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Travis Boothe, Dan Kim, Daniel M
cCormack,
Walter Park, Sarah Yelverton
2009
Corning Analysis and Valuation
A comprehensive business analysis and equity valuation for the Materials Science industry and all of its varying sub-industries
TTU Travis.Boothe@ttu.edu
Dan.Kim@ttu.edu DpMcCormack@gmail.com
Walt.Park@ttu.edu S.Yelverton@ttu.edu
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Table of Contents
Executive Summary 11
Business and Industry Analysis 19
Company Overview 19
Industry Overview 21
Five Forces Model 23
Industry 1 – Display Technologies 23
Rivalry among Existing Firms 23
Industry Growth 24
Threat of New Entrants 25
Threat of Substitute Products 25
Degree of Switching Costs 26
Bargaining Power of Buyers 27
Economies of Scale 27
Bargaining Power of Suppliers 28
Fixed to Variable Costs Ratio 28
Conclusion 29
Industry 2 – Telecommunications 29
Rivalry among Existing Firms 29
Threat of New Entrants 30
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Economies of Scale 31
First Mover Advantage 32
Threat of Substitute Products 32
Distribution Access 33
Bargaining Power of Buyers 33
Relationships 34
Bargaining Power of Suppliers 35
Conclusion 35
Industry 3 – Environmental Technologies 36
Rivalry among Existing Firms 36
Threat of New Entrants 36
Threat of Substitute Products 37
Bargaining Power of Buyers 37
Differentiation 38
Bargaining Power of Suppliers 38
Conclusion 39
Industry 4 – Life Sciences 39
Rivalry among Existing Firms 39
Threat of New Entrants 39
Switching Costs 40
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Threat of Substitute Products 41
Importance of Product for Cost and Quality 41
Bargaining Power of Buyers 42
Volume per Supplier 42
Bargaining Power of Suppliers 42
Conclusion 43
Analysis of Key Success Factors 43
Cost Leadership 44
Economies of Scale 44
Efficient Production 45
Lower Input Costs 45
Simpler Product Designs 46
Differentiation 46
Product Quality 47
Product Variety 48
Brand Image 48
Flexible Delivery 49
Customer Service 49
Research and Development 50
Conclusion 51
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Firm Competitive Advantage Analysis 52
Product Quality and Brand Image 52
Product Variety 53
Customer Service 53
Flexible Delivery 54
Research and Development 54
Conclusion 55
Formal Accounting Analysis 55
Key Accounting Policies 56
Research and Development 57
Display Technologies 58
Telecommunications 59
Environmental Technologies 61
Life Sciences 62
Currency Risk 63
Capital and Operating Leases 64
Goodwill 65
Pension Liabilities 67
Accounting Flexibility 68
Research and Development 68
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Capital and Operating Leases 70
Pension Liabilities 71
Goodwill 72
Currency 74
Evaluation of Accounting Principles 75
Research and Development 76
Capital and Operating Leases 77
Pension Liabilities 78
Goodwill 79
Currency 81
Qualitative Analysis 82
Research and Development 83
Capital and Operating Leases 85
Pension Liabilities 87
Goodwill 88
Currency 89
Quantitative Analysis 90
Sales Manipulation Diagnostics 91
Cash Collections from Sales 91
Net Sales/ Accounts Receivables 97
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Net Sales/ Inventory 102
Conclusion 107
Expense Manipulation Diagnostics 114
Asset Turnover 114
CFFO/OI 120
CFFO/NOA 121
Total Accruals/ Net Sale 122
Conclusion 123
Identification of Red Flags 123
Undo Accounting Distortions 125
Foreign exchange rate risk 125
Special Purpose entities 126
Capitalization of research and Development 128
Financial Analysis Forecasting Financials and Cost of Capital Estimation 129 Financial Ratio Analysis 129
Liquidity Ratio Analysis 130 Current Ratio 130 Quick Asset Ratio 132 Inventory Turnover 133 Days Supply of Inventory 134 Accounts Receivables Turnover 136
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Days Sales Outstanding 137 Cash to Cash Cycle 138 Working Capital Turnover 139 Conclusion 140 Profitability Analysis 141
Gross Profit Margin 141 Operating Profit Margin 142 Net Profit Margin 144 Asset Turnover 145 Return on Assets 146 Return on Equity 147 Conclusion 148 Firm Growth Rate Ratios 149 Internal Growth Rate 149 Sustainable Growth Rate 150 Conclusion 151
Capital Structure Analysis 152 Debt to Equity 152 Times Interest Earned 153 Debt Service Margin 154 Altman Z-Scores 156 Conclusion 158
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Financial Statement Forecasting 158
Methodology 158
Balance Sheet 159 Total Assets 159 Current Assets 159 Cash 159 Accounts Receivables 159 Inventory 160 Current Liabilities 160 Retained Earnings 160 Shareholders’ Equity 160 Income Statement 161 Sales 161 Gross Profit 162 Cost of Goods Sold 162 Operating Income 162 Net Income 162
Statement of Cash Flows 162
Cash Flow from Operating Activities 163
Cash Flow from Investing Activities 163
Cash Flow from Financing Activities 163
Dividends 163
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Restated Methodology 164
Balance Sheet 164
Assets 164
Liabilities and Stockholder’s Equity 164
Income Statement 164
Statement of Cash Flows 165
Cost of Capital Estimation 178
Cost of Equity using the Capital Asset Pricing Model 178
Weighted Average Cost of Debt 180
Weighted Average Cost of Capital 180 Valuation Analysis 181 Methods of Comparables 181 Price to Earnings Ratio (ttm) 182 Price to Earnings (Forward) 183 Price to EBITDA 183 Price to Book 184 Dividend to Price 185 Price to Earnings Growth 186 Price to Free Cash Flow 186 Enterprise Value to EBITDA 187 Conclusion 188
Intrinsic Valuation Models 189
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Discounted Dividend Model 189 Discounted Free Cash Flow Model 191 Abnormal Growth Earnings Model 193 Residual Income Model 195 Long Run Residual Income Model 197 Conclusion 200
Appendices 202
References 249
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Executive Summary Analyst Recommendation: Fairly Valued, Hold
As of April 1st, 2009
GLW ‐ NYSE (4/01/2009) $ 14.92 Altman Z‐Scores
52 Week Range: 7.36 ‐ 28.07 2004 2005 2006 2007 2008Revenue: 5.95 Billion As Stated: 1.85 3.2 2.72 2.93 1.53Market Capitalization: 22.84 Billion Restated: 1.83 3.15 2.7 2.9 1.57
Shares Outstanding: 1.56 Billion
Current Market Price: $14.92
As Stated Restated
Book Value Per Share: 12.34 12.63 Financial Based Valuations
Return on Equity: 55% 54% As Stated Restated Return on Assets: 35% 34% Trailing P/E: 4.43 4.43 Forward P/E: 7.1 7.1
Cost of Capital Dividends to Price: 0.01 0.01
Estimated R2 Beta Price to Book: 1.21 1.18 3 ‐ Month: 45% 1.32 Price Earning Growth: 0.37 0.37 1 ‐ Year: 45% 1.36 Price to EBITDA: 28.42 25.46 2 ‐ Year: 45% 1.32 Price to FCF: 6.74 7.14 5 ‐ Year: 45% 1.32
10 ‐ Year: 45% 1.34
Intrinsic Valuations:
Published Beta: 1.4 As Stated Restated Estimated Beta: 1.34 Discounted Dividends: 4.57 N/A Cost of Capital: 10.40% Discounted Free Cash Flow: 68.58 72.72 Cost of Equity: 12.68% Abnormal Earnings Growth: 7.1 6.72 Cost of Debt: 6.47% Residual Income: 13.15 13.39
WACC (BT): 10.99% Long Run Residual Income: 14.48 14.95
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Corning (GLW) and Becton Dickenson (BDX) 5 Year History
Corning (GLW) 1 Year History
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Company and Industry Analysis
Corning was founded in 1851 by Amory Houghton Sr. and the Company
originated as a glass manufacturing company. Today the company has offices all
around the world including offices in, Japan, Brazil, China and France, with the main
headquarters in New York, New York. Corning has five different business segments and
they include: Display Technologies, Environmental Technologies, Telecommunications,
Life Sciences, and Specialty Materials.
Industry Overview
The materials science industry is a wide-ranging industry concerning the
engineering and study of properties of matter such as glass, metals, and ceramics as it
applies to various areas of large-scale production. This industry operates in a highly
capital and technologically intensive market. For the purposes of this industry analysis
and equity valuation, the materials science industry will be comprised of Corning’ four
main sub-industries: display technologies, telecommunications, environmental
technologies, and life sciences. Firms in the Display Technologies industry produce
glass substrates that are used primarily in the production of active matrix Liquid Crystal
Displays (LCDs). The Telecommunications industry develops and manufactures optical
fiber for single, multi-dwelling, and corporate needs. Firms within the Environmental
Technologies industry manufacture ceramic and technology solutions for pollution and
emission control. Competitors within the life sciences industry manufacture lab supplies
and equipment such as flasks, beakers, cell dishes and liquid handling instruments. The
charts below break down each of the five forces for the display technologies,
telecommunications, environmental technologies, and life sciences industry.
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Display Technologies Competitive Force Level of Competition
Rivalry Among Existing Firms High Threat of New Entrants Low Threat of Substitute Products Low Bargaining Power of Buyers Low Bargaining Power of Suppliers High
Telecommunications Competitive Force Level of Competition
Rivalry Among Existing Firms High Threat of New Entrants High Threat of Substitute Products Low Bargaining Power of Buyers High Bargaining Power of Suppliers Low
Environmental Technologies Competitive Force Level of Competition
Rivalry Among Existing Firms High Threat of New Entrants Low Threat of Substitute Products Low Bargaining Power of Buyers Low Bargaining Power of Suppliers High
Life Sciences Competitive Force Level of Competition
Rivalry Among Existing Firms High Threat of New Entrants High Threat of Substitute Products Low Bargaining Power of Buyers High Bargaining Power of Suppliers Low
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Analysis for Key Success Factors for Value Creation
In order for one firm to stand out amongst the rest, it is imperative that they
continue to expand on their core competencies through cost leadership and
differentiation. Firms in this industry use core competencies such as research and
development, product quality, product variety, and customer service to achieve this
goal. The firms involved in the industries in which Corning competes rely primarily on
differentiation with some mixed cost. No matter what industry that they compete in,
many of these firms use the same strategy when it comes to producing their products.
These firms must be able to produce differentiation at a cost customers are willing to
pay in order to be successful within their industry.
Given the thousands of products produced within the display technologies
industry, telecommunications industry, environmental technologies industry, and life
sciences industry there is a high premium on cost leadership and economies of scale.
Successful firms are ones which are able to focus on differentiation of their products
while establishing a cost leadership. To lower input costs, firms such as Corning, NGK,
Nippon Glass, and Schott, have started outsourcing production which has allowed these
companies to produce their product at a lower price through the use of cheaper direct
labor. Also, the firms that can establish cost controls are usually the firms which
implement simpler product design resulting in the production becoming more cost
effective. Firms within the industry also employ flexible delivery and advanced logistical
systems in order to create a competitive advantage. Effective research and
development is possibly the most important key success factor for firms hoping to
survive in the material sciences industry. They must keep their products cutting edge
for fear of being outdone by their competitors and becoming outdated.
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Formal Accounting Analysis
Using the six steps of formal accounting analysis; identify distortions, accounting
flexibility, evaluate accounting strategy, quality of disclosure, identify red flags, and
undo accounting distortions a more accurate valuation decision can be made. By
adjusting the financial statements to a standard format, analysts can better present a
firm’s financials in a more realistic picture of its performance (Palepu & Healy). The
subsequent analysis concluded that the only major accounting distortion was in the
area of research and development due to its high percentage of sales. The firm
adequately accounted for as well as displayed a high level of disclosure for pension
liabilities, goodwill, currency, and operating leases, areas that companies take
advantage of due to the higher degree of accounting flexibility. Outside the area of
research and development, there were no apparent red flags or other accounting
distortions that required restatements of adjustments.
Diagnostic Ratios
According to all 3 of the different sales manipulation diagnostic ratios it was
concluded that Corning does a very good job of disclosure due to the fact that their
numbers do not skew at all from the industry “norm”. The only cause for concern
found when reviewing the sales manipulation diagnostics was that some of the
Japanese based firms, with Furukawa in particular, showed large changes from year to
year. This is likely due to the lower level of regulation faces by firms operating in Japan
because they are not subject to the same GAAP guidelines and Sarbanes-Oxley
regulations.
Formal Financial Analysis
The capital structure ratios were used to help determine a firm’s ability to
manage its finances and make interest payments. Corning’s debt-to-equity ratio is the
lowest among its competitors and much lower than the industry average. Corning’s
times interest earned ratio increases to above the industry average in 2008. Corning’s
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debt service margin remains steadily above the industry average, with the exception of
2004 when Becton Dickinson experienced a significant decrease in their current portion
of notes payable. As debts become payable, Corning’s ratio remains constant and above
the industry average, which shows their ability to pay off debts when needed. Corning’s
capital structure ratios revealed that it performs above average compared to others in
the industry. Furthermore, even after capitalizing the research and development
expense, the restated financials did not produce any significant changes in the liquidity,
profitability, and the capital structure ratio analyses.
The financial forecasts were made in order to predict future values and make
necessary adjustments accordingly. This method of due diligence will create a basis for
what the firm needs and expects. Although forecasts are highly susceptible to
inaccuracy, the estimations made will give a firm a small glimpse into the future. These
estimations are derived from present and historical data found in the company’s
financial statements. Using this information, firms are able to predict future trends
which reflect those from prior years. Some trends seem to follow an observable pattern
while others do not. Analysts can use ratios, averages, and growth rates in order to
accurately forecast these trends and future values. This evaluation forecasted accounts
from the balance sheet, the income statement, and the statement of cash flows for the
next ten years based primarily on historical and forecasted sales figures.
The cost of capital estimation section was performed to provide the analyst with
an idea of the source and level the firm’s capital financing. The regression results
provided us with a beta of 1.34 with a corresponding adjusted R squared value of 45.4
percent. Using that beta, and a size adjustment factor of .7 percent, we calculated an
estimated cost of equity of 12.68 percent. Taking into account the different types of
debt and their corresponding interest rates, the resulting calculated cost of debt for
Corning was 6.47 percent. Using both the cost of debt and cost of equity above, we
were able to calculate both a weighted average cost of debt before and after taxes.
The weighted average cost of debt before and after taxes were 10.99 and 10.40
percent, respectively.
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Valuation Analysis
The valuation multiples calculated are used by analysts and potential investors to
compare firm’s value relative to its competitors and to help identify whether or not a
firm may be over or undervalued. All of the comparable valuation multiples are deemed
to be over, under, or fairly valued based on 15 percent analyst perspective. Without
doubt, the main limitation of the section is that we were only able to compare Corning
with one other competitor due to all the others being privately held. Of the eight
comparables calculated, seven of them (87.5%), concluded that according to their
respective comparable price per share Corning would be considered undervalued.
Market PPS
Comparable PPS (as stated) Overvalued Fairly Valued Undervalued Conclusion
P/E (ttm) 14.92 30.12 .01 ‐ 12.68 12.69 ‐ 17.15 17.16 + UndervaluedP/E (forward) 14.92 19.49 .01 ‐ 12.69 12.69 ‐ 17.16 17.16 + UndervaluedP/EBITDA 14.92 23.76 .01 ‐ 12.70 12.69 ‐ 17.17 17.16 + UndervaluedP/Book 14.92 27.33 .01 ‐ 12.71 12.69 ‐ 17.18 17.16 + UndervaluedDividend to Price 14.92 11.76 .01 ‐ 12.72 12.69 ‐ 17.19 17.16 + Overvalued PE Growth 14.92 17.68 .01 ‐ 12.73 12.69 ‐ 17.20 17.16 + UndervaluedP/FCF 14.92 40.85 .01 ‐ 12.74 12.69 ‐ 17.21 17.16 + UndervaluedEV/EBITDA 14.92 25.01 .01 ‐ 12.75 12.69 ‐ 17.22 17.16 + Undervalued
The intrinsic valuation models will be used to estimate a firm’s market price per
share in order to better understand the firm’s value and aid in investment decisions
when variables such as cost of equity, earnings growth rate, or weighted average cost
of capital are changed. Of the five valuation models used two of them concluded
Corning to be overvalued, two fairly valued, and one undervalued. In the two models
that found Corning to be overvalued, the model prices per share produced were almost
all substantially different from the firm’s current market price bringing into question the
explanatory power of the model rather than the firm being over or under valued.
Likewise for the discounted free cash flow model that concluded Corning was
undervalued, the model price per share used to determine the firm’s valuation was 460
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percent higher than Corning’s current market price per share. In both residual income
based models, the per share model prices were only 11.68 percent lower than and .2
percent greater than current market price. Considering all the model results the
intrinsic model valuation section suggests that Corning is currently fairly valued.
Market Over Fairly Under As
stated Restated
Model PPS Valued Valued Valued Model PPS
Model PPS Conclusion
Discounted Dividend 14.92 -12.67 12.68 - 17.16 17.17 + 4.57 N/A Overvalued
Discounted Free Cash Flow 14.92 -12.67 12.68 - 17.17 17.17 + 68.58 72.72 Undervalued
Abnormal Earnings Growth 14.92 -12.67 12.68 - 17.18 17.17 + 7.1 6.72 Overvalued
Residual Income 14.92 -12.67 12.68 - 17.19 17.17 + 13.15 13.39
Fairly Valued
Long Run Residual Income 14.92 -12.67 12.68 - 17.20 17.17 + 14.48 14.95
Fairly Valued
Business and Industry Analysis
Company Overview
Corning was founded in 1851 by Amory Houghton Sr. and the Company
originated as a glass manufacturing company. Corning’s first business line consisted of
manufacturing ceramic and specialty glass. This business line continued until the early
20th century when Dr. Eugene Sullivan became actively involved in the management of
the company. Dr. Sullivan created a strategic vision that concentrated heavily on
scientific research and development. This new focus on research and development led
the company in the new direction of, “invention to innovation” (corning.com). Today
the company has offices all around the world including offices in, Japan, Brazil, China
and France, with the main headquarters in New York, New York.
Today Corning has five different business segments and they include: Display
Technologies, Environmental Technologies, Telecommunications, Life Sciences, and
Specialty Materials. The products for the Display Technologies are manufactured in
Taiwan, Japan, China, the United States, and Korea. Products within this business
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segment include the glass substrates that are used in liquid crystal displays (LCD) which
are found in computer screens, and televisions. In the Display Technologies line the
company has a 50% equity strategic partnership with Samsung. This entity is called
Samsung Corning Precision Glass Co.
The second business unit is Environmental Technologies. Products within this
business line are manufactured in plants from the United States to China. Some of the
products in this product line include Ceramic Substrates, Diesel Particulate Filters, and
Corning’s patented product Celcor Substrates that are used in stationary applications.
These products are designed to help minimize the impact of the manufacturing and
transportation of products on the environment.
The third business segment is Telecommunications. This segment is focused on
the manufacture of fiber optic cable that is used to create bandwidth in both
commercial and residential properties. A new product within this segment is the
multimode version of Clear curve Optical Fiber. This new product allows for “improved
bend performance” which “minimizes signal loss and enables faster and more efficient
optical pathways, routing and installation” (online.wsj.com). The company expects this
new product to be used in the installation of fiber-to-the-home networks, which are
found in multi dwelling units.
The fourth business segment is Life Sciences. Products in this line include cell
culture and bioprocess materials, general lab ware and equipment, genomics and
proteomics, HTS, assay and label-free detection equipment. This division also includes
Pyrex lab and glassware, a major brand name for Corning in this business industry.
These products are mostly used in the pharmaceutical segment in the development of
new drugs that are intended to fight diseases including cancer and HIV. This business
segment is the second smallest with net sales in 2007-2008 equaling about 6.5% of
Corning’s total revenue. Manufacturing plants for the Life Sciences segment are located
in Mexico, New York and Maine.
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The last business segment is Specialty Materials. Products in this business line
are manufactured to customer specifications such as the windshield of the space
shuttle. This segment creates over 150 specialty formations of glass, glass ceramics
and fluoride crystals. Examples of the products found in this line include Gorilla glass
and Vita Hermetic Sealing Solution for OLEDS. This business segment is the smallest
and represents 6% or just over 1 billion dollars in sales for Corning. Due to the unique
nature of products within this division products are manufactured plants across the
world with major locations in France, China and New York.
Industry Overview
The materials science industry is a wide-ranging industry concerning the
engineering and study of properties of matter such as glass, metals, and ceramics as it
applies to various areas of large-scale production. This industry operates in a highly
capital and technologically intensive business. Each firm in the materials industry
operates in various segments. Each segment produces very different products.
