Question 17.10: Goodwill Sealed Air Corporation In August 2012, a Wall Stree......
Goodwill
Sealed Air Corporation
In August 2012, a Wall Street Journal article listed six companies that were carrying more goodwill on their balance sheets than the companies’ market values (Thurm 2012). At the top of the list was Sealed Air Corporation (NYSE: SEE), a company operating in the packaging and containers industry. Exhibit 27 presents an excerpt from the company’s income statement for the following year, and Exhibit 28 presents an excerpt from the company’s balance sheet.
1 . SEE’s financial statements indicate that the number of common shares issued and outstanding in 2011 was 192,062,185. The price per share of SEE’s common stock was around $18 per share in December 2011 and around $14 in August 2012; the Wall Street Journal article (Thurm 2012) was written in 2012. What was the company’s market value?
2 . How did the amount of goodwill as of 31 December 2011 compare with the company’s market value?
3 . Why did the Wall Street Journal article state that goodwill in excess of the company’s market value is “a potential clue to future write-offs”?
4 . Based on the information in Exhibit 28, does the Wall Street Journal article statement appear to be correct?
| EXHIBIT 27 Sealed Air Corporation and Subsidiaries Consolidated Statements of Operations ($ millions, except per share amounts) | |||
| Year ended 31 December | 2012 | 2011 | 2010 |
| Net sales | $7,648.1 | $5,550.9 | $4,490.1 |
| Cost of sales | 5,103.8 | 3,950.6 | 3,237.3 |
| Gross profit | 2,544.3 | 1,600.3 | 1,252.8 |
| Marketing, administrative, and development expenses | 1,785.2 | 1,014.4 | 699.0 |
| Amortization expense of intangible assets acquired | 134.0 | 39.5 | 11.2 |
| Impairment of goodwill and other intangible assets | 1,892.30 | — | — |
| Costs related to the acquisition and integration of | |||
| Diversey | 7.4 | 64.8 | — |
| Restructuring and other charges | 142.5 | 52.2 | 7.6 |
| Operating (loss) profit | (1,417.1) | 429.4 | 535.0 |
| Interest expense | (384.7) | (216.6) | (161.6) |
| Loss on debt redemption | (36.9) | — | (38.5) |
| Impairment of equity method investment | (23.5) | — | — |
| Foreign currency exchange (losses) gains related to Venezuelan subsidiaries | (0.4) | (0.3) | 5.5 |
| Net gains on sale (other-than-temporary impairment) of available-for-sale securities | — | — | 5.9 |
| Other expense, net | (9.4) | (14.5) | (2.9) |
| (Loss) earnings from continuing operations before income tax provision | (1,872.0) | 198.0 | 343.4 |
| Income tax (benefit) provision | (261.9) | 59.5 | 87.5 |
| Net (loss) earnings from continuing operations | (1,610.1) | 138.5 | 255.9 |
| Net earnings from discontinued operations | 20.9 | 10.6 | — |
| Net gain on sale of discontinued operations | 178.9 | — | — |
| Net (loss) earnings available to common stockholders | $(1,410.3) | $149.10 | $255.90 |
| EXHIBIT 28 Excerpt from Sealed Air Corporation and Subsidiaries Consolidated Balance Sheets ($ millions, except share data) | ||
| Year Ended 31 December | 2012 | 2011 |
| ASSETS | ||
| Current assets | ||
| Cash and cash equivalents | $679.6 | $703.6 |
| Receivables, net of allowance for doubtful accounts of $25.9 in 2012 and $16.2 in 2011 | 1,326.0 | 1,314.2 |
| Inventories | 736.4 | 777.5 |
| Deferred tax assets | 393.0 | 156.2 |
| Assets held for sale | — | 279.0 |
| Prepaid expenses and other current assets | 87.4 | 119.7 |
| Total current assets | $3,222.4 | $3,350.2 |
| Property and equipment, net | $1,212.8 | $1,269.2 |
| Goodwill | 3,191.4 | 4,209.6 |
| Intangible assets, net | 1,139.7 | 2,035.7 |
| Non-current deferred tax assets | 255.8 | 112.3 |
| Other assets, net | 415.1 | 455.0 |
| Total assets | $9,437.2 | $11,432.0 |
to 1: SEE’s market cap was about $3,457 million (= 192,062,185 shares × $18 per share) in December 2011 and around $2,689 million (= 192,062,185 shares × $14 per share) when the Wall Street Journal article was written in August 2012.
to 2: The amount of goodwill on SEE’s balance sheet as of 31 December 2011 was $4,209.6 million. The amount of goodwill exceeded the company’s market value. (Also note that goodwill and other intangible assets represented about 55% of SEE’s total assets as of 31 December 2011.)
to 3: If the market capitalization exactly equaled the reported amount of goodwill, the value implicitly assigned to all the company’s other assets would equal zero. In this case, because the market capitalization is less than the reported amount of goodwill, the value implicitly attributed to all the company’s other assets is less than zero. This suggests that the amount of goodwill on the balance sheet is overvalued, so a future write-off is likely.
to 4: Yes, based on the information in Exhibit 28 , the Wall Street Journal article statement appears correct. In the fiscal year ending 31 December 2012 after the article, SEE recorded impairment of goodwill and other intangible assets of $1,892.3 million.