1.6 1.6 1.2

BMS 1 0.8 1.2 1 1

Sealed Air 119

Times Interest Earned:

As liabilities accrue interest, it is important for a company to have enough capital

to pay these expenses. Times interest earned measures how much coverage is provided

by income from operations to pay interest expenses. Times interest earned is computed

by dividing income from operations by interest expenses. A well functioning firm would

like this ratio to be between 4-7. For example, if the ratio was 4.06, this would be

interpreted as for every one dollar incurred in interest expense then a firm would have

$4.06 to cover the payment of interest expense. It is important to have enough money

to cover these expenses, because if not, it could push a firm into bankruptcy. The

following is a graph of computed time interest earned values over five years of Sealed

Air and its main competitors.

Sealed Air 120

According to the graph, Sealed Air is just below industry average in their times

interest earned values. Although SEE is below average, they have been extremely

constant staying between 4-3.2. Industry average could be skewed because of Bemis’

huge decrease between the years of 2004 and 2005. Overall, investors viewing Sealed

Air’s time interest earned ratio should not be concerned that SEE would be failing to

cover their interest expense payments. The following table displays the numerical data

presented from the graph.

Times Interest Earned

2003 2004 2005 2006 2007

SEE 4 3.2 3.4 3.5 3.9

PTV 5.6 4.1 3.7 5.8 4.9

PKG 4.5 4.7 3.6 7.2 11.5

GEF 1.23 2.4 4.9 6.8 6.3

BMS 19.1 18.9 8.2 6.8 6.1

Sealed Air 121

Debt Service Margin:

The debt service margin coverage ratio measures the “adequacy of cash

provided by operations to cover required annual installment payments on the principal

amount of long term liabilities” (Financial Statement Analysis Notes- Mark Moore’s FIN

3321). Debt service margin ratio is calculated by dividing cash flow from operations by

the previous year’s installments due on long term debt. The numeric value of the ratio

states that for every one dollar in long term debt due currently, the expense will be

covered by the value of the ratio. The graph above could indicate two different

assumptions, one being that different firms have extremely different takes on this

computation, or alternative firms have a large range in the amount of long term debt

currently due. These differences cause the graph to have such a large range on the

horizontal axis. For example, in 2007 Sealed Air had over 300 million dollars come due

on long term installments but in 2006 SEE had a mere 5.5 million come due in long

term debt (SEE 2008 10-k). Overall, we feel that SEE will continue to see a rise in the

debt service margin ratio. The following is the numerical value from the graph

presented in a table format.

Sealed Air 122

Debt Service

Margin

2003 2004 2005 2006 2007

SEE 234.8 181.7 94.2 1.7 68

PTV 25.8 73.4 5.65 124 2.8

PKG 2.1 1.9 2.22 208 2.5

GEF N/A N/A N/A N/A N/A

BMS 88.8 246.8 331.5 89.4 24.9

Z-Score:

Altman’s Z-score weights five different variables to compute a score for a firm

that indicates the possibility bankruptcy through default risk and credit risk for a

company. This helps asses the company’s credit risk. A company is considered to be

bankrupt when their Z-score is below 1.81. A company with a score between, or equal

to, 1.81-2.67 are labeled in the gray area. A company with a Z-score higher than 2.67 is

considered to have low credit and bankruptcy risks. As the graph below shows, the

packaging and container industry have not only a high Z-score average but also a high

range of Z-scores. After adjustments, Sealed Air’s score decreases only slightly due to a

decline in retained earnings. Sealed Air, though not a leader in the industry as far as Z-

score goes, maintains a score that shows low credit and bankruptcy risks.

Sealed Air 123

The Altman’s Z-Score:

Z-Score= 1.2(Working Capital/Total Assets) + 1.4(Retained Earnings/Total Assets) + 3.3(Earnings Before Interest and Taxes/Total Assets) + .6(Market Value of Equity/Book Value of Liabilities) +

1.0(Sales/Total Assets)

Conclusion

Analyzing the capital structure ratios can help evaluate the industry by

measuring how a firm is financed (either through debt or equity). There are large

disparities between these ratios in the packaging and containers industry, particularly in

each firms’ debt service margin. Sealed Air’s debt to equity ratio is sub-par compared to

other firms; however over the past five years it has decreased rapidly and is

approaching 1. This indicates that Sealed Air is moving closer to a more balanced

capital structure. Their TIE is also under-performing their competition, mainly because

of their relatively large interest expense. Overall, Sealed Air is slightly under-performing

compared to the industry average.

Sealed Air 124


Debt to Equity Under‐performed Decreasing trend

Times Interest Earned Under‐performed Stable

Debt Service Margin Over‐performed Decreasing trend

Overall Slightly under‐performed Decreasing trend

Estimating Cost of Capital

Cost of Equity:

The cost of equity is the rate at which an investor demands compensation for

bearing the risk of holding equity based assets. Cost of equity is higher in comparison

to the cost of debt since the risk of default on equity is substantially greater. For

example, in forced liquidation of a firm’s debt holders, bond holders, would receive

partial or whole payment before equity holders. Cost of equity can be derived several

ways, for our valuation we chose to use the Capital Asset Pricing Model approach. The

following is the CAPM model.

Cost of Equity = Risk Free Rate + Beta of the Firm (Risk of the Market – Risk

Free Rate)

Regression analysis was used to calculate the most accurate beta of Sealed Air.

It is important to find a steady beta because it measures how a firm will react in

correlation to the market as a whole. Beta in essence measures the systematic risk that

can be explained by the volatility of the market. A beta of less than one would be less

volatile than the market, and a beta of greater than one should show that the firm’s

security would be more volatile than the market. Another variable in the CAPM formula

is the market risk premium, which is the return of the market minus the risk free rate.

Return of the market was estimated from the S&P 500, and the risk free rate was

calculated using the St. Louis Federal Reserve. The yield curve presents a snap shot of

Sealed Air 125

risk free rates, which can be thought of as annualized rent on money. As the X-axis on

the yield curve increases so does the curve its self. Thus the yield of maturity is higher

creating a higher risk free rate. The reason for the increase on the yield curve is due to

price risk and inflation. Sealed Air investors are long term security holders, not

speculative in theory, this lead us to a larger 10 year risk free rate on the yield curve.

To perform the regression analysis, monthly stock prices over the past 7 years

for Sealed Air, 3 month, 6 month, 2 year, 5 year, and 10 year risk free rates from the

treasury yield curve, and seven year’s of monthly returns from the S&P were gathered.

Regression analysis was then computed over 24, 36, 48, 60, and 72 month investment

periods to estimate beta. Regression analysis creates an output of several variables

including an Adjusted R^2. The numerical percent of Adjusted R^2 explains strength in

the relationship between the market and systematic risk of a security. It is key to

observe the adjusted R^2 in order to estimate the beta because the higher the R^2,

the higher the explanatory power behind the estimated beta. After running all

regression models, the highest value of Adjusted R^2 was presented as the 10 year risk

free rate and the 60 month holding period. The beta from this regression was .87.

After all variables of the capital asset pricing model were estimated, we derived

the cost of equity to be 11.07%. This cost of equity tells us that for each dollar of

equity investment the return required on it would be $0.11. We believe that the

estimated cost of equity is correct because it has high explanatory power in conjunction

to the regression analysis performed. It also complies with the theory that cost of

equity must be higher than the cost of debt. Cost of equity will be used in further

calculations in the weight average cost of capital.

Sealed Air 126

Alternative Cost of Equity:

After running regressions we have established that Sealed Air’s beta is .87. From

this beta we calculated the cost of equity using the CAPM to be 11.07%. We feel that

this measurement may not be accurate, so we use the backdoor cost of equity to get an

alternative measure for Sealed Air’s cost of equity. The cost of equity according to this

alternative method was 16.21%. After these computations of alternative estimates to

cost of equity, we have decided to use the CAPM model because we feel it more

accurately depicts the risk of investing in the company.

Back Door Cost of Equity

ROE P/B-1 Growth Rate P/B Cost of Equity

Sealed Air 21.79%

0.68 8% 1.68 16.31%

Cost of Debt:

Cost of debt for a company is the total weighted average of long term and short

term interest rates on a firm’s liabilities. A firm value is composed of both equity and

debt; therefore it is important to assess the cost of both equity and liabilities to find the

total cost of capital. Debt holders bare less risk compared to equity holders because in

the case of liquidation debt holders are paid first. Cost of debt is lower than the cost of

equity because of its lower default risk rate.

Cost of debt of debt is calculated by taking the weighted rate of current and long

term liabilities from total liabilities. Once the appropriate weights have been assigned to

each liability, the weight is multiplied by the interest rate most relevant to the debt.

Sealed Air’s total current liability weight was 50.9% of total liabilities. In terms of

current liabilities, Sealed Air listed many of their interest rates in their 2008 10-k.

Interest rates for current accounts payable were estimated from the 3 month non-

financial rate AA grade commercial paper acquired from the St. Louis Federal Reserve.

Sealed Air 127

Other current liabilities were stated in the 10-k such as the asbestos settlement liability,

which was carrying a 6% interest rate. Current interest rates were then multiplied by

individual current weights to a sum of 2.08%.

Sealed Air only lists three items in the long term portion of liabilities. Sealed Air’s

long term portion of liabilities has a total weight of 49.1% of their total liabilities. Of

these three listed, long term debt (current portion excluded) was stated to have a

5.47% rate. Defered tax liabilities were given the rate of 3.88% from the seven year

treasury yield for risk free rates. Other long term liabilities were assigned the rate of

5.47% as they were estimated to have the same amount of risk as long term portions

of debt. Long term liabilities total weight rate was calculated as 2.67%. The total

weighted rate for current liabilities was added to the long term total weighted rate to

equal the weighted average cost of debt to be 4.76%. Weighted average cost of debt

will now be used to help calculate the weighted average cost of capital.

Weighted Average Cost of Capital (WACC):

The weighted average cost of capital is the normal rate at which a firm will pay

to finance assets. The WACC is computed by adding together the weighted sum of the

cost of equity and the weighted sum of the cost of debt. This will create the WACC

before tax. WACC before tax is what we will use in our free cash flow intrinsic valuation

model. We found the before tax WACC to be 7.10% based upon the 11.07% cost of

equity and the 4.76% cost of debt. Due to our decrease in equity our restated WACC

was 5.68%. The after tax was calculated to be 6.21% using a 30% tax rate. The after

tax WACC for our restated financials gives us a number lower than our cost of debt

therefore it is not applicable (Restated WACC (AT) 4.47 %< 4.76% cost of debt). The

difference between the after tax WACC and the before tax WACC is that in the WACC

(AT) we multiply our weighted average cost of debt times one minus the tax rate.

Overall, we feel that our computations for the weighted average cost of capital were

fairly accurate, and would provide accurate information for our valuation models.

Sealed Air 128

Weighted Average Cost of Capital

MVE/MVA Cost of Equity

MVD/MVA Cost of Debt

Tax Rate WACC

WACC (BT) 37.14% 11.07% 62.86% 4.76% 0 7.10%

WACC (BT) Revised

14.65% 11.07% 85.35%

4.76% 0 5.68%

WACC (AT) 37.14% 11.07% 62.86% 4.76% 30% 6.21%

Financial Statement Forecasting:

Forecasting is the process of analyzing a company’s current and historical data to

determine their future trends. This is a good way to gain insight on the future

expectations of a company. Since these estimations are bases on historical fact and

cannot possibly take into consideration future market results, the results are the best

available guess. We will be forecasting out Sealed Air’s income statement, balance

sheet, and statement of cash flows ten years to predict their future earnings. We will

use trends, growth rates, profitability and capital structure ratios to compute the future

values.

Income Statement:

When forecasting financial statements in a prospective analysis, the income

statement is without question the most essential and significant item over all the other

statements. Since forecasting the income statement is the most imperative and critical,

it is essential that the assumptions that are used are firmly grounded in business reality

and logical probability, so that the future expectations can be reasonably estimated and

relatively simple to comprehend. To further illustrate the importance of the forecasted

income statement, we must note that many of the assumptions and figures used in this

analysis will flow into the forecasted balance sheet and forecasted cash flows.

Sealed Air 129

The first and single most critical assumption that we made in the prospective

financial forecast is net sales growth rate. By looking at the past 5 years of data, we

can see that net sales seem to fluctuate around an average of 7.75% yearly growth

rate. However, in our forecasted analysis we used an 8% yearly sales growth rate when

estimating total revenue. The reason we chose a slightly higher growth rate than our

average is because of the conclusions we made earlier relating to industry growth and

Sealed Air’s relative market share. When looking at the packaging and container

industry as a whole, it grew an average of 8.32% per year over the past 5 years. Given

this industry growth rate, we further assume that Sealed Air will be able to maintain

their relative market share of about 27.5%, which has been consistent this past decade.

Therefore, 8% seemed like a logical midpoint between the industry growth average and

the company growth average.

Another crucial assumption that we made was the growth rate for cost of goods

sold. As we mentioned earlier in the analysis of key success factors of this report, lower

input costs are a vital element in the cost leadership competitive business strategy.

Since input costs are identified as a key success factor for the packaging and container

industry, we must strictly use prospective information relating to the expected prices for

these raw materials. Since plastic polymers are an essential ingredient for an

overwhelming majority of the industry’s product line, we must consider estimates that

try to predict the future costs from the company’s plastic suppliers. Plastics are derived

from petroleum, which as we all know have recently been increasing dramatically in

price. The following is an article about one of Sealed Air’s largest supplier of plastics,

Huntsman Chemical Corporation.

“U.S. chemical maker Huntsman Corp said on Thursday it will raise prices up to

25 percent and impose an energy surcharge across a wide range of products. The

move, which is driven by a sustained increase in costs for energy, transportation and

raw materials, mirrors similar actions taken by other U.S. chemical makers like Dow

Chemical and Rohm and Haas. The price increases by Huntsman and its counterparts

are likely to pressure plastics packaging makers like Bemis Co, Sealed Air, and Pactiv

Sealed Air 130

Corp, which have in recent months already seen profits affected by rising resin costs”.

Source: Reuters via Yahoo! Finance

(http://biz.yahoo.com/rb/080529/huntsmancorp_prices.html?.v=1).

Presented below is a price history of the oil markets from 1994 to today. Notice how

since 2002 the price of oil has jumped by nearly 500% over the last 6 years; faster than

any other publicly traded commodity in history.

Source: http://octane.nmt.edu/gotech/Marketplace/Prices.aspx via Wikipedia.org

Due to the rapidly increasing prices of petroleum based products, we can safely

assume that the growth rate for cost of goods sold (COGS) will be relatively higher than

the sales growth rate. The problem that we are now presented with is by how much

should the COGS growth rate exceed total revenue growth rate? We decided to go with

Sealed Air 131

a conservative choice of 8.5%; a mere 50 basis points over our total sales growth rate.

The reason we didn’t choose a higher rate of 9% or 10% was because of the

uncertainty of the oil market. Many analysts have recently stated that the price of oil is

artificially too high and cannot be reasonably explained through the market’s supply and

demand curves. This over-inflated price has many economists claiming that there is a

“bubble” within the oil market and it is only a matter of time before it “bursts”, sending

prices falling back down to a market equilibrium level. Another factor to consider is the

potential availabilty of fuel alternatives such as ethanol, biodeisel, butanol, hydrogen,

biomass, and electric hybird vehicles that could significantly lower the demand for oil.

Given the relatively extreme volatility of the oil market and the considerable factors of

price on both oil and alternative fuels, we have decided that a cost of goods sold

growth rate of a modest 8.5% is a reasonable estimate for our forecast.

The next line item on the income statement that we forecasted was the gross

profit from sales, which is calculated by taking net sales minus the cost of goods sold.

As we mentioned earlier, the cost of goods sold growth rate is relatively higher than the

total revenue growth rate. Given these assumptions, we can expect that the gross profit

margin will steadily decrease although gross profits are shown to be increasing from

year to year. Therefore, it should be noted that a steadily decreasing profit margin

could potentially cause problems for Sealed Air in matters such as liquidity and overall

profitability.

An additonal aspect of the income statement that was forecasted out was the

perating profit, which is Net Sales minus cost of goods sold and selling, general, and

administrative expenses. We chose to forecast operating profit by Sealed Air’s average

operating profit margin of 13% of total net sales. The reason we decided to use an

operating profit margin rather than use the formula (Sales – COGS-SGA) was because

we could not reasonably estimate future SG&A expenses. Therefore, by applying a

profit margin to expected sales we can get a rough estimate of what to expect for

earnings before interest and taxes.

Sealed Air 132

The last income statement line item that we forecasted was the net income. To

determine net income, we would have to take operating profit and deduct both interest

and tax expenses. However, interest and tax are extremely difficult to predict given that

they often vary in relation to certain economic conditions. Therefore, we decided to

simply utilize our net profit margin to forecast our net income. Since the net profit

margin is derived from sales, we can conclude that net income will increase along with

net sales. However, we should note that we chose a growth rate of 7%. We chose 7%

because it is slightly less than the sales growth rate of 8%. Since the cost of goods sold

was increasing at a greater rate than sales, we could determine that the income profit

margin would steadily decrease from year to year, thus explaining why net income was

increasing at a significantly slower rate than sales.