Therefore, each segment of each firm all compete in different industries. For the
purposes of this business analysis and equity valuation, the materials science industry is
comprised of four main sub-industries: display technologies, telecommunications,
environmental technologies, and life sciences. The display technologies industry is
comprised of firms such as Nippon Electric Glass, Asahi Glass, and Sumitomo Electric.
The main competitors in the telecommunications industry are Furukawa Electric,
Sumitomo Electric, and Fujikura Co. Ltd. The main firm that competes in the
environmental technologies industry is NGK. The life sciences industry is primarily
controlled by Becton Dickinson. In general, the materials produced by these firms are
purchased by other firms in the production of mainstream products such as Liquid
Crystal Display (LCD) monitors and fiber-optic cables. The key success attribute in the
materials science industry is the ability to raise capital, and to develop and protect
innovative technological advancements. For example: In 2007, Corning spent
$565,000,000 in research, development, and engineering expenses. These expenses
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included exploratory research and investments in new technologies such as synthetic
green lasers, silicon-on-glass, and micro-reactors. The materials science industry is
broken down in the following paragraphs.
It should be noted that within several of Corning’s business segments a majority
of its competitors are located in Japan and or other Asian countries. In order to make a
good qualitative analysis we are assuming the economy of the 21st century is globally,
and thus competitors regardless of their home location face the same business
problems and capital constraints. Each company including Corning operate in a tough
and constantly evolving business environment and comparison for performance will be
made later in our analysis thru financial ratio evaluation and comparison. For our
comparison in this section we assume all competitors are equal from a standpoint of
culturally infrastructure.
Below is a broad definition of the competitors’ characteristics within each segment.
Display Technologies Industry
Firms in the Display Technologies industry produce glass substrates that are
purchased by other firms in the production of active matrix Liquid Crystal Displays
(LCDs). These LCDs are mainly used in televisions, laptops, desktops, and other flat
panel monitors.
Telecommunications Industry
Firms within the Telecommunications industry develop and manufacture optical
fiber for single, multi-dwelling, and corporate needs. These include premises, fiber to
premise and urban networks. It should be noted that Corning did invent the first
optical fiber cable over 35 years ago.
Environmental Technologies Industry
Firms within the Environmental Technologies industry manufacture ceramic and
technology solutions for pollution and emission control. These include but are not
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limited to automotive and diesel filters which are designed to reduce the pollution and
emissions that are seen in both gas and diesel engines. Corning also has several
patents in this business segment that relate to process manufacturing and product
development.
Life Sciences Industry
Competitors within this industry manufacture lab supplies and equipment such as
flasks, beakers, cell dishes and liquid handling instruments. Corning does the industry
standard brand in Pyrex but in no way do they have a monopoly over this business line.
The Five Forces Model
The Five Forces Model is an outline for industry analysis, and aids management
in developing business strategies. The five forces encompass: rivalry among firms,
threat of new entrants, threat of substitution products, bargaining power of buyers, and
bargaining power of suppliers. Businesses analyze these forces to determine
competition and industry profitability. The framework for the five forces as it applies to
the materials science industry is illustrated below.
Industry 1-Display Technologies
Rivalry among Existing Firms-Display Technologies-Force #1
Rivalry exists at all levels of production, and business strategies are heavily
influenced by competition. Therefore success can be determined by how a company
competes with one another. Different companies employ different strategies depending
on factors such as costs or on components involving innovation. To successfully
evaluate these business strategies, one must closely examine the elements that
determine the magnitude of rivalry. Among these elements include but are not limited
to, the growth rate of an industry, the concentration and balance of competitors, the
degree of differentiation and switching costs, economies of scale, learning economies,
the relationship between fixed and variable costs, excess capacity, and exit barriers.
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The competitive advantage for Corning in the Display Technologies business line is the
fact Corning is the largest manufacturer of glass substrates, the leading component for
LCD displays.
Industry Growth-Display Technologies
The market for LCD displays has seen exceptionally growth over the last 5 years.
The market is demanding larger screens that have high contrast and refresher rates for
either their computer and television screens. This high growth rate has helped Corning
be a leader in a not only a growing market but a shift in customer perception of what a
television should truly look like. No longer are television screens large and wide, but
today they are large and narrow, thus setting the market and demand for Corning’s
glass substrate products.
The above chart details the growth of the LCD market in world-wide sales between the
years of 2004-2008. The industry has grown from sales of just over 100 million units in
2004 to over 500 million units in 2008 (Source, Consumer Electronics, January 2009).
This chart serves as evidence that the LCD industry is experiencing a large amount of
growth and it is anticipated that this growth will continue in the coming years.
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Threat of New Entrants-Display Technologies-Force #2
Level of competition can be determined by the number and size of firms in an
industry. More firms in an industry can create greater rivalry since firms must compete
for the same customers. A single firm can engage in a monopoly and can control the
entire market. Few firms in an industry can cooperate with one another and avoid self-
destructive price wars. Many firms in an industry can cause serious competition.
However if firms have similar market share, rivalry may increase as firms fight for
market leadership. Due to the large growth of the LCD market, many competitors have
tried to enter the market but on the consumer side. These competitors have attempted
to sell LCD screens, but decided not to enter into the glass substrate industry in which
Corning manufacturers. That being said, Corning leads the market with a 45% market
share in the glass substrate market and represents over 20% of Corning’s overall net
sales.
Threat of Substitute Products-Display Technologies-Force #3
A firm can reduce its chances of competition by differentiating its products. If
multiple firms produce the same product, customers are likely to switch brands based
on price alone. Therefore, firms aim to set their products apart to attract customers
away from their competitors. Differentiating can be as miniscule as changing the colors
on the packaging of a product. In the Display Technologies industry, firms spend
endless amounts of capital to achieve the highest level of innovation. Within display
technologies the company produces glass substrates that are used in Liquid Crystal
Displays (LCD’s). There are no true substitute products for these glass substrates, the
threat of substitute products comes in when comparing the different types of displays
which also include plasma, and Digital Liquid Display (DLP). Consumers choose on
plasmas due to their faster refresher rate and their vibrant colors, but consumers that
buy plasma TV’s run the risk of burn out (The image burnt into the TV or screen itself).
DLP TV’s are not as thin and thus cannot be hung from walls like LCD’s or Plasmas. Due
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to the size and weight of the DLP it is not a true competitor when talking about a true
flat screen.
Corning continues to make significant investments into research to provide their
scientists with the latest innovative technology. “The materials industry uses key
strategies including efficient manufacturing, access to capital, technology know-how,
and patents.” Patents make it possible for firms in the materials industry to create
unique products that are unmatched by other firms. In order to stay at the forefront of
technology in the LCD market Corning continues to work on research and development
in the glass substrate manufacturing process. Customers are continually demanding
thinner, more lightweight screens that contain higher and faster refresher rates. Thus,
that is key to its differentiation is the constant development of new and faster products
that will meet customer needs.
Degree of Switching Costs-Display Technologies
The ability of a firm to switch industries relies on the cost of switching resources.
A company has to decide if taking on the cost of switching will financially benefit them
in the long run. Low switching costs create price competition as firms will be able to
move from producing one product to another. The display technologies industry is
highly capital intensive and requires specialized materials and equipment, so switching
industries would be difficult. Large amounts of capital have already been invested into
research, and many of the skills and equipment acquired during production are not
easily transferable between industries. This creates an exit barrier. “Corning has a
growing portfolio of patents relating to its products, technologies, and manufacturing
processes.” These patents would become useless in another industry unless they were
sold to a competitor prior to switching industries. Corning’s display technologies
segment represented 45% of sales in 2007 (Corning 2007, 10-K). Within the display
technologies industry, there are large barriers to any company that wants to enter the
glass substrate business.
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Bargaining Power of Buyers-Display Technologies-Force #4
Due to the fact there are so many competitors that are selling LCD screens the
buying power of buyers in this business segment is low. The price of glass substrates is
controlled by the market, and within this industry there are only a few suppliers of this
main ingredient for LCD screens. But, it also needs to be considered is the impact
buyers can have on the price but using the large manufacturers of glass substrates
against each other. For example, Vizio, a large consumer seller of LCD televisions could
bid out its need for glass substrates to both Corning and its main competitor in this
industry, Furukawa. Depending on whose price is lower will determine who gets the bid
for business, thus giving some power to the buyer of this raw material. With expected
growth rates in LCD screen demand expected to grow between 10-12% per year
(Consumer Electronics, July 2008) the demand for glass substrates will also continue to
grow. With the market for glass substrates concentrated between two main suppliers,
the bargaining power of the buyer will continue to be a force within this industry.
Economies of Scale-Display Technologies
Economies of scale can be achieved when a growing company spreads its costs
over more units of production. Therefore the company will be able to efficiently produce
at a lower input cost. A company can gain efficiency through research and
development. Firms in the display technologies industry invest billions into research
studies that provide their scientists with the latest innovative technologies. These
technologies help a firm operate and produce materials more efficiently. Firms also
invest in patents to protect these new technological advances from being duplicated by
other firms. This ensures a competitive advantage and supports Corning’s strategic
vision of creating product differentiation thru large investments in research and
development.
Bargaining Power of Suppliers-Display Technologies-Force #5
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Within any industry there is a constant battle between the buyers of the products
and the manufactures in relation to the price of goods. The display technologies
industry is no different in regards to this issue. For our analysis, we need to detail the
market dynamics of this industry and this includes a large number of buyers and only a
small number of manufacturers. This dynamic, causes a slight power shift away from
the buyers of the products and toward the manufacturers of the products. This is due
to the fact the buyers of glass substrates are limited in who they can bid out projects
and demand for goods to. Corning, and its main competitor in this industry, Furukawa
are the only main suppliers of glass substrates. This limits the amount of suppliers
buyers can use, and helps to create price stability for manufacturers. The only true risk
to this price stability is the market on the consumer end. If consumers decide to stop
buying LCD screens then the demand for glass substrates would fall, causing price
pressure to happen. But, until that market shift occurs the bargaining power of
suppliers in this industry is stronger than the bargaining power of buyers.
Fixed to Variable Costs Ratio-Display Technologies
To produce and sell at the ideal quantity and price, a firm must control their
fixed to variable costs ratio effectively. Variable costs are expenses to a firm that are
dependent and adjust in relation to other volume related variables. Fixed costs do not
adjust and are kept constant throughout the production process. Examples of fixed
costs include rent and utility bills for a manufacturing building. The relationship
between these two costs determine the fixed to variable costs ratio. In the display
technologies industry, fixed costs are relatively high. Corning’s production of glass
substrates requires significant quantities of energy and specialty manufacturing
facilities. These facilities cannot be used for other manufacturing needs due to the
lengthy and delicate process needed for the creation of these high tech LCD inputs.
Although Corning utilizes energy efficient sources of power such as natural gas and
propane, the cost of energy has increased. Many of the variable costs identified in the
production process include certain key materials and proprietary equipment. Rare
materials and specialty equipment used in manufacturing are available only through few
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suppliers. It is not uncommon for a supplier to experience capacity limitations and may
eliminate product lines. However, Corning maintains an adequate supply of batch
materials that would allow operations to continue. If Corning fails to successfully adjust
their manufacturing volumes and fixed cost structure, the firm may not achieve
anticipated profitability levels. Many of Corning’s manufacturing processes are capital
intensive and require large amounts of investments. Since Corning’s fixed to variable
costs are high it would be relatively difficult and costly to discontinue its operations.
Conclusion-Display Technologies
Rivalry among existing firms in the display technologies industry is high due to
the high utilization of proprietary technology. This is also one of the primary reasons
the threat of new entrants in this industry is low combined with the large capital
requirements and high research and development costs. Likewise, the threat of
substitute products is also low in large part because of the high level of product
differentiation. The bargaining power of buyers in the display technologies industry is
low because of the very few substitutes offered by limited suppliers. Bargaining power
of suppliers is high because firms in the industry depend of the few suppliers that exist.
Industry 2 Telecommunications
Rivalry among Existing Firms-Telecommunications-Force #1
Corning also operates in the telecommunications industry thru the production of
fiber optic cable and hardware. Due to large increase in internet usage across the
globe, the market for fiber optic cable has experienced rapid growth on both the
consumer and manufacturing ends. The competition Corning is facing today is much
stronger than it was just 5-7 years ago. Numerous low cost manufacturers have
entered the market in an attempt to undercut price. Some of these competitors
include: Furukawa Electronic, Sumitomo Electronic and finally Fujikura Company. All
three of these main competitors are located in either Japan or other Asian countries.
This should be noted because in the competitive global market of business today it
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could be an advantage for these companies to manufacturer fiber optic cable because
of their cost structure. The unit cost of labor for these firms is historically lower than
companies that manufacturer in the United States or other large world economies.
Thus to offset this price structure advantage, Corning continues to support large
research and development in order to keep a competitive advantage over other firms
attempting to enter the industry.
Over the last few years Corning has introduced several new fiber optic products
onto the market that include: ClearCurve (cable that does not lose its signal when put
into tight bends or turns) as well as single and multi-mode cable that allow for single or
multi-dwelling use. These products have changed the competitive landscape because
they allow for data transmit in places where this type of access was previously not
possible. A few factors that can reduce the threat of other firms entering the industry
are: economies of scale, first mover advantage, distribution access, relationships, and
legal barriers.
Threat of New Entrants-Telecommunications-Force 2
Within any business environment there is always the risk of new competitors
entering the marketplace. This is especially true when the industry has a strong growth
rate and the profit margin is strong within the industry. For the telecommunications
segment both of these trends are strong and thus the risk of new entrants into this
market is also quite strong. The only barriers to entry within this business segment are
the capital costs associated with purchasing the equipment necessary to produce fiber
optic cable and the constant pressure from consumers on price and reliability of the
cable they are using. In order to get a true picture of the competitive landscape we will
analyze several factors that contribute to the business environment and how these
factors will affect the risk of new entrants into this marketplace.
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Economies of Scale-Telecommunications
The relative size of companies already operating within the industry can help
deter others from attempting to enter. The telecommunications industry already has a
number of companies with large amounts of resources that will help to continue their
on-going operations. The telecommunications segment focuses on price and product
innovation to help keep their leading position in the market. In 2007, Corning had a
56% market share in the fiber optic sector and was the market leader for single and
multi-mode connectors and cable.
Although firms can enter into this segment with the right investment the true
competitive advantage in manufacturing comes from volume. The more volume a
producer can produce, the lower the cost per unit becomes for that company. Thus, it
is important for any company that operates in the telecommunication industry to
achieve high sales and a large asset base so it can produce cable at the lowest possible
price. To gain an idea on the size of Corning to its competitors in the
telecommunications segment a graph was created showing the total assets of each
company between 2003 and 2007.
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First Mover Advantage-Telecommunications
Early entry into an industry gives a company a number of advantages. They have
the ability to establish relationships with suppliers and customers. They have more
experience and knowledge about the industry than firms that enter after them. Corning
was the first company to introduce fiber optic cable into the market and thus was the
true first mover in this sector. Along with being the first company to produce fiber optic
cable they have also obtained several patents to ensure their inventions are protected.
The patents for the telecommunication sector include ClearCurve fiber cable, as well as
the single and multi-mode technology that allows for multi-use modes of the cable
itself. This multi-mode patent created the technology that allows for fiber optic cable to
be placed in multi-dwelling areas such as apartment buildings and office spaces.
Needless to say this invention changed the how the world accesses data and where
they are able to access it. Overall, just within the telecommunications segment Corning
has over 1600 patents that protect its innovations and products from competitors.
Threat of Substitute Products-Telecommunication-Force #3
For the telecommunications sector the threat of products that will replace fiber
optic cable is small. The reason for this low risk is because the society we live in today
demands access to the internet and data. In order for this access to occur, there has to
be an infrastructure piece that allows for large amounts of data to be transferred across
some type of medium. Currently, that medium is fiber optic cable. There is a risk this
medium could eventually change to wireless or satellite but this change could cause
some security and reliability issues. The future of this segment revolves around the
ability of the producers of cable to create fibers that transmit faster and allow for more
data to move across its lines. With the large amount of research and development
Corning utilizes, the company should remain at the forefront of innovation in the fiber
optic arena. This would include any innovation that could move the medium from fiber
optic cable to wireless or satellite.
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Distribution Access-Telecommunications
It is necessary for firms to have access to distribution channels for them to be
successful. Firms must have a customer base in order to operate. New entrants must be
able to differentiate themselves from others in the industry to gain and maintain a
customer base. New firms will experience difficulty finding customers because most are
already being supplied. In the materials science industry firms must be innovative and
create quality products to maintain customers. Existing firms already have the resources
for research and development to create new innovative products customers desire.
Corning is a well known company and it will not be as difficult for them to expand their
customer base as it would be for new entrants. New firms will be limited to the
products they can produce and will struggle finding distribution access to customers.
Bargaining Power of Buyers-Telecommunications-Force #4
Within any industry there is always a power struggle between the buyers of
products and the producers of those products. For the fiber optic industry this struggle
is the same. The power of buyers within this industry is stronger than the power of the
suppliers because of the generic nature of fiber optic cable. There are numerous low-
cost producers of cable that can cause price pressure on the product in the market. For
any project that requires just normal cable a buyer can bid out its need to numerous
producers and then can select the company that offers the best price. This balance can
be shifted only is the customer has a specific need or requirement for the cable, such as
the ability of the cable to turn or bend in sharp angles which would give Corning’s
ClearCurve product an advantage. Overall, the buyer usually has the greater influence
when there are numerous suppliers of the same product and within the fiber optic cable
market this is the case.
Relationships-Telecommunications
New entrants lack relationships with suppliers and customers. Existing firms have
already established relationships and will most likely continue. New entrants have to
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gain reliable suppliers and customers to operate successfully. Firms in the materials
science industry have a specific customer base they supply certain products. For a new
firm to take business from others in the industry they must be able to create strong
relationships with customers and learn what they want. Existing firms in the materials
science industry already know what customers want and have been successful at
providing quality products. New entrants will have difficulty creating relationships with
people who are already supplying another firm or are customers to another firm.
Bargaining Power of Suppliers-Telecommunications-Force #5
For the generic product of fiber optic cable, the supplier is limited in its ability to
control price because any competitor can produce a product that meets the customers’
needs to data transmittal a majority of the time. With the unique patents that Corning
possesses, the only power they can exhibit over buyers is when the customer needs a
specialty product that cannot be found with other competitors. Construction companies
might need a multi-mode cable that allows for numerous ports that will be used in a
new apartment complex. In this instance a company like Corning would have some
bargaining power because that product is unique and only a few companies would have
the technology to provide this type of specialty product.
Conclusion-Telecommunications
Rivalry among existing firms in the telecommunications industry is high due to
the high utilization of proprietary technology, much like display technologies. Threat of
new entrants in this industry is high because of the relatively low startup costs involved
in entering the industry. Given the low level of product differentiation, the threat of
substitute products is low. Likewise, the bargaining power of buyers is high because of
the low level of product differentiation and low buyer switching costs. For the same
reasons, the bargaining power of suppliers is low.
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Industry 3 Environmental Technologies
Rivalry among Firms-Environmental Technologies-Force #1
With the recent emphasis on environmental issues such as global warming and
pollution by numerous news outlets and broadcasts, the general public has become
aware about the how important the world’s environment is and what can be done to
protect it. One main focus of this conversation movement has been the demand to
increase fuel mileage in cars and trucks while attempting to reduce emissions that are
produced by burning fossil fuels. Over the last several years there has been a large
influx of environmental competitors that have entered into this market that produce all
types of filters and devices that are aimed at reducing pollution on manufacturing plants
as well as cars and trucks. Any time you have a large influx of competitors the
marketplace becomes extremely competitive and each company is looking for a
competitive advantage. This advantage can be anything from product development to
low cost producer. Thus, it can be concluded that the rivalry amongst firms in the
environmental technologies sector has become extremely strong over the last several
years.
Threat of New Entrants-Environmental Technologies-Force #2
With the environment becoming such a hotly debated topic in the political arena
the need has been created for all types of products that help reduce the impact the
human race has on the environment. In today’s marketplace we have wind turbines
that are producing electronic current thru the power of wind and solar energy. For
Corning, the true risk of new entrants into the diesel particulate segment is a real risk
and risk that continues to grow with each and every passing day. Corning in 2007 had
a 35% market share in the diesel particulate segment. In order to maintain and grow
that market share Corning must create a competitive strategy that creates product
differentiation. They do that thru superior research and development, superior
customer service and brand image.
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The marketplace understands that a majority of goods and products are
transported across the United States thru the use of diesel trucks and the need to
reduce their impact on the environment is a real demand. Thus, anytime you have a
business need you can be certain other companies and individuals will attempt to take
advantage of that need by supplying the market with new innovations and products.
The advantage Corning has in this tough business environment is its reputation and its
ability to use its large research and development budget to create these new innovative
products. But as the world’s population continues to grow the demand for
environmental products that reduce carbon footprints will also grow and thus the risk of
new entrants into the marketplace grows as well.
Threat of Substitute Products-Environmental Technologies-Force #3
The environmental technologies business segment manufactures ceramic and
filter products that are used in both mobile and stationary applications. One of Corning’s
main products in this segment is diesel particulate filters; companies manufacture all
types of pollution control items. Different companies manufacture different air filters
that take particulates out of the air just like Corning’s Duratrap filters. There are a lot of
substitutes for this product not only from other manufactures but also from cleaner
burning fuels such as ethanol and low sulfur diesel. With all this competitive pressure
in the market, the threat of substitute products is extremely real for Corning both in the
present and it is anticipated that this risk will continue to grow as time moves on.
Bargaining Power of Buyers-Environmental Technologies-Force #4
Any industry that has a high level of innovation and product development usually
has a situation where the bargaining power of buyers is reduced and shifted toward the
suppliers of products. The environmental technologies sector is continually developing
new products that are designed to reduce pollution in both gasoline and diesel burning
engines. These products are in direct competition with Corning’s products and thus any
advantage that can be developed usually is. That advantage is always associated with
a new technology or process that produces better results. With a new product or
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process comes a higher cost for the product because of the advantage of the new
technology. Once this occurs, the bargaining power of the buyer is reduced because
there are few products that will meet the ability of the new technology.
Differentiation-Environmental Technologies
There is going to be more than one company for each product within the
environmental technologies industry that will be able to offer the same product that
Corning does whatever it may be. The main way that Corning is able to differentiate
themselves in order to intrigue prospective clients is through their reputation, customer
service, and their commitment to expanding as well as creating better and new
products each and every day. The competitive advantage that Corning uses is its large
size to produce new and innovative products that the market demands with its research
and development budget. This is extremely important to have in an industry that is
constantly changing and demanding new and better products.
Bargaining Power of Suppliers-Environmental Technologies-Force #5
The bargaining power of suppliers in this industry is much higher than the
bargaining power of buyers. This is because of the types of products that are produced
and developed in this sector. The market is demanding new filters that reduce more of
the emissions that are created on diesel and gasoline engines. When a new technology
is developed a patent is usually gathered that will protect this technology from
infringement from other companies. Once that patent protection is there, a supplier
can determine the price it will sell for in the market and not the buyer of the product.
This supply and demand dynamic serves Corning well in this industry as along as the
development of new products is constant. A company cannot afford to put all of its
energy and resources into protecting one type of product because this industry is quite
new, the competitive forces are quite strong on the innovation side. Thus, in order to
keep the bargaining power on the side of the supplier, the supplier needs to be
developing new technology that will create new products that perform better.
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Conclusion-Environmental Technologies
Like Corning’s other industry segments, the rivalry among existing firms is high
in the environmental technologies industry as well. This industry is primarily dominated
by Corning and NGK. Therefore, the threat of new entrants is low. The low
differentiation among products within the industry creates few opportunities for
substitute products. Again, because of the industry dominance of only two firms, the
buyer has very low bargaining power and consequently the bargaining power of
suppliers is high.
Industry 4-Life Sciences
Rivalry amongst Firms-Life Sciences-Force #1
The products produced inside of the life sciences sector include beakers, Petri
dishes, and other lab equipment that is used in the research industry, especially in a lab
setting. Overall, Corning has a 42% market share in the Life Sciences sector. Due to
this fact lab equipment is standard and easy to design they are numerous competitors
in this sector that produce all types of lab equipment. There are low cost producers,
producers that focus on innovation and finally companies that focus on brand name
recognition. Within Corning’s product line is a brand name product called Pyrex, which
is considered within the lab industry as the standard of what quality and customer
service should be. This brand name helps Corning with product sales in this industry as
scientists and researchers recognize the Pyrex name and have a good understanding of
what type of quality product they would receive if they ordered this brand. Regardless
of what strategy a company might select to use, the rivalry and competition in this
industry is strong.
Threat of New Entrants-Life Sciences-Force #2
Anytime within an industry if design of a product is generic such as in life
sciences where the need for a beaker is constant across numerous research labs, the
threat of companies entering the market is real. New entrants into this type of market
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do not need to spend large amounts of resources developing their products as the
industry standard for specifications are constant for beakers and other lab equipment.
This type of equipment must meet certain heat and pressure requirements but these
requirements are the same across most of the research labs, and thus once a product is
developed it can be sold to a lab that develops drugs or to a lab that conducts AIDS
research. The standards and demands on the equipment are the same and this opens
the door for new entrants into the market due to the low threshold for innovation and
product development. The true advantage for a company in a market like this its
reputation of products and the ability of a company to produce a brand name product
that is recognized within the industry. Corning has done that with Pyrex in the life
sciences segment.
Switching Costs-Life Sciences
Switching costs are the costs associated with a business switching suppliers.
There are many factors that can dictate the cost of making the switch such as the
number of suppliers and the demand for the material you need, contracts with other
suppliers regarding purchase obligation or limitations, etc. The switching costs for the
materials needed to produce Corning’s products can be relatively high in the life
sciences segment. They have raw material inputs such as glass and other materials
that used in the making of delicate lab and research materials. Due to the limited
quantity of suppliers of certain precious materials, it would not be an easy transition for
Corning to switch suppliers. Corning must have a steady supply of materials needed in
order for them to produce their products in an efficient manner. Corning engages in
large quantity purchases from its suppliers and this helps to decrease the costs of its
inputs. For example, Corning discloses in its 2006 10-K about a multi-year purchase
agreement with its glass supplier for 15 tons of glass that Corning agrees to purchase
over a 24 month time horizon. If Corning were to stop producing lab supplies the cost
of this raw material would have to be consumed at a cost of 75 million dollars. Before a
company can switch suppliers all aspects of current costs and contracts need to be
examined.
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Threat of Substitute Products-Life Sciences-Force #3
For the business segment life sciences, which manufactures specialty made glass
for chemistry and biological research the threat of substitute products is small. The only
true substitute products are the products that meet the researcher’s specifications for
the sample products the lab is examining. For example, if a researcher has a need for a
specialty beaker that holds stem cells the only substitute for that product is another
beaker that meets the specific specifications of the sample. This leads to competitors in
the industry having no true competitive advantage for their product because the
customer demands are the same for general lab and research equipment. Thus, the
threat of a product being able to take the place of a specialty beaker or glass dish is
extremely small. The needs of the customers in this business segment are constant
and rarely change. This fact produces a stable market for lab supplies for the research
industry.
Importance of Product for Costs and Quality-Life Sciences
Costs and quality are two terms that are generally used in tandem when
producing a product. The products that Corning produces are made with the up most
quality that can be provided as they continue to lead and innovate in the Life Sciences
space. To produce flawless products, the quality of the materials purchased from the
suppliers must also be excellent. Any flaws or defects in the materials purchased from
the suppliers could have an adverse effect on the quality of products produced by
Corning. Costs of materials are higher when the quality of materials being purchased
from the supplier is of high-grade quality. This is usually the case when talking about
lab supplies because the research community requires all lab equipment to be of the up
most quality and in order to produce quality outputs a company must start with quality
inputs. Thus, the input costs for producing high quality glass and measuring equipment
are higher in this industry than for other manufacturing industries such as clothing or
fiber optic cable.
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Bargaining Power of Buyers-Life Sciences-Force #4
The power of buyers in the life sciences segment is stronger than the bargaining
power of suppliers because of the specific nature of the equipment used in this
industry. Another factor that adds to the power of the buyers is the shear numbers of
producers that manufacturer lab equipment. The more competitors within an industry
the stronger the competitive forces in the market and this usually lead to price pressure
on the end products. A lab can order their supplies from a variety of producers, from
low-cost, low quality companies to high-cost, high quality companies. The customer or
buyer has numerous choices and whatever company is able to meet the demands of
the customer will receive the order and the business. The customer or buyer is in
control and has the ability to bargain with producers in order to receive the highest
quality, lowest cost supplies.
Volume per Supplier-Life Sciences
Corning consumes a vast amount of raw materials used to make the components
of the products they sell in the life sciences sector. In order to receive the best price on
its inputs Corning buys in large volume these raw materials from the selected suppliers
of those resources. Corning works with suppliers so that they can avoid both shortages
in materials needed or overstock of materials not being utilized. In the manufacturing
arena a company needs to be able to control its inventory levels and avoid large
amounts of inventory on hand. Due to large nature of its manufacturing business
across all of its product lines, Corning has development processes and procedures that
allow it to use Just-In-Time inventory management to control inventory levels and input
costs.
Bargaining Power of Suppliers-Life Sciences-Force #5
The bargaining power of suppliers in the life sciences industry is limited due to
the large number of competitors in this industry and the generic nature lab equipment.
Research labs require beakers of a certain size that meet certain heat and pressure
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requirements. The requirements are general across numerous research lines and this
factor helps to create a culture of low product innovation and development. Thus, the
industry the static and this helps to create competitive pressure on prices for suppliers.
The only true competitive advantage in a market like this relates to a company
developing a brand or product name that the industry can recognize and know the
quality of the product is good and will meet the labs needs for year to come. Corning
has done this with its Pyrex product line.
Conclusion-Life Sciences
The life sciences segment is full of competition due to the large volume of lab
supplies that are ordered each year and the ease of competition to enter the market
due to low product innovation. Therefore, rivalry among firms is high. Threat of new
entrants is high due to the relatively simple production of lab equipment. Furthermore,
since products in this industry are very similar, the threat of substitute products is low.
The demands of the research industry are fairly constant and predictable, and this leads
to a market that is static and creates price pressure for suppliers of lab equipment.
Because of this, bargaining power of suppliers is low. Since differentiation among
products in this industry is low, firms must compete with each other based on price.
This gives buyers high bargaining power since they can easily switch from one product
to another.
Analysis for Key Success Factors for Value Creation in the Industry
Cost leadership and differentiation are two of the most important concepts
looked at when analyzing an industry’s success. Cost leadership is measured by the
ability of firms in the industry to operate at lower cost than competitors. It is a
competitive advantage firms strive to achieve to reduce cost and increase profits. Cost
leadership can be achieved by maintaining economies of scale, efficient production,
lower input costs, and simpler product designs. Differentiation is achieved when a firm
creates individuality within an industry. It can be measured by product quality and
variety, brand image, flexible delivery, customer service, and research and
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development. They must be able to produce a product that is unique and valuable that
consumers are willing to buy an attainable price.
The firms involved in the industries in which Corning competes rely primarily on
differentiation with some mixed cost. No matter what industry that they compete in,
many of these firms use the same strategy when it comes to producing their products.
These firms must be able to produce differentiation at a cost customers are willing to
pay in order to be successful within their industry.
Cost Leadership
There are thousands of products produced within the display technologies
industry, telecommunications industry, environmental technologies industry, and life
sciences industry. Although highly differentiated, some similar products can be
purchased from multiple companies. With some degree of switching costs by
customers, it is still important that firms develop a cost leadership. Firms must develop
a cost leadership in order to compete with competitive products of others firms in the
same industry. It is important that these firms apply the aspects of cost leadership to
further reduce product costs and prices of their product. Some of the aspects that must
be used to achieve an effective cost leadership include economies of scale, efficient
production, lower input costs, and simpler product design. Differentiation can only
occur with the products being produced once a cost leadership is well managed by the
firms. In industries as highly competitive as these, firms must be able to produce a
product of superior quality at an affordable price.
Economies of Scale
The most competitive firms of the industries in which Corning competes are the
ones which are able to focus on differentiation of their products while establishing a
cost leadership. A popular tactic for many of these firms, to decrease cost, is the mass
production of their product. To benefit from economies of scale, it is common for these
manufactures to increase output. By doing so, firms can reduce the average cost
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allocated to each product. As production of these products increase, fixed costs can be
allocated over a larger base of units produced. For example, over the past six years,
the demand for LCD panels has grown at an exponential rate. Firms that manufacture
these panels have greatly increased the numbers produced. The fixed costs that are
required to manufacture the product can then be allocated over a larger number of
products produced. With lower costs, these panels become more competitive on price.
Another strategy often used by many of these firms is vertical integration of production
and distribution through the use of acquisitions or mergers. Corning merged with
Samsung to produce Samsung Corning Precision in 1995 just as Asahi Glass merged
with Hankuk Electric Glass Co. in 2003 (Corning 10-K, Asahi Annual Financial Report).
While not only lowering costs, these mergers and acquisitions can increase market
share for a firm. They can benefit from the increase of the customer base as well as
reducing cost.
Efficient Production
Efficient production is the ability of a firm to create a competitive cost advantage
by manufacturing a product quickly at a low cost. A recent trend used to develop a
competitive advantage has been the reduction of energy cost used for production.
Many of these firms have achieved flexibility through important engineering changes to
take advantage of low-cost energy sources in most significant processes (Corning 10-
K). In the manufacturing process, many firms can now operate on electricity, natural
gas, propane, oil, or a combination of any of these energy sources. Reducing these
costs can help a company develop a cost leadership through the use of efficient
production.
Lower Input Costs
Input costs can be summed up as the direct material, direct labor, and overhead
costs that are allocated to the production of a product. To lower the cost of production,
firms seek a way to maximize the input of these variable cost items. However, the raw
materials needed by the firms to produce the products of these industries can
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sometimes be costly. Bargaining power of the supplier can be difficult when there is
little competition and few substitutes. When producing glass substrate products, the
suppliers of precious ores, minerals, polymers, and processed chemicals used to
manufacture the products can sometime experience shortages. These shortages can
drive up the price of the materials needed. A successful firm would be able to ensure a
reliable supply through the use of adequate programs.
A different alternative to lower input cost by firms, such as Corning, NGK, Nippon
Glass, and Schott, has resulted in outsourcing of production. Many of these firms which
compete in these industries have moved production overseas. The use of outsourcing
has allowed these companies to produce their product at a lower price through the use
of cheaper direct labor. Cheaper labor costs reduce the amount of labor allocated to
each product. Each of these companies now facilitates in multiple areas of the world
with cheaper average labor such as Japan, Taiwan, and China (Corning 10-K, NGK
Annual Report, Nippon Glass Annual Report, Schott 10-K).
Simpler Product Design
Firms that produce glass substrate products create several different products
each. The firms that can establish cost control are the firms which implement simple
product design. The more simple the design and manufacturing process is, the less cost
that must be used to make the product. It is important that these companies create a
simple approach to producing a product while delivering quality. By creating more
efficient production, companies can become more cost effective.
Differentiation
The most successful firms, of the industries in which Corning competes, focus on
differentiation with some mixed cost leadership. It is the differentiation that the
customers value in the product. The company must find a way for its customers to see
unique value in its product that sets itself apart from competitors. To do this a firm
must first find an attribute of a product or service that customer’s need. By doing so in
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a unique manner, they must be able to achieve this differentiation at a cost that the
customer is willing to pay (Palepu and Healy). In many technological industries
differentiation occurs because of many important aspects, such as superior product
quality. It is important that whatever product the firm is selling must meet all quality
standards to complete the task. Product variety of the firm gives customers choices.
Developed brand image allows the customer to feel safe about the quality of a product
that the firm produces. Flexible delivery makes it easier for companies to get the
products to the consumer in a timely manner. Reputable customer service makes it
easier for the buyer to solve any issue they might have with the firms product might it
arise. Last, investment in research and development allow for firms to gain the
resources to produce these superior products. By combining these attributes and
services, a firm can differentiate its product from others, which can lead to a
competitive advantage.
Product Quality
Many companies which produce glass substrate products rely on reputable
superior quality as a success factor. These firms realize that the success of their
operations is directly related to how well their product is produced. The cost of
different liquid crystal displays differentiates depending on quality. It is important that
successful firms produce a better quality display than competitors. The LCD panels of
the best quality are the ones whose appearance can defy the eye as they view the
monitor. By using active matrix technologies in current LCD panels, firms are able to
produce much brighter, sharper display, and less heavy liquid crystal display panels that
ever before. Manufactures of LCD televisions want to use the best LCD panels that
firms of the industry have to offer. They know that the success of their final product
depends on how well the LCD manufactured panel works. It is important in this
industry that product quality be emphasized because consumers will pay the cost for
better quality. Superior product quality also reduces the firm’s expenses because of
defects. The less they must refund the customers by warranty the better. Similar
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products by firms who produce glass substrate related products rely on the success of
their product quality to maintain success.
Product Variety
Firms which produce glass substrate products usually manufacture many
different types of products. These companies have the ability to compete in several
different industries while using similar technologies and differentiation strategies. The
ability of firms in these industries to produce a variety of products gives them
opportunities to expand their customer base and increase profits. The firms which
produce in these industries are more successful when they are able to give the
customers choices even within its industry. Producers of glass substrate products are
very competitive and it is important that they produce a variety of products to remain
strong competitors. Differentiation of products can also diversify the risk of demand in
one industry not meeting the supply, by higher demand in a different industry. One
major competitor, Asahi Glass, competes in over five different industries including flat
glass, automotive glass, display, chemicals, and electronics & energy (Asahi Annual
Report). Furukawa Electric competes with products in six industries such as
telecommunication, electronics, automotive, energy, construction, and material
(Furukawa Electric Co. Annual Report). The main industries in which Corning competes
are display, telecommunication, environmental science, and life science (Corning 10-K).
This product diversity is apparent through the leaders of many glass substrate
producing products.
Brand Image
Brand image is something people can choose to rely when purchasing one
product over another. Brand image is the result of superior quality, marketing, reliance,
and trust that consumers develop when purchasing products from a particular firm.
People will choose certain products over others if they have a well developed
knowledge of a brand and the products they produce. Brand image can also be
tarnished through poor product quality or customer service. People who are brand loyal
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will choose the product produced by a firm they are comfortable with over any
competitors. It is important that successful firms establish themselves a reputable
brand image to represent the products they produce. Brand image can also create
perceived value in the product they sale. Brand image of firms which produce glass
substrate products rely on well developed brand knowledge by customers. Few of
these firms spend any money what so ever on advertising and marketing. Instead, new
customers to the industry choose the firm with the good reputation. These customers
can rely on the brands recognition developed within the industry. The firms with
repeated superior quality are always highly recommended.
Flexible Delivery
Flexible delivery is a major factor to success in any major manufacturing
industry. The companies that are able to produce and deliver their products in the
timeliest manner have an edge on other competitors. Companies with these
competitive advantages generally will have multiple locations from which they can
distribute their product to customers. This minimizes time and cost from the product
leaving the producer and arriving at the consumer. With the global market growing at
a fast rate, many companies have turned to outsourcing. With manufacturing being
relocated to where labor costs are less, companies can expand into other markets and
deliver their products in a timelier manner around the world. Companies which
manufacture glass substrate products such as Asahi Glass, Corning, and Furukawa
Electric Co. have multiple locations based geographically all over the world such as New
York, Kentucky, Japan, Taiwan, China, and South Korea (Asahi Glass Annual Report,
Corning 10-K, Furukawa Electric Co. Annual Report). By having numerous locations
geographically in different areas, producers can deliver their products faster to
customers worldwide.
Customer Service
A large factor to success by any company in any industry is customer service.
Customer service is a series of activities that are developed to keep a high level of
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customer satisfaction. The ability to maintain relations or fix any problem that a
consumer might occur is a vital component of keeping those consumers purchasing
your product. When considering the industries which compromise of glass substrate
products, consumer service might be generally overlooked. Considering products that
are highly differentiated with mixed cost leadership, customer service should be
regarded with a high priority. Many some of the products produced by competing firms
may appear similar. However, having excellent relations with buyers keep those
customers purchasing products from your company. Many of these competing firms
have a few customers that make for a large percentage of their sales. Sales could be
negatively impacted if one or more key customers substantially reduce orders for
products. Of Corning’s customers, the ten largest accounted for over 50% of sales
(Corning 10-K). Other figures could not be found due to lack of information in other
foreign companies annual reports. It is important that these firms keep good relations
with their customers or else the loss of a customer could greatly impact sales.
Customer service is a vital key to success by keeping those customers loyal and
purchasing a firms product.
Research and Development
Research and development refers to the physical and capital resources used to
help create and innovate new products and designs. New product design and
development is almost always necessary for a company to continue to strive and lead in
whichever market it competes. New products are continuously coming out and
technology is rapidly increasing. A company must stay ahead of the curve or else their
product will become outdated and unwanted. Competitors are continuously trying to
change and develop in order to satisfy customer needs.
Firms that produce glass substrate products invest hundreds of millions of dollars
into research and development each year. Increasing technology is constantly forcing
these firms to produce the newest products. The firms that compete within these
industries spend on average, on research and development, about of 2-10% of their net
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sales. Some firms are more aggressive spending more amounts of capital than others.
Research and development leaders such as Corning will spend nearly 10% of all net
sales on research and development (Corning 10-K). On the other hand, firms such as
Asahi Glass Co. will spend as little as 2% of all net sales on R&D (Asahi Glass Co.