Sealed Air 133

SEALED AIR CORPORATION AND SUBSIDIARIESIncome Statement(in millions, except per share amounts)

20022003

20042005

20062007

20082009

20102011

20122013

20142015

20162017

2018Net sales

3,204.30$

3,531.90$

3,798.10$

4,085.10$

4,327.90$

4,651.20$

5,023.30$

5,425.16$

5,859.17$

6,327.91$

6,834.14$

7,380.87$

7,971.34$

8,609.05$

9,297.77$

10,041.59$

10,844.92$

Cost of sales2,146.70

$ 2,419.10

$ 2,636.00

$ 2,927.10

$ 3,087.80

$ 3,350.10

$ 3,634.86

$ 3,943.82

$ 4,279.05

$ 4,642.77

$ 5,037.40

$ 5,465.58

$ 5,930.15

$ 6,434.22

$ 6,981.13

$ 7,574.52

$ 8,218.35

$ Gross profit

1,057.60$

1,112.80$

1,162.10$

1,158.00$

1,240.10$

1,301.10$

1,388.44$

1,481.34$

1,580.13$

1,685.14$

1,796.74$

1,915.29$

2,041.19$

2,174.83$

2,316.65$

2,467.07$

2,626.56$

Marketing, administrative and development expenses541.90

$ 572.40

$ 626.10

$ 645.90

$ 701.10

$ 750.20

$ Restructuring and other charges

(1.30)$

(0.50)$

33.00$

1.70$

12.90$

1.60$

Operating profit517.00

$ 540.90

$ 503.00

$ 510.40

$ 526.10

$ 549.30

$ 583.14

$ 622.16

$ 663.65

$ 707.76

$ 754.63

$ 804.42

$ 857.30

$ 913.43

$ 972.99

$ 1,036.17

$ 1,103.16

$ Interest expense

(65.90)$

(136.00)$

(153.70)$

(149.70)$

(148.00)$

(140.60)$

Gain on sale of equity method investment-

$ (33.60)

$ (32.20)

$ -

$ -

$ 35.30

$ Other income, net

7.10$

8.40$

7.80$

15.90$

22.00$

12.00$

Earnings before income tax provision(391.90)

$ 376.90

$ 322.90

$ 376.60

$ 400.10

$ 456.00

$ Income tax provision

(82.80)$

136.50$

107.30$

120.80$

126.00$

103.00$

Net earnings(309.10)

$ 240.40

$ 215.60

$ 255.80

$ 274.10

$ 353.00

$ 377.71

$ 404.15

$ 432.44

$ 462.71

$ 495.10

$ 529.76

$ 566.84

$ 606.52

$ 648.98

$ 694.40

$ 743.01

$ Net earnings per common share:Basic

(4.20)$

2.21$

2.56$

1.56$

1.70$

2.21$

Diluted(4.30)

$ 1.97

$ 2.25

$ 1.35

$ 1.47

$ 1.89

$

Actual Financial StatementsForecasted Financial Statements

Sealed Air 134

SEALED AIR CORPORATION AND SUBSIDIARIESCommon Size Income Statement

20032004

20052006

20072008

20092010

20112012

20132014

20152016

2018Sales Growth

10.22%7.54%

7.56%5.94%

7.47%8.00%

8.00%8.00%

8.00%8.00%

8.00%8.00%

8.00%8.00%

8.00%Net sales

100.00%100.00%

100.00%100.00%

100.00%100.00%

100.00%100.00%

100.00%100.00%

100.00%100.00%

100.00%100.00%

100.00%Cost of sales

68.49%69.40%

71.65%71.35%

72.03%72.36%

72.70%73.03%

73.03%73.37%

73.71%74.05%

74.39%74.74%

75.08%Gross profit

31.51%30.60%

28.35%28.65%

27.97%27.64%

27.30%26.97%

26.97%26.63%

26.29%25.95%

25.61%25.26%

24.92%SG&A expenses

16.21%16.48%

15.81%16.20%

16.13%Operating profit

15.31%13.24%

12.49%12.16%

11.81%11.61%

11.47%11.33%

11.33%11.18%

11.04%10.90%

10.75%10.61%

10.46%Interest expense

3.85%4.05%

3.66%3.42%

3.02%Income before taxes

10.67%8.50%

9.22%9.42%

9.80%Income tax provision

3.86%2.83%

2.96%2.91%

2.21%Net Income

6.81%5.68%

6.26%6.33%

7.59%7.52%

7.45%7.38%

7.38%7.31%

7.24%7.18%

7.11%7.05%

6.98%


Sealed Air 135

Restated Income Statement:

Now that we have seen the forecast for the original income statement, we now

focus our attention on the revised income statement. The only difference between the

original income statement and the revised version was the impairment for goodwill.

While the impairment for goodwill significantly lowered Sealed Air’s net income, it had

absolutely no effect on our forecasts. All of the impaired balance was amortized

between the years of 2002 to 2007. Since the impairment has essentially been written

off, we still acknowledge the fact that goodwill will continuously be inflated by

management. However, since we cannot reasonably forecast expected goodwill

impairment, we will not forecast a complete variable. Therefore, the forecasted net

earnings of both versions will be identical and unaltered.

Sealed Air 136

SEALED AIR CORPORATION AND SUBSIDIARIESRestated Income Statement(in millions, except per share amounts)

20032004

20052006

20072008

20092010

20112012

20132014

20152016

20172018

Net sales3,531.90

$ 3,798.10

$ 4,085.10

$ 4,327.90

$ 4,651.20

$ 5,023.30

$ 5,425.16

$ 5,859.17

$ 6,327.91

$ 6,834.14

$ 7,380.87

$ 7,971.34

$ 8,609.05

$ 9,297.77

$ 10,041.59

$ 10,844.92

$ Cost of sales

2,419.10$

2,636.00$

2,927.10$

3,087.80$

3,350.10$

3,634.86$

3,943.82$

4,279.05$

4,642.77$

5,037.40$

5,465.58$

5,930.15$

6,434.22$

6,981.13$

7,574.52$

8,218.35$

Gross profit1,112.80

$ 1,162.10

$ 1,158.00

$ 1,240.10

$ 1,301.10

$ 1,388.44

$ 1,481.34

$ 1,580.13

$ 1,685.14

$ 1,796.74

$ 1,915.29

$ 2,041.19

$ 2,174.83

$ 2,316.65

$ 2,467.07

$ 2,626.56

$ Marketing, administrative and development expenses

572.40$

626.10$

645.90$

701.10$

750.20$

Restructuring and other charges(0.50)

$ 33.00

$ 1.70

$ 12.90

$ 1.60

$ Operating profit

540.90$

503.00$

510.40$

526.10$

549.30$

583.14$

622.16$

663.65$

707.76$

754.63$

804.42$

857.30$

913.43$

972.99$

1,036.17$

1,103.16$

Interest expense(136.00)

$ (153.70)

$ (149.70)

$ (148.00)

$ (140.60)

$ Impairment of Goodwill Expense

310.80$

224.30$

193.60$

164.50$

134.20$

Gain on sale of equity method investment(33.60)

$ (32.20)

$ -

$ -

$ 35.30

$ Other income, net

8.40$

7.80$

15.90$

22.00$

12.00$

Earnings before income tax provision376.90

$ 322.90

$ 376.60

$ 400.10

$ 456.00

$ Income tax provision

136.50$

107.30$

120.80$

126.00$

103.00$

Net earnings(70.40)

$ (8.70)

$ 62.20

$ 109.60

$ 218.80

$ 377.71

$ 404.15

$ 432.44

$ 462.71

$ 495.10

$ 529.76

$ 566.84

$ 606.52

$ 648.98

$ 694.40

$ 743.01

$

Forecasted Financial StatementsActual Financial Statements

Sealed Air 137

SEALED AIR CORPORATION AND SUBSIDIARIESRestated Common Size Income Statement

20032004

20052006

20072008

20092010

20112012

20132014

20152016

20172018

Sales Growth10.22%

7.54%7.56%

5.94%7.47%

8.00%8.00%

8.00%8.00%

8.00%8.00%

8.00%8.00%

8.00%8.00%

8.00%Net sales

100.00%100.00%

100.00%100.00%

100.00%100.00%

100.00%100.00%

100.00%100.00%

100.00%100.00%

100.00%100.00%

100.00%100.00%

Cost of sales68.49%

69.40%71.65%

71.35%72.03%

72.36%72.70%

73.03%73.37%

73.71%74.05%

74.39%74.74%

75.08%75.43%

75.78%Gross profit

31.51%30.60%

28.35%28.65%

27.97%27.64%

27.30%26.97%

26.63%26.29%

25.95%25.61%

25.26%24.92%

24.57%24.22%

SG&A expenses16.21%

16.48%15.81%

16.20%16.13%

Operating profit15.31%

13.24%12.49%

12.16%11.81%

11.61%11.47%

11.33%11.18%

11.04%10.90%

10.75%10.61%

10.46%10.32%

10.17%Impairment Expense

8.80%5.91%

4.74%3.80%

2.89%Interest expense

3.85%4.05%

3.66%3.42%

3.02%Income before taxes

10.67%8.50%

9.22%9.42%

9.80%Income tax provision

3.86%2.83%

2.96%2.91%

2.21%Net Income

‐1.99%‐0.23%

1.52%2.53%

4.70%7.52%

7.45%7.38%

7.31%7.24%

7.18%7.11%

7.05%6.98%

6.92%6.85%


Sealed Air 138

Balance Sheet:

The balance sheet is a form of financial statement that states the company’s

assets and how they obtained them through liabilities and equity. The framework for

forecasting is established from estimating future sales growth on the income statement.

To link the income statement to the balance sheet we use asset turnover. By obtaining

the forecasted sales from the income statement and plugging them into Sealed Air’s

appropriate asset turnover ratio of .86, we were able to obtain a forecast for future

assets. We used .86 for our asset turnover because it fit appropriately with the current

trend along with being the mean of our asset turnovers for the past 5 years.

First, after establishing our total assets for the year we can forecast non-current

assets as a percentage of total assets. We decided that our noncurrent assets would

level out to a percentage of approximately 65% of our total assets. We feel that for

Sealed Air finds this is a comfortable percentage of non-current assets in the packaging

industry. Next, we derived current assets by subtracting noncurrent assets from total

assets. Now that we have current assets, we can use it to establish a forecast for

current liabilities. We can forecast the current liabilities by using an established current

ratio and our previously forecasted current assets. The current ratio that we

established credible was 1.19 because of the previous years with higher emphasis

placed on the last two year’s current ratio.

Next, we move to the shareholder’s equity portion of the balance sheet to

forecast retained earnings and shareholder’s equity. For forecasting retained earnings,

we simply used the previously forecasted numbers and plug them into the retained

earnings formula (Retained Earnings=Beginning Balance of Retained Earning+Net

Income-Dividends). We pulled the net income from our previously forecasted income

statement and dividends from our statement of cash flows. Once we have retained

earnings we can add the change in retained earnings to our previously held

stockholder’s equity. This calculation creates the forecasted total stockholder’s equity.

Sealed Air 139

Now that we established stockholder’s equity and assets we can find our total

liabilities by using the classic balance sheet formula (assets=liabilities+equity). This has

to be true in order for our balance sheet to balance. Now that we have established

current liabilities from the current ratio and total liability, we can subtract the current

liabilities from the total liabilities to get our noncurrent liabilities. Other forecasts that

were made on the balances sheet were inventory and accounts receivable. Accounts

Receivable was established by calculating 41% of current assets. We used 41% due to

the steady trend shown on the common sized balance sheet in the previous years. We

expect our inventories to keep a steady 8.5% increase because it has been growing at

a slightly higher rate than our growth rate. Applying these forecasting tools allows

investors to get a future look at how a company should perform, based upon the

previous five years.

Sealed Air 140

SEALED AIR CO

RPORATIO

N AN

D SUBSID

IARIESBalance Sheet(in m

illions, except share data)2003

20042005

20062007

20082009

20102011

20122013

20142015

20162017

AssetsCurrent assets:Cash and cash equivalents

297.80$

358.00$

455.80$

373.10$

430.30$

Short-term investm

ents-available-for-sale securities67.20

$ 54.10

$ 44.10

$ 33.90

$ -

$ Receivables, net of allow

ance for doubtful accounts of$16.2 in 2007 and $17.5 in 2006

615.20$

662.50$

674.00$

721.30$

789.80$

887.50$

958.50$

1,035.18$

1,118.00$

1,207.44$

1,304.03$

1,408.35$

1,521.02$

1,642.70$

1,774.12$

Inventories371.20

$ 417.90

$ 409.10

$ 509.40

$ 581.70

$ 632.15

$ 685.88

$ 744.18

$ 807.44

$ 876.07

$ 950.54

$ 1,031.33

$ 1,118.99

$ 1,214.11

$ 1,317.31

$ Prepaid expenses and other current assets

18.80$

17.00$

11.40$

18.20$

21.90$

Deferred tax assets

100.60$

101.70$

101.00$

100.80$

112.40$

- - - - - - - - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - - -

- - - - - - Total current assets

1,470.80$

1,611.20$

1,695.40$

1,756.70$

1,936.10$

2,164.64$

2,337.81$

2,524.83$

2,726.82$

2,944.97$

3,180.56$

3,435.01$

3,709.81$

4,006.60$

4,327.12$

Property and equipment, net

1,042.40$

1,008.60$

911.20$

970.10$

1,080.10$

Goodwill

1,939.50$

1,953.40$

1,908.80$

1,957.10$

1,969.70$

Non-current deferred tax assets42.00

$ 66.30

$ 130.40

$ 175.40

$ 163.20

$ Non-current investm

ents-available-for-sale securities-

$ 40.80

$ O

ther assets, net209.40

$ 215.50

$ 218.40

$ 161.60

$ 248.40

$ Total Non-current assets

3,233.30$

3,243.80$

3,168.80$

3,264.20$

3,502.20$

4,020.04$

4,341.65$

4,688.98$

5,064.10$

5,469.22$

5,906.76$

6,379.30$

6,889.65$

7,440.82$

8,036.09$

- - - - - - - - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - - -

- - - - - - Total assets

4,704.10$

4,855.00$

4,864.20$

5,020.90$

5,438.30$

6,184.68$

6,679.46$

7,213.81$

7,790.92$

8,414.19$

9,087.33$

9,814.31$

10,599.46$

11,447.41$

12,363.21$

- - - - - - - - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - - -

- - - - - - Liabilities and shareholders' equityCurrent liabilities:Short-term

borrowings

18.20$

19.80$

21.80$

20.20$

36.50$

Current portion of long-term debt

2.40$

3.80$

241.40$

5.50$

303.70$

Accounts payable191.70

$ 248.50

$ 250.30

$ 283.90

$ 316.30

$ 363.80

$ 392.91

$ 424.34

$ 458.29

$ 494.95

$ 534.55

$ 577.31

$ 623.50

$ 673.38

$ 727.25

$ D

eferred tax liabilities5.80

$ 5.70

$ 4.60

$ 7.80

$ 12.10

$ Asbestos settlem

ent liability512.50

$ 512.50

$ 512.50

$ 512.50

$ 512.50

$ O

ther current liabilities459.80

$ 513.50

$ 502.90

$ 576.20

$ 560.50

$ - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - -

Total current liabilities1,190.40

$ 1,303.80

$ 1,533.50

$ 1,406.10

$ 1,741.60

$ 1,819.02

$ 1,964.55

$ 2,121.71

$ 2,291.45

$ 2,474.76

$ 2,672.74

$ 2,886.56

$ 3,117.49

$ 3,366.89

$ 3,636.24

$ Long-term

debt, less current portion2,259.80

$ 2,088.00

$ 1,813.00

$ 1,826.60

$ 1,531.60

$ Non-current deferred tax liabilities

34.90$

26.90$

23.90$

7.60$

9.90$

Other liabilities

95.40$

102.80$

101.70$

125.80$

135.60$

Total Non-current Liabilities2,390.10

$ 2,217.70

$ 1,938.60

$ 1,960.00

$ 1,677.10

$ 2,034.45

$ 2,050.28

$ 2,070.71

$ 2,096.34

$ 2,127.84

$ 2,165.94

$ 2,211.46

$ 2,265.31

$ 2,328.46

$ 2,402.02

$ - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - -

Total liabilities3,580.50

$ 3,521.50

$ 3,472.10

$ 3,366.10

$ 3,418.70

$ 3,853.47

$ 4,014.82

$ 4,192.42

$ 4,387.78

$ 4,602.60

$ 4,838.68

$ 5,098.03

$ 5,382.79

$ 5,695.34

$ 6,038.25

$ Com

mitm

ents and contingencies - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - -

Shareholders' equity:Preferred stock, $0.10 par value per share, 50,000,000shares authorized; no shares issued in 2007 and 2006

-$

-$

-$

-$

-$

Comm

on stock, $0.10 par value per share, 400,000,000 sharesauthorized; shares issued: 167,741,721 in 2007 and86,488,913 in 2006; shares outstanding; 161,627,030 in 2007and 80,655,028 in 2006

8.60$

8.60$

8.60$

8.60$

16.80$

Comm

on stock reserved for issuance related to asbestossettlem

ent, $0.10 par value per share, 18,000,000 shares in2007 and 9,000,000 shares in 2006

0.90$

0.90$

0.90$

0.90$

1.80$

Additional paid-in capital1,046.90

$ 1,059.80

$ 1,075.50

$ 1,075.90

$ 1,086.10

$ Retained earnings

243.70$

459.30$

715.10$

972.40$

1,260.80$

1,572.41$

1,905.83$

2,262.60$

2,644.33$

3,052.79$

3,489.84$

3,957.49$

4,457.86$

4,993.27$

5,566.15$

- - - - - - - - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - - -

- - - - - - 1,283.80

$ 1,510.70

$ 1,782.30

$ 2,057.80

$ 2,365.50

$ - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - - - - - - - -

Unamortized pension item

s, net of taxes(1.60)

$ (3.30)

$ (5.30)

$ (60.20)

$ (58.20)

$ Cum

ulative translation adjustment

(147.00)$

(77.80)$

(169.70)$

(70.70)$

(4.00)$

Unrecognized gain on derivative instruments, net of taxes

8.00$

7.60$

6.80$

6.10$

5.60$

Unrecognized losses on available-for-sale securities, netof taxes

-$

(2.40)$

- - - - - - - - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - Accum

ulated other comprehensive loss

(140.60)$

(73.50)$

(168.20)$

(124.80)$

(59.00)$

- - - - - - - - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - Com

mon stock in treasury 6,114,691 shares in 2007 and

5,823,885 shares in 2006(19.60)

$ (103.70)

$ (222.00)

$ (278.20)

$ (286.90)

$ - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - -

Total shareholders' equity1,123.60

$ 1,333.50

$ 1,392.10

$ 1,654.80

$ 2,019.60

$ 2,331.21

$ 2,664.63

$ 3,021.40

$ 3,403.13

$ 3,811.59

$ 4,248.64

$ 4,716.29

$ 5,216.66

$ 5,752.07

$ 6,324.95

$ - - - - - - -

- - - - - - - - - - - - - -

- - - - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - -

Total liabilities and shareholders' equity4,704.10

$ 4,855.00

$ 4,864.20

$ 5,020.90

$ 5,438.30

$ 6,184.68

$ 6,679.46

$ 7,213.81

$ 7,790.92

$ 8,414.19

$ 9,087.33

$ 9,814.31

$ 10,599.46

$ 11,447.41

$ 12,363.21

$

Actual Financial Statements

Forecasted Financial Statements

Sealed Air 141

SEALED AIR CORPORATION AND SUBSIDIARIESCommon Size Balance Sheet

20032004

20052006

20072008

20092010

20112012

20132014

20152016

2017Cash and equivalents

20%22%

27%21%

22%Inventories

25%26%

24%29%

30%29%

29%29%

30%30%

30%30%

30%30%

30%Net Receivables

42%41%

40%41%

41%41%

41%41%

41%41%

41%41%

41%41%

41%Prepaid expenses

1%1%

1%1%

1%Deferred tax assets

7%6%

6%6%

6%Short Term Investments

5%3%

3%2%

NATotal current assets

31%33%

35%35%

36%35%

35%35%

35%35%

35%35%

35%35%

35%Property and equipment

32%31%

29%30%

31%Goodwill

60%60%

60%60%

56%Other assets

6%7%

7%5%

7%non-current deferred

1%2%

4%5%

5%non-current investments

NANA

NANA

1%Total long-term assets

69%67%

65%65%

64%65%

65%65%

65%65%

65%65%

65%65%

65%Total assets

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%Short-term borrowings

2%2%

1%1%

2%Current portion of L.T. debt

0%0%

16%0%

17%Accounts payable

16%19%

16%20%

18%Deferred tax liabilities

0%0%

0%1%

1%Asbestos settlement liability

43%39%

33%36%

29%Other current liabilities

39%39%

33%41%

32%Total current liabilities

33%37%

44%42%

51%47%

49%51%

52%54%

55%57%

58%59%

60%Long-term debt, less current portion

95%94%

94%93%

91%Non-current deferred tax liabilities

1%1%

1%0%

1%Other liabilities

4%5%

5%6%

8%Total LT liabilities

67%63%

56%58%

49%53%

51%49%

48%46%

45%43%

42%41%

40%Total Liabilities

100%100%

100%100%

100%62%

60%58%

56%55%

53%52%

51%50%

49%Common Stock

1%1%

1%1%

1%Stock Reserves

0%0%

0%0%

0%Paid In Capital

93%79%

77%65%

54%Retained Earnings

22%34%

51%59%

62%67%

72%75%

78%80%

82%84%

85%87%

88%Equity Before Losses

114%113%

128%124%

117%Unamortized pension items, net of taxes

0%0%

0%-4%

-3%Cumulative translation adjustment

-13%-6%

-12%-4%

0%Unrecognized gain on derivative instruments, net of taxes

1%1%

0%0%

0%Accumulated other comprehensive loss

-13%-6%

-12%-8%

-3%Total Equity

100%100%

100%100%

100%38%

40%42%

44%45%

47%48%

49%50%

51%Total liabilities and shareholders' equity

100%100%

100%100%

100%100%

100%100%

100%100%


Sealed Air 142

Restated Balance Sheet:

Sealed Air reported goodwill of 36% of total assets. This raised a red flag and

we decided that restating our financials would aid us in valuing the company. We

decided to impair Sealed Air’s goodwill at 20% per year which affected assets and

shareholder’s equity. Shareholder’s equity was reduced because of the decrease in net

earnings that occurred over the restatement. The decrease in net earnings will cause

retained earnings to fall, which is a component of shareholder’s equity. The assets of

goodwill were affected as well. The same .86 from the total asset turnover ratio that

was used in the stated balance sheet forecasting was used in the revised balance sheet

as well, due to the strong trend in asset balances. We feel that even though the assets,

such as goodwill, were impaired that they will steadily increase in the forecasted years

because of acquisitions and total asset increases to support growing sales production.

In correlation to total asset forecasting on the revised balance sheet, the non-current

assets grew at the same 65% of total assets. In current assets, net receivables was

forecasted to increase at 41% of total current assets. Inventories were assumed to

grow at same amount as our forecasted sales growth. Our conclusions for this are that

sales could only grow at the same rate that goods were acquired. The sales rate is

appropriate for many reasons, such as, it would be difficult to maintain efficiency if

sales were increasing but inventory was not present. Also, it would be costly to have

too much inventory on hand, thus causing costly storage problems. Third, having too

high an inventory growth rate make increase the risk of unsold inventory susceptible to

obsolesces or theft. We considered increasing inventory by a rate that was congruent

to inventory turnover but the lack of consistency in the ratios made it difficult to

forecast.

In addition to total, current, and noncurrent assets being forecasted on the

balance sheet, we forecasted total liabilities, current liabilities, and noncurrent liabilities.

Total current liabilities were found by dividing total assets by 1 plus 19%. Noncurrent

liabilities were forecasted by subtracting current liabilities from total liabilities. In

Sealed Air 143

essences since we already had both current and total liabilities forecasted, this became

a plug figure. Furthermore, a total liability was forecasted by subtracting total assets

from total stockholders’ equity.

After forecasting total, current, and noncurrent liabilities stock holders equity was

forecasted. The first part of stockholders equity that was forecasted was the retained

earnings portion. Retained earnings were simple computations to forecast. The way we

arrived at our values was by taking our beginning balance in retained earnings from our

restated income statement and adding our net income and subtracting our dividends

(from our revised statement of cash flows). Our ending balance was calculated and

then used as our beginning balance for the next years retained earnings. This is one of

the reasons why the balance sheet is the second most accurate statement to forecast

because of its tight correlations to the income statement. In addition to retained

earnings, we forecasted our total stock holder’s equity. Stockholders’ equity was

calculated by taking our 2007 value and adding the difference in retained earnings of

the current and previous years. This may not seem like the most accurate forecast, but

it is the most stable and consistent over time. Finally after we were able to forecast our

total stockholders’ equity we were able to forecast our total liabilities and stock holders

equity by adding together our two previous forecast for stockholders equity and total

liabilities.

In conclusion, forecasting both the stated balance sheet and restated balance

sheet will help investors accurately view future activities of a firm. Through ratio and

industry analysis we arrived at what we feel is the most accurate and stable portrayal of

asset, liability, and equity values for the next ten years for both the restated versions

and stated versions of Sealed Air’s financial balance sheet.

Sealed Air 144

SEALED AIR CO

RPORATIO

N AN

D SU

BSIDIARIES

Restated Balance Sheet(in m

illions, except share data)2003

20042005

20062007

20082009

20102011

20122013

20142015

20162017

2018AssetsCurrent assets:Cash and cash equivalents

297.80$

358.00$

455.80$

373.10$

430.30$

Short-term investm

ents-available-for-sale securities67.20

$ 54.10

$ 44.10

$ 33.90

$ -

$ Receivables, net of allow

ance for doubtful accounts of$16.2 in 2007 and $17.5 in 2006

615.20$

662.50$

674.00$

721.30$

789.80$

676.97$

731.12$

789.61$

852.78$

921.00$

994.68$

1,074.26$

1,160.20$

1,253.02$

1,353.26$

1,461.52$

Inventories371.20

$ 417.90

$ 409.10

$ 509.40

$ 581.70

$ 632.15

$ 685.88

$ 744.18

$ 807.44

$ 876.07

$ 950.54

$ 1,031.33

$ 1,118.99

$ 1,214.11

$ 1,317.31

$ 1,429.28

$ Prepaid expenses and other current assets

18.80$

17.00$

11.40$

18.20$

21.90$

Deferred tax assets

100.60$

101.70$

101.00$

100.80$

112.40$

- - - - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - - - - -

Total current assets1,470.80

$ 1,611.20

$ 1,695.40

$ 1,756.70

$ 1,936.10

$ 1,651.14

$ 1,783.23

$ 1,925.88

$ 2,079.96

$ 2,246.35

$ 2,426.06

$ 2,620.14

$ 2,829.76

$ 3,056.14

$ 3,300.63

$ 3,564.68

$ Property and equipm

ent, net1,042.40

$ 1,008.60

$ 911.20

$ 970.10

$ 1,080.10

$ G

oodwill

1,243.40$

977.50$

774.60$

658.30$

536.80$

Non-current deferred tax assets

42.00$

66.30$

130.40$

175.40$

163.20$

Non-current investm

ents-available-for-sale securities-

$ 40.80

$ O

ther assets, net209.40

$ 215.50

$ 218.40

$ 161.60

$ 248.40

$ Total N

on-current assets2,537.20

$ 2,267.90

$ 2,034.60

$ 1,965.40

$ 2,069.30

$ 3,066.39

$ 3,311.71

$ 3,576.64

$ 3,862.77

$ 4,171.80

$ 4,505.54

$ 4,865.98

$ 5,255.26

$ 5,675.68

$ 6,129.74

$ 6,620.12

$ - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - Total assets

4,008.00$

3,879.10$

3,730.00$

3,722.10$

4,005.40$

4,717.53$

5,094.93$

5,502.53$

5,942.73$

6,418.15$

6,931.60$

7,486.13$

8,085.02$

8,731.82$

9,430.36$

10,184.79$

- - - - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - - - - -

Liabilities and shareholders' equityCurrent liabilities:Short-term

borrowings

18.20$

19.80$

21.80$

20.20$

36.50$

Current portion of long-term debt

2.40$

3.80$

241.40$

5.50$

303.70$

Accounts payable191.70

$ 248.50

$ 250.30

$ 283.90

$ 316.30

$ D

eferred tax liabilities5.80

$ 5.70

$ 4.60

$ 7.80

$ 12.10

$ Asbestos settlem

ent liability512.50

$ 512.50

$ 512.50

$ 512.50

$ 512.50

$ O

ther current liabilities459.80

$ 513.50

$ 502.90

$ 576.20

$ 560.50

$ - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - Total current liabilities

1,190.40$

1,303.80$

1,533.50$

1,406.10$

1,741.60$

1,387.51$

1,498.51$

1,618.39$

1,747.86$

1,887.69$

2,038.71$

2,201.80$

2,377.95$

2,568.18$

2,773.64$

2,995.53$

Long-term debt, less current portion

2,259.80$

2,088.00$

1,813.00$

1,826.60$

1,531.60$

Non-current deferred tax liabilities

34.90$

26.90$

23.90$

7.60$

9.90$

Other liabilities

95.40$

102.80$

101.70$

125.80$

135.60$

Total Non-current assets

2,390.10$

2,217.70$

1,938.60$

1,960.00$

1,677.10$

2,431.71$

2,364.69$

2,295.64$

2,224.63$

2,151.77$

2,077.15$

2,000.94$

1,923.31$

1,844.47$

1,764.67$

1,684.23$

- - - - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - - - - -

Total liabilities3,580.50

$ 3,521.50

$ 3,472.10

$ 3,366.10

$ 3,418.70

$ 3,819.22

$ 3,863.20

$ 3,914.03

$ 3,972.50

$ 4,039.46

$ 4,115.86

$ 4,202.74

$ 4,301.25

$ 4,412.65

$ 4,538.31

$ 4,679.75

$ Com

mitm

ents and contingencies - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - Shareholders' equity:Preferred stock, $0.10 par value per share, 50,000,000shares authorized; no shares issued in 2007 and 2006

-$

-$

-$

-$

-$

Comm

on stock, $0.10 par value per share, 400,000,000 sharesauthorized; shares issued: 167,741,721 in 2007 and86,488,913 in 2006; shares outstanding; 161,627,030 in 2007and 80,655,028 in 2006

8.60$

8.60$

8.60$

8.60$

16.80$

Comm

on stock reserved for issuance related to asbestossettlem

ent, $0.10 par value per share, 18,000,000 shares in2007 and 9,000,000 shares in 2006

0.90$

0.90$

0.90$

0.90$

1.80$

Additional paid-in capital1,046.90

$ 1,059.80

$ 1,075.50

$ 1,075.90

$ 1,086.10

$ Retained earnings

(328.10)$

(461.00)$

(268.70)$

(201.60)$

(113.10)$

198.51$

531.93$

888.70$

1,270.43$

1,678.89$

2,115.94$

2,583.59$

3,083.96$

3,619.37$

4,192.25$

4,805.24$

- - - - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - - - - -

728.30$

608.30$

816.30$

883.80$

991.60$

- - - - - - - - - - - -

- - - - - - - - - - -

- - - - - - Unam

ortized pension items, net of taxes

(1.60)$

(3.30)$

(5.30)$

(60.20)$

(58.20)$

Cumulative translation adjustm

ent(147.00)

$ (77.80)

$ (169.70)

$ (70.70)

$ (4.00)

$ Unrecognized gain on derivative instrum

ents, net of taxes8.00

$ 7.60

$ 6.80

$ 6.10

$ 5.60

$ Unrecognized losses on available-for-sale securities, netof taxes

-$

(2.40)$

- - - - - - - - - - - -

- - - - - - - - - - -

- - - - - - Accum

ulated other comprehensive loss

(140.60)$

(73.50)$

(168.20)$

(124.80)$

(59.00)$

- - - - - - - - - - - -

- - - - - - - - - - -

- - - - - - Com

mon stock in treasury 6,114,691 shares in 2007 and

5,823,885 shares in 2006(19.60)

$ (103.70)

$ (222.00)

$ (278.20)

$ (286.90)

$ - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - Total shareholders' equity

427.50$

357.60$

257.90$

356.00$

586.70$

898.31$

1,231.73$

1,588.50$

1,970.23$

2,378.69$

2,815.74$

3,283.39$

3,783.76$

4,319.17$

4,892.05$

5,505.04$

- - - - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - - -

- - - - - - - - - - - - -

- - - - - - - - - - - - -

Total liabilities and shareholders' equity4,008.00

$ 3,879.10

$ 3,730.00

$ 3,722.10

$ 4,005.40

$ 4,717.53

$ 5,094.93

$ 5,502.53

$ 5,942.73

$ 6,418.15

$ 6,931.60

$ 7,486.13

$ 8,085.02

$ 8,731.82

$ 9,430.36

$ 10,184.79

$



Sealed Air 145

SEALED AIR CORPORATION AND SUBSIDIARIESRestated Common Size Balance Sheet

20032004

20052006

20072008

20092010

20112012

20132014

20152016

20172018

Cash and equivalents20%

22%27%

21%22%

Inventories25%

26%24%

29%30%

38%38%

39%39%

39%39%

39%40%

40%40%

40%Net Receivables

42%41%

40%41%

41%41%

41%41%

41%41%

41%41%

41%41%

41%41%

Prepaid expenses1%

1%1%

1%1%

Deferred tax assets7%

6%6%

6%6%

Short Term Investments5%

3%3%

2%NA

Total current assets31%

33%35%

35%36%

35%35%

35%35%

35%35%

35%35%

35%35%

35%Property and equipment

32%31%

29%30%

31%Goodwill

42%32%

26%21%

16%Other assets

6%7%

7%5%

7%non-current deferred

1%2%

4%5%

5%non-current investments

NANA

NANA

1%Total long-term assets

67%65%

64%64%

63%65%

65%65%

65%65%

65%65%

65%65%

65%65%

Total assets100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%Short-term borrowings

2%2%

1%1%

2%Current portion of L.T. debt

0%0%

16%0%

17%Accounts payable

16%19%

16%20%

18%Deferred tax liabilities

0%0%

0%1%

1%Asbestos settlement liability

43%39%

33%36%


39%39%

33%41%

32%Total current liabilities

33%37%

44%42%

51%36%

39%41%

44%47%

50%52%

55%58%

61%64%

Long-term debt, less current portion95%

94%94%

93%91%

Non-current deferred tax liabilities1%

1%1%

0%1%

Other liabilities4%

5%5%

6%8%

Total LT liabilities67%

63%56%

58%49%

64%61%

59%56%

53%50%

48%45%

42%39%

36%Total Liabilities

100%100%

100%100%

100%81%

76%71%

67%63%

59%56%

53%51%

48%46%

Common Stock1%

1%1%

1%1%

Stock Reserves0%

0%0%

0%0%

Paid In Capital93%

79%77%

65%54%

Retained Earnings-6%

16%39%

49%56%

22%43%

56%64%

71%75%

79%82%

84%86%

87%Equity Before Losses

114%113%

128%124%

117%Unamortized pension items, net of taxes

0%0%

0%-4%

-3%Cumulative translation adjustment

-13%-6%

-12%-4%

0%Unrecognized gain on derivative instruments, net of taxes

1%1%

0%0%

0%Accumulated other comprehensive loss

-13%-6%

-12%-8%

-3%Total Equity

100%100%

100%100%

100%19%

24%29%

33%37%

41%44%

47%49%

52%54%

Total liabilities and shareholders' equity100%

100%100%

100%100%

100%100%

100%100%

100%100%


Sealed Air 146

Statement of Cash Flows:

The statement of cash flows proves to be the most difficult and inaccurate

financial statement to forecast because of the unpredictability from year to year.

Another reason it is difficult to forecast the statement of cash flows is due to the lack of

correlation of dependent variables. Although it is the most inaccurate statement it is still

important for investors to analyze. The information presented in the cash flow

statement presents investors with three main segments, including cash flow from

operations, cash flow from investing activities, and cash flow from financing activities.

Cash flow from operations is important to consider because it indicates the efficiency of

a firm. Furthermore, the financing portion of the cash flow statement tells investors

whether a firm will be attaining more debt to further continuing and future operations.

In our forecasting of Sealed Air’s statement of cash flows, we looked for stable

and reliable patterns to base our estimations of growth or decline on. For the cash flow

from operations we found it most suitable to use cash flow from operating activities

over operating income of the previous five years to calculate a stable trend. Our

CFFO/OI trends indicated that near 8% was a reasonable estimate to grow our net cash

provided by operating activities. In addition to the operating cash flow section, net

earnings were forecasted by a net income derivative of 7%. Following our operating

section, the investing section was forecasted. We felt that if operating activities were to

increase by 8% that the firm could use the same growth rate to pour back into their

investing activities. We chose this assumption because we believe that SEE is on a path

to further their current investing relations and 8% would allow for a modest increase.

In addition to forecasting our net investing cash flows, we attempted to forecast our

net financing cash flow. Financing cash flow presented the largest amount of inaccuracy

in the statement of cash flows. There was no detectable pattern in our analysis. We felt

that we could not even slightly portray future growth of this sector without further

information that was unattainable. Furthermore, we felt that it would be a

disadvantage to try to forecast these numbers and lead investors astray due to arbitrary

Sealed Air 147

inaccurate forecasting for this segment. This relates back to earlier statements about

the difficulty and unstable predictions. The only portion of the financing cash flows that

was able to be forecasted was the dividend growth. Dividend growth was forecasted as

a portion of net earnings. As net earnings continued to grow, we felt there would be a

steady increase in dividends of 17.5%. After looking at the previous five year trends

this may seem like a large increase, but SEE continues to attain larger net earnings. As

earnings grow, the firm will be pressured to give larger portions back to shareholders.