Annual Report). These strategies are determined by the firm’s management. Below
are the actual percentages of research and development invested by a company,
expressed as a percentage of that year’s net sales.
Research and Development 2003 2004 2005 2006 2007
(R&D expressed as a % of net
sales)
Corning 11.13 9.21 9.67 9.99 9.64
Asahi Glass Co. 2.2 2.19 2.07 1.9 2.02
Furukawa Electric Co. 3.5 2.6 2.2 2.1 1.8
Sumitomo Electric 3.27 3.58 3.25 3.21 2.86
Conclusion
The firms that compete within the display technology, telecommunication,
environmental science, and life science industries have all developed a differentiation
with some mixed cost leadership. The leaders of these industries are the firms who can
differentiate their product from others through quality, variety, brand image, flexible
delivery, and research and development. Differentiation is what customers perceive as
value of a firms product. Although more focus is placed on differentiation, these firms
must be cost conscious about their products. There is some degree of switching costs
for customers to choose another product from another firm. By keeping direct
expenses to a minimum, for example direct labor, material costs, overhead costs, firms
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can dictate some cost factors. The most successful firms must choose the correct
balance of these two important strategies.
Firm Competitive Advantage Analysis
The concept of switching costs and differentiation definitely contribute to the
success of a thriving company such as Corning, but the real success lies within their
core competencies. In order for something to fall under this category it must help its
respective firm standout and must be something that other firms would find hard to
duplicate. For Corning these core competencies are research and development, product
quality, product variety, and customer service. In the following sections we will continue
to discuss how Corning maintains a strong grip on the industry through their various
strongholds in their different business segments.
Product Quality and Brand Image
Even with a 50% market share in the displays technologies division of their
company, which accounts for 45% of the firm’s net sales, Corning has not begun to
slow down on expanding its reign. There is still room for growth in the other divisions of
their company and the $565 million that they spent on R & D as well as engineering
proves that they are striving to be the best in whatever they do. Considering that their
product quality is all they have to represent their image as a brand, Corning continues
to strive for excellence in producing the highest quality product in whatever industry
they deal with. “Our business depends on the production of products of conisistenly
high quality. Our products, components and materials purchased from our suppliers,
are typically tested for quality” (Corning 10-K). For various reasons, if their products
produced were to fail to perform, Corning states they will make the necessary expenses
to correct the default. This product quality is what consumers expect to have when
doing business with Corning.
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Product Variety
Corning competes in over four major industries. Their product variety is
relatively high within each group. This allows the customers to choose from the
products of which Corning provide. In the display technology industry they produce
many different types of liquid crystal displays. These displays range in sizes,
resolutions, and to what future product they will be applied to. Within the
telecommunication industry, Corning provides optical fiber cable and any necessary
hardware are equipment needed for intended use. The amount of these product range
widely depending on intended use. In the environmental technology industry, Corning
produces many ceramic technology products for solutions to emission and pollution
control for automobiles. They produce many different models of these filter products
for various kinds of diesel and gasoline machines. However, Corning provides the
largest product variety to their life sciences segment. Here they produce all sorts of
laboratory equipment and various glass products. The range of products is highly
diversified by size and application.
It is important that Corning provide high product diversity in order to remain the
leading competitor in the industries in which it competes. By having a large array of
products to choose from, Corning can satisfy any of its customers’ needs.
Customer Service
A large factor to Corning’s success in the material science industry is the ability
to produce quality products and maintain a high level of satisfaction with their buyers
through customer service. Instead of fighting with other producers to sell their
products by cost leadership, Corning is a leader in their industry by producing the
products their consumers want and keeping those consumers satisfied. The ability of
being able to fix issues that might result such as damaged goods or delayed shipment,
keep the customer from using a different company.
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Corning faces competition in most of its business. They expect additional
competition from existing competitors, low cost manufactures, and new entrants. They
state “Corning must continue to improve customer service and support in order to
remain competitive” (Corning 10-K). It is important that Corning focus on listening to
the customer and trying to meet their demand to help retain their market share in their
industries.
Flexible Delivery
Flexible delivery in the materials science industry is a key to success for
companies that want to sell their product worldwide. With technology developing at an
extremely fast rate, it is important that it does not take long periods of time to ship a
product from the producer to the consumer. Corning has been a leader in the material
science industry by developing locations globally in which they can produce and ship
their products to consumers in a timely manner. They have facilities based in Kentucky,
Japan, Taiwan, China, and South Korea where they manufacture and supply high
quality glass substrates used to produce LCD panels for televisions, computer screens,
etc. (Corning 10-K). “Panel manufactures in the other leading LCD-producing areas of
the world, Japan, Taiwan, Singapore and China, are supplied by Corning” (Corning 10-
K). These variables allow Corning to be quick and flexible with all customers needs
Research and Development
Research and development is a large contributing factor to having success in the
material science industry. Corning is committed to contributing large amounts of their
own earnings and revenue back into research and development to further the
technology of the products they produce. “Corning is the largest worldwide producer of
glass substrates for active matrix LCD displays. That market position remained
relatively stable of the past year. Corning believes it has competitive advantages in LCD
glass substrate products from investing in new technologies.” (Corning 10-K). With
mass amounts of both physical and capital resources invested back into research and
develop, Corning is able to produce the largest, thinnest, most light weight LCD displays
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on the market. Through research and development they have been able to accomplish
these characteristics in their panels while creating exceptional surface quality without
the use of heavy metals. Price and new product innovations are significant competitive
factors (Corning 10-K).
Corning’s investments in Research and Development:
Conclusion
Firms in the materials science industry use different strategies to compete with
one another. In order for one firm to stand out amongst the rest, it is imperative that
they continue to differentiate amongst themselves. Corning uses core competencies
such as research and development, product quality, product variety, and customer
service to achieve this goal. Corning continues to be an industry leader due to
significant investments to research and development which demonstrates their
commitment to product quality and innovation. This ensures product differentiation as
well as quality in their various business segments in the materials science industry.
Formal Accounting Analysis
Financial statements are released periodically, by publicly traded corporations, so
that investors can have a brief glimpse of the businesses operations. In hopes of
2002 2003 2004 2005 2006 2007
R&D Expenses
(in millions of dollars)
$483 $344 $355 $443 $517 $565
R&D Expenses
(expresses as % of
revenues)
15% 11% 9% 10% 10% 10%
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keeping shareholders and increasing investment, firms can use different formats and
accounting policies to present their financial results of operations. Using the six steps
of formal accounting analysis, analysts can better determine the corporation’s credible
accounting policies and reliability of financial statements.
It all begins by identifying the key accounting policies of the company’s financial
statements. It is important that the analysts directly relate the key accounting policies
with the key success factors of the business and other competitors of the same
industry. They then seek to identify any distortions, which can result with misleading
numbers. The second step involves determining the degree of accounting flexibility, as
a result of the firms applied accounting methods and estimates. Third, the analyst must
evaluate the actual accounting strategy to assess whether the company is high
disclosure company or low disclosure company. The actual accounting strategy will also
help to define whether conservative of aggressive accounting policies are reflected on
the financial statements. For the fourth step, the use of qualitative and quantitative
analysis can help to evaluate the quality of disclosure. The fifth step in the accounting
analysis is to point out or identify any potential red flags. These indicators could point
out problems or issues with questionable accounting methods. The last and final step
in the process is to undo accounting distortions. If the analyst feels that there might be
any misleading reported numbers, he or she then would attempt to restate the financial
statements using the reported numbers to reduce any distortion. By adjusting the
financial statements to a standard format, analysts can better present a firm’s financials
in a more realistic picture of its performance. (Palepu & Healy)
Key Accounting Policies
Key success factors can often be directly correlated with the ability of a firm to
have a competitive advantage over other companies in the same industry. Based on
the industry characteristics in which a firm competes, a business must compete and
determine its key success factors and risks. These key success factors are always
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directly related to the key accounting policies implemented. Analysts try to evaluate the
management of these factors and risks of the company.
The competitive analysis determined that extensive research and development,
product quality, product variety, and customer service lead to product quality and
innovation for Corning. Some of the key accounting policies in our industry that could
be used to distort financial statements are research and development, currency risk,
capital and operating leases, and pension liabilities. By knowing the key success
factors, we can better understand the key accounting polices used by these firms.
Research and Development
Research and development has enormous risks and rewards associated with
producing the latest technology or complete failures. Vast amounts of capital are
invested into research and development with hopes of developing or furthering
innovative products. A firm’s investment in R&D has the ability to give the firm an edge
over the competition in the future. To ensure growth and development, companies
must dedicate necessary resources, such as time and money. Because of the
uncertainty in actual future benefit from R&D, companies cannot asses a dollar amount
to place on the Balance Sheet. Therefore, GAAP requires that firms disclose all
amounts invested into research and development. Therefore, these large amounts of
expenses result in lowering assets, equity, and understating net income.
Within the industries in which Corning competes, large amounts of a company’s
capital are expensed into research and development. In 2007, Corning spent $430
million dollars on research and development (Corning 10-k). As a percentage of net
sales, total R&D accounted for 7.3%. In the table below, a breakdown is given of how
many millions of dollars were invested into each industry segment.
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Research and Development 2003 2004 2005 2006 2007
(in millions)
Display Technologies 55 83 107 126 125
Telecommunications 120 90 76 82 82
Environmental Technologies 87 87 102 121 126
Life Sciences 28 38 40 49 55
Other 54 57 119 139 177
Totals: 344 355 443 517 565
Outspending competitors in research and development can hurt Corning on their
financial statement by increasing expenses and decreasing Net Income compared to
other firms. With a lower Net Income, some investors may feel more optimistic, despite
the opportunities and benefits of R&D. However, we can compare each industry as a
whole to determine the percentages of net sales invested into each of these groups.
Display Technologies
As the leader in market share of display technologies, Corning invests large
amounts of research and development to help further the development of their LCD
panels. This R&D helps to increase the high quality glass substrates through the
manufacturing process and technology expertise. In Corning’s displays technology
segment, that investment of R&D “helps our customers produce larger, lighter, thinner
and higher resolution displays more affordably” (Corning 10-k). The charts below
depict the firm’s contributions in millions of dollars to research and development and
the percentage of sales that consists of R&D for the displays technology segment:
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Research and Development 2003 2004 2005 2006 2007
(in millions)
Corning ‐ Display Technologies 55 83 107 126 125
Nippon Electric Co. ‐ Display Technologies 20.51 20.19 27.03 22.4 37.98
Asahi Glass ‐ Display Technologies 25.55 30.15 29.63 28.77 31.72
Research and Development 2003 2004 2005 2006 2007
(% of Sales)
Corning ‐ Display Technologies 9.24 7.46 6.14 5.91 4.82
Nippon Electric Co. ‐ Display Technologies 0.67 0.72 1.02 0.98 1.4
Asahi Glass ‐ Display Technologies 2.2 2.19 2.07 1.9 2.02
We can assume that as an industry, amounts invested into research and
development for display technologies is growing. As demand for flat panel LCD TV’s
grows, firms are going to invest more into research and development to develop the
latest technology. Quality is a necessity as panels being developed are larger, lighter,
and of better visual quality than ever before. Flat panel TV’s began dominating the
market around 2005, which explains why R&D is so high as a percentage of sales in
previous years. Although as the amount of R&D as a percentage of sales over the
years have decreased, actual investment in R&D has increased along with exponential
sales growth.
Telecommunications
“Corning is the largest producer of optical fiber and cable products, but faces
significant competition due to continued excess capacity in the market place, price
pressure and new product innovations” (Corning 10-k). To ensure Corning’s position as
largest producer of the telecommunication industry, they must have the most advanced
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optical fiber products on the market at a price the consumer is willing to pay. The
company invests millions of dollars each year to help ensure that their products stay as
industries front runners. The R&D expenses invested into this industry segment are
used to produce optical fiber and cable products with superior quality at a competitive
price. Technology advances help Corning to stay ahead of its competitors. The charts
below show the contributions to research and development of the leading producers in
the telecommunications industry. The first table shows the total dollar amount invested
(in millions) while the second analyzes the ration of R&D to net sales.
*Note: Sumitomo does not list R&D by industry. Numbers are reported as total
R&D to total net sales.
Research and Development 2003 2004 2005 2006 2007
(in millions)
Corning ‐ Telecommunications 120 90 76 82 82
Furukawa Electric ‐ Telecommunications 24.9 19.1 17.2 18 20
Sumitomo ‐ Company Overall 414 472 482 550 584
Research and Development 2003 2004 2005 2006 2007
(in millions)
Corning ‐ Telecommunications 8.4 5.8 4.7 4.7 4.6
Furukawa Electric ‐ Telecommunications 3.5 2.6 2.2 2.1 2
Sumitomo ‐ Company Overall 3.3 3.6 3.2 3.2 2.9
Amounts of research and development invested into optical fiber and cable
products have decreased, but not significantly, over the past years. R&D for these
products was at their highest when fiber optic use for telecommunications was being
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developed in the early 2000’s. Since then the capital invested into research and
development for Corning and other producers has slowed.
Environmental Technologies
Corning competes in the Environmental Technologies industry by producing
automotive ceramic substrate products. This includes catalytic converters and emission
control systems for both gasoline and diesel engines. Due to recent years demand for
more fuel efficient and less greenhouse gas emission vehicles, Corning has been a
leader in developing products that help with these issues. The research and
development used in this segment are primarily for developing and producing even
more environmental friendly pollution reducing systems. Corning took a decrease in net
income for the fiscal year 2006 primarily due to increased research, development, and
engineering spending in preparation for the growth in sales of heavy duty and light duty
products (Corning 10-k). To meet tighter emission standards, Corning must develop
products that help these engines meet the regulations. The charts below compare the
amount invested by Corning into Environmental Technologies (in millions), compared to
similar product producing companies in the same industries.
*Note: Sumitomo does not list R&D by industry. Numbers are reported as total R&D to
total net sales
Research and Development 2003 2004 2005 2006 2007
(in millions)
Corning ‐ Environmental Technologies 87 87 102 121 126
NGK ‐ Company Overall 113 118 134 125 137
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Research and Development 2003 2004 2005 2006 2007
(%of net sales)
Corning – Environmental Technologies 18.2 15.9 17.6 19.7 16.6
NGK ‐ Company Overall 5 5.2 5.5 4.4 4
As demand for emissions products that must meet regulations and emissions
standard increases, firms in the environmental science industries will continue to invest
large sums into research and development. Corning’s closest competitor, NGK, was
compared on a company overall R&D to net sales ratio, due to lack of Japanese
financial report disclosure. We can tell that research and development is high and
important for both of these firms. Products to reduce emissions standards are
continuously improving as new technologies are researched and discovered.
Life Science Segment
“Corning is a leading supplier of glass and plastic science laboratory products,
with a growing plastics products market presence.” (Corning 10-k) As one of Corning’s
smaller industry segments, it does not require near the resource of research and
development as some other segment industries in which it competes. However, the
amount that is invested plays a large role in net sales. They do seek to continuously
emphasize product quality, research engineering design, and increase product
innovation. The charts below represent the dollar amounts (in millions) invested into
research and development for their life sciences segment compared to their
competitors.
Research and Development 2003 2004 2005 2006 2007
(in millions)
Corning ‐ Life Sciences 28 38 40 49 55
Becton Dickinson Co. 224 236 272 302 360
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Research and Development 2003 2004 2005 2006 2007
(%of net sales)
Corning ‐ Life Sciences 9.9 12.5 14.1 17 17.9
Becton Dickinson Co. 4.6 4.7 5 5.2 5.6
As a percentage, the amount of research and development invested into
Corning’s Life Science segment commands a large percentage of net sales. The
numbers derived from Becton Dickinson represent their business as a whole due to lack
of information. Although they function in other aspects of the medical industry, they
are a good indication of competitor investment in research and development. We can
assume from the numbers given, proportionally Corning invests more into research and
development than others.
Currency Risk
All global companies must factor in currency risk when doing business with
companies and firms operating outside the U.S. They run the risk of losing value due to
fluctuations in currency rates. The currency rate used is primarily a set rate that
involves little room for accounting flexibility. In most all of the industries in which
Corning operates they are exposed to any of these possible currency rate fluctuations.
“Because we have significant customers and operations outside the U.S., fluctuations in
foreign currencies, especially the Japanese yen, the New Taiwan dollar, the Korean
won, and the euro, affect our sales and profit levels” (Corning 10-k). As Corning
expects to see growth in the Display Technologies segment, the exposure to currency
fluctuations is expected to follow. To reduce the exposure to foreign currency
fluctuations, Corning hedges major transaction and balance sheet currency exposures.
They try to limit the exposure to these fluctuations associated with certain assets and
liabilities (Corning 10-K).
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Capital and Operating Leases
Capital and operating leases are two different ways of recording a company’s
assets. Many firms use both a combination of the two types of leases when recording
data on the financials.
Capital leases are recorded on the balance sheet under long term assets and
long term leased liabilities. At signing it is recognized as both an asset and a liability.
When payments are made, a company will decrease the leased liability amount with
cash. They then recognize a depreciation expense and accumulated depreciation of the
long term asset. With a capital lease, the company owns the rights to that asset and
will depreciate the value of it over its contractual life.
The opposite, operating lease, never goes on the balance sheet. It is simply a
lease in which you expense as you accrue it. The asset is used in operations, but is
only recorded on the income statement as an expense. With the use of an operating
lease, firms have the ability to understate both assets and liabilities. Operating leases
are recorded as operating expenses on the income statement. Since the amounts are
not recorded on the balance sheet, the financial statements can mislead some
investors.
These different options of leases can play a role when writing the financial
statements. It gives the company alternatives and ways to manipulate the numbers on
the balance sheet. The company is generally not allowed to switch the type of lease
during the lease term. If they were to do so, they must disclose all information in the
notes and fix past reports. This gives the accountant room for accounting flexibility
when reporting numbers.
In the industries in which Corning operates, both capital and operating leases are
used. Corning leases a large amount of both property and equipment for the
production of goods using a capital lease. Operating leases are also disclosed with over
$40 million in operating expenses in the fiscal year 2007. The minimum lease
payments required under non-cancellable operating leases at December 31st, 2007
totaled $214 million (Corning 10-k). These operating lease contracts will be expensed
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by Corning over an accumulating of future year’s income statements. Below are the
amounts of non-cancellable operating leases by Corning over the next five years.
Operating Leases
(in millions) 2008 2009 2010 2011 2012
Corning‐ Non cancellable operating leases
43.6 31.2 32 15.5 15.4
Goodwill
Goodwill is when an acquisition of another company is purchased by a firm at a
purchase price that is above the market value for that asset. It is an intangible asset
that is recorded into the goodwill account on the balance sheet by the value determined
to surpass market value. The amount of goodwill is determined by the firm, which is
the difference of the purchase price and the fair market value of total assets minus total
liabilities. The difference of the purchase price and owners equity is debited to the
goodwill account. By acquiring other firms, a company would gain market share on
competitors. They can integrate horizontally or vertically in hopes of reducing costs or
increasing production of their products.
In past years, goodwill was calculated and written down on the balance sheet as
an intangible asset, later to be amortized over a period of time. New accounting
practices state that goodwill is still recorded as an intangible asset; however, instead of
being amortized, firms must examine the goodwill for impairments each year.
Impairments reduce the value down to new market prices. Distortions to the financial
statements can occur if the impairments to goodwill go unrecorded. A result of
overstated assets and equity can cause deceit. Expenses would then also be
understated resulting in an overstated Net Income. Below would be the results to the
balance sheet and income statement if impairments were not stated properly.
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Balance Sheet Asset = Liability + Owners Equity
Overstated No Effect Overstated
Balance Sheet Revenue - Expenses = Net Income No Effect Understated Overstated
The amounts of goodwill, that competitors in the industries in which Corning
operates, can give us an idea about the key accounting policies used by Corning. The
figures below are the amounts of goodwill on the balance sheets of both Corning and
Asahi Glass Co, one of the major competitors of the industries in which Corning
operates. Also included are the amounts of goodwill, listed as a percentage of total
non-current assets, to give us a better idea about competing firms of different sizes.
Limited amounts of Corning’s competitors listed goodwill in their annual reports due to
lack of disclosure requirements by Japanese firms.
Goodwill
(in millions) 2003 2004 2005 2006 2007
Corning 1901 398 338 316 308
Asahi Glass Co. 747 645 628 236 190
Goodwill
(as a % of non‐current assets) 2003 2004 2005 2006 2007
Corning 23.6 6.2 4.6 3.8 3.1
Asahi Glass Co. 7.1 6.1 5.3 1.9 1.6
We can conclude that Corning uses a ratio of goodwill similar to their closest
competitor between the 7% to 3% range. The dramatic decrease of goodwill in 2003 is
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associated with a sale of the frequency controls segment of the Telecommunications
portion. “As required by SFAS No. 142, "Goodwill and Other Intangible Assets," we
allocated a portion of the Telecommunications segment goodwill balance to the carrying
amount of the frequency controls business in determining the loss on disposal. The
amount of goodwill to be included in that carrying amount was based on the relative
fair value of the business to be disposed and the portion of the Telecommunications
segment to be retained” (Corning 10-k).
Pension Liabilities
Most companies offer some sort of retirement benefit plan for their employees.
Pension plans are a form of post-retirement benefit plans configured by companies for
their employees once they retire. The goal of the pension plan is to provide a source of
cash flow for a retired worker. A pension plan can undergo many variable changes, of
which can change the present value of those future cash flows to the retiree. Discount
rate, rate of increase of future compensation levels, and expected long-term rate of
return on plan assets are a few. A company must be accurate when determining these
rates. These factors have an influence on future payments to retired employees on the
pension plan.
Pension plans are recorded in the liability segment of the balance sheet since the
company has the obligation to pay the retiree in payments at a later date. When
determining the discount rate, it is important that the company not understate or
overstate the rate. An understatement of the discount rate would result in an
overstatement of liabilities, while an overstatement of the discount rate would have the
adverse effect. It is important that the correct discount rate is chosen so that liabilities
are not overstated and appear less appealing to investors. Or if liabilities are
understated, the company might have non-sufficient funds to repay those liabilities in
the future.
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Accounting Flexibility
In order to generate all the figures on a firm’s annual reports, the firm must use
policies and approximations known as accounting flexibility. These policies and
approximations determine how a company accounts for expenses and revenues.
Accounting rules such as the Generally Accepted Accounting Principles are used to set a
certain standard to which accounting information is disclosed. GAAP aims to ensure fair
value measurement for all public firms. Firms with considerable accounting flexibility
usually have more informative data. Firms with limited accounting flexibility usually
have less informative data. Therefore, analysts find it more difficult to understand these
firms’ economics. Further analysis has shown that the Japanese competitors in the
materials science industry have very different accounting standards than that of U.S.
competitors. For example, Japanese accounting standards seem to provide very little
accounting flexibility compared to that of U.S. standards. Further evidence of
accounting differences can be found in subsequent paragraphs.
Furthermore, the flexibility to disclose certain information for a firm is influenced
by standards set by accounting policies such as GAAP. As such, some companies are
provided enough flexibility to disclose additional information such as segment data
which summarizes the operations of each business segment of a firm. As described
throughout this analysis, the materials science industry is made up of four main sub-
industries that include: the display technologies industry, the telecommunications
industry, the environmental technologies industry, and the life sciences industry. The
following main points of the accounting flexibility analysis integrate these different sub-
industries where appropriate.
Research and Development
Research and development plays a key role in the materials science industry and
all of its sub-industries. In order to maintain technological innovation in these
industries, a company must continuously contribute capital into research and
development. Depending on the standards and policies set by GAAP, firms will have
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high or limited flexibility when reporting these R&D expenses. In accordance with GAAP,
every company charges research and development costs to operations when incurred.
The materials science industry is divided into four separate industries. Therefore,
each firm operates in a sub-industry that has its own R&D expenditures. The relative
size of each business segment determines the amount of capital invested into R&D for
that segment. Larger amounts of capital are typically invested into the larger segments.
Companies that operate in the life sciences industry such as Becton Dickinson usually
include total R&D expenses in one category on one financial statement. According to
the company’s 10-K, the firm includes total R&D costs under operating expenses on the
income statement. This trend mirrors that of other companies in the industry such as
Corning. Normally, this would make it difficult to determine which business segment
incurred the most R&D expenditures. However, these companies provide additional
performance evaluations for each business segment. These supplemental statements
represent revenues reduced by product costs and operating expenses. This provides
evidence that the materials science industry offers enough accounting flexibility to their
firms. Firms that operate in Japan’s telecommunications industry such as Sumitomo
Electric also provided accounting information for its different business segments;
however, R&D costs are omitted. This indicates that Japanese managers face differing
GAAP standards than those of the U.S. firms. Companies that are based in the U.S. tend
to show a specific pattern when allocating R&D expenses to each sub-industry.
According to Corning’s 10-K annual report, Corning’s display technologies sector
brought in 45% of overall net sales in 2007. In turn, this sector spent $125 million or
30% of total R&D expenses during the same year. In comparison, their life sciences
segment only contributed 5% of net sales. This segment spent a mere 9% of total R&D
expenses during 2007.
Overall, firms in the U.S. tend to have higher accounting flexibility than those of
Japanese firms in the materials science industry. As a whole, each firm has provided
enough information to determine overall R&D expenses. Due to strict and more rigid
accounting standards, some Japanese firms have failed to supply additional statements
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that allocate total R&D costs to each of their business segments. Moreover, this
Japanese trend in accounting flexibility will be discussed more heavily throughout this
analysis.
Capital and Operating Leases
Firms have the choice of obtaining property either through operating leases or
through capital leases. All firms have flexibility in choosing which type of lease to use,
and most firms typically choose to use operating leases. Operating leases allow a
company to acquire a facility without recording the rent expense. Capital leases differ
from operating leases in that a firm acquires the property asset and must record the
lease payments as a liability. Operating leases are favorable since expenses are
understated, thus overstating net income. This overstatement in income attracts
potential investors. Choosing an operating lease also eliminates the risk of keeping a
long-term asset which can depreciate over time. Also, lease payments and rent
expenses are usually recorded in the “Operating Expenses” section of the “Selling,
General, & Administrative Expenses” account on the income statement.
Most companies in the materials science industry seem to share a common trend
in that they all use operating and Capital leases when acquiring property. Companies
such as Corning and Becton Dickinson have specified in supplemental notes that they
both use operating and capital leases for all of their business segments. According to
Corning’s 10-K, the company “leases certain real estate property under capital leasing
agreements that generally require the company to pay for maintenance, insurance, and
taxes. Future lease payments for other real property are required under operating
leasing agreements. Rent, utilities, and insurance expenses from capital leases were
charged to the company’s General, Selling, & Administrative expenses as incurred.
Property improvements that increase asset value and extend property life were
capitalized.” (Corning 10-K) Other firms such as Becton Dickinson “purchased property,
plant, and equipment at cost less any impairment using capital leases.” (Becton
Dickinson 10-K) For these companies, the exact amount of assets purchased using
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capital leases vs. operating leases is unclear. Although, the previous examples indicate
that it is certain that both companies do use both types of leases.
The utilization of both operating and capital leases creates a balance between
the pros and cons for each type of lease. For example: When Corning acquires property
through operating leases, the company does not have to incur rent expense which will
understate liabilities as explained previously. However, with this lease the company will
not own title to the property. At the same time, when the company acquires property
through capital leases the company will gain title but will have to recognize lease
payments. Accounting policies such as GAAP implement these types of rules. Hence, the
level of thoroughness for these companies to disclose these activities are called
accounting flexibility.
Pension Liabilities
Pension plans are arrangements made by employers that provide employees with
income upon retirement. The amount of income provided is dependent upon the
number of years the employee has been with the company. A discount rate is then used
to discount the future payments to the present value. In order for a pension to work, a
company must hypothesize the approximate number of years a particular employee will
work. The company must then estimate the amount of time an employee will live after
retirement. Additionally, in accordance with the Statement of Financial Accounting
Standards (SFAS), firms in this industry have adopted the “recognition and disclosure
provisions which require firms to recognize on a prospective basis the funded status of
its pension and other post-retirement benefit plans in the balance sheet with a
corresponding adjustment to accumulate other comprehensive (loss) income. The
incremental effect of adopting this new policy was a $209,695 cutback in shareholder’s
equity net of deferred taxes.” (Becton Dickinson 10-K) Additionally, pension plans are
not allocated to each sub-industry of a firm.
All firms in the materials science industry have included pension obligations in
their financial reports. Different companies have different methods of computing the
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discount rate. As stated in Corning’s 10-K annual report, “Discount rates are weighted
based upon the projected benefit obligations of the respective plans. To arrive at an
effective discount rate, some companies use the Citigroup Pension Discount Curve that
matches points along the curve to the projected future benefit payments.” (Corning 10-
K) As mentioned earlier, Japanese competitors tend to provide less informative data
than American companies. Companies that operate opposite Corning in the display
technologies industry, such as Nippon Electric Glass, did provide information regarding
liabilities for severance and retirement benefits; however, the company did not specify
discount rate calculations. Companies like Becton Dickinson “determine their discount
rates each year based on investment grade bonds and other factors as of the
measurement date (September 30).” (Becton Dickinson 10-K) For U.S. pension plans,
BD used a discount rate of 8%. This rate was based on an actuarially-determined,
company specific yield curve.
According to the evidence provided, companies in the materials science industry
are provided considerable accounting flexibility when recognizing benefit liabilities.
Managers use different techniques when calculating discount rates. Ultimately, the
determining factor when selecting a fair rate is the final judgment of the manager. For
this reason, when these numbers are translated to financial statements, these figures
may become easily distorted. Accounting standards allow this to happen by leaving
room for managers to work with when determining a fair net income investment. A
perceptive investor will keep this in mind when analyzing pension plans in a financial
statement.
Goodwill
Goodwill is recorded in a company’s financial statements when an asset is
purchased for more than the fair market value. The difference is recorded as an
intangible asset. The methods of recognizing goodwill is standardized by GAAP.
However, firms in the materials science industry are still allowed moderate flexibility. In
accordance with U.S. GAAP, goodwill is no longer amortized. GAAP recently
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implemented new methods to recognizing impairment on goodwill. As of recently,
amortization of goodwill is also prohibited under the International Accounting
Standards. Companies are now required to establish fair value of the reporting unit
using present value of future cash flow, and then compare it to their carrying value. If
the carrying value is impaired, goodwill must be reduced to match the fair value to the
carrying value. This method is in comparison to the old method where companies used
to be able to deduct the value of goodwill annually over a set number of years.
With goodwill, firms in the materials science industry are allowed considerable
flexibility since goodwill is ultimately determined by management’s judgment.
Companies like Becton Dickinson that operates opposite of Corning in the life sciences
industry, review goodwill annually for impairment or whenever indicators of impairment
arise. Impairment reviews are based on a cash flow approach as previously discussed.
However, this method requires significant judgment by management with respect to
“future volume, revenue and expense growth rates, changes in working capital use,
appropriate discount rates, and other assumptions and estimates.” (Becton Dickinson
10-K) This reflects strong accounting flexibility. The use of alternative estimates and
assumptions could increase or decrease the estimated fair value of assets, and could
potentially result in different conclusions to BD’s results of operations. Actual results
may differ from management’s evaluations. According to Corning’s 10-K report, “long-
lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable… Recoverability
of assets is measured by comparing the amount of an asset against future
undiscounted cash flow. If the sum of the expected future cash flow is less than the
carrying amount of the asset, an impairment loss is measured as the difference
between the estimated fair value and carrying value.” (Corning 10-K) Accounting for
goodwill seems to be very similar between companies across all sub-industries.
Similarities in accounting flexibility are also consistent with these comparisons.
In the event of impairment, companies will specify the conditions of the
impairment in the company’s 10-K. For example: Japanese competitor Furukawa
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Electric recognized that recoverable amounts of plant for copper compound metal
materials were less than their carrying amounts due to continuing negative cash flow.
This negative cash flow was generated from “operating activities and the likelihood of
the carrying amount not being recoverable by future cash flows.” According to
Furukawa’s 2008 annual report, “the carrying amounts were reduced to recoverable
amounts which were mainly evaluated based on the value in use, which was calculated
by discounting future cash flows at an interest rate of 14%.” In accordance with the
Statement of Financial Accounting Standards, as a result of the impairment the fair
value of certain assets owned by the U.S. subsidiary was determined to be less than its
carrying amount, so that the impairment loss of $10,000 was recognized. This loss was
included in “other, net” in the statement of income in 2007.
In summary, long drawn out processes to estimating goodwill are standardized
by accounting policies set forth by GAAP, SFAS, and other accounting standards. These
policies ensure accurate estimations to financial statements. Nevertheless, the final
approximations are ultimately dependent upon the judgment of management. Some
factors that require additional attention by managers are left out of accounting
calculations. Even after lengthy calculations made through GAAP policies to recognize
goodwill, the materials science industry is fundamentally allowed high flexibility for
managers to have the last word.
Currency
The determination of the functional currency is made based on the appropriate
economic factors. Accounting standards provide low flexibility for managers when
translating exchange rates. Exchange rates are understood by many analysts, and any
distortion in the exchange rates would be easily caught. For the most part, managers
have been honest when translating exchange rates. However, numbers can be easily
distorted on financial statements if not careful. Foreign competitors in the materials
science industry use local currencies as the functional currency. For instance, foreign
competitors that operate across specific sub-industries in the materials science industry
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such as Furukawa Electric, Nippon Electric Glass, NGK, Sumitomo Electric, and Asahi
Glass all use the Japanese yen. Many firms in the materials science industry report all
transactions regarding exchange rates in financial reports. For example: for all of
Corning’s transactions denominated in a currency other than the company’s functional
currency, “exchange rate gains and losses are included in income for the period in
which the exchange rates changed.” (Corning 10-K) Other U.S. companies such as
Becton Dickinson also operate in foreign subsidiaries which use the same basic currency
determination methods. “Foreign subsidiary functional currency balance sheet accounts
are translated at current exchange rates, and statement of operations accounts are
translated at average exchange rates for the year.” (Becton Dickinson 10-K) Any gains
or losses in translations are reported as a separate component of accumulated other
comprehensive income (loss) in shareholders’ equity.
Since exchange rates are easily understood, managers have no incentive to
distort rates on financial statements. The main fact that the general public is informed
on what the current exchange rate is, provides low flexibility for managers when
translating rates on annual reports. Companies across all sub-segments in the materials
science industry typically use similar accounting methods when accounting for losses or
gains in translations. Since companies operate in various subsidiaries in multiple
countries, it is also important to correctly state currency translations. Accurate
translations help companies operate internally between foreign subsidiaries. Effective
communication is essential in any successful industry.
Evaluate Actual Accounting Strategy
The type of accounting strategies used by a company ultimately impacts
investors’ views of the company. Manipulating financial statements can make the
company appear more successful and mislead investor’s valuation of the firm. Two
dimensions are used when evaluating the actual accounting strategies companies
practice; the firm’s level and quality of disclosure and the firm’s choice of accounting
policies. Managers who believe their company is doing well tend to use policies that
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accurately portray the companies economic position. On the other hand managers who
know the company is not being as successful may tend to use accounting flexibility to
portray the company in a better economic position than it actually may be. Trends over
a period of time help determine a company’s level of disclosure and recognize if they
are distorting their accounting numbers.
Investors and analyst want to make sure companies are providing correct
information for them to make accurate decisions on the company’s economic position
and outlook. It is important to determine if a company uses aggressive or conservative
policies when reporting accounting numbers. Undervalued companies use conservative
accounting policies, which results in understating book value and growth of the firm.
Individuals investing in a firm, which uses conservative accounting, will experience
larger gains when the rest of the market realizes that the firm is really more valuable
than it has portrayed. Overvalued companies use aggressive accounting policies, which
lead overstated book value and economic growth.
Corning has a good level of disclosure when comparing their books to others in
the industry. Their books are very open and in some cases their financial reports
provide more information than other firms competing in the industry.
Research and Development
Firms within the materials science industry act in accordance with the GAAP
standard, which states each company’s research and development costs are expensed
as incurred. As a result, firms have limited flexibility in ways they account for research
and development. If managers had accounting flexibility when reporting research and
development they would have the ability to manipulate their books to represent a
greater value of their firm. Large research and development cost will result in greatly
overstated expense cost and managers must be able to adjust their expense account to
portray a more accurate value of the firm. When research and development is
recognized as an expense, expenses are overstated and net income is understated,
resulting in less accurate financial reports. In the materials science industry most firms
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expense large amounts of revenue back into research and development, which results
in an inaccurate financial report. For example, Corning reinvested 7.3% of net sales
back into research and development over the past year. Expensing that amount of sales
back into research and development can greatly affect the company’s books. One way
to fix inaccurate financial reports is to capitalize the research and development as an
asset over the completion of developing projects. Once that occurs, investors will have
the ability to determine a more accurate value of the firm. All firms in the industry still
recognize research and development as an expense, which tells us the company
practices a conservative accounting strategy.
Operating and Capital Leases
Companies usually do not own all of their assets therefore they need to lease.
Companies have the option to use capital leases or operating leases. Operating leases
are not recorded on the books as a liability but rather as rent expense. Cash flows out
as rent expense and the company does not own the asset. Capital leases are treated
very differently and are recorded on the books as long-term assets and long-term
liabilities. This type of lease required the company to pay interest expense and give the
company ownership of the asset. The asset must also be accounted for its depreciation
over time.
Companies within the material science industry own and lease assets. Most
American companies verify the use of capital and operating leases to acquire assets.
The ability for a firm to choose what type of lease to use gives them room for
accounting flexibility. Accounting flexibility concerning capital and operating leases gives
firms the opportunity to distort numbers on the balance sheet. Companies located in
Japan do not show evidence of using either type of lease on their financial statements.
Companies that do not present expenses or liabilities regarding leases use very low
levels of disclosure. U.S. based companies annual reports must agree with stricter
standards set by GAAP. U.S. companies have a high level of disclosure due to
responsibilities to report data regarding both capital and operating leases on financial
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reports. However, since Corning does not disclose operating leases in the liability
section of the balance sheet they could potentially experience more distortion. Corning’s
real estate property is reported using capital expense, which displays high disclosure.
Other real property is reported using operating expense, which has the potential to
eliminate an increase in liability and distort income. However, the financial reports
separating what type of lease is used allow investors to still accurately value the
company. Since numbers are not given for Japanese based companies they have a low
level of disclosure compared to U.S. companies in the industry. Corning and Becton
Dickinson both use a mixture of operating and capital lease expenses which shows
companies in the industry tend to follow the same accounting strategy. Firms in the
industry as a whole, based on available information, follow both conservative and
aggressive accounting policies by disclosing and not disclosing information regarding
operating and capital leases on their financial statements.
Pension Plans
Corning discloses more information about their pension plan than almost all of its
competitors except Becton Dickinson. This is a good sign for investors; it gives them the
ability to understand how the company calculates the rate necessary for their
obligations and to get a better understanding of the firm’s economic position.
Pension Benefits Postretirement Benefits Domestic International Domestic 2007 2006 2005 2007 2006 2005 2007 2006 2005 Discount rate 6.00% 5.75% 5.50% 4.58% 4.59% 4.52% 6.00% 5.75% 5.50% Rate of compensation increase
5.00%
4.50%
3.99%
3.89%
3.73%
5.00%
5.00%
4.50%
(Corning 10K)
Most firms within the materials science industry also follow conservative accounting
principals such as:
Benefit Obligation Discount rate:
U.S. plans (A) 6.35 5.95 5.50
Foreign plans 5.32 4.65 4.19
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(Becton and Dickinson 10K)
Discount rates have been increasing over the past few years and this shows the
companies flexibility in changing the discount rate. The discount rate is an estimate the
company makes using specific calculations based on several different factors such as
economic factors and conditions. “Expected return on plan assets Domestic from 2007
to 2005, 8.00% 8.00% 8.00% and international form 2007 to 2005,6.73% 6.81%
6.80%. The expected rate of return on plan assets was determined based on the
current interest rate environment and historical market premiums relative to fixed
income rates of equity and other asset classes and adjusted for active management of
certain portions of the portfolio” (Corning 10-K). Corning states why the rates vary for
domestic pension benefits and international pension benefits, “We have an investment
policy for domestic and international pension plans with a primary objective to
adequately provide for both the growth and liquidity needed to support all current and
future benefit payment obligations” (Corning 10-K).
Both Corning and Becton and Dickinson have gradually been increasing discount
rates that are relatively close to each other. Since both firms operate in the materials
science industry and each use similar discount rates it can be concluded that Corning
and other firms within the industry use conservative accounting procedures.
Goodwill
Goodwill is the additional amount paid over book value to acquire another
company. Goodwill is subject to an early impairment test that compares fair value to
book value. If the book value is greater than fair value then impairment is used. The
process requires a great amount of estimations and may allow companies to
aggressively overvalue assets. Due to the strong accounting flexibility companies have
when recording goodwill there needs to be some kind of way to verify the accuracy of
estimation. “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived
intangible assets are subject to impairment reviews at least annually, or whenever
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Indicators of impairment arise. Intangible assets other than goodwill and
indefinite-lived intangible assets and other long lived assets are reviewed for
impairment in accordance with SFAS No. 144” (Becton and Dickinson 10K). Actual
results may be different than estimates made by managers so it is important to review
their judgment. When observing accounting policies of companies in the materials
science industry we discovered that all firms follow a similar yearly impairment
evaluation. After companies realize the need for impairment they must complete certain
tests to estimate the actual impairment loss. For companies operating in the U.S. under
Financial Accounting Standard Board regulations, all companies are required to perform
annual goodwill impairment evaluations. If there is impairment in the financial report
companies will provide information related to why it has occurred.