Sealed Air 148

SEALED AIR CORPORATION AND SUBSIDIARIESStatem

ent of Cash Flows

(in millions)

20032004

20052006

20072008

20092010

20112012

20132014

20152016

20172018

Cash flows from

operating activities:Net earnings

240.40$

215.60$

255.80$

274.10$

353.00$

377.71$

404.15$

432.44$

462.71$

495.10$

529.76$

566.84$

606.52$

648.98$

694.40$

743.01$

Adjustments to reconcile net earnings to net cash

provided by operating activities:Depreciation and am

ortization154.10

$ 159.60

$ 174.60

$ 168.00

$ 166.30

$ Am

ortization of senior debt related items and other

19.10$

19.90$

3.20$

2.80$

2.50$

Deferred taxes, net2.40

$ 3.20

$ (29.80)

$ (44.70)

$ (28.50)

$ Gain on sale of equity m

ethod investment

-$

10.30$

-$

-$

(35.30)$

Loss on sale of small product line

(23.40)$

(32.70)$

-$

-$

6.80$

Net loss (gain) on disposals of property and33.60

$ 32.20

$ equipm

ent2.30

$ 0.90

$ (1.60)

$ (3.00)

$ 0.10

$ Changes in operating assets and liabilities, net ofeffects of businesses and certain assets acquired:Receivables, net

(20.30)$

(19.10)$

(36.70)$

(7.40)$

(20.90)$

Inventories(11.60)

$ (29.10)

$ (7.00)

$ (33.60)

$ (49.30)

$ Other current assets

(5.40)$

2.40$

5.80$

(4.80)$

(0.90)$

Other assets(2.90)

$ (16.30)

$ (10.90)

$ 5.70

$ (0.20)

$ Accounts payable

9.20$

48.50$

16.70$

15.60$

16.80$

Other current liabilities61.50

$ 40.10

$ (5.10)

$ 56.60

$ (21.10)

$ Other liabilities

10.70$

0.70$

(1.70)$

3.60$

(11.20)$

- - - - - - - - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - Net cash provided by operating activities

469.70$

436.20$

363.30$

432.90$

378.10$

466.51$

497.73$

530.92$

566.21$

603.70$

643.54$

685.84$

730.74$

778.39$

828.94$

882.53$

- - - - - - - - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - Cash flow

s from investing activities:

Capital expenditures for property and equipment

(124.30)$

(102.70)$

(96.90)$

(167.90)$

(210.80)$

Purchases of available-for-sale securities(203.30)

$ (403.00)

$ (339.80)

$ (273.60)

$ (388.30)

$ Sales of available-for-sale securities

136.10$

416.10$

349.80$

283.70$

377.50$

Businesses acquired in purchase transactions, net ofcash and cash equivalents acquired

3.40$

5.00$

(0.20)$

(53.30)$

(32.90)$

Acquisitions of intangible assets-

$ -

$ (43.30)

$ Proceeds from

sale of equity method investm

ent-

$ -

$ 36.00

$ Proceeds from

sales of property and equipment

3.30$

15.60$

1.90$

Other investing activities(2.50)

$ (6.40)

$ (5.10)

$ (7.00)

$ (14.20)

$ - - - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

Net cash used in investing activities(190.60)

$ (91.00)

$ (88.90)

$ (202.50)

$ (274.10)

$ (296.03)

$ (319.71)

$ (345.29)

$ (372.91)

$ (402.74)

$ (434.96)

$ (469.76)

$ (507.34)

$ (547.93)

$ (591.76)

$ (639.10)

$ - - - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

Cash flows from

financing activities:Proceeds from

long-term debt

1,582.00$

20.40$

0.10$

25.80$

1.40$

Payments of long-term

debt(276.70)

$ (237.80)

$ (4.10)

$ (275.40)

$ (5.80)

$ Paym

ent of senior debt issuance costs(19.50)

$ -

$ (1.80)

$ -

$ (0.20)

$ Net proceeds from

(payments of) short-term

borrowings

0.70$

1.60$

1.30$

(2.20)$

15.80$

Repurchases of comm

on stock(116.40)

$ (52.40)

$ (6.80)

$ Dividends paid on com

mon stock

-$

(48.60)$

(64.60)$

(66.10)$

(70.73)$

(75.68)$

(80.97)$

(86.64)$

(92.71)$

(99.20)$

(106.14)$

(113.57)$

(121.52)$

(130.03)$

Proceeds from stock option exercises

2.50$

2.80$

0.70$

- - - - - - - - - - - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - Net cash used in financing activities

(108.90)$

(300.30)$

(118.40)$

(350.00)$

(59.50)$



Sealed Air 149

SEALED AIR CORPORATION AND SUBSIDIARIESCommon Size Statement of Cash Flows

20032004

20052006

20072008

20092010

20112012

20132014

20152016

20172018

Net earnings51%

49%70%

63%93%

81%81%

81%82%

82%82%

83%83%

83%84%

84%Depreciation and amortization

33%37%

48%39%

44%Amortization of senior debt related items and other

4%5%

1%1%

1%Deferred taxes, net

1%1%

-8%-10%

-8%Gain on sale of equity method investment

0%2%

0%0%

-9%Loss on sale of small product line

-5%-7%

0%0%

2%Net loss (gain) on disposals of property and

7%7%

0%0%

0%Changes in operating assets and liabilities, net of

0%0%

0%-1%

0%Receivables, net

-4%-4%

-10%-2%

-6%Inventories

-2%-7%

-2%-8%

-13%Other current assets

-1%1%

2%-1%

0%Other assets

-1%-4%

-3%1%

0%Accounts payable

2%11%

5%4%


13%9%

-1%13%

-6%Other liabilities

2%0%

0%1%

-3%Net cash provided by operating activities

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

Capital expenditures for property and equipment65%

113%109%

83%77%

Purchases of available-for-sale securities107%

443%382%

135%142%

Sales of available-for-sale securities-71%

-457%-393%

-140%-138%

Businesses acquired in purchase transactions, net of-2%

-5%0%

26%12%

Acquisitions of intangible assetsNA

NANA

NA16%

Proceeds from sale of equity method investmentNA

NANA

NA-13%

Proceeds from sales of property and equipmentNA

NA-4%

-8%-1%

Other investing activities1%

7%6%

3%5%

Net cash used in investing activities100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%Proceeds from long-term debt

-1453%-7%

0%-7%

-2%Payments of long-term debt

254%79%

3%79%

10%Payment of senior debt issuance costs

18%NA

2%NA

0%Net proceeds from (payments of) short-term

-1%-1%

-1%1%

-27%Repurchases of common stock

NANA

98%15%

11%Dividends paid on common stock

NANA

NA14%

109%N/A

N/AN/A

N/AN/A

N/AN/A

N/AN/A

N/AN/A

Proceeds from stock option exercisesNA

NA-2%

-1%-1%

Net cash used in financing activities100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%


Sealed Air 150

Restated Statement of Cash Flows:

In relation to SEE’s restated financials, forecasting the statement of cash flows

revised presented the same problems as the stated statement. Our operating cash flow

section started with net earnings. Net earnings on the restated cash flow statement had

decreased in relation to the previously stated earnings. The declines lead us to take a

more conservative approach in our growth for operating activities. The most stable

trend we found when forecasting net earnings was our CFFO/IO. This allowed us to

reach a 7% rate. We applied the same rate of increase to our net cash flow from

operating activities because the net earnings were the only stable and predictable

element to forecast out.

The next step in forecasting the revised statement of cash flows is to analyze the

net cash flow from investing activities. We used an 8% growth rate for our net CFFI

because it was a reasonable estimate among industry average. The lack of stability in

investment ratios eliminated any trend detectable to us, and therefore we analyzed

close competitors such as Pactiv and Bemis to find a suitable growth rate. After we

forecasted our CFFI, we focused on our net cash flow from financing activities on our

restated statement of cash flows. The same inconsistency issue that was presented in

the stated cash flow statement was prevalent in the revised statement as well. Thus,

we were unable to forecast this cash flow due to inability to find relevant information

attaining to this forecast. For example, we even considered and average or industry

average of close competitors. However, growth rates were too unstable and did not

seem accurate enough to forecast for other investors to base assumptions off of. This

led us to the decision of not forecasting this segment. Just as in the stated statement

of cash flows, the only portion of CFFF that was able to be forecasted was dividends.

Forecasted dividends for the revised statements were the same as the stated. Future

dividends are projected to grow at 17.5% of future net earnings.

Sealed Air 151

In conclusion, forecasting the stated statement of cash flows and the revised

statement of cash flows both presented similar problems. However, we feel that the

forecasted values are considered to be the most accurate for the net cash flows of

operating activities since a trend in growth was the most detectable for this segment.

Ratio analysis and industry analysis helped us define our estimates in our forecasting

for the cash flow statements.

Sealed Air 152

SEALED AIR CORPORATION AND SUBSIDIARIESRestated Statem

ent of Cash Flows(in m

illions)2003

20042005

20062007

20082009

20102011

20122013

20142015

20162017

2018Cash flows from

operating activities:Net earnings

(70.40)$

(8.70)$

62.20$

109.60$

218.80$

377.71$

404.15$

432.44$

462.71$

495.10$

529.76$

566.84$

606.52$

648.98$

694.40$

743.01$

Adjustments to reconcile net earnings to net cash

provided by operating activities:Depreciation and am

ortization154.10

$ 159.60

$ 174.60

$ 168.00

$ 166.30

$ Am

ortization of senior debt related items and other

19.10$

19.90$

3.20$

2.80$

2.50$

Deferred taxes, net2.40

$ 3.20

$ (29.80)

$ (44.70)

$ (28.50)

$ Gain on sale of equity m

ethod investment

-$

10.30$

-$

-$

(35.30)$

Loss on sale of small product line

(23.40)$

(32.70)$

-$

-$

6.80$

Net loss (gain) on disposals of property and33.60

$ 32.20

$ equipm

ent2.30

$ 0.90

$ (1.60)

$ (3.00)

$ 0.10

$ Changes in operating assets and liabilities, net ofeffects of businesses and certain assets acquired:Receivables, net

(20.30)$

(19.10)$

(36.70)$

(7.40)$

(20.90)$

Inventories(11.60)

$ (29.10)

$ (7.00)

$ (33.60)

$ (49.30)

$ Other current assets

(5.40)$

2.40$

5.80$

(4.80)$

(0.90)$

Other assets(2.90)

$ (16.30)

$ (10.90)

$ 5.70

$ (0.20)

$ Accounts payable

9.20$

48.50$

16.70$

15.60$

16.80$

Other current liabilities61.50

$ 40.10

$ (5.10)

$ 56.60

$ (21.10)

$ Other liabilities

10.70$

0.70$

(1.70)$

3.60$

(11.20)$

Net cash provided by operating activities $ 158.90

$ 211.90 $ 169.70 $ 268.40 $ 243.90 $ 466.51 $ 497.73 $ 530.92 $ 566.21 $ 603.70 $ 643.54 $ 685.84 $ 730.74 $ 778.39 $ 828.94 $ 882.53 Cash flows from

investing activities:Capital expenditures for property and equipm

ent(124.30)

$ (102.70)

$ (96.90)

$ (167.90)

$ (210.80)

$ Purchases of available-for-sale securities

(203.30)$

(403.00)$

(339.80)$

(273.60)$

(388.30)$

Sales of available-for-sale securities136.10

$ 416.10

$ 349.80

$ 283.70

$ 377.50

$ Businesses acquired in purchase transactions, net ofcash and cash equivalents acquired

3.40$

5.00$

(0.20)$

(53.30)$

(32.90)$

Acquisitions of intangible assets-

$ -

$ (43.30)

$ Proceeds from

sale of equity method investm

ent-

$ -

$ 36.00

$ Proceeds from

sales of property and equipment

3.30$

15.60$

1.90$

Other investing activities(2.50)

$ (6.40)

$ (5.10)

$ (7.00)

$ (14.20)

$ Net cash used in investing activities

(190.60)$

(91.00)$

(88.90)$

(202.50)$

(274.10)$

(296.03)$

(319.71)$

(345.29)$

(372.91)$

(402.74)$

(434.96)$

(469.76)$

(507.34)$

(547.93)$

(591.76)$

(639.10)$

Cash flows from financing activities:

Proceeds from long-term

debt1,582.00

$ 20.40

$ 0.10

$ 25.80

$ 1.40

$ Paym

ents of long-term debt

(276.70)$

(237.80)$

(4.10)$

(275.40)$

(5.80)$

Payment of senior debt issuance costs

(19.50)$

-$

(1.80)$

-$

(0.20)$

Net proceeds from (paym

ents of) short-termborrowings

0.70$

1.60$

1.30$

(2.20)$

15.80$

Repurchases of comm

on stock(116.40)

$ (52.40)

$ (6.80)

$ Dividends paid on com

mon stock

-$

(48.60)$

(64.60)$

(66.10)$

(70.73)$

(75.68)$

(80.97)$

(86.64)$

(92.71)$

(99.20)$

(106.14)$

(113.57)$

(121.52)$

(130.03)$

Proceeds from stock option exercises

2.50$

2.80$

0.70$

Net cash used in financing activities(108.90)

$ (300.30)

$ (118.40)

$ (350.00)

$ (59.50)

$



Sealed Air 153

SEALED AIR CORPORATION AND SUBSIDIARIESRestated Common Size Statement of Cash Flows

20032004

20052006

20072008

20092010

20112012

20132014

20152016

20172018

Net earnings-44%

-4%37%

41%90%

81%81%

81%82%

82%82%

83%83%

83%84%

84%Depreciation and amortization

97%75%

103%63%

68%Amortization of senior debt related items and other

12%9%

2%1%

1%Deferred taxes, net

2%2%

-18%-17%

-12%Gain on sale of equity method investment

0%5%

0%0%

-14%Loss on sale of small product line

-15%-15%

0%0%

3%Net loss (gain) on disposals of property and

1%0%

-1%-1%

0%Changes in operating assets and liabilities, net ofReceivables, net

-13%-9%

-22%-3%

-9%Inventories

-7%-14%

-4%-13%

-20%Other current assets

-3%1%

3%-2%

0%Other assets

-2%-8%

-6%2%

0%Accounts payable

6%23%

10%6%


39%19%

-3%21%

-9%Other liabilities

7%0%

-1%1%

-5%Net cash provided by operating activities

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

Capital expenditures for property and equipment65%

113%109%

83%77%

Purchases of available-for-sale securities107%

443%382%

135%142%

Sales of available-for-sale securities-71%

-457%-393%

-140%-138%

Businesses acquired in purchase transactions, net of-2%

-5%0%

26%12%

Acquisitions of intangible assets0%

0%0%

0%16%

Proceeds from sale of equity method investment0%

0%0%

0%-13%

Proceeds from sales of property and equipment0%

0%-4%

-8%-1%

Other investing activities1%

7%6%

3%5%

Net cash used in investing activities100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%Proceeds from long-term debt

-1453%-7%

0%-7%

-2%Payments of long-term debt

254%79%

3%79%

10%Payment of senior debt issuance costs

18%0%

2%0%

0%Net proceeds from (payments of) short-term

-1%-1%

-1%1%

-27%Repurchases of common stock

0%0%

98%15%

11%Dividends paid on common stock

0%0%

0%14%

109%N/A

N/AN/A

N/AN/A

N/AN/A

N/AN/A

N/AN/A

Proceeds from stock option exercises0%

0%-2%

-1%-1%

Net cash used in financing activities100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%100%

100%


Sealed Air 154

Forecasting conclusion:

After forecasting the income statement, balance sheet, and statement of cash

flows analyst are able see where a firm is headed in terms of profitability, asset values,

and capital fluctuations. In references to Sealed Air’s forecast, there is a steady increase

in profits margins and net earnings. Sales growth was the basis for our forecast

valuations. According to our predictions sales will increase at a conservative 8% per

year. However there are concerns that current commodity market trends will continue

causing the cost of goods sold to increase at a rate of 8.5%. It is important for Sealed

Air investors to take this into consideration as most plastic packaging products are

created from petroleum derivatives. As the cost of oil increases as the global market

competition expands sales prices will need to increase to counteract these price hikes.

Although this may cause distress to some investors, Sealed Air’s current strong financial

position in the packaging industry will allow this rise in commodity prices to not be

detrimental in its net earnings. In comparison to other analysis forecast, such as yahoo

finance, our predictions differ slightly but seem to have a most conservative take on all

aspects, i.e. sales, cogs, expenses, and operating cash flows. Overall forecasting is

more of an art than predictive science, but the forecast stated previously of all three

financial statements reflect an accurate picture of what we feel will be congruent with

industry standards.

Valuation Analysis Methods of Comparables

The methods of comparables are ratios used by some analysts to help determine

if a firm is overvalued or undervalued. They measure value based on the relative

comparability to the industry average. The only true benefit of using methods of

comparables is that they are quick and easy to implement. However, they are not

grounded in theory and often produce inconsistent results. The data is simply calculated

with little room for interpretation. These comparables were used to suggest if Sealed Air

Sealed Air 155

was overvalued, undervalued, or fairly valued, based on the share price falling within

20% of the actual published share price. Sealed Air’s published share price on June 1,

2008 was $24.36, thus our 20% margin of safety lies between $19.49 and $29.23.

Price/Earnings Trailing:

Trailing P/E

Net Income

12/31/07 # of shares outstanding

Price 6/1/2008 P/E Computed Price

Sealed Air 353 161.63 $ 28.96 Sealed Air Revised 218.8 161.63 $ 17.95 PTV 245 130.79 $ 23.75 12.68 GEF 156.368 23.90 $ 64.50 9.86 PKG 170.066 103.81 $ 26.04 15.90 BMS 181.554 99.65 $ 26.60 14.60 average 13.26

The price to earnings trailing ratio is a very popular ratio seen on the main

summary of a stock on many financial websites, such as yahoo. Although it is often

used, there is little theory to support this ratio. Trailing P/E uses earnings per share of

pervious years and prices of upcoming years. The pull in different directions of this ratio

makes it less useful in the long run to value a security. A better alternative to this

problem would be to use a forecasted P/E, where both elements of the ratio are

forward looking. The P/E trailing ratio is computed dividing the price per share by the

net earnings per share. The net earnings per share are calculated by dividing net

income from the previous year by the total number of shares outstanding. There are

no serious outliers in the industry, so we are able to use all four competitors to get an

average P/E trailing ratio for the packaging industry of 13.26. We then set Sealed Air’s

P/E trailing to 13.26 and the earning per share to 2.18 (net income/# of shares

Sealed Air 156

outstanding). With these two numbers in the equation, it allows us to compute for the

price per share according to the industry average P/E trailing. The computed price is

$28.96, which infers that our stock is fairly valued. The restatement of our financials

causes Sealed Air’s earning per share to decrease to 1.35. This causes our computed

stock price to drop to $17.95. This shows that when Sealed Air’s financials are

restated, then our company appears overvalued. Now, we will use further comparables

to check the relevance of this ratio.