Corning displays a high level of disclosure by disclosing information concerning
goodwill related to different business segments over the years. “In 2006, restructuring,
impairment and other charges and (credits) includes a charge of $44 million for certain
assets in our Telecommunications segment. In 2005, restructuring, impairment and
other charges and (credits) includes a gain of $84 million for the reversal of the
cumulative translation account of a wholly-owned subsidiary that was substantially
liquidated. Amounts for 2005, also include a charge of $28 million for a restructuring
plan in the Telecommunications segment (Corning 10K). Corning generally reports
goodwill, but did not record any impairment cost in 2007 or 2006 because, “There were
no changes in the carrying amount of goodwill for the years ended December 31, 2007
and 2006” (Corning 10K). Furukawa Electric, which also competes with Corning in the
telecommunications segment, did not report any impairment cost for 2007 either. Over
all the firms in the materials science industry practice conservative accounting
procedures when reporting goodwill as a result of annual reviews. Firms across the
industry disclose reasons for impairment and correct financial reports to accurately
reflect their business.
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Currency
Firms operating in the materials science industry operate in the U.S. as well as
several different foreign countries. Companies operating in foreign markets are subject
to currency exchange rates for each individual country around the world. The majority
of competitors in the materials science industry either use U.S. dollars or Japanese yen.
It is very hard for companies to distort information on the financial reports using foreign
exchange rates due to the fact that it is common knowledge to investors.
Corning as well as all firms operating in the materials science industry tends to
follow conservative accounting strategies in regard to currency exchange rates.
Companies do not create their own exchange rates but must follow those set by a
higher authority in each country. As a result of the set rate it is difficult for firms to
distort foreign currency. Corning reveals what effect translation of currency has on their
books, “We engage in foreign currency hedging activities to reduce the risk that
changes in exchange rates will adversely affect the eventual net cash flows resulting
from the sale of products to foreign customers and purchases from foreign suppliers.
The hedge contracts reduce the exposure to fluctuations in exchange rate movements
because the gains and losses associated with foreign currency balances and
transactions are generally offset with gains and losses of the hedge contracts” (Corning
10-K). In the past year Corning has not been successful at hedging and they have a
resulting in a significant loss, “Corning defers net gains and losses from cash flow
hedges into accumulated other comprehensive income on the consolidated balance
sheet until such time as the hedged item impacts earnings. At that time, Corning
reclassifies net gains and losses from cash flow hedges into the same line item of the
consolidated statements of income as where the effects of the hedged item are
recorded, typically sales, cost of sales, or royalty income. At December 31, 2008, the
amount of net losses expected to be reclassified into earnings within the next 12
months is $36 million” (Corning 10K). Becton and Dickinson also use the same method
when considering foreign currency translation, “The Company hedges substantially all of
its transactional foreign exchange exposures, primarily intercompany payables and
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receivables, through the use of forward contracts and currency options with maturities
of less than 12 months. “Gains or losses on these contracts are largely offset by gains
and losses on the underlying hedged items.” (Becton and Dickinson 10K) In conclusion
all companies supply sufficient information concerning currency and its affects on
financial reports. As a result of practicing conservative accounting procedures, firms
with in the materials science industry also display a high level of disclosure on financial
statements.
Qualitative Analysis
Financial statements are analyzed by investors to determine the attractiveness
of a particular firm. Certain details that a company discloses may either hurt or help the
company. GAAP determines which information has to be disclosed and allows certain
information to be hidden from the public. The more information that is present on a
financial statement, the more accurately an investor can assess the true value of a firm.
Accurate information also provides analysts with comparability. Investors would be able
to compare companies with other companies more effectively. Since GAAP provides
considerable flexibility for companies to disclose information, managers may take
advantage and distort information. High disclosure means a company is being honest.
Low disclosure can indicate that a company might be hiding something. Companies that
disclose all relevant information appear more reliable than dishonest companies and will
attract more investors. Information that is contradicting may mean that a company
intentionally distorted data in order to gain initial attractiveness. Astute investors and
analysts usually catch these elaborate illusions early on in their investigations.
In addition, most of the companies in the materials science industry have
prepared separate financial statements for their different business segments. For
example: Corning states in their 10-K, “We include separate financial statements on a
basis that is consistent with the manner in which we internally disaggregate financial
information to assist investors in making financial decisions… The accounting policies of
our reportable segments are the same as those applied in the consolidated financial
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statements.” (Corning 10-K) This company operates in the materials science industry
which is the main focal point of this entire analysis. For the purpose of this study, the
materials science industry is divided into four main sub-industries which include: the
display technologies industry, the telecommunications industry, the environmental
technologies industry, and the life sciences industry. As such, the main points in the
qualitative analysis will incorporate these sub-industries whenever applicable.
Research and Development
As previously discussed, research and development plays an integral role in the
materials science industry and all of its sub-industries. Therefore, in this industry
information regarding R&D is highly disclosed in a firm’s financial statements. For
example: NGK’s 10-K states that “R&D is viewed as a key management concern.
Underpinned by materials and systems technologies founded on high-performance
ceramics, the Group invests proactively in R&D, with the goal of delivering products
with higher added value and enhanced performance.” (NGK 10-K) A key success factor
in this industry is product differentiation. Differentiation among products exists because
of high concentration in R&D. In an industry that contributes significant amounts of
capital into R&D, firms must disclose detailed information regarding these expenses. If
a firm operates in multiple business segments, these firms should specify how much of
R&D expenses are allocated to each segment. Which segments spend the most money
in R&D? Investors are also interested in details regarding the specific type of R&D
expenditures that were incurred by the company. Did the company focus on early stage
or later stage development for future growth? These questions can be answered in well
disclosed financial statements.
Companies have disclosed information that helps investors understand which
business segments employ research and development the most. Firms in the materials
science industry operate in multiple sub-industries. For example, Corning operates as a
whole in the materials science industry but also in four sub-industries: Display
technologies, Telecommunications, Environmental technology, and Life Sciences. These
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sub-industries all thrive on research and development. The amount of commitment to a
specific sub-industry by a firm can be described by examining that business segment’s
net sales. Typically, the business segment with highest net sales incurs the most R&D
costs. This pattern is consistent with all firms in the materials science industry. Since
each sub-industry incurs different costs, firms must disclose how they allocate these
expenses to each sub-industry. For example: Corning’s 10-K specifies that their display
technologies segment contributed 45% of total net sales in 2007. Accordingly, their 10-
K also disclosed that R&D expenses for this sector incurred 30% of total R&D
expenditures. Since this business segment is the company’s largest segment, R&D was
highly concentrated in this area. The telecommunications segment contributed 30% of
total net sales and incurred 19% of total R&D costs. The environmental segment
produced 13% of total net sales and incurred 29% of total R&D. The firm’s least
contributing segment was the life sciences division. This segment produced only 5% of
total net sales. R&D costs incurred by this sector were 9% of total R&D expenses
(Corning 10-K). For the most part, the largest business segments incurred the largest
R&D expenses. This pattern is noticeable because the company disclosed information
that allocated R&D costs to each business segment.
Since research and development covers a broad spectrum, determining the
actual developmental processes can be omitted from accounting information. To help
investors better understand the research and developmental process, firms have
disclosed information for a closer look into R&D. Case in point: According to NGK’S
annual report, NGK’s ceramics products business segment focuses on three main
themes: “improving DPF production techniques and performance; enhancing production
techniques for ceramic honeycomb substrates used in catalytic converters for diesel and
other automobiles; and creating better continuous atmospheric kilns for the electronics
sector.” (NGK 10-K) All of these activities are included in R&D which can easily be
overlooked if not for high-quality disclosure. Additionally, Corning disclosed that “one-
third of total research and development expenditures were for research spending
related to our existing businesses, new business development, exploratory research,
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and early stage marketing… expenses in each year also reflect costs associated with
later stage development projects. These projects include investments in new
technologies such as synthetic green lasers, silicon-on-glass, and micro-reactors.”
(Corning 10-K) These disclosures give investors and analysts an in-depth look into R&D
related activities that are not recorded on the income statements.
It is safe to say that R&D disclosure among firms in the materials science
industry is very high. For companies in this industry to survive competition, companies
must differentiate their products. To successfully differentiate their products, firms must
make significant investments to research and development. Since companies efficiently
capitalize on R&D in this industry, information on these activities must be strongly
disclosed. Investors need to know how companies allocate R&D costs to each
respective business segment. Also, detailed information regarding R&D activities must
also be disclosed to obtain a clear understanding of a firm’s operations. This type of
knowledge is essential for potential investors who are looking to contribute to the
company.
Operating and Capital Leases
Each firm in the materials science industry acquires property and plants through
operating or capital leases. GAAP requires companies to disclose this information.
Disclosing a companies operating or capital lease on financial statements can either
help or hurt the image of a company. Liabilities and net income can be understated or
overstated depending on which lease a company uses. When acquiring property
through operating leases rent expense is not recorded in financial statements, thus
understating liabilities. This overstates net income. As a result, this understatement of
liabilities and overstatement of net income appeals to investors. On the other hand,
capital leases work similar to mortgages. When acquired, the property is recorded as a
long-term asset and the lease payments are recorded as a liability. This can hurt a
company since investors would be turned off by the increase in liabilities. For this
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reason, most firms in the materials science industry acquire a portion of property
through operating leases and another portion using capital leases.
American firms differ from Japanese firms in the materials science industry in
terms of disclosure. American firms such as Corning and Becton Dickinson both disclose
enough information to effectively assess their operating and capital leases. For instance,
Corning’s latest annual report stated that their company “leases certain real estate
property under capital leasing agreements that generally require the company to pay
for maintenance, insurance, and taxes. Future lease payments for other real property
are required under operating leasing agreements.” (Corning 10-K) Japanese
competitors follow different GAAP policies than that of U.S. competitors in the materials
science industry. Annual reports for companies, like Sumitomo Electric that operate in
both the display technologies and telecommunications segment, disclose less
information regarding leases. According to Sumitomo’s annual report, “finance leases
which do not transfer ownership or do not have bargain purchase option provisions are
accounted for in the same manner as operating leases.” (Sumitomo Electric 10-K) This
annual report had limited information regarding leasing agreements. This can indicate
the company’s attempt to hide certain information that might turn away many
investors. Other Japanese companies that operate in the display technologies industry
such as Asahi Glass did not disclose any information regarding leases. This reinforces
the fact that most Japanese companies are more private about certain information. This
is reflective of Japanese accounting standards.
Lease disclosures can help a firm or it can hurt it. To balance out the pros and
cons of each type of lease, most firms in the materials science industry have adopted
both methods of leasing property. Firms in the U.S. disclose enough information for
analysts to determine the value of the firm. Yet, Japanese firms disclose information
under different standards that do not require companies to disclose as much
information. This type of disclosure allows firms the flexibility to distort numbers to
make the firm more attractive. The quality of disclosure for American companies in the
materials science industry allows investors to effectively determine the firm’s value,
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while Japanese disclosure standards create difficulty for investors to assess a firm’s true
value.
Pension Liabilities
Each firm in the materials science industry qualitatively discloses information
regarding pension plans about equally, although U.S. firms disclose just higher than
that of Japanese firms. For example: U.S. firms such as Corning discloses benefit
obligation statements that include discount rates as well as rate of increase in future
compensation levels. Japanese firms also disclose discount rates, but omits rate of
increase levels. This may create suspicion among investors who might assume the
company has higher than average rate of increase levels. In contrast, all firms in the
U.S. industry seem to follow a similar trend in that each firm utilizes lower discount
rates in foreign plans. Case in point: According to Becton Dickinson’s 10-K, the
company’s discount rate for U.S. and foreign plans in 2008 were 6.35% and 5.32%
respectively (Becton Dickinson 10-K). Other American based companies in the industry
such as Corning reported discount rates for U.S. and foreign plans as 6.48% and 5.38%
respectively. (Corning 10-K)The lower discount rates for foreign plans may delude
investors and disguise liabilities to be lower than they really are. Japanese firms did not
disclose foreign plans in their 10-K’s, which may indicate that they do not have foreign
plans.
Other instances of discrepancies in disclosure can be found in Corning’s 10-K.
The company states that “For the U.S. defined benefit plan, the fair value of plan assets
included 65% of equity securities and 35% of debt securities. The plan targets an asset
allocation of 65% equity and 35% debt securities. The plan’s expected long-term rate
of return is primarily based on historical returns of similarly diversified passive portfolios
and expected results from active investment management.” (Corning 10-K) The
company assesses its plan of using 65% of equity and 35% of debt for plan assets. This
debt to equity ratio creates considerable risk. However, the company does not specify
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its plan to reduce this risk. Risk management must be frequently disclosed for investors
to effectively analyze a company’s vulnerability, yet this company fails to do so.
Goodwill
The quality of disclosure regarding goodwill is similar between competitors in the
materials science industry. All firms in the industry periodically evaluate assets for
impairment or whenever circumstances indicate that the carrying amount of an asset
might not be recoverable. Additionally, each firm allocates impairment adjustments for
goodwill to each business segment. For example: In 2007, Corning reported $4 million
in “impairment loss” for its telecommunications segment only. Other segments did not
incur any charges. This can most likely indicate that the company previously purchased
an asset related to its telecommunications segment and recognized impairment in the
asset during the current year. Japanese companies such as Nippon Electric Glass do not
allocate goodwill across its business segments. This supports the reoccurring theme
that Japanese companies disclose less material than that of companies in the U.S.
Some firms in the materials science industry use different methods when
disclosing impairment. For instance: Nippon Electric Glass uses a two-step process
when recognizing loss on impairment. According to NEG’s financial statements, “The
Company and its consolidated subsidiaries essentially group its operating assets by
business units and its idle assets separately, to measure the impairment of the assets.
After review, the book values of the following assets were reduced to recoverable
values and the reduced amounts were recognized as impairment losses.” Even though
the firms in this industry use different methods of disclosing impairment, quality of
disclosure among these firms seems to be moderately informative.
Overall, all competitors in the materials science industry disclose goodwill in their
financial statements. Disclosure quality is moderate and similar among the rivals. They
all report goodwill and impairment on the balance sheet and the income statement
respectively. The main difference among firms in regards to disclosing goodwill is that
Japanese firms do not allocate goodwill or impairment charges to each business
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segment, as explained in previous examples. U.S. firms operate under very different
GAAP policies. Therefore, quality of disclosure between these two countries will differ.
Another important factor to keep in mind is that, since GAAP gives managers in this
industry much flexibility, actual numbers can vary from manager to manager.
Currency
Gains and losses against currency translations are highly disclosed among firms
in the materials science industry. Since all of the firms in this industry operate in
multiple countries, currency translations play an important role in internal control.
Fluctuations in the U.S. dollar affect the firms’ financial position and results of
operations. The resulting gains or losses are disclosed in a company’s financial
statements. For example: Corning reflects these gains or losses in accounts called
“cumulative translation adjustments” in the stockholder’s equity section of the balance
sheet. These adjustments are not allocated to each business segment within firms.
Since currencies and exchange rates are usually translated in a firm’s overall financial
statements, there is no need to disclose translation gains or losses in each business
segment. Other companies in the industry such as Becton Dickinson disclose translation
gains and losses in similar methods. According to BD’s annual report, “Net assets of
foreign operations are translated into U.S. dollars using current exchange rates. The
U.S. dollar results that arise from such translation, as well as exchange gains and losses
on intercompany balances of a long-term investment nature are included in the foreign
currency translation adjustments in ‘accumulated other comprehensive (loss) income.’”
(Becton Dickinson 10-K) BD explains that company operates in multiple countries and
must evaluate currency instability periodically to ensure currency loss prevention. These
activities are consistent from year to year which allows investors enough confidence to
trust this company’s disclosure.
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Quantitative Analysis
The quantitative accounting disclosure section is used to measure a firm’s
accuracy in the reporting of their financial statements. This becomes very important
due to the fact that a company’s financial statements are what potential shareholders
analyze in order to create their own opinion of value of a particular firm. These
numbers are sometimes directly correlated to a firm’s accounting flexibility in regards to
the numbers on their balance sheet, income statement, as well as their statement of
cash flows. In recent years, the room for error allowed in a firm’s financials has grown
reasonably smaller due to the amount of corporate entities that have been caught using
illegal accounting measures in order to report their numbers. The GAAP, as well as the
Sarbanes-Oxley act, have both contributed in an effort to eliminate illegal accounting
practices and help investors from investing their money in firms with false statements.
If investors use these ratios wisely it will benefit them greatly in order to further
evaluate a firm’s value more than just the limited information required of them by the
previously mentioned GAAP and Sarbanes-Oxley act.
In order to further evaluate Corning and its vast amount of competitors along its
various business segments we will be using two sets of quantitative accounting
measures. They can be broken down into Sales and Expense manipulation diagnostic
ratios. The sales manipulation diagnostics will consist of the cash collection from sales,
net sales/ account receivables, net sales/ inventory, as well as the change these ratios
experience from year to year. These sales diagnostic ratios will help us further evaluate
each individual firm and how well their revenues are supported by their different
segments of business activities. Large jumps in the numbers from this section may
cause concern or raise a “red flag” which may indicate that there has been some
distortion in a certain area of a firm’s numbers. Further evaluation will be needed to see
if this is in fact true.
The second set of ratios used in our evaluation of the industry’s financials is the
expense diagnostic ratio section. The ratios we will use consist of sales/ assets,
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CFFO/OI, & CFFO/NOA. We use these diagnostic ratios to see if there are any possible
distortions in the reporting of a company’s expenses. If there is a large spike in any
certain year for an individual firm, again this may be cause for concern and it will
require further investigation to see if a company did indeed distort some of there
numbers in order to understate/ overstate their expenses for any given reason.
Sales Manipulation Diagnostics
The sales manipulation diagnostics will be used as a tool to further evaluate the
financial statements of Corning and their top competition across their numerous
business segments. These ratios will be used to assess the accuracy as well as the
credibility of all the firms operating in the materials science industry. Any given year for
each of these ratios does not give us any real relevant information so it is because of
this that we will be comparing the numbers across a five year span. The use of these
ratios when compared across the five year span will help us investigate whether the
firms being evaluated used proper disclosure. For the materials science industry and the
competitors we are using in comparison to Corning there are some gaps in the numbers
due to the limited amount of information we are able to access from the Japanese
based firms such as Furukawa, Fujikura, and Sumitomo. Japanese based firms due not
operate under GAAP and are not regulated by the Sarbanes-Oxley act, so we must be
careful when looking into their numbers and as well be hesitant if any “red flags” arise
in our evaluation for those firms.
Cash Collections from Sales
The first ratio we will analyze in our sales manipulation diagnostic section is the
cash collections from sales ratio. To calculate this ratio we will first need to find the
change in accounts receivables for the year we are evaluating and its previous year.
Next we must subtract this number from our net sales in order to find a firm’s cash
collections. To find their correlation you must then go one step further and divide the
net sales by this number. Ideally, the number we get from this calculation should be
fairly close to 1 in order for them to be considered efficient.
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The cash collections from sales ratios, for the whole industry, as well as their
change from year to year are shown above. As can be seen from the graph’s the
numbers for this ratio across the industry seem to be very consistent and all of the
firms being analyzed ratios border 1 with mild differentiation in our 5 year period. The
one company that does seem to show some outliers which may be a cause for concern
is Furukawa which shows a consistent increase since 2004 in their ratio. Their does
seem to be some apparent change from year to year but as of now it is uncertain why
their numbers are the only ones that differ. We will further investigate this abnormality
when we compare them in the telecommunications business segment.
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After breaking down the numbers in the displays technologies section we are
able to get a much better look at whether or not there is a jump in the numbers for the
firms competing in the displays technologies industry as well as Corning’s individual
numbers in that particular business segment. After looking into the numbers further, all
four firms’ numbers seem to be very consistent and close to 1 which is a good
indication that they are operating efficiently. Corning’s displays segments shows the
greatest differentiation but it is minor and does not leave us with a cause for concern.
The change from year to year also seems to be consistent and that all the firms’ ratios
seem to be growing from year to year. All and all, the numbers look solid for this
particular business segment.
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We will next look into the telecommunications business segment of operation in
order to see if we think that there cash collections from sales seem to be distorted for
any reason. Again, the numbers seem to border 1 very closely, which is a good
indication that all of the firms in question are operating efficiently and that their
numbers have not caused a concern for distortion. Although, in the change form
Corning’s telecommunications numbers, there is a drastic drop or change from 06-07.
Considering that this is only segment of their operation and their ratio as whole is still
close to 1 it does not seem that there has been any distortions for their firm.
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The life sciences segment which includes only Corning and Becton Dickinson also
shows consistent ratios with numbers that are close to 1. The individual numbers for
Corning’s life sciences business segment does seem to show some growth and change
that differs from Corning as a whole and Becton Dickinson which is very close to 1, but
it being only one business segment and the number change not being that significant
does not necessarily raise a red flag.
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The last business segment whose cash collections from sales ratio we will be
analyzing is the environmental segment, which consists of NGK and Corning. As with
our other 3 business segments and all of the eight total firms there does not seem to be
and major jumps in the numbers and all of the ratios border 1 very closely which is a
good indicator that these firms our operating properly and efficiently as well. Although
there is a significant change in the change form for the environmental segment from
05-07 the numbers seem to get back to where they should be, and since the numbers
for Corning as a whole are so consistent this should not cause us to raise a “red flag”
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Net Sales/ Accounts Receivables
For us to see what portions of a firm’s net sales are supported by their
receivables, we will use the net sales/ accounts receivable sales manipulation diagnostic
ratio. This ratio is used to determine exactly how much of a firms sales are related to
credit transactions. This is important to evaluate because it relates to the liquidity of a
firm which is a very desirable trait for a firm to have as far as investor’s as concerned.
Since accounts receivables in general have to be calculated with the allowance for
doubtful accounts it is important for firm’s to monitor the amount that there firm has in
relation to their overall sales.
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After analyzing all of the sales/ receivables ratios for the materials science industry
there were no apparent outliers that have caused us to raise any initial “red flags”.
Corning and Becton Dickinson lead the industry with ratios that are consistently around
6. On the other hand Furukawa shows a consistently low ratio for the five-year span
and in its change form shows a large change from 04-06. Their ratio as a whole seems
be consistent, and although it is the lowest in the industry does not give us any reason
for possible distortion.
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-50
0
50
2003 2004 2005 2006 2007
Net Sales / Accounts Receivables- All Business Segments (Change)
Corning
Sumitomo
Nippon Electric
Asahi Glass
Becton Dickinson
NGK
Furukawa
Fujikura
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The displays technologies business segment shows consistent ratios for the firms
operating in this segment with Corning having the highest ratios overall. It’s displays
technologies business segment however has shown consistent growth in this ratio
which should ten to be favorable for them. Asahi Glass’s ratios come closest to Corning
while ranging 5-6 consistently, where as both Nippon Electric and Sumitomo stay under
5 but above 3. Overall, the ratios for these firms do not show any noticeable distortion
and their numbers seem consistent
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10152025
2003 2004 2005 2006 2007
Net Sales/ Accounts Receivables- Display Technologies Segment (Change)
Corning(All)
Sumitomo
Nippon Electric
Asahi Glass
Corning(Displays)
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For the telecommunications business segment all of the firms operating within it
seem to have consistent as well as similar sales/ account receivables ratios. This
business segment pins Corning against all Japanese firms whose ratios appear to low
compared to most of the industry. Corning’s telecommunications segment’s ratio alone
is almost as high as the other firms in the industry. This may indicate that Corning’s
telecommunications segment is very liquid compared to that of the larger segments or
maybe that the Japanese firms hold a lot of their sales on receivables or credit.
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-50
0
50
2003 2004 2005 2006 2007
Net Sales/ Accounts Receivables- Telecommunications Segment (Change)
Corning(All)
Sumitomo
Furukawa
Fujikura
Corning(Telecomm)
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The life sciences segment shows two firms whose numbers are consistently
higher than the other 6 firms in the industry. Although, Corning is a little higher at
times its numbers are very close to Becton Dickinson’s. For firms of similar size it is a
good sign that there ratios are both close to one another. There is no considerable
spike for either firm in the period of 2003-2007, which indicates that there is no reason
for any “red flags” to be raised.
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0
5
10
15
20
2003 2004 2005 2006 2007
Net Sales/ Accounts Receivables- Life Sciences Segment (Change)
Corning(All)
Becton Dickinson
Corning(Life Sciences)
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For the environmental industry, NGK and Corning both show sales/ account
receivable ratios that are reasonable for the time period that we are evaluating.
Corning’s environmental segment ratios border 1 which indicates that the sales received
from that particular segment may be almost entirely on a credit basis. As a whole, each
of these companies shows a consistent ratio. NGK shows consistent growth in their
change for the period 2003-2007, although it is much more drastic than the actual
sales/ receivables ratio itself. NGK sits in the middle of all 8 competitors being analyzed
and has a good solid ratio.
Net Sales/ Inventory
The inventory turnover ratio is what investors can use to assess the amount of
sales a company has that is supported by their inventory. High and low ratios have
specific meanings here as well. Ideally if a firm has strong sales it will lower their
inventory amounts due to the constant demand. Although even if a firm has a high
inventory turnover ratio it does not necessarily mean that their sales are strong. The
graph illustrated below will help us how these certain industries manage their inventory.
-4-202468
1012141618
2003 2004 2005 2006 2007
Net Sales/ Account Receivables- Environmental Segment (Change)
Corning
NGK
Corning(Environmental)
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After evaluating the inventory turnover ratios for all business segments it was
easy to see that all of the firms had ratios with constant trends. No one firm had a
great amount of differentiation in one of the given years in our five year span being
evaluated. Fujikura recorded the highest ratio of the firms. Sumitomo had the second
highest ratio which makes since considering that there overall net sales were
considerably larger than most of the firms being analyzed. Fujikura high ratio was
probably due to the fact that they have low inventory numbers. NGK came out with the
smallest ratios overall for our business segments which also made sense because their
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0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2003 2004 2005 2006 2007
Net Sales/ Inventory-All Business Segments (Change)
Corning(All)
Sumitomo
Nippon Electric
Asahi Glass
Becton Dickinson
NGK
Furukawa
Fujikura
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inventory numbers when looked at further were some of the lowest of the companies in
question.
The displays technologies business segment’s inventory turnover ratios showed
constant growth for the most part except for Sumitomo who seemed to reach a high
the settle back a little lower into a medium by 2007. We would need 2008’s numbers in
order to seem if this trend continues or if Sumitomo’s ratio would continue to grow as in
from 03-06. Corning’s displays technologies segment also shows considerable growth
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100020003000400050006000700080009000
2003 2004 2005 2006 2007
Net Sales/ Inventory- Display Technologies Segment (Change)
Corning(All)
Sumitomo
Nippon Electric
Asahi Glass
Corning(Displays)
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during this time period. The 3 turns increase may be a result of many factors, but
overall there does not seem to be any distortions in this business segment.
The telecommunications segment has all 4 firms with ratios that are pretty close
in range to one another with Fujikura being the exception and having the highest ratio
of all business segments. Corning telecommunications ratio for this time span does not
differentiate much at all and stays pretty low. As a whole, the telecommunications
business segment shows consistent numbers for the firms in question and has its firms
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-40
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0
20
40
2003 2004 2005 2006 2007
Net Sales/ Inventory- Telecommunications Segment (Change)
Corning(All)
Sumitomo
Furukawa
Fujikura
Corning(Telecomm)
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having the highest ratios compared to all 8 being analyzed. There is also positive
growth which is favorable for each firm.
The life sciences segment of Corning shows a very low ratio for this business
segment and seems to have a small decline from 2003-2007. Becton Dickinson does not
have a large overall change in the time period being looked at compared to Corning
who grows by 3 turns overall in the 5 year span. The ratios as a whole are fairly close
except for 2007 where Corning is almost 4 turns higher than Becton Dickinson.
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0
20
40
2003 2004 2005 2006 2007
Net Sales/ Inventory- Life Sciences Segment (Change)
Corning(All)
Becton Dickinson
Corning(Life Sciences)
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Much like the other 3 business segments being evaluated there was not a whole
lot of change in the inventory turnover ratio from 2003-2007. Once again, Corning as a
whole shows some consistent growth however its environmental segment stays
constant during the period with a low ratio overall. All of the numbers for the inventory
turnover ratios seemed to correlate to each respective firm’s numbers without any
noticeable distortions.
Sales Manipulation Diagnostics Conclusion
Due to the fact that Corning does not have any warrants or unearned revenues
this will be the conclusion of our sales manipulation diagnostics. After reviewing all 3 of
0123456789
10
2003 2004 2005 2006 2007
Net Sales/ Inventory- Environmental
Corning
NGK
Corning (Environmental)
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0
20
40
2003 2004 2005 2006 2007
Net Sales/ Inventory- Environmental Segment (Change)
Corning(All)
NGK
Corning(Environmental)
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the different sales manipulation diagnostic ratios it was concluded that Corning does a
very good job of disclosure due to the fact that their numbers do not skew at all from
the industry “norm”. Overall Corning is either an industry leader or right in the middle of
the pack in each of these ratios. The cash collections from sales ratio showed consistent
numbers bordering 1 for all the firms being analyzed which is what we were looking for
when we performed this analysis. As for the sales/ receivables ratio it was found that
Becton Dickinson had the highest overall ratios and that Corning was second in the
industry in this category. Overall there were no outliers raising cause for concern on
this ratio.
The only cause for concern that was found when reviewing the ratios performed
for the sales manipulation diagnostics section was that some of the Japanese based
firms, with Furukawa in particular, showed a large percent increase change from year to
year even though there ratios along with that of the others in the industry seemed to
be very consistent. Since these firms are not required to follow GAAP and are not
regulated by the Sarbanes-Oxley act like the rest of the American based firms being
analyzed there might need to have some further investigation in order to make sure
these distortions are not the cause of human manipulation in order to reflect more
desirable numbers.
Sales Manipulation Diagnostics
Corning 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.0181 1.0158 1.0097 1.0177 1.0239
Sales/ Accounts Receivables 5.8857 6.588 7.2798 7.1961 6.8458
Sales/ Inventory 6.6167 7.2037 8.0333 8.097 9.2868
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Corning (Displays) 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.1019 1.057 1.0259 1.0441 1.0553
Sales/ Accounts Receivables 1.1333 1.9026 2.7695 2.9666 3.0526
Sales/ Inventory 1.2741 2.0804 3.0561 3.3308 4.141
Corning (Telecommunications) 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.0401 1.0406 1.0279 1.0549 1.0837
Sales/ Accounts Receivables 2.7162 2.6308 2.5803 2.4047 2.0724
Sales/ Inventory 3.0535 2.8766 2.8474 2.7058 2.8114
Corning (Life Sciences) 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.2434 1.2459 1.1849 1.4569 1.8059
Sales/ Accounts Receivables 0.5352 0.5197 0.4483 0.3992 0.3586
Sales/ Inventory 0.6017 0.5682 0.4947 0.4491 0.4865
Corning (Environmental) 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.1306 1.123 1.0821 1.1714 1.221
Sales/ Accounts Receivables 0.9067 0.9368 0.9221 0.8554 0.8843
Sales/ Inventory 1.0193 1.0243 1.0176 0.9624 1.1997
Sumitomo 2003 2004 2005 2006 2007
Sales/ Cash from Sales N/A 1.0095 1.0068 1.0228 1.0302
Sales/ Accounts Receivables 3.3134 3.995 4.4697 4.7486 4.4063
Sales/ Inventory 6.8921 8.8871 9.8241 10.22 9.3678
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Nippon Electric Glass 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.004 1.0078 0.9769 0.9809 1.01
Sales/ Accounts Receivables 4.1236 3.6246 4.1527 4.301 4.6554
Sales/ Inventory 5.5133 5.6465 6.7011 7.2662 8.4582
Asahi Glass 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1 1.0001 1.0001 1 1.0001
Sales/ Accounts Receivables 4.783 5.2588 4.9334 5.4919 5.8689
Sales/ Inventory 6.1036 6.8388 6.4139 6.5228 7.0732
Furukawa Electric 2003 2004 2005 2006 2007
Sales/ Cash from Sales 0.9989 1.0412 1.0487 1.1246 1.2661
Sales/ Accounts Receivables 3.2592 0.3121 0.2974 0.3076 0.281
Sales/ Inventory 7.1141 7.8966 8.3326 8.7614 9.4491
Fujikura 2003 2004 2005 2006 2007
Sales/ Cash from Sales N/A 1.021 1.0325 1.0611 1.0281
Sales/ Accounts Receivables 3.4211 3.3484 3.2542 3.5982 4.1018
Sales/ Inventory 8.45 8.7043 10.038 11.466 11.742
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Becton Dickinson 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.032 1.0075 0.988 1.0264 1.008
Sales/ Accounts Receivables 5.7126 5.3933 6.337 6.4781 5.8715
Sales/ Inventory 5.6144 6.6243 6.8829 6.5522 6.0456
NGK 2003 2004 2005 2006 2007
Sales/ Cash from Sales 0.9768 1.0157 1.012 1.0495 1.0255
Sales/ Accounts Receivables 5.5127 5.1107 5.0653 4.6671 4.9542
Sales/ Inventory 4.9429 5.4201 5.3161 5.572 5.2708
Sales Manipulation Diagnostic (Change form)
Corning 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) -0.024 1.0066 0.9784 1.0838 1.0736
Sales/ Accounts Receivables (Change) -1.345 12.733 16.477 6.6111 5.0073
Sales/ Inventory (Change) 0.8043 11.235 20.714 8.6232 -85.75
Corning (Displays) 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a 1.0097 0.9752 1.1333 1.1085
Sales/ Accounts Receivables (Change) 3.4545 8.6333 14.295 4.3444 3.5037
Sales/ Inventory (Change) -2.065 7.6176 17.971 5.6667 -60
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Corning (Telecommunications) 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a 1.0463 0.84 1.7667 -22.5
Sales/ Accounts Receivables (Change) -3.727 1.8833 1.9091 1.1778 0.3285
Sales/ Inventory (Change) 2.2283 1.6618 2.4 1.5362 -5.625
Corning (Life Sciences) 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a 1.2778 3.6667 -0.122 -0.741
Sales/ Accounts Receivables (Change) 0.0182 0.3833 -0.5 0.0556 0.146
Sales/ Inventory (Change) -0.011 0.3382 -0.629 0.0725 -2.5
Corning (Environmental) 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a 1.0746 0.6667 -3.182 1.4947
Sales/ Accounts Receivables (Change) 1.4909 1.2 0.7273 0.3889 1.0365
Sales/ Inventory (Change) -0.891 1.0588 0.9143 0.5072 -17.75
Sumitomo 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a n/a 0.9893 1.1173 1.1589
Sales/ Accounts Receivables (Change) n/a 21.463 19.834 7.1086 2.0996
Sales/ Inventory (Change) n/a -61.2 31.419 13.005 4.1263
Nippon Electric Glass 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) 0.0867 0.9695 0.5727 0.8985 1.2953
Sales/ Accounts Receivables (Change) 12.632 -13.76 -1.759 2.3828 11.973
Sales/ Inventory (Change) -0.744 4.509 -2.026 2.5045 -39.04
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Asahi Glass 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) 0.2344 1.0004 1.0014 0.9969 1.003
Sales/ Accounts Receivables (Change) -23.41 11.219 1.7685 -6.54 -7.038
Sales/ Inventory (Change) 8078.6 19.173 2.2914 9.1964 -5.752
Furukawa Electric 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a -36.88 1.2317 2.6825 2.4024
Sales/ Accounts Receivables (Change) 0.0245 2.2663 -162.3 2.5638 5.529
Sales/ Inventory (Change) 0.0216 -4.722 -62.22 14.928 13.403
Fujikura 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a n/a 1.1953 1.141 0.9268
Sales/ Accounts Receivables (Change) n/a 2.367 2.429 4.9153 8.0859
Sales/ Inventory (Change) n/a 21.106 -11.83 17.929 12.827
Becton Dickinson 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) 0.0972 1.267 0.701 1.3713 1.3306
Sales/ Accounts Receivables (Change) 12.175 3.4142 -6.918 9.248 3.1494
Sales/ Inventory (Change) 4.4225 -7.654 12.023 3.9804 3.528
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NGK 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) 0.0254 -0.195 0.9481 1.3193 0.9252
Sales/ Accounts Receivables (Change) -1.095 0.4131 4.3523 3.2549 6.9984
Sales/ Inventory (Change) -1.151 -0.386 3.927 7.587 4.1944
Core Expense Manipulation Diagnostics
Another set of diagnostic ratios that analysts as well as investors use to take a
deeper look into the financials of a firm are the expense manipulation ratios. This along
with the sales diagnostics are ways that we are able to find distortions in certain areas
of the financials. Unlike the ratios from before we will now incorporate the statement of
cash flows as well as the income statement to get our inside look of the firm. We will
use the following ratios to seek any distortions there may be causing us to raise a “red
flag” in the expense ratio section.
Asset Turnover (sales/assets)
The first expense diagnostic ratio that we will look at is the asset turnover ratio
which is computed by dividing a firm’s net sales by their total assets. Typically there is a
direct correlation between a firm’s assets and how much revenue is generated from
those assets. Any “red flags” that may arise in these ratios are typically attributed to
discrepancies in the reporting of a firm’s assets and may indicate that a firm has failed
to write off or report certain expenses. As a firm’s sales rise there should typically also
be a rise in their number of total assets. The fact that the materials science industry, as
well as the firms from each business segment, competes on innovation and spend a
large amount of money on R & D we will look for these ratios to be around 1.
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All of the asset turnover ratios for the firms being analyzed came out to be at, or
around, 1 which is the desirable outcome for this ratio. Furukawa showed the most
growth overall from the 2003-207 time period, while Becton Dickinson had the highest
ratios consistently during that period of time. Corning however fell to the bottom of the
pack for this ratio, which we will take a deeper look at later on in our analysis.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2003 2004 2005 2006 2007
Asset Turnover (Sales/Assets) ‐ All Business Segments
Corning
Sumitomo
Nippon Electric
Asahi Glass
Furukawa
Fujikura
Becton Dickinson
NGK
-45-40-35-30-25-20-15-10
-505
10
2003 2004 2005 2006 2007
Asset Turnover- All Business Segments (Change)
Corning
Sumitomo
Nippon Electric
Asahi Glass
Becton Dickinson
NGK
Furukawa
Fujikura
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The displays technologies’ asset turnover ratio shows a good amount of
differentiation between the firms in this business segment. Corning and Sumitomo,
which are two of the larger firms fall to the bottom of the pack in this ratio category
after being leaders in a lot of the sales diagnostic ratios. Asahi Glass shows the highest
asset turnover, which get up to .8 at its peak. Corning’s displays technologies segment
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
2003 2004 2005 2006 2007
Asset Turnover (Sales/Assets) Displays Technology Segment
Corning (all)
Sumitomo
Asahi Glass
Nippon Electric
Corning (Displays)
-3
-2
-1
0
1
2
3
4
2003 2004 2005 2006 2007
Asset Turnover- Displays Technologies Segment (Change)
Corning
Sumitomo
Nippon Electric
Asahi Glass
Corning(Displays)
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shows consistent growth in its ratio during the period of 2003-2007, but like the other
firms does not have any significant outliers indicating a possible distortion.
All of the firms in the telecommunications business segment have ratios which
border one another very closely with no real outliers causing concern. Furukawa which
is higher than the rest and has the overall highest ratio shows consistent growth in its
ratio for this time period, but has no jump in its percent change from year to year so
there is no “red flag” raised in there regards. Fujikura’s ratio for this time period stays
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2003 2004 2005 2006 2007
Asset Turnover (Sales/Assets) ‐Telecommunications Segment
Corning (All)
Sumitomo
Furukawa
Fujikura
Corning (Telecomm)
-45-40-35-30-25-20-15-10
-505
10
2003 2004 2005 2006 2007
Asset Turnover- Telecommunications Segment (Change)
Corning(All)
Sumitomo
Furukawa
Fujikura
Corning(Telecomm)
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fairly consistent with mild fluctuation during the period but does show a large jump in
its change numbers from 04-06.
For the two firms in the life sciences business segment there is a large difference
in both firm’s asset turnover ratio. Becton Dickinson, doubles Corning’s ratio
consistently from 2003-2007. The life sciences ratio for Corning is quite low mostly due
to the facts that Corning’s assets are not broken down into each individual business
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
2003 2004 2005 2006 2007
Asset Turnover (Sales/Assets) ‐ Life Sciences Segment
Corning (All)
Becton Dickinson
Corning (Life Sciences)
-1
-0.5
0
0.5
1
1.5
2003 2004 2005 2006 2007
Asset Turnover- Life Sciences Segment (Change)
Corning(All)
Becton Dickinson
Corning(Life Sciences)
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segment and their net sales are small compared to the company’s large total asset
number.
The Environmental segment’s number for the asset turnover ratio came out
much like the life sciences segment from before with NGK doubling Corning’s asset
turnover ratio consistently from 2003-2007. The ratio for Corning’s environmental
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
2003 2004 2005 2006 2007
Asset Turnover (Sales/Assets) ‐Environmental Technologies Segment
Corning (All)
NGK
Corning (Environmental)
-2.5-2
-1.5-1
-0.50
0.51
1.52
2.5
2003 2004 2005 2006 2007
Asset Turnover- Environmental Segment (Change)
Corning(All)
NGK
Corning(Environmental)
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segment was also low due to the non-disclosure of each business segments total
assets.