Price/Earnings Forecast:

Forecasted P/E

Forecasted EPS Price 6/1/2008 P/E Computed Price

Sealed Air 2.34 $ 30.98 Sealed Air Revised 2.34 $ 30.98 PTV 1.87 $ 23.75 12.68 GEF 6.54 $ 64.50 9.86 PKG 1.64 $ 26.04 15.90 BMS 1.82 $ 26.60 14.60 average 13.26

The next comparable used was the forecasted price to earnings ratio. This is

very similar to the previous comparable (P/E trailing), except that we use the forecasted

earnings per share instead of the last years earning per share. The benefit of this ratio

is that is incorporates two concurrent forward looking elements. We calculated the

forecasted earnings per share for Sealed Air by taking the forecasted net income

divided by the total number of shares outstanding. Once we calculated this number,

we multiplied it by the industry’s average forecasted P/E to get a price per share of

$30.98. According to the set stock price of SEE at June 1, 2008 of $24.36 there was a

20% margin of differences in price. With this significant drop in price we can conclude

that Sealed Air is undervalued. The restated version of our forecasted P/E does not

change because we would expect Sealed Air to stop impairing goodwill since it has

Sealed Air 157

reached an acceptable percentage of total asset value. Thus, SEE would return to their

normal percentage of net earnings in the future. This comparable can be more useful

in valuing a company for analysis purposes because it bases price and earnings off of

future forecast.

Price/Book:

P/B Comparables

Company PPS BPS P/B Industry Avg. SEE PPS

Sealed Air 24.36 12.5 1.95 2.66 33.24

Sealed Air (restated) 24.36 3.63 6.71 2.66 9.65

Pactiv 24.57 9.24 2.66

Bemis 26.57 13.46 1.97

Packaging Co. 22.08 7.24 3.05

Greif 64.5 21.83 2.95

The price to book ratio is used to compare a stock's market value to its book

value. It is calculated by dividing the current price per share (PPS) by the current book

value of equity per share (BPS). Additionally, the BPS is calculated by dividing the book

value of equity by the number of shares of common stock outstanding. After

determining the P/B ratios for each firm, we took the industry average, excluding

Sealed Air, and multiplied that average by SEE’s book value of equity per share. This

gave us a price per share of $33.24 for Sealed Air. According to the price to book ratio,

Sealed Air is under-valued in the market because their current share price of $24.36 is

much less than the price we computed from P/B ratio industry average. However, after

restatement SEE’s comparable price plummeted to $9.65. This occurred because of the

drastic decrease in the firm’s book value of equity after restatement.

Sealed Air 158

Price Earnings Growth (P.E.G.):

P.E.G. Comparable

Company P/E Growth P.E.G. Industry Avg.

Sealed Air PPS

Sealed Air .94 14.37Sealed Air Restated .94 8.91Pactiv 12.83 10.5 1.22 Greif 16.86 18.67 0.90 Package Co. of America N/A N/A N/A Bemis 13.41 9.33 0.70 7% Growth assumed for Sealed Air

Another method of comparables is the price earnings growth model (PEG), it

uses our previously calculated earnings per share and our forecasted growth in

earnings. This model helps us assess an appropriate stock price according to the price

per earnings and the future growth of the earnings. Around one is a logical and

consistent PEG value. The packaging industry calculated was very close to one at .94.

This average was found by divided the P/E ratio for each competitor in the industry by

their expected 5 year growth. There were no outliers in the industry, but Package

Corporation of America lacked sufficient information to compute this ratio.

Next, since we have the industry average we can plug it into our PEG model and

get a price per share for Sealed Air. The value that was established was $14.37 per

share. This is a value lower than our current market price and our previously valued

P/E models. This price is approximately 60% of the stated market price. The restated

price per share changes to $8.91 due to the decrease in earnings per share. This

means that in Sealed Air’s as stated and restated financials state that they are

overvalued according to this model.

Sealed Air 159

Price/EBITDA:

Price over EBITDA is calculated by taking the current market capitalization rate

and dividing that by EBITDA, which stands for earnings before interest, taxes,

depreciation, and amortization. The current market capitalization is found by multiplying

the company’s price per share (PPS) and their number of shares outstanding. We found

the PPS, number of shares outstanding, and the analysts’ opinion of EBITDA on Yahoo

Finance for Sealed Air’s competitors. We found the number for Sealed Air in their 10-K.

First we calculated the current market capitalization rate and the P/EBITDA ratio

for all the firms. Next, we took the industry average of the ratio, excluding Sealed Air.

Then we took the industry average and multiplied that with Sealed Air’s PPS; and

divided that number by their number of shares outstanding to bring it back to a final

per share number. This ratio had Sealed Air’s PPS as $21.79, with the market PPS being

$24.36. In conclusion, this ratio suggests that Sealed Air is fairly valued because it lies

within the 20% margin of error.

EV/EBITDA:

Enterprise value over earnings before interest, tax, depreciation, and

amortization is one of the most widely used comparable ratios to value firms. The

benefit to using this ratio instead of a price to earnings ratio is that it ignores the capital

structure of a firm. The value of debt can often obscure an investor’s perception of a

company, but by using the EV/EBITDA comparable investors are looking at the debt

free value of a firm to the earnings before interest on debt.

To calculate EV/EBITDA, the first step is to compute the enterprise value of the

firm. Enterprise value is composed of the market value of equity plus the book value of

liabilities minus cash and investments (short term and long term). The next step is the

compute EBITDA. Earnings before interest, tax, depreciation, and amortization is

computed by taking revenues minus expenses excluding tax, interest, depreciation and

amortization. Once both variables have been computed EV is divided by EBITDA. For

our valuations, we took averages from each of our competitors (PKG, GEF, BMS, and

Sealed Air 160

PTV). Once we were able to compute SEE and competitors EV/EBITDA we were able to

compute an estimated price per share. The estimated price using this model for Sealed

Air was $41.03. Although this value is much higher than our observed share price of

$24.63, it is due to the lack of debt associated with this ratio.

In order to have the most accurate value for our EV/EBITDA ratio, we chose to

computer a restated version that excluded goodwill. In order to have a bench mark for

this, we computed the same ratio for SEE’s competitors as well. Goodwill was

subtracted from the end balance of enterprise value for each company. We used SEE,

GEF, PKG, BMS, and PTV’s 10-K to find the balance of goodwill as stated in 2007 for

each company, to subtract for each enterprise value. When computing these restated

values it was difficult to create a bench mark since some companies such as PKG, and

BMS has low values of goodwill on their books compared to SEE and PTV. The

computed share price for the comparable was substantially lower for the restated

version, giving us a price of $16.69. We believe that the large differences in estimated

share price for these are because SEE has over 30% of asset value consisting of

goodwill on their 2007 balance sheet.

In conclusion EV/EBITDA is an important comparable because it looks at firms in

a debt free perspective. If investors feel that not including debt as part of the value of a

firm then this model, to a degree, will accurately reflect an estimated share price of a

firm. However, in relation to SEE we felt that the large spread between the stated and

restated versions of this comparable left too much room for discretion and was not a

truly accurate picture of share price.

EV/EBITDA

Company EV ($ BIL) EBITDA ($ BIL) EV/EBITDA Industry Average Comparable SEE 2.95 0.50 5.88 41.03

PKG 2.77 0.45 6.17 7.02

GEF 3.55 0.42 8.51

PTV 4.31 0.64 6.76

BMS 3.00 0.45 6.64

Sealed Air 161

EV/EBITDA ‐ GOODWILL

Company EV ($BIL) EBITDA ($BIL) EV/EBITDA Industry Average Comparable SEE 0.98 0.50 1.95 16.69

PKG 2.73 0.45 6.09 5.88

GEF 3.01 0.42 7.22

PTV 3.19 0.64 4.99

BMS 2.35 0.45 5.20

Price to Free Cash Flows:

Another method to estimate the market price per share is the price to free cash

flows ratio. This calculation measures how well a company’s free cash flows can support

its equity value. To calculate this estimate, we first find the market cap for Sealed Air

and its competitors by taking the price per share and multiplying that amount by the

number of shares outstanding. Once we determine the market cap, we divide that

amount by the firm’s respective free cash flows. Free cash flows are calculated by

taking the cash flows from operations and adding/subtracting the cash flows from

investing activities. Once we figured the entire price to free cash flows, we find an

industry average by taking the average of Sealed Air’s competitors. In this valuation, we

had to ignore both Pactiv and Greif since they had negative free cash flows.

Price to Free Cash Flows

Market Cap FCF P/FCF Industry Average P/FCF per share

SEE $ 4,132.80 104 39.74 11.68 $ 7.52 SEE revised $ 3,740.05 ‐30.2 ‐123.84 N/A BMS $ 2,647.70 238.42 11.11 PTV $ 3,213.51 ‐1228 ‐2.62 outlier GEF $ 1,541.55 ‐83.32 ‐18.50 outlier PKG $ 2,292.12 186.96 12.26 *market cap and free cash flows in millions

Sealed Air 162

We found the industry average to be 11.68, which we then multiplied by the

market cap of Sealed Air. After we divided that amount by the number of shares

outstanding, we found a price to free cash flow of $7.52 per share. This number is

obviously far below the quoted price of $24.36, which would imply that the current

market price for Sealed Air is a gross overestimation of the true economic value of the

firm.

Dividends/Price:

D/P Comparables

Company DPS PPS D/P Industry Avg SEE PPS

Sealed Air 0.4 25.57 0.016 0.038 10.46

Pactiv N/A 24.57 N/A

Bemis 0.84 26.57 0.032

Packaging Co. 1.05 22.08 0.048

Greif 2.29 64.5 0.036

The dividend to price ratio is another method of comparables. Since Sealed Air

pays dividends, we are able to compute this ratio. The D/P is calculated by taking a

firm’s dividend per share over the price per share. After we calculated each firm’s D/P,

we took an average of the industry (excluding Pactiv since they did not pay dividends).

The next step was to take Sealed Air’s DPS of 0.4 and divide it by the average that we

computed to give us the suggested share price for the D/P model. Since $10.46 falls

well outside of our 20% error tolerance, we determined from this model that Sealed Air

is overvalued. Our restated figures also gave us the same share price because the

impairment of goodwill did not have any impact on future dividends.

Sealed Air 163

Conclusion:

Due to the unreliable nature of these comparables, it is difficult to determine an

accurate conclusion for Sealed Air. These numbers leave no room for analysts’ opinions

which are a heavily weighted part of the valuation process. Collectively, the ratios

suggested that SEE was both overvalued and undervalued, and sometimes restating the

figures caused the discrepancy. As previously stated, these ratios are not supported by

financial theory and must exclude outliers to capture a realistic look at an industry.

However, we can now focus on the intrinsic models to give us a better indication of

Sealed Air’s true value.

Intrinsic Valuation Models

Unlike the methods of comparables, the intrinsic valuation models include more

theory based assumptions and the results can be more easily interpreted. They include

the dividend discount model, discounted free cash flow model, residual income model,

abnormal earnings growth model, and the long-run residual income model. We can

value Sealed Air by forecasting different components such as future dividends, free cash

flows, and net earnings. Sensitivity analysis will show the changes in our estimated

price per share by tweaking growth rates (both positive and negative), WACC, and cost

of equity. These models should provide us with more accurate information for valuing

Sealed Air.

Discounted Dividend Model:

The discounted dividend model, overall, has the lowest explanatory power out of

all the intrinsic valuation models. This is because it is nearly impossible to value a

company based on their forecasted future dividends. Dividends, which first and

foremost change in a step ladder fashion, are very extremely hard to forecast numerous

years down the line with any reasonable accuracy. Also, most stockholders do not

Sealed Air 164

Ke 0.00 0.02 0.04 0.06 0.088.07% 6.87$ 7.64$ 8.84$ 11.00$ 15.96$ 9.07% 6.47$ 7.18$ 8.00$ 10.28$ 14.87$

10.07% 6.10$ 6.75$ 7.78$ 9.62$ 13.86$ 11.07% 5.75$ 6.36$ 7.31$ 8.81$ 12.94$ 12.07% 5.44$ 6.00$ 6.88$ 8.45$ 12.09$ 13.07% 5.14$ 5.66$ 6.48$ 7.94$ 11.31$ 14.07% 4.87$ 5.35$ 6.11$ 7.47$ 10.59$

Discounted Dividends ModelGrowth Rate

Overvalued < $19.43 Undervalued > $29.23$19.43 < Fairly Vauled > $29.23

purchase a certain stock over another based on the dividends because the payback

period for any dividend is way too long to matter. Another reason this model has low

explanatory power is that we are assuming the profitability of the company will go on

for an indefinite amount of time, where in real life, the company could be bankrupt

within the year.

To calculate the value of Sealed Air’s stock using this model, first we took the

forecasted dividends per share from Sealed Air’s statement of cash flows, which were

found by taking 17.5% of that year’s net earnings. Then we discounted these dividends

back to the present valued, using Ke as the discount rate, and calculated the sum,

which was $2.87. Once we had the present value of year by year dividends per share,

we then calculated the present value of the terminal value perpetuity, which starts in

year 2016. We also discounted this number back to present value. The present value of

the terminal perpetuity for Sealed Air was $2.64. Once we had this, we found the model

price of dividends per share to be 5.51 (PV YAY Dividends + TV Perp.). Next, we found

the time consistent price by taking the future value of the initial share price. Using a Ke

11.07%of and 0% growth rate, we found Sealed Air’s time consistent share price to be

$5.75.

The chart above shows the sensitivity analysis of the discounted dividends

model. By using a Ke 11.07% of and growth rate of 0%, we found that Sealed Air is an

undervalued company. Because of the effect that growth rates have on the terminal

Sealed Air 165

value perpetuity, the dividends are somewhat sensitive to growth rates. However, even

with the low explanatory power of this model, it suggests that Sealed Air is an

undervalued company.

Discounted Free Cash Flows Model:

The discounted free cash flows model is a valuation method used to establish

an intrinsic value for the firm’s equity. However, through sensitivity analysis we can

conclude that this particular model does not provide the most useful or accurate

valuation. The model is based on both the present value of the forecasted cash flows,

and the present value of the continuing perpetuity. We find the present values of the

continuing perpetuity by using the weighted average cost of capital before tax

(WACCBT) as the discount rate. WACCBT is used because net income is already taxed

and included in the cash flow from operations, thus avoiding double taxation. The

present value of forecasted cash flows is simply calculated by subtracting the estimated

cash flow from investing activities (CFFI) from the estimated cash flow of operations

(CFFO). In order to make these cash flows time consistent we next multiply each year-

by-year cash flow by its individual present value factor. The present value factors are

derived by taking 1 divided by one plus the WACC, raised to the number of years out

the free cash flow occurred. This calculation gives us the value of equity over the ten

year period.

When using a WACCBT of 7.1% and a 0% growth rate, we calculated our total

present value of year-by year cash flows to be $2195.62 million. The next step was to

add the present value of the terminal value perpetuity. The perpetuity starts in the year

2018, so we have to discount it back to get the value in December 31, 2007 dollars. In

order to achieve this, we have to multiply the present value of the perpetuity by the

present value factor in 2017. When using a WACCBT of 7.10% and a 0% growth rate,

we found the present value of the terminal value perpetuity to be $3466.98 million.

These two calculations added together represent the total present value of free cash

flows to the firm ($5662.59).

Sealed Air 166

This model also includes the forecasted book value of liabilities. The market

value of equity is found by taking the present value of the firm’s assets and subtracting

the market value of liabilities. We can then take this number and divide it by the total

number of shares outstanding to calculate an estimated price per share. Sealed Air’s

market value of liabilities was $3,418.70, which was subtracted from the total present

value of the firm’s assets, giving us an estimated market value of equity of $2,243.89.

After dividing this number by the shares outstanding, we calculated our share price to

be $13.88. The final step was to take the future value of the share price and formulate

the time consistent price as of June 1, 2008. This generated a time consistent share

price of $14.29.

FCF Growth Model

Growth Rate

WACC(BT) 0 0.02 0.04 0.06 0.08

0.041 45.45 93.81 2076.77

0.051 30.89 54.82 165.81

0.061 21.19 34.95 74.93 1714.27

0.071 14.29 22.94 42.77 134.68

0.081 9.14 14.92 26.34 59.52 1419.59

0.091 5.18 9.21 16.40 32.88 109.27

0.101 2.03 4.94 9.75 19.25 46.87

Overvalued < $19.49 Fairly Valued *20% of Observed Price (white)

Undervalued > $29.23

*Observed Price $24.36

Sealed Air 167

FCF Growth Model (restated)

Growth Rate

WACC(BT) 0 0.02 0.04 0.06 0.08

0.041 45.19 93.29 2065.21

0.051 30.71 54.52 164.89

0.061 21.07 34.76 74.52 1704.73

0.071 14.21 22.81 42.53 133.93

0.081 9.09 14.84 26.2 59.19 1411.7

0.091 5.15 9.16 16.31 32.69 108.66

0.101 2.02 4.91 9.69 19.15 46.61

Overvalued < $19.49 Fairly Valued *20% of Observed Price (white)


*Observed Price $24.36

The chart above shows the sensitivity analysis for the discounted free cash flows

model. Our initial estimated share price using a WACCBT of 7.10% and a 0% growth

rate yielded us a price of $14.29, which suggests Sealed Air is overvalued. Our restated

chart, using a restated WACC of 5.86%, gave us very similar prices, and there was not

any fluctuation in the classifications for each combination (undervalued, overvalued,

etc.). The charts portray some of the pitfalls in using this valuation model. The model is

extremely sensitive to changes in growth rates because of the effect it has on the

terminal value perpetuity. Most of the prices are unreasonable and make it difficult to

place any significant emphasis on the results. Also, we see that our price per share is

fairly sensitive to changes in WACCBT. An increase in WACCBT from 4.1% to 10.1%

caused the price to drop from $45.45 to $2.03, respectively. Additionally, a firm’s CFFO

and CFFI are some of the toughest numbers to forecast and are less accurate than the

other intrinsic valuation models. This creates more variability and uncertainty for this

particular model.

Sealed Air 168

Overall, the discounted free cash flows model suggests that Sealed Air is overvalued.

This model is flawed because of the over-sensitivity to growth rates, and the difficulty

of forecasting accurate future cash flows. The model has low explanatory power and

therefore will have a minimal influence on our final valuation process

Residual Income:

When estimating the true economic value of a firm’s equity, the residual income

model is perhaps the best valuation tool available. The main reason this model is more

reliable is the fact that it is less sensitive to changes in the terminal value perpetuity

growth rate; thus focusing more attention to the firm’s book value of equity and the

present value of the company’s annual residual income. The residual income model is

even less sensitive to changes in the cost of equity relative to the discounted dividends

or free cash flows models. This valuation model also has a 50% explanatory power, far

exceeding the other models such as the free cash flows (10 -15%) and the discounted

dividends (5%). Perhaps the only potential flaw within this model is the fact that the

initial book value of equity is an accounting assumption made by the firm’s managers.

The first step in the residual income model is to find the book value of equity in

the base year of 2007, which was found on the most recent 10-K’s balance sheet. Next,

we posted both the forecasted net income and total dividend payout. Then, we simply

added the difference between net income and dividends, to the previous year’s book

value of equity to get the next year’s equity. Then we found the benchmark income

estimate by taking the new equity value and multiplying it by the firm’s cost of equity.

Once this figure is found for all 10 years, we then find the annual residual income by

taking the difference between the forecasted net earnings and the benchmark income.

Once all of these numbers have been calculated, we then put them all in current years’

dollars by multiplying each figure by its corresponding present value factor (1+Ke)time .

We then take the sum of all the years’ residual income and add it to both the base

year’s book value of equity and the terminal value of the perpetuity.

Sealed Air 169

To find the terminal value of the perpetuity, we made an estimate of the ending

year’s (2018) residual income by making the figure 85% of the previous year’s residual

income. Once that was found, we then divided that amount by the difference between

the cost of equity and the growth rate. It is important to note that changes in the

growth rate are negative values. The reason this is done is because in equilibrium

theory, all residual income reverts back to zero over a long enough time period,

meaning that residual income and the growth rate are inversely related.

After the initial value equity is added to the total residual incomes (including the

terminal value of perpetuity), we then get a new market value of equity. Once this

amount is divided by the number of shares outstanding, we now have an estimate for

the price per share according to the residual income model. However, this price is in

December 31, 2007 monetary terms. To get a time consistent price on the day of our

valuation (June 1, 2008), we must multiply the year end model price by (1 + Ke)(5/12).

After the adjustments have been made to the model price, we can then compare the

calculated price to the observed market share price on June 1st, 2008, which was

$24.36. By using a 20% margin of acceptance, any model figure below $19.49 indicated

that the current market price is overvalued. Likewise, any model price that was over

$29.23 predicted that the firm was undervalued. Obviously, any model price that fell in

between the two ranges of $19.49 and $29.23 indicated that the current share price is

accurately priced at fair value. It is also important to point out that the only difference

between the original residual income model and the one after restatement is the fact

that the original book value of equity is $2.0196 billion while the initial book value of

equity after the restatement (impairment of goodwill) is just a mere $586.7 million. All

of the forecasted net earnings and dividends are unaffected by the adjustment to total

assets.

Before Adjustments

Sensitivity Analysis Residual Income Model Growth Rate

Ke 0% -10% -20% -30% -40% -50%

Sealed Air 170

6.00% $ 44.03 $ 33.08 $ 30.56 $ 29.43 $ 28.80 $ 28.39 8.00% $ 29.83 $ 25.74 $ 24.57 $ 24.02 $ 23.70 $ 23.48

10.00% $ 21.64 $ 20.38 $ 19.96 $ 19.75 $ 19.63 $ 19.54 11.07% $ 18.58 $ 18.10 $ 17.94 $ 17.85 $ 17.80 $ 17.76 12.00% $ 16.41 $ 16.39 $ 16.38 $ 16.37 $ 16.37 $ 16.36 14.00% $ 12.86 $ 13.35 $ 13.56 $ 13.67 $ 13.74 $ 13.78 Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23

Observed Price $24.36

After Restatement

Sensitivity Analysis Residual Income Model Growth Rate

Ke 0% -10% -20% -30% -40% -50% 6% $ 43.27 $ 29.63 $ 26.48 $ 25.08 $ 24.29 $ 23.78 8% $ 29.20 $ 23.10 $ 21.36 $ 20.54 $ 20.06 $ 19.74

10% $ 21.11 $ 18.34 $ 17.41 $ 16.95 $ 16.68 $ 16.49 11.07% $ 18.09 $ 16.31 $ 15.68 $ 15.35 $ 15.15 $ 15.02

12% $ 15.97 $ 14.78 $ 14.34 $ 14.10 $ 13.96 $ 13.86 14% $ 12.48 $ 12.08 $ 11.91 $ 11.82 $ 11.77 $ 11.73

Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23 Observed Price $24.36

By looking at the residual income tables, we can see the year by year present

value of residual income is creating value at a decreasing rate. The reason the residual

income decreases more and more each year is because most companies cannot sustain

consistent abnormal profits. It is also apparent that the readjustment of total assets had

very little effect on this model.

By closely examining the sensitivity analysis, we can see that a majority of the

figures point to the firm being overvalued. Only at an impossible 6% could this firm be

seen as a potentially undervalued investment. Perhaps the most important fact is that

our estimated cost of equity of 11.07% was consistently in the overvalued range; thus

indicating that Sealed Air is not meeting market expectations.

Sealed Air 171

Abnormal Earnings Growth Model (A.E.G.):

AEG Model Ke Growth Rate

0.00% -

5.00% -

10.00%-

20.00%-

30.00%-

40.00% -50.00% 6.00% 52.05 49.27 47.81 46.30 45.52 45.05 44.73 8.00% 29.9 29.55 29.37 29.18 29.08 29.02 28.98

10.00% 17.35 18.1 18.5 18.91 19.12 19.25 19.34 11.07% 13.29 14.35 14.91 15.49 15.78 15.96 16.08 12.00% 10.17 11.44 12.1 12.79 13.14 13.36 13.5 14.00% 5.86 7.34 8.11 8.92 9.33 9.58 9.75 Overvalued P<19.49 Undervalued P>29.23 Fair Value is 20% observed share price

AEG Model Restated Ke Growth Rate

0.00% -

5.00% -

10.00%-

20.00%-

30.00%-

40.00% ‐50.00%

6.00% 52.74 49.96 48.50 46.99 46.21 45.74 45.42

8.00% 29.40 29.05 28.87 28.68 28.58 28.52 28.48

10.00% 17.21 17.97 18.36 18.77 18.99 19.11 19.20

11.07% 13.04 14.12 14.69 15.28 15.58 15.76 15.88

12.00% 10.27 11.54 12.20 12.89 13.24 13.46 13.60

14.00% 6.12 7.60 8.37 9.18 9.59 9.84 10.01

Overvalued P<19.49

Undervalued P>29.23

Fair Value is 20% observed share

price

The abnormal earnings growth model (A.E.G.) model is based off of accounting

numbers. Abnormal earnings are calculated by adding forecasted net earnings to the

dividend reinvestment earnings, which gives us the cumulative dividend net income.

From the cumulative dividend net income number we will subtract out our normal or

Sealed Air 172

benchmark income to give us our A.E.G. for the year. The dividend reinvestment

(DRIP) is calculated by multiplying the dividend by cost of equity. The DRIP is based

on the assumption that a investor will reinvest dividends and get returns equal to that

of the cost of equity (11.07%). The benchmark or normal income is calculated by

taking the previous year’s net income and increasing it by the cost of equity amount.

Next, after we establish our A.E.G., we need to discount back the appropriate

number of years using our cost of equity of 11.07%. Once values have been put into

present value terms then they are added together to get equal total A.E.G. for your

annual calculations. The other section of A.E.G. that must be accounted for is the value

of the A.E.G. perpetuity. We first calculated the value of the perpetuity and then

discounted it back. The present value of the perpetuity added to the sum of our annual

A.E.G. will give us the total adjusted earnings. Adjusted earnings can be divided by the

capitalization rate to give us our market value of equity that was established by this

model. This market value of equity is given in total dollars, so we must then divide by

our number of shares outstanding (161,627,030 shares) to give us a price per share. To

put our numbers in time consistent bases, we must multiply our share price times one

plus our cost of equity to the 5/12 power. As seen in the table above, the majority of

our prices show that our current price is overvalued.

Last, a way to check that we have run our A.E.G. valuation model correct is to

compare it to our residual income model. The A.E.G. for the year by year should be

equal to the change in your residual income from year to year. As you can see from the

table below, Sealed Air’s forecasted change in residual income was equal to the year by

year value of the A.E.G..

A.E.G. vs. Change in Residual Income Annual AEG -8.06 -8.62 -9.22 -9.87 -10.56 -11.30 -12.09 -12.94 -13.84Change in RI -8.06 -8.62 -9.22 -9.87 -10.56 -11.30 -12.09 -12.94 -13.84

Sealed Air 173

Long Run Residual Income Valuation Model:

The long run residual income model differs only slightly from the previous stated

residual income model. The most noticeable difference is the replacement of earnings

over dividends. Earnings have a smoother growth over time compared to stair stepping

dividend payments and thus, a better ability to be predicted in the long run. This model

is used less frequently because of its high level of sensitivity to changes in return on

equity, growth rates, and cost of equity.

To compute the long run residual income valuation model, the following formula

is used.

MVE0= BVE0 + BVE0 [(ROE-ke)/(ke-g)]

To forecast this model appropriately we took an average of our return on equity over

the next ten years (from our forecasting). This average was 13.64%. We used our

computed Ke of 11.07% from our capital asset pricing model for this valuation. The

growth rate that we used was an average 7%. Once our formula was computed, we

found our time consistent share price to be $21.03. Then sensitivity analysis was run on

our price by changing the ROE, growth rates, and cost of equity.

LR RI Model Growth KE 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%

8.07% 36.76 48.21 81.06 1052.57 9.07% 27.73 32.51 41.90 68.86 866.05

10.07% 22.26 24.52 28.25 35.59 56.66 679.53 11.07% 18.59 19.68 21.31 24.00 29.29 44.46 12.07% 15.96 16.44 17.11 18.10 19.75 22.98 13.07% 13.98 14.11 14.29 14.53 14.90 15.49

ROE held constant at 13.64% Overvalued P<19.49 Undervalued P>29.23 Fair Value is 20% observed share price

Sealed Air 174

ROE

KE 0.13 0.14 0.15 0.16 0.17 0.18

7.07% 1044.51 1231.03 1417.55 1604.07 1790.59 1977.11

8.07% 68.33 80.53 92.74 104.94 117.14 129.34

9.07% 35.32 41.63 47.94 54.24 60.55 66.86

10.07% 23.82 28.07 32.32 36.57 40.83 45.08

11.07% 17.96 21.17 24.38 27.59 30.80 34.00

12.07% 14.42 17.00 19.57 22.15 24.72 27.30

Growth Held Constant at 7%

Overvalued P<19.49

Undervalued P>29.23

Fair Value is 20% observed share price

ROE

Growth 12.60% 13.60% 14.60% 15.60% 16.60% 17.60%

5.00% 16.347 18.498 20.649 22.8 24.9512 27.1022

6.00% 16.996 19.572 22.147 24.722 27.2974 29.8726

7.00% 17.965 21.173 24.38 27.588 30.7964 34.0043

8.00% 19.563 23.816 28.069 32.322 36.5749 40.8278

9.00% 22.707 29.014 35.322 41.629 47.9365 54.2439

10.00% 31.726 43.928 56.13 68.332 80.5347 92.7369

Cost of Equity Held Constant at 11.07%

Overvalued P<19.49

Undervalued P>29.23

Fair Value is 20% observed share price

Sealed Air 175

It was necessary to compute this valuation model using our restated financials in

order to have an accurate picture of the impact of changes in both earnings and equity

values. The computation was performed in the same manner as with the stated

financials. The changes made on the restated version of this model included an initial

change to earnings in 2007, but the following earnings were consistent to the stated

forecast. The reason for this small differentiation is because we felt that we were

aggressive enough to lower goodwill to a small enough percentage of assets that

impairment would not further be needed thereafter. Although, this one small change to

earnings did have a large impact on both our beginning and ending book values of

equity through the model. This in turn led to a much larger return on equity average.

The restated average return on equity was 26.5%. Growth and cost of equity for the

restated version of this model stayed constant as there was no need to change them in

references to restated financials. The computed time consistent value for our restated

long run residual income model was $18.17. The differences in these prices seem

reasonable in comparison to both the dollar and percentage amounts. There for, we

feel that the long run residual income model (both stated and restated), gives an

accurate reflection of share price for Sealed Air.

Analyst Recommendation

After extensive research and careful critical analysis, it is our opinion that the

Sealed Air Corporation is an overvalued firm. Our conclusion was derived from a

comprehensive assessment of the firm’s industry characteristics, accounting policies,

and financial analysis. It was from those observations on the company’s industry,

accounting, and financial structure that we were able to forecast out Sealed Air’s

financial statements from the years 2008 to 2017. From those forecasted financial

statements we then implemented intrinsic valuation models to determine a “true”

economic value of the firm. After calculating the intrinsic value and carefully considering

the overall performance of the firm, we believe that the company does not meet its

Sealed Air 176

market expectations and therefore we suggest that shareholders sell their stock in

Sealed Air.

In order to find the true economic value of a firm, we must first understand the

company’s business environment. By looking at the packaging and container industry as

a whole, we see that the main competitors of Sealed Air were Pactiv, Bemis, Greif, and

the Packaging Corporation of America. It is these same competitors that we use as a

benchmark to gauge the level of performance of Sealed Air. By further analysis, we can

tell that the industry has been experiencing modest levels of growth and that it follows

a cost leadership business strategy. Low concentration of competitors, high economies

of scale and scope, simpler product designs, low differentiation of products, and little

excess capacity have all been classified as key success factors for the packaging and

container industry. These identified key factors were significant when we conducted the

accounting, financial, and prospective analysis.

When performing an accounting analysis, we must look at the key accounting

policies of the firm and measure the degree of disclosure. Operating leases, pension

plans, research and development, goodwill and currency exchanges are all key

accounting factors that are critical to look at since most of those figures are made by a

firm’s management. Given that managers of the firm have an incentive to distort

numbers and artificially increase earnings, we must discount any deceptive accounting

assumptions made by management and undo potential red flags that can overinflate

the true economic value of the firm. It was goodwill that proved to be Sealed Air’s

crucial red flag since it had maintained its level of 40% of total assets the past five

years, and had never been impaired during that time. After writing off a considerable

portion of their goodwill, we then went back and restated the original five years of

financial statements and all of the forecasted information as well. Throughout both the

financial analysis and the valuation methods, we can see ratios and margins listed in

both unadjusted and readjusted terms.

After we had a firm understanding of the key success factors and the key

accounting policies, we then focused our attention to the operating performance of the

Sealed Air 177

company. To effectively measure the company’s performance, we computed numbers

and ratios that use key financial statement line items as their inputs. These figures

measure liquidity, profitability, capital structure, and firm growth. Once a number was

given, we then interpreted the results and compared it to the industry averages.

Overall, Sealed Air performed either on par or above industry average in the matters of

profitability and liquidity; however, they managed to lag behind in the management of

their capital structure.

Perhaps the single most important part of the financial statement analysis is the

valuation methods. These valuation models are grounded in solid financial theory and

their assumptions are based off of the results of our industry, accounting, and financial

analysis. By looking at the figures given by the method of comparables, we can see that

this valuation approach gives us somewhat mixed results. Although an overall majority

of our results (7 out of 13) indicates that Sealed Air is overvalued, the other half is

either fair or undervalued; thus making our conclusion relatively fragmented. We must

also keep in mind that the methods of comparables are a very poor choice when

estimating firm value. Once we performed the intrinsic valuations for Sealed Air, we

were able to get a much clearer picture as to the true economic value of the company.

As opposed to the comparables, the intrinsic models all suggested that Sealed Air was

significantly overvalued. For example, we will use the residual income model as our

focal point, since it has the most reliable source and is the least sensitive to changes in

terminal value of perpetuity growth rates. The residual income model gave us a share

price of $18.58, which was just slightly below the 20% margin of error benchmark.

Both the free cash flows and the A.E.G. model were similar to residual income in this

regard. The only exception would be the long-run residual income model, which

originally priced Sealed Air at fair value. However, once we computed the same formula

with the restated financial statements (taking goodwill impairment into account), we

see that this model lists a price that more closely resembles our original residual income

figure. Despite the fact that Sealed Air is a leader in the packaging and container

Sealed Air 178

industry, and possesses the potential for future prosperity, we still believe that the firm

is worth much less than its current market value.

Sealed Air 179

2003 2004 2005 2006 2007Sealed Air (SEE) 1.02 1.01 1.00 1.01 1.01Pactiv (PTV) 1.01 1.03 1.02 1.00 1.02Bemis (BMS) 1.00 1.01 1.02 1.00 1.00Greif (GEF) 1.02 1.01 1.02 1.02 1.01Packaging Corp. of America (PKG) 1.01 1.01 1.00 1.02 1.01

Net Sales/ Cash from Sales


Net Sales / Accounts Receivables


Net Sales / Inventory

Appendices

Sales Manipulation Diagnostics

Sealed Air 180

2003 2004 2005 2006 2007Sealed Air (SEE) 0.83 0.81 0.84 0.89 0.93Sealed Air (SEE) (restated) 0.91 0.95 1.05 1.16 1.25Pactiv (PTV) 0.92 0.91 0.74 1.03 1.18Bemis (BMS) 1.17 1.24 1.40 1.23 1.20Greif (GEF) 1.09 1.22 1.34 1.40 1.52Packaging Corp. of America (PKG) 0.88 0.95 0.96 1.11 1.17

Asset Turnover


CFFO/OI (raw)

2003 2004 2005 2006 2007Sealed Air (SEE) 6.10 0.88 -10.54 4.76 -2.36Pactiv (PTV) -16.00 -0.07 -0.38 0.85 1.33Bemis (BMS) -0.88 -0.73 0.32 4.87 -2.13Greif (GEF) 1.33 3.16 -0.58 0.75 3.66Packaging Corp. of America (PKG) -0.10 -0.68 -0.71 0.03 0.79

CFFO/ OI (change)


CFFO/NOA (raw)

Expense Manipulation Diagnostics

Sealed Air 181

2003 2004 2005 2006 2007Sealed Air (SEE) 4.96 0.99 0.80 1.25 -0.50Pactiv (PTV) -0.31 -0.08 -25.25 -2.21 0.37Bemis (BMS) 0.25 -0.55 0.03 1.13 0.43Greif (GEF) 0.07 0.17 0.13 0.15 0.22Packaging Corp. of America (PKG) -0.13 1.07 -1.11 -0.06 -1.45

CFFO/NOA (change)


Total Accruals / Sales

Sealed Air 182

2003 2004 2005 2006 2007Sealed Air (SEE) 1.14 1.14 1.03 1.16 1.03Bemis (BMS) 1.2 1.2 1.11 1.01 1.11Pactiv (PTV) 1.08 0.48 1.08 0.68 1.1Greif (GEF) 1.1 0.79 0.99 1.02 0.73Packaging Corp. of America (PKG) 1.06 1.28 0.88 1.09 0.9Industry Average 1.12 0.98 1.02 0.99 0.97

Quick Asset Ratio

2003 2004 2005 2006 2007Sealed Air (SEE) 12.6 12.36 25.23 12.34 23.91Bemis (BMS) 6.04 5.68 6.77 6.76 6.06Packaging Corp. of America (PKG) 7.77 5.53 10.99 8.46 13.59Pactiv (PTV) 4.68 4.58 7.57 9.92 9.65Greif (GEF) 7.07 12.59 9.98 8.71 17.22Industry Average 7.63 8.15 12.11 9.24 14.09

Working Capital Turnover

2003 2004 2005 2006 2007Sealed Air (SEE) 5.74 5.73 6.06 6 5.89Bemis (BMS) 7.9 7.94 7.97 8.12 8.14Packaging Corp. of America (PKG) 9.09 8.73 9.35 8.31 8.39Pactiv (PTV) 6.88 9.15 8.64 9.03 11.92Greif (GEF) 6.5 7.18 9.37 8.33 9.55Industry Average 7.22 7.75 8.28 7.96 8.78

A/R Turnover

2003 2004 2005 2006 2007Sealed Air (SEE) 1.24 1.24 1.11 1.25 1.11Bemis (BMS) 2.38 2.33 2.08 1.97 2.13Pactiv (PTV) 2.07 1.54 1.8 1.54 1.73Greif (GEF) 1.87 1.4 1.63 1.61 1.3Packaging Corp. of America (PKG) 1.91 2.02 1.49 1.67 1.3Industry Avg. 1.89 1.71 1.62 1.6 1.51

Current Ratio

Liquidity Ratios

Sealed Air 183


Inventory Turnover


Days Supply Inventory


Cash to Cash Cycle (in days)


Days Sales Outstanding

Sealed Air 184

2003 2004 2005 2006 2007Sealed Air (SEE) 32% 31% 28% 29% 28%Pactiv (PTV) 30% 28% 26% 31% 29%Bemis (BMS) 20% 21% 19% 19% 19%Greif (GEF) 18% 17% 16% 18% 18%Packaging Corp. of America (PKG) 17% 16% 15% 20% 23%Industry Average 23% 22% 21% 23% 23%

Gross Profit Margin


Operating Expense Ratio


Operating Profit Margin

2003 2004 2005 2006 2007Sealed Air (SEE) 6.81% 5.68% 6.26% 6.33% 7.59%Pactiv (PTV) 6.21% 4.58% 1.96% 9.39% 7.53%Bemis (BMS) 5.58% 6.35% 4.68% 4.84% 4.98%Greif (GEF) 0.50% 2.16% 4.32% 5.41% 4.71%Packaging Corp. of America (PKG) -0.83% 3.64% 2.64% 5.72% 7.34%Industry Average 3.65% 4.48% 3.97% 6.34% 6.43%

Net Profit Margin

Profitability Ratios

Sealed Air 185

2003 2004 2005 2006 2007Sealed Air (SEE) 82.89% 80.74% 84.14% 88.97% 92.64%Pactiv (PTV) 91.97% 91.26% 73.67% 103.44% 117.95%Bemis (BMS) 116.77% 123.61% 139.70% 122.76% 120.08%Greif (GEF) 108.99% 121.64% 133.70% 139.57% 151.84%Packaging Corp. of America (PKG) 87.54% 95.21% 95.72% 110.83% 116.56%Industry Average 97.63% 102.49% 105.39% 113.11% 119.81%

Asset Turnover

2003 2004 2005 2006 2007Sealed Air (SEE) 5.64% 4.58% 5.27% 5.64% 7.03%Sealed Air (SEE) (restated) -1.82% -0.22% 1.60% 2.94% 5.88%Pactiv (PTV) 5.72% 4.18% 1.44% 9.72% 8.88%Bemis (BMS) 6.52% 7.85% 6.54% 5.95% 5.97%Greif (GEF) 0.54% 2.63% 5.77% 7.55% 7.15%Packaging Corp. of America (PKG) -0.72% 3.46% 2.53% 6.34% 8.56%Industry Average 3.54% 4.54% 4.31% 7.04% 7.52%

Return on Assets

2003 2004 2005 2006 2007Sealed Air (SEE) 29.58% 19.18% 19.18% 19.69% 21.33%Sealed Air (SEE) (restated) -16.55% -3.54% 7.39% 8.79% 14.70%Bemis (BMS) 15.34% 15.80% 12.43% 13.07% 12.33%Pactiv (PTV) 20.40% 14.61% 4.99% 33.41% 28.72%Greif (GEF) 1.67% 8.34% 16.64% 19.44% 18.53%Packaging Corp. of America (PKG) -1.80% 8.62% 6.43% 18.35% 24.58%Industry Average 8.11% 10.50% 11.18% 18.79% 20.03%

Return On Equity

2003 2004 2005 2006 2007Sealed Air (SEE) 0.00% 19.18% 19.18% 0.00% 0.00%Pactiv (PTV) 20.40% 14.61% 4.99% 33.41% 28.72%Bemis (BMS) 15.34% 15.80% 0.00% 0.00% 0.00%Greif (GEF) 0.00% 0.00% 0.00% 0.00% 0.00%Packaging Corp. of America (PKG) 8.11% 0.00% 0.00% 0.00% 0.00%Industry Average 8.77% 9.92% 4.83% 6.68% 5.74%

Sustainable Growth Rate (SGR)

Sealed Air 186

2003 2004 2005 2006 2007Sealed Air (SEE) 0.00% 4.58% 5.27% 0.00% 0.00%Pactiv (PTV) 5.72% 4.18% 1.44% 9.72% 8.88%Bemis (BMS) 6.52% 7.85% 0.00% 0.00% 0.00%Greif (GEF) 0.00% 0.00% 0.00% 0.00% 0.00%Packaging Corp. of America (PKG) -0.72% 0.00% 0.00% 0.00% 0.00%Industry Average 2.30% 3.32% 1.34% 1.94% 1.78%

Internal Growth Rate (IGR)

Sealed Air 187

2003 2004 2005 2006 2007Sealed Air (SEE) 3.1 2.6 2.4 2 1.6Pactiv (PTV) 2.5 2.5 2.4 2.2 2.1Greif (GEF) 2.1 1.88 1.6 1.6 1.2Packaging Corp. of America (PKG) 1.5 1.5 1.9 1.9 1.7Bemis (BMS) 1 0.89 1.2 1 1Industry Average 2.04 1.874 1.9 1.74 1.52

Debt to Equity

2003 2004 2005 2006 2007Sealed Air (SEE) 4 3.2 3.4 3.5 3.9Pactiv (PTV) 5.6 4.1 3.7 5.8 4.9Greif (GEF) 1.23 2.4 4.9 6.8 6.3Packaging Corp. of America (PKG) 4.5 4.7 3.6 7.2 11.5Bemis (BMS) 19.1 18.9 8.2 6.8 6.1Industry Average 6.89 6.66 4.76 6.02 6.54

Time Interest Earned

2003 2004 2005 2006 2007Sealed Air (SEE) 234.8 181.7 94.26 1.79 68Pactiv (PTV) 25.8 73.4 5.65 124 2.8Packaging Corp. of America (PKG) 2.1 1.9 2.22 208 2.5Greif (GEF) N/A N/A N/A N/A N/ABemis (BMS) 88.8 246.8 331.5 89.46 24.9

Debt Service Margin

2003 2004 2005 2006 2007Sealed Air (SEE) 7.73 6.28 7.42 9.02 6.68Sealed Air (SEE) (restated) 7.64 6.21 7.37 8.97 6.64Pactiv (PTV) 5.39 6.31 9.45 16.08 13.25Bemis (BMS) 12.17 9.71 6.28 7.22 10.83Greif (GEF) 3.12 6.89 7.30 22.33 8.44Packaging Corp. of America (PKG) 6.95 4.74 13.70 7.10 14.73

Z-Scores

Capital Structure Ratios

Sealed Air 188

Weight Rate Weighted Rate Rate SourceCurrent liabilities:Short-term borrowings 36.50 0.011 0.110 0.001 Sealed Air 2/29/2008 10-KCurrent portion of long-term debt 303.70 0.089 0.054 0.005 Sealed Air 2/29/2008 10-KAccounts payable 316.30 0.093 0.021 0.002 3-Month AA Nonfinancial Commercial Paper Rate from St. Louis Federal ReserveDeferred tax liabilities 12.10 0.004 0.039 0.000 10 Year Treasury Bill Rate (Risk Free Rate) From St. Louis Federal ReserveAsbestos settlement liability 512.50 0.150 0.055 0.008 Sealed Air 2/29/2008 10-KOther current liabilities 560.50 0.164 0.055 0.009 Sealed Air 2/29/2008 10-KTotal Current 1741.60 0.509 0.021

Long-term debt, less current portion 1531.60 0.448 0.055 0.025 Sealed Air 2/29/2008 10-KNon-current deferred tax liabilities 9.90 0.003 0.039 0.000 10 Year Treasury Bill Rate (Risk Free Rate) From St. Louis Federal ReserveOther liabilities 135.60 0.040 0.055 0.002 Sealed Air 2/29/2008 10-KTotal Long Term 1,677.10 0.491 0.027

Total Liabilities 3418.70 1.000 4.76%

Cost of Debt

*Liability Values Stated In Millions

Vd* 3,418.70$ Ve* 2,019.60$ Total* 5,438.30$ Kd 4.76%Ke 11.07%

Upper Bound 15.05%Lower Bound 7.10%Alternative Ke 16.21%

UB WACC 2.99%LB WACC 8.58%Alternative WACC 5.63%

WACC 7.10%* in millions

Weighted Average Cost of CapitalVd* 3,418.70$ Ve* 586.70$ Total* 4,005.40$ Kd 4.76%Ke 11.07%

Upper Bound 15.05%Lower Bound 7.10%Alternative Ke 16.21%

UB WACC 6.27%LB WACC 5.10%Alternative WACC 6.44%

WACC 5.68%*in millions

Weighted Cost of Capital (Restated)

Weighted Average Cost of Debt

Weighted Average Cost of Capital

Sealed Air 189

Regression StatisticsMultiple R 0.196090681R Square 0.038451555Adjusted R Square ‐0.005255192Standard Error 0.062866712Observations 24

ANOVAdf SS MS F Significance F

Regression 1 0.003477018 0.003477018 0.879762448 0.358450742Residual 22 0.086948918 0.003952224Total 23 0.090425935

Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000227321 0.01283324 0.017713434 0.98602713 ‐0.02638719 0.026841831 ‐0.02638719 0.026841831X Variable 1 0.436815235 0.465709468 0.937956528 0.358450742 ‐0.529007083 1.402637553 ‐0.529007083 1.402637553

Regression StatisticsMultiple R 0.196082827R Square 0.038448475Adjusted R Square 0.010167548Standard Error 0.058761858Observations 36







Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000448628 0.008047832 0.055745181 0.955786233 ‐0.015750817 0.016648072 ‐0.015750817 0.016648072X Variable 1 0.781482571 0.324772131 2.406248862 0.020191932 0.127750188 1.435214954 0.127750188 1.435214954

Weighted Average Cost of Equity

3 Month Rates

Summery Output – 24



Sealed Air 190











6 Month Rates

Sealed Air 191

















Summery Output - 24



Summery Output

– 60

Sealed Air 192










2 Year Rates


Sealed Air 193
















Sealed Air 194










5 Year Rates


Sealed Air 195




Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000345886 0.009792226 0.03532249 0.972029158 ‐0.019554312 0.020246083 ‐0.019554312 0.020246083X Variable 1 0.459093162 0.389308707 1.179252233 0.246484133 ‐0.332077315 1.250263639 ‐0.332077315 1.250263639Regression StatisticsMultiple R 0.335835865R Square 0.112785728Adjusted R Square 0.093498461Standard Error 0.055644004Observations 48











Sealed Air 196










10 Year Rates


Sealed Air 197











Sealed Air 198











Sealed Air 199

ComparablesCompany P/E Growth P.E.G Industry Average Sealed Air PPSSealed Air (SEE) 0.94 14.37Sealed Air (SEE) (restated) 0.94 8.91Pactiv (PTV) 12.83 10.50 1.22Greif (GEF) 16.86 18.67 0.90Packaging Corp. of America (PKG) N/A N/A N/ABemis (BMS) 13.41 9.33 0.70

7% Growth assumed for Sealed Air

P.E.G.

CompanyNet Income

12/31/07# of shares

outstandingPrice

5/1/2008 P/E Industry Average Computed PriceSealed Air (SEE) 353 161.62703 13.26 28.96$ Sealed Air (SEE) (restated) 218.8 161.62703 13.26 17.95$ Pactiv (PTV) 245 130.79 23.75$ 12.68Greif (GEF) 156.368 23.9 64.50$ 9.86Packaging Corp. of America (PKG) 170.066 103.81 26.04$ 15.90Bemis (BMS) 181.554 99.65 26.60$ 14.60

Trailing P/E

Company Forecasted EPS Price 5/1/2008 P/E Industry Average Computed PriceSealed Air (SEE) 2.34 13.26 30.98$ Sealed Air (SEE) (restated) 2.34 13.26 30.98$ Pactiv (PTV) 1.87 23.75$ 12.68Greif (GEF) 6.54 64.50$ 9.86Packaging Corp. of America (PKG) 1.64 26.04$ 15.90Bemis (BMS) 1.82 26.60$ 14.60

Forecasted P/E

ComparablesCompany PPS BPS P/B Industry Avg SEE PPSSealed Air (SEE) 24.36 12.5 1.95 2.66 33.24Sealed Air (SEE) (restated) 24.36 3.63 6.71 2.66 9.65Pactiv (PTV) 24.57 9.24 2.66Bemis (BMS) 26.57 13.46 1.97Packaging Corp. of America (PKG) 22.08 7.24 3.05Greif (GEF) 64.5 21.83 2.95

P/B

Methods of Comparables

Sealed Air 200

Company EV ($ BIL) EBITDA ($ BIL) EV/EBITDA Industry Average ComparableSealed Air (SEE) 2.95 0.502 5.876 41.03Packaging Corp. of America (PKG) 2.77 0.44835 6.17 7.01925Greif (GEF) 3.55 0.41689 8.506Pactiv (PTV) 4.31 0.638 6.761Bemis (BMS) 3 0.45237 6.64

EV/EBITDA

Company EV ($BIL) EBITDA ($BIL) EV/EBITDA Industry Average ComparableSealed Air (SEE) 0.981 0.502 1.95 16.69Packaging Corp. of America (PKG) 2.73 0.44835 6.08899 5.8750975Greif (GEF) 3.01 0.41689 7.22Pactiv (PTV) 3.188 0.638 4.99Bemis (BMS) 2.353 0.45237 5.2014

EV/EBITDA - Minus GOODWILL

(in millions other than PPS) ComparableCompany PPS # of Shares EBITDA P/EBITDA Industry Average Sealed Air PPSSealed Air (SEE) 24.36 161.63 714.80 5.51 4.93 21.79Pactiv (PTV) 24.57 130.79 638.00 5.04Bemis (BMS) 26.57 99.65 452.37 5.85Greif (GEF) 64.50 23.90 416.07 3.71Package Corp. of America (PKG) 22.08 103.81 448.35 5.11

Price/EBITDA

Sealed Air 201

ComparableCompany Market Cap FCF P/FCF Industry Average P/FCF per shareSealed Air (SEE) 4,132.80$ 104.00 39.74 11.68250501 7.517186457Bemis (BMS) 2,647.70$ 238.42 11.11Pactiv (PTV) 3,213.51$ -1228.00 -2.62 outlierGreif (GEF) 1,541.55$ -83.32 -18.50 outlierPackaging Corp. of America (PKG) 2,292.12$ 186.96 12.26*market cap and free cash flows in millions

Price to Free Cash Flows

ComparableCompany DPS PPS D/P Industry Avg SEE PPSSealed Air (SEE) 0.4 24.36 0.016 0.038 10.46Pactiv (PTV) N/A 24.57 N/ABemis (BMS) 0.84 26.57 0.032Packaging Corp. of America (PKG) 1.05 22.08 0.048Greif (GEF) 2.29 64.5 0.036

D/P

Sealed Air 202

Discounted Dividends Approach 0 1 2 3 4 5 6 7 8 9

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016DPS (Dividends Per Share) 0.400 0.409 0.438 0.468 0.501 0.536 0.574 0.614 0.657 0.703PV Factor 0.925 0.856 0.792 0.733 0.678 0.628 0.581 0.537 0.497

PV of annual div. 0.378 0.375 0.371 0.367 0.364 0.360 0.356 0.353 0.349PV YBY div 3.274TV Perp. 12.18012/31/1987 model price 15.454Time Consistent price 15.962 Ke 0.00 0.02 0.04 0.06 0.08Observed Share Price 25.570 8.07% 6.87$ 7.64$ 8.84$ 11.00$ 15.96$ Initial Cost of Equity 0.111 9.07% 6.47$ 7.18$ 8.00$ 10.28$ 14.87$ Perpetuity Growth Rate (g) 0.080 10.07% 6.10$ 6.75$ 7.78$ 9.62$ 13.86$

11.07% 5.75$ 6.36$ 7.31$ 8.81$ 12.94$ 12.07% 5.44$ 6.00$ 6.88$ 8.45$ 12.09$ 13.07% 5.14$ 5.66$ 6.48$ 7.94$ 11.31$ 14.07% 4.87$ 5.35$ 6.11$ 7.47$ 10.59$


Forecasted

Discounted Dividends ModelGrowth Rate

Overvalued < $19.43 Undervalued > $29.23$19.43 < Fairly Vauled > $29.23

Discounted Dividends Approach

Sealed Air 203

Discounted FCF 0 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017CFFO 522.42 564.22 609.35 658.10 710.75 767.61 829.02 895.34 966.97 1044.33CFFI -296.03 -319.71 -345.29 -372.91 -402.74 -434.96 -469.76 -507.34 -547.93 -591.76FCF Firm 226.39 244.51 264.07 285.19 308.01 332.65 359.26 388.00 419.04 452.56

PV Factor 0.93 0.87 0.81 0.76 0.71 0.66 0.62 0.58 0.54 0.50PV FCF each year 211.39 213.16 214.95 216.76 218.58 220.42 222.27 224.14 226.02 227.92Total PV of YBY FCF 2195.62TV of per 3466.98 6884.08MV of assets 5662.59BV Debt & Preferred stock 3,418.70Model Estimated MVE 2,243.89Divide by share 161.63Model share price 13.88WACC(BT) 0.09 WACC(BT) 0 0.02 0.04 0.06 0.08g 0.00 0.041 45.45 93.81 2076.77

0.051 30.89 54.82 165.810.061 21.19 34.95 74.93 1714.27

time consistent 14.29 0.071 14.29 22.94 42.77 134.680.081 9.14 14.92 26.34 59.52 1419.590.091 5.18 9.21 16.40 32.88 109.27

Observed Share Price 23.88 0.101 2.03 4.94 9.75 19.25 46.87Initial WACC 7.10%Perpetuity growth rate (g) 0%

FCF Growth ModelGrowth Rate

Overvalued < $19.43 $19.43 < Fairly Vauled > $29.23 Undervalued > $29.23

Forecasted


Discounted Free Cash Flows Approach

Actual

Restated

Sealed Air 204

0 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017377.71$ 404.15$ 432.44$ 462.71$ 495.10$ 529.76$ 566.84$ 606.52$ 648.98$ 694.40$ -66.10 -70.73 -75.68 -80.97 -86.64 -92.71 -99.20 -106.14 -113.57 -121.52

2,019.60 2,331.21$ 2,664.63$ 3,021.40$ 3,403.13$ 3,811.59$ 4,248.64$ 4,716.29$ 5,216.66$ 5,752.07$ 6,324.95$

223.57 258.07 294.98 334.47 376.73 421.94 470.32 522.09 577.48 636.75154.14$ 146.08$ 137.47$ 128.24$ 118.37$ 107.81$ 96.52$ 84.43$ 71.49$ 57.65$

0.900 0.811 0.730 0.657 0.592 0.533 0.480 0.432 0.389 0.350138.78$ 118.42$ 100.32$ 84.26$ 70.03$ 57.42$ 46.28$ 36.45$ 27.79$ 20.18$

2,019.60699.93$

154.9191 Ke 0% -10% -20% -30% -40% -50%2,874.45 6.00% 44.03$ 33.08$ 30.56$ 29.43$ 28.80$ 28.39$

161.62703 8.00% 29.83$ 25.74$ 24.57$ 24.02$ 23.70$ 23.48$ 17.78 10.00% 21.64$ 20.38$ 19.96$ 19.75$ 19.63$ 19.54$ 18.58 11.07% 18.58$ 18.10$ 17.94$ 17.85$ 17.80$ 17.76$

12.00% 16.41$ 16.39$ 16.38$ 16.37$ 16.37$ 16.36$ 24.36 14.00% 12.86$ 13.35$ 13.56$ 13.67$ 13.74$ 13.78$

11.07%0.00%


Residual Income ApproachForecasted

pv factor

Net Income (Millions)Total Dividends (Millions)Book Value Equity (Millions)

Annual Normal Income (Becnhmark)Annual Residual Income

YBY PV RI

Book Value Equity (Millions)Total PV of YBY RI

Terminal Value PerpetuityMVE 12/31/07

Observed Share Price (6/1/2008)Initial Cost of EquityPerpetuity Growth Rate (g)

divde by shares Model Price on 12/31/07time consistent Price


Residual Income ModelSensitivity AnalysisGrowth Rate

Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23

Discounted FCF Restated 0 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017CFFO 522.42 564.22 609.35 658.10 710.75 767.61 829.02 895.34 966.97 1044.33CFFI -296.03 -319.71 -345.29 -372.91 -402.74 -434.96 -469.76 -507.34 -547.93 -591.76FCF Firm 226.39 244.51 264.07 285.19 308.01 332.65 359.26 388.00 419.04 452.56

PV Factor 0.93 0.87 0.81 0.76 0.71 0.66 0.62 0.58 0.54 0.50PV FCF each year 211.39 213.16 214.95 216.76 218.58 220.42 222.27 224.14 226.02 227.92Total PV of YBY FCF 2195.62TV of per 3466.98 6884.08MV of assets 5662.59BV Debt & Preferred stock 3,418.70Model Estimated MVE 2,243.89Divide by share 161.63Model share price 13.88WACC(BT) 0.09 WACC(BT) 0 0.02 0.04 0.06 0.08g 0.00 0.041 45.19 93.29 2065.21

0.051 30.71 54.52 164.890.061 21.07 34.76 74.52 1704.73

time consistent 14.22 0.071 14.21 22.81 42.53 133.930.081 9.09 14.84 26.2 59.19 1411.70.091 5.15 9.16 16.31 32.69 108.66

Observed Share Price 23.88 0.101 2.02 4.91 9.69 19.15 46.61Initial WACC 5.86%Perpetuity growth rate (g) 0%

Forecasted

Overvalued < $19.43 $19.43 < Fairly Vauled > $29.23 Undervalued > $29.23

Growth Rate


FCF Growth Model (restated)

Residual Income Approach (R.I)

Actual

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0 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017377.71$ 404.15$ 432.44$ 462.71$ 495.10$ 529.76$ 566.84$ 606.52$ 648.98$ 694.40$ -66.10 -70.73 -75.68 -80.97 -86.64 -92.71 -99.20 -106.14 -113.57 -121.52

586.70 898.31 1,231.73 1,588.50 1,970.23 2,378.69 2,815.74 3,283.39 3,783.76 4,319.17 4,892.05

64.95 99.44 136.35 175.85 218.10 263.32 311.70 363.47 418.86 478.13312.76 304.71 296.09 286.86 277.00 266.44 255.14 243.05 230.11 216.270.9003 0.8106 0.7298 0.6571 0.5916 0.5326 0.4795 0.4317 0.3887 0.3500281.59 247.00 216.09 188.49 163.87 141.91 122.35 104.93 89.45 75.69

586.70

1631.36

581.17 Ke 0% -10% -20% -30% -40% -50%2,799.23 6% 43.27$ 29.63$ 26.48$ 25.08$ 24.29$ 23.78$

161.62703 8% 29.20$ 23.10$ 21.36$ 20.54$ 20.06$ 19.74$ 17.32$ 10% 21.11$ 18.34$ 17.41$ 16.95$ 16.68$ 16.49$ 18.09$ 11.07% 18.09$ 16.31$ 15.68$ 15.35$ 15.15$ 15.02$

12% 15.97$ 14.78$ 14.34$ 14.10$ 13.96$ 13.86$ 24.36 14% 12.48$ 12.08$ 11.91$ 11.82$ 11.77$ 11.73$

11.07%0.00%

Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23Observed Price $24.36

Residual Income Approach (Restated)Forecasted

Growth RateResidual Income ModelSensitivity Analysis

Net Income (Millions)Total Dividends (Millions)Book Value Equity (Millions)

Annual Normal Income (Becnhmark)Annual Residual Income

Observed Share Price (6/1/2008)Initial Cost of Equity (You Derive)Perpetuity Growth Rate (g)

time consistent Price

pv factorYBY PV RI

Book Value Equity (Millions)

Total PV of YBY RI

Terminal Value PerpetuityMVE 12/31/07divde by shares Model Price on 12/31/07

Restated

Abnormal Earnings Growth Approach (A.E.G)

Sealed Air 206

A.E.G. Approach (Restated) 0 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Net Income 218.8 377.71 404.15 432.44 462.71 495.10 529.76 566.84 606.52 648.98 694.40Total Dividends (64.60) 66.10 70.73 75.68 80.97 86.64 92.71 99.20 106.14 113.57 121.52Drip Income ‐7.15 7.32 7.83 8.38 8.96 9.59 10.26 10.98 11.75 12.57Cumulative Dividend Income 370.56 411.47 440.27 471.09 504.06 539.35 577.10 617.50 660.73 706.98Normal (Benchmark) Income 243.02 419.52 448.89 480.31 513.93 549.91 588.40 629.59 673.66 720.82Annual AEG 127.54 ‐8.06 ‐8.62 ‐9.22 ‐9.87 ‐10.56 ‐11.30 ‐12.09 ‐12.94 ‐13.84PV factor 0.90 0.81 0.73 0.66 0.59 0.53 0.48 0.43 0.39 0.35PV AEG 114.83 ‐6.53 ‐6.29 ‐6.06 ‐5.84 ‐5.62 ‐5.42 ‐5.22 ‐5.03 ‐4.84Change in RI ‐8.06 ‐8.62 ‐9.22 ‐9.87 ‐10.56 ‐11.30 ‐12.09 ‐12.94 ‐13.84

Core to Perpetuity 218.80Total PV of AEG added to core 63.97AEG TV Perp ‐59.38 ‐137.535

Total Adjusted Earnings Perp 223.39

KeModel MVE (6/1/08) 2018.01 0.00% ‐5.00% ‐10.00% ‐20.00% ‐30.00% ‐40.00% ‐50.00%Divided by shares 161.63 6.00% 52.74 49.96 48.50 46.99 46.21 45.74 45.42Model Price at 6/1/08 12.49 8.00% 29.40 29.05 28.87 28.68 28.58 28.52 28.48time consistent price 13.04 10.00% 17.21 17.97 18.36 18.77 18.99 19.11 19.20

11.07% 13.04 14.12 14.69 15.28 15.58 15.76 15.88Capitalization Rate Ke 11.07% 12.00% 10.27 11.54 12.20 12.89 13.24 13.46 13.60Observed Share Price 24.36 14.00% 6.12 7.60 8.37 9.18 9.59 9.84 10.01initial equity 11.07%Perpetuity Growth Rate (g) 0

Forecasted

AEG Model Restated

Overvalued < $19.49 Undervalued > $29.23$19.43 < Fairly Valued > $29.23

Growth Rate


A.E.G. Approach 0 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Net Income 353 377.71 404.15 432.44 462.71 495.10 529.76 566.84 606.52 648.98 694.40Total Dividends (64.60) 66.10 70.73 75.68 80.97 86.64 92.71 99.20 106.14 113.57 121.52Drip Income ‐7.15 7.32 7.83 8.38 8.96 9.59 10.26 10.98 11.75 12.57Cumulative Dividend Income 370.56 411.47 440.27 471.09 504.06 539.35 577.10 617.50 660.73 706.98Normal (Benchmark) Income 392.08 419.52 448.89 480.31 513.93 549.91 588.40 629.59 673.66 720.82Annual AEEG ‐21.52 ‐8.06 ‐8.62 ‐9.22 ‐9.87 ‐10.56 ‐11.30 ‐12.09 ‐12.94 ‐13.84PV factor 0.90 0.81 0.73 0.66 0.59 0.53 0.48 0.43 0.39 0.35PV AEG ‐19.37 ‐6.53 ‐6.29 ‐6.06 ‐5.84 ‐5.62 ‐5.42 ‐5.22 ‐5.03 ‐4.84Change in RI (8.06)$ (8.62)$ (9.22)$ (9.87)$ (10.56)$ (11.30)$ (12.09)$ (12.94)$ (13.84)$

Core to Perpetuity 353.00Total PV of AEG added to core ‐70.23AEG TV Perp ‐59.38 ‐137.5351544Total Adjusted Earnings Perp 223.39

KeModel MVE (5/1/08 2018.01 0.00% -5.00% -10.00% -20.00% -30.00% -40.00% -50.00%Divided by shares 161.63 6.00% 52.05 49.27 47.81 46.30 45.52 45.05 44.73Model Price at 5/1/2008 12.49 8.00% 29.9 29.55 29.37 29.18 29.08 29.02 28.98time consistent price 13.04 10.00% 17.35 18.1 18.5 18.91 19.12 19.25 19.34

11.07% 13.04 14.12 14.69 15.28 15.58 15.76 15.88Capitalization Rate Ke 11.07% 12.00% 10.17 11.44 12.1 12.79 13.14 13.36 13.5Observed Share Price 24.36 14.00% 5.86 7.34 8.11 8.92 9.33 9.58 9.75initial equity 11.07%Perpetuity Growth Rate (g) 0 Observed Price $24.36

Forecasted

AEG ModelGrowth Rate

Overvalued < $19.49 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23

Actual

Restated

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Long Run ROE Residual Income 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Beginning Book Value of Equity 2019.60 2397.31 2801.46 3233.90 3696.61 4191.71 4721.47 5288.31 5894.83 6543.81Earnings 377.71 404.15 432.44 462.71 495.10 529.76 566.84 606.52 648.98 694.40Ending Book Value of Equity 2,019.60 2397.31 2801.46 3233.90 3696.61 4191.71 4721.47 5288.31 5894.83 6543.81 7238.21

Long Run Return on Equity 0.187022183 0.168585 0.1543624 0.1430814 0.1339337 0.1263822 0.12005603 0.11469065 0.1100924 0.1061163Long Run Growth Rate in Equity 0.15755576 0.144264 0.1260758 0.1119603 0.1006873 0.0914768 0.08381009 0.07732913 0.0717786 0.0669714Cost of Equity 0.1107Average ROE 0.176Average Growth 0.1Shares Outstanding 162Observed Share Price 5/01/2008 $24.36Estimated Price per share 08/31/2007

SEE ‐ Equity based on expected normal earnings 2008 Forecasted

Ke 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%8.07% 36.76 48.21 81.06 1052.579.07% 27.73 32.51 41.90 68.86 866.05

10.07% 22.26 24.52 28.25 35.59 56.66 679.5311.07% 18.59 19.68 21.31 24.00 29.29 44.4612.07% 15.96 16.44 17.11 18.10 19.75 22.9813.07% 13.98 14.11 14.29 14.53 14.90 15.49

ROE held constant at 13.64%

LR RI ModelGrowth Rate


Long Run Residual Income Approach (LR RI)

Actual

Sealed Air 208

Ke 0.13 0.14 0.15 0.16 0.17 0.187.07% 1044.51 1231.03 1417.55 1604.07 1790.59 1977.118.07% 68.33 80.53 92.74 104.94 117.14 129.349.07% 35.32 41.63 47.94 54.24 60.55 66.86

10.07% 23.82 28.07 32.32 36.57 40.83 45.0811.07% 17.96 21.17 24.38 27.59 30.80 34.0012.07% 14.42 17.00 19.57 22.15 24.72 27.30

Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23

ROE

Growth Held Constant at 7%


Growth 12.60% 13.60% 14.60% 15.60% 16.60% 17.60%5.00% 16.34735755 18.49832565 20.6492938 22.800262 24.95123 27.1021986.00% 16.99646627 19.57168843 22.1469106 24.722133 27.2973549 29.8725777.00% 17.96454733 21.17250221 24.3804571 27.588412 30.7963668 34.0043228.00% 19.56330009 23.81619141 28.0690827 32.321974 36.5748654 40.8277579.00% 22.7067415 29.01416969 35.3215979 41.629026 47.9364543 54.243882

10.00% 31.72577434 43.92799524 56.1302161 68.332437 80.5346579 92.736879Cost of Equity Held Constant at 11.07%


ROE

SEE - Equity based on expected normal earnings 2008 Long Run ROE Residual Income Restated

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Beginning Book Value of Equity 586.70 964.41 1368.56 1801.00 2263.71 2758.81 3288.57 3855.41 4461.93 5110.91Earnings 377.71 404.15 432.44 462.71 495.10 529.76 566.84 606.52 648.98 694.40Ending Book Value of Equity 586.70 964.41 1368.56 1801.00 2263.71 2758.81 3288.57 3855.41 4461.93 5110.91 5805.31

Long Run Return on Equity 0.643787285 0.41906419 0.315982 0.256919 0.218712 0.19202392 0.172367 0.1573165 0.14545 0.13586719Long Run Growth Rate in Equity 0.15755576 0.14426397 0.1260758 0.11196 0.1006873 0.09147677 0.08381009 0.0773291 0.07178 0.06697144Cost of Equity 0.1107Average ROE 0.295Average Growth 0.1Shares Outstanding 162Observed Share Price 5/01/2008 $24.36Estimated Price per share 08/31/2007

Forecasted

Restated

Sealed Air 209

Ke 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%8.07% 26.66 37.70 69.39 1006.47 N/A N/A9.07% 20.11 25.42 35.87 65.84 952.29 N/A

10.07% 16.14 19.17 24.18 34.04 62.30 898.1011.07% 13.48 15.39 18.24 22.95 32.20 58.7512.07% 11.57 12.86 14.64 17.31 21.71 30.3713.07% 10.14 11.04 12.23 13.90 16.38 20.48

GrowthLR RI Model


ROE held constant at 13.64%

Ke 0.13 0.14 0.15 0.16 0.17 0.187.07% 948.23 1002.41 1056.60 1110.78 1164.97 1219.158.07% 62.03 65.58 69.12 72.67 76.21 79.769.07% 32.07 33.90 35.73 37.56 39.40 41.23

10.07% 21.62 22.86 24.09 25.33 26.56 27.8011.07% 16.31 17.24 18.17 19.10 20.04 20.9712.07% 13.09 13.84 14.59 15.34 16.08 16.83

ROE

Growth Held Constant at 7%Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23


Growth 12.60% 13.60% 14.60% 15.60% 16.60% 17.60%5.00% 12.18 12.81 13.43 14.06 14.68 15.316.00% 13.84 14.59 15.34 16.08 16.83 17.587.00% 16.31 17.24 18.17 19.10 20.04 20.978.00% 20.39 21.62 22.86 24.09 25.33 26.569.00% 28.40 30.23 32.07 33.90 35.73 37.56

10.00% 51.40 54.94 58.49 62.03 65.58 69.12

Undervalued > $29.23Observed Price $24.36

ROE

Cost of Equity Held Constant at 11.07%Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23

Sealed Air 210

References

1. Sealed Air Corporation (SEE), 2003-07 10-k

2. Wall Street Journal

3. Yahoo Finance

4. Reuters

5. Wikipedia.com

6. Investopedia.com

7. Business Analysis & Valuations, Palepu & Healy

8. Dr. Mark Moore’s Notes Finance 3321

9. Pactiv 10-K (2003-2007)

10. Bemis 10-K (2003-2007)

11. Greif 10-K (2003-2007)

12. Packaging Corp. of America 10-K (2003-2007)

Sealed Air Corporation - Texas Tech University

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