CFFO/OI
In order to calculate the CFFO/OI expense diagnostic ratio we must divide the
firms cash received from operations by their operating income. The ratio that we get
from performing these operations will ideally be closer to a 1 to 1 ratio. The ratio is
meant to describe the correlation between a firms cash flows and their income from
operations. Drastic spikes in the ratio from any given year may cause concern for
possible distortion.
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According to the graphs, computed for the CFFO/OI expense diagnostic ratio
Corning has the least volatile ratio out of the companies in the graph. The ratio of cash
flows from operations stays consistent with the inflow of operating income. Corning has
seen the steadiest correlation in its growth rate of cash flows from operations and
operating income. From 2003 to 2004 they dropped to a low growth rate of -1%.
However in the next three years they maintained an average growth rate around 0%.
Fujikura is the most volatile company ranging from -2% in 2004 to 5.3% in 2005. This
uncharacteristic dramatic increase could raise concerns for potential “red flags”. There
is no discernable trend to the graph and it seems to go up or down in each given year
with no given logic. After analyzing the various companies figures and graph, there
appear to be no major distortions in the firms figures of cash flow from operations and
operating income.
CFFO/NOA
The second ratio that we will calculate using the cash flows from operations data
from each firm’s respective financial reports is CFFO/NOA. For this particular ratio we
will consider NOA (net operating assets) to be the plant property and equipment (PP&E)
minus depreciation. This ratio provides a snapshot into how effectively and efficiently a
firm is generating revenues form from its operating assets relative to its competitors.
-3
-2
-1
0
1
2
3
4
5
6
2003 2004 2005 2006 2007
CFFO/OI (Change)
Corning
Sumitomo
Nippon Electric
Asahi Glass
Becton Dickinson
NGK
Furukawa
Fujikura
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When comparing the CFFO/NOA ratio, Corning is producing less CFFO per dollar
of net operating assets; mainly due to the large dollar value of assets Corning carries its
books. That being noted, its competitors are conducting business and producing
revenue from assets at a better pace than Corning. Despite its larger asset base,
Corning is being outperformed by its competitors on an operating cash flow basis. This
could be a signal that Corning has excess manufacturing capacity and building space
that they are not properly utilizing.
Total Accruals/Net Sales (raw)
Calculating the Total Accrual/Total Sales shows the correlation between
company’s accruals and sales. In order to calculate total accruals we take cash flow
from operations minus net income. If the ratio is higher than 1 it can be concluded that
accounts receivable represent the majority of net sales. A ratio lower than one means
that’s sales are derived from some other payment method. The graph below shows for
all firms in the industry have a ratio less than one, which shows that majority of sales
are on a non-credit basis.
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Expense Manipulation Diagnostic Conclusion
After performing a full expense diagnostics analysis Corning does not seem to
have manipulated any of there numbers. Cornings Asset turnover ratio is relatively low
compared to competitiors. It has remained less than 1 for the past 5 years which means
they have less than a dollar of sales to cover every dollar of assets. The jump in
Corning’s CFFO/ OI from 2004-2005 might be something to look at for potential “red
flags”.This jump in cash flows also affected the total accruals ratio which in turn leads
us to also look for distortions. Corning has the lowest CFFO/NOA ratio among its
competitors which helps conclude they are not as efficiently using their plant, property,
or equipment as other firms in the industry are.
Potential Red Flags
Accounting analysis can capture red flags in company’s financial statements. Red
flags are identified when analysts examine financial statements and find information
related to asset and expense accounts questionable and unexplained. A few issues
analyst would want to further examine for Corning are; effects of foreign exchange rate
risk, special purpose entities, and capitalizing research and development. It is important
to examine financial reports in a relative time period to identify red flags. Once analysts
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have identified red flags proper measures can be taken to adjust distorted accounts to
portray a more accurate view of the company’s position.
When examining Corning’s financial statements a red flag was raised when
looking at its foreign exchange rate risk. The majority of Corning’s gross sales come
from foreign transactions. The large amount of sales has the potential to greatly impact
currency on the income statement. Corning hedges its currency rate risk in order to
stabilize any unexpected movement in foreign currency exchange rates. In 2007 and
2008 appreciation of the Yen and Euro against the dollar occurred. Corning realized the
effect the risk’s related to the exchange rates will potentially have on the company.
Corning used hedges to make estimates for 2008 sales and net income based on the
change in the currency rate. As a result of those estimate Corning may positively impact
the financial income statement regarding currency. Adjustments must be made to
accurately report the results of the change in currency rate risk.
Another potential red flag is related to special purpose entities. Corning
combined with PPG industries to create Pittsburg Corning Corporation twenty years ago.
Nine years ago the company was forced to file bankruptcy as a result of asbestos
exposure. Due to Corning’s equity ownership in the company they were required to
restate earnings for 2003-2005. Corning failed to comply with GAAP when recognizing
liability and was required to adjust liabilities. It is important to realize the change in net
income as well as earnings per share resulting from adjustments made. Corning
formed another special purpose entity with Samsung in 2005 and split equity 50/50.
Corning’s equity has grown dramatically over the past five years which may raise a red
flag to analyst. The equity position on Corning’s financial statements can be understood
when realizing the equity they acquired from joining Samsung and the profitability of
that entity.
The last concern presenting a red flag to analyst is the capitalization of research
and development. Corning places varying percents of research and development into
each of its four business segments. Each year all four segments use a percentage of
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research and development and should be able to allocate the expense as an asset.
However, GAAP requires all firms in the materials science industry to record research
and development as a liability on financial reports. Adjustments must be made, by
capitalizing research and development, to represent the accurate value of the company.
Net income would improve, making the financial position improve, if research and
development expenses were eliminated from the income statement and placed as an
asset on the balance sheet.
Undo Accounting Distortions
Foreign exchange rate risk
In the process of our research we discovered Corning Inc. realizes over 70% of
their gross sales occur outside of the United States. Due to this high dollar amount of
sales located outside of dollar denominated economies, Corning has a need to hedge its
currency rate risk. This risk is managed thru the use of hedges that are intended to
stabilize any dramatic and large movement in the Dollar-Yen and Dollar-Euro exchange
rate. The risks associated with these exchange rates became extremely important as
the appreciation of the Yen and Euro against the dollar happened in 2007 and 2008.
The management of Corning recognizes and quantifies this risk in the management
discussion of their 2007 10K. Through the use of hedges Corning estimates that for
“every 10 point movement” (2007 10-K) in the Dollar-Yen or the Dollar-Euro interest
rate the company can be impacted plus or minus 220M-236M dollars. This is note-
worthy because of the large appreciation the Yen and the Euro to the dollar over the
last 18 to 24 months. In our research it was discovered that all 2008 pro forma
calculations for both sales and net income we used with the Dollar-Yen and Dollar-Euro
with January 2008 exchange rate levels. Thus we wanted to note that Corning for the
first three quarters of the fiscal year could have a large positive financial impact
currency impact on its income statement.
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Special Purpose Entities
Over 20 years ago there was a Special Purpose Entity formed with PPG
Industries, to develop a corporation called Pittsburgh Corning Corporation (PCC).
Ownership between the two companies was split 50/50; the business model of PCC was
based on construction and remodeling of old buildings around the Pittsburgh and East
coast areas. On April 16, 2000 PCC filed for chapter 11 bankruptcy due to more than
140,000 open claims of asbestos exposure of its employees and people associated with
this business model. Due to the equity ownership in PCC there was a restatement of
earnings between 2003 and 2005. This restatement was caused by the fact General
Accepted Accounting Principles (GAAP) were not followed on the recognition of the
liability. The impact to earnings is detailed in the chart below.
Year ended December 31 2005 2004 2003
As reported:
Net income (loss)
$
585.00 $ (2,165.00)
$
(223.00)
Basic earnings (loss) per share
$
0.40 $ (1.56)
$
(0.18)
Diluted earnings (loss) per share
$
0.38 $ (1.56)
$
(0.18)
As restated:
Net income (loss)
$
585.00
$
(2,231.00)3.05%
$
(280.00)
Basic earnings (loss) per share
$
0.40 $ (1.61)
$
(0.22)
Diluted earnings (loss) per share
$
0.38 $ (1.61)
$
(0.22)
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Increase in net loss $ (66.00)
$
(57.00)
Increase in basic loss per share $ (0.05)
$
(0.04)
Increase in diluted loss per share $ (0.05)
$
(0.04)
*Net Income numbers in thousands*
This impact caused the net income to decrease in both 2004 and 2003 due to
the recognition of the asbestos liabilities of PCC. This adjustment to recognize the
liabilities and meet GAAP principles also caused both the basic and diluted earnings per
share to decrease as well. The above chart illustrates the true impact of the asbestos
liability and cash payments of over $815 million.
Another Special Purpose Entity was formed in 2005 with Samsung. This
partnership was designed to streamline the manufacturing of LCD televisions the
growth in this consumer electronics product has grown substantially between 2003 and
2007. The equity ownership structure was split 50/50.
Through the use of Special Purpose Entities Corning has been able to drastically
improve its equity value by expanding into new products and services. The table below
details the growth over a 5 year period in equity value.
Summary 2003-2007 Equity Position in Special Purpose Entities
2003 2004 2005 2006 2007
Equity $ Value in
Special Purpose
Entities
$216M
$454M
$611M
$960M
$942M
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Capitalization of Research and Development
It was stated in managements discussion in the 2005 10-K that 30% of the
Research and Development budget expense goes directly towards new product
research. This expense creates new products and services that will provide the future
revenue streams for all 4 of the different business segment. Thus, due to the direct
allocation of research funding for the development of new products this expense should
truly be calculated as an asset. Below is a chart summarizing the R&D expense for all 4
business segments from 2003-2007.
2003 2004 2005 2006 2007
Research and Development
Expense 344 355 443 517 565
Allocation of Expense for New
Research 30.00% 30.00% 30.00% 30.00% 30.00%
Capitalized R&D 103.20 106.50 132.90 155.10 169.50
*In thousands*
Below is a chart that details how the capitalization of R&D expense affects the net
income and balance sheet.
2003 2004 2005 2006 2007
Before
Net Income
$
(280.00)
$
(2,231.00)
$
585.00
$
1,855.00
$
2,150.00
After
Capitalized R&D Expense
$
103.20
$
106.50
$
132.90
$
155.10
$
169.50
Net Income $ $ $ $ $
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(176.80) (2,124.50) 717.90 2,010.10 2,319.50
*Numbers in Thousands*
Although it might be uncommon to capitalize R&D for financial statement
analysis due to the nature of Corning’s core business we feel it is a proper adjustment
to represent the true financial position of Corning. Product Differentiation is the leading
core competency and thus new product development is essential to future growth. In
the management discussion section it is mentioned in their 10-k that 30% percent of
R&D expense is directly allocated as pure research and product development. This
capitalization causes the financial position to improve as the R&D expense is removed
from the income statement and added to the balance sheet as an asset.
Financial Analysis, Forecasting Financials, and Cost of Capital Estimation
This analysis will evaluate the financial position of Corning Incorporated and all
of its competitors through ratio analysis, financial forecasting, and determining capital
structure. This evaluation will help in determining the present and future financial
position of a company. The ratio analysis is broken down into four sub-categories:
liquidity, profitability, firm growth rate ratios, and capital structure analysis. The ratio
analysis will provide analysts with comparable figures that make it easier to evaluate
different trends within a firm. Ratios will also be used to forecast the firm’s financial
statements. The forecasting section will predict the future values of a firm for the next
ten years using historical data. Finally, the capital structure section will focus on the
process in which a firm finances its operations using portions of equity based on market
performance.
Financial Ratio Analysis
Analysts utilize ratios to effectively compare financial statements of competitors
in a certain industry. Ratios provide easily comparable numbers that help analyst
evaluate a single firm, its competitors, and the industry as a whole. Financial ratios
provide analysts with comparable numbers that aide them in measuring liquidity,
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profitability, and capital structure of individual firms. Due to the ratios’ easily
comparable numbers, analysts are able to compare data from previous years. These
ratios will allow us to compare Corning’s financial position to its competitors within the
industry.
Liquidity Ratio Analysis
Liquidity ratios come from accounts on the balance sheet and measure the
liquidity of a certain firm on the day the balance sheet was prepared. These ratios are
important to a company when measuring short- term debt obligations. High liquidity
ratios reflect a firm’s ability to meet current short-term obligations if necessary.
Liquidity ratios include the current ratio, quick assets ratio, working capital turnover,
days supply outstanding, inventory turnover, days’ supply of inventory, and cash-to-
cash cycle.
Current Ratio = Current Assets/Current Liabilities
Year Corning Corning (Restated) Asahi Glass Furukawa NGK Becton Dickinson Industry
2003 1.73 1.78 1.19 0.78 2.03 2.24 1.562004 1.4 1.46 1.18 0.86 2.88 2.52 1.862005 1.74 1.84 1.17 1.13 2.28 2.29 1.722006 2.07 2.21 1.17 1.12 2.44 2.02 1.692007 2.11 2.28 1.05 1.17 3.11 2.12 1.862008 2.25 2.47 0.94 1.2 2.76 2.55 1.86
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The current ratio is calculated by dividing the company’s current assets by its
current liabilities. It indicates a firm’s ability to meet short-term debt obligations. A
higher ratio represents higher liquidity in a firm which creates a greater ability to meet
short-term liabilities. If a company’s current assets are more than twice their current
liabilities they are considered to have excellent short-term financial strength. After
observing the table and the graph, it is clearly shown that all firms within the industry
have a relatively constant current ratio. The majority of firms in the industry have
current ratios above one, which shows they are successfully managing their current
liabilities with their current assets. After further investigation, Corning appears to have
a good short-term financial position. This can be explained by a current ratio greater
than 1.7 within the last four years, which continually increases every year. Corning
follows closely in relation to the industry average. Corning’s current ratio starts below in
the first few years and later moves above the industry average. Competitors such as
Furukawa and Asahi Glass have current ratios that are lower than the industry average,
but still around one. This is comparable to NGK’s higher current ratio, which could be
due to a growth in assets and a decline in liabilities over the past five years. Corning’s
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ability to meet short-term liabilities increase while remaining above 1. This makes them
a favorable company.
Quick Asset Ratio = Cash + Securities + AR/Current Liabilities
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 1.15 1.15 0.66 0.54 1.36 1.24 0.952004 1.05 1.05 0.69 0.6 1.46 1.48 1.062005 1.29 1.29 0.65 0.74 1.16 1.52 1.022006 1.67 1.67 0.61 0.74 1.55 1.26 1.042007 1.74 1.74 0.57 0.8 2.06 1.19 1.162008 1.62 1.62 0.46 0.84 1.82 1.49 1.15
The quick asset ratio is computed by subtracting the inventories from current
assets and then dividing it by current liabilities. Inventory is not included in this ratio
because some assets held in inventory are not easily liquidated. The quick asset ratio,
similar to the current ratio, is used to determine a company’s financial strength or
weakness. Most creditors accept a quick asset ratio of 1 or higher, which indicates the
firm’s capability to pay current liabilities if necessary. Ratios for each firm in the industry
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dropped after deducting inventory from the equation. Corning’s quick asset ratio trend
was close to the industry average in 2003 and 2004, but in 2005 it begins increasing
and becomes noticeably larger than the industry average. Corning’s quick asset ratio
average for the last five years is greater than one, which supports that Corning is
capable of meeting short-term debt obligations without liquidating its inventory. All
firms in the industry have quick asset ratios that tend to relate to the industry average
just as they did using the current ratio. In 2006 and 2007 Corning and NGK maintain a
quick asset ratio much higher than the industry average. While competitors Asahi Glass
and Furuwaka trends remain below the industry average. It can be concluded from the
data that Corning has the capability to meet short-term debt obligations if they need to.
Inventory Turnover = COGS/Inventory
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 4.8 4.8 4.62 6.24 3.87 2.96 4.432004 4.56 4.56 5.03 6.66 3.37 3.38 4.612005 4.55 4.55 4.84 6.88 3.21 3.38 4.582006 4.52 4.52 4.91 7.26 3.09 3.19 4.612007 4.93 4.93 7.07 7.96 3.1 2.92 5.262008 4.02 4.02 4.51 8.5 3.13 3.23 4.84
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Inventory turnover, calculated by cost of goods sold divided by inventory, allows
firms to measure how effective a firm is in selling and replacing inventory each year.
The inventory turnover ratio is helpful when estimating the liquidity of a firm’s inventory
and the accuracy of the current ratio since inventory is included in that ratios
calculation. A low inventory turnover implies the firm experiences low sales, which
results in a surplus of inventory. Corning has maintained an inventory turnover related
closest to the industry average. Corning’s cost of sales and inventory both increase
slightly each year keeping the ratio relatively constant. Information shown in the table
and graph represent Corning’s inventory turnover to follow closely with the industry
average, which represents average sales strength when compared to competitors. For
the past five years Furuwaka has maintained the highest inventory turnover relative to
the industry average, which reflects strong sales. NGK and Becton and Dickinson both
follow trends lower than the industry average, which reflects lower sales strength
compared to other firms within the industry.
Day Supply of Inventory = 365/Inventory Turnover
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 76.04 76.04 78.96 58.47 94.32 123.36 88.782004 80.04 80.04 72.62 54.8 108.15 107.85 85.862005 80.22 80.22 75.4 53.03 113.6 108 87.512006 80.75 80.75 74.41 50.31 118.04 114.43 89.32007 74.04 74.04 51.6 45.86 117.71 124.99 85.042008 90.74 90.8 80.88 42.96 116.62 112.91 88.34
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The day’s supply of inventory is directly related to the inventory turnover ratio,
and is calculated by dividing the number of days in a year, or 365, by the inventory
turnover ratio. The DSI ratio calculated the number of days a company takes to
turnover its entire inventory. The main goal for all firms is to sell their inventory;
therefore, companies desire to take the least number of days possible to accomplish
inventory turnover. The table displays Corning’s DSI to follow closely with changes in
the industry average. Its DSI average for Corning is 80 days over the past six years. It
remains close to but lower than the industry average DSI which is 87 days. NGK and
Becton Dickinson follow relatively the same trend, taking longer than the industry
average, with an average DSI of 112 days. While Asahi Glass and Furuwaka follow the
same trend, being less than the industry average, with an industry average DSI of 61
days. Furuwaka had the highest inventory turnover and therefore has the lowest day’s
supply of inventory, with an average of 52 days. Since Corning’s DSI closely resembles
the industries average DSI, it can be concluded a surplus in inventory will not create a
large threat from competitors within the industry.
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Accounts Receivables Turnover = Sales/AR
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 5.89 5.89 4.78 3.26 3.1 5.78 4.232004 6.59 6.59 5.26 3.2 5.44 6.11 5.02005 7.28 7.28 4.93 3.36 5.03 6.34 4.922006 7.2 7.2 5.49 3.25 3.33 6.48 4.642007 6.85 6.85 5.87 3.56 3.61 5.87 4.732008 11.62 11.62 6.92 3.85 4.21 6.63 5.4
Accounts receivable turnover is calculated using sales divided by accounts
receivables and measures how effective a firm is at collecting cash from sales made on
account. Many firms give customers credit in the form of accounts receivable, which
allows them to pay for goods and services later. A higher ratio means the firm is able to
collect outstanding accounts receivables quickly and realize payment in a short amount
of time. Corning has maintained a high accounts receivable turnover compared to
competitors and the industry average. Although above industry average, Corning’s
turnover has remained in a constant range for the previous five years and greatly
increased in 2008. It can be concluded that Corning collects receivables in a shorter
period of time compared to others in the industry.
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Days’ Sales Outstanding = 365/Receivables Turnover
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 62.01 62.01 76.31 111.99 117.59 63.14 92.262004 55.4 55.4 69.41 113.93 67.15 59.72 77.552005 50.14 50.14 73.98 108.54 72.6 57.6 78.182006 50.72 50.72 66.46 112.28 109.6 56.34 86.172007 53.32 53.32 62.19 102.56 101.15 62.16 82.022008 31.42 31.42 52.72 94.92 86.77 55.04 72.36
Days’ sales outstanding ratio is calculated by dividing the number of days in one
year, or 365, by receivables turnover. The DSO ratio allows companies to measure
accounts receivable turnover in terms of days and helps firms estimate a policy dealing
with payment of sales made on account. It helps firms measure their ability to collect
outstanding debt from customers. The sooner a firm is able to collect its receivables,
the quicker they can reinvest those assets back in the company. Compared to the
collection of its competitors Corning takes the least number of days to collect
receivables. On average they take 51 days to collect receivables from customers. All
other competitors in the industry take an average over the past six years of 81 days to
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collect receivables. Since Corning collects receivables 30 days sooner than competitors,
they have the opportunity to reinvest assets back into the company sooner. Most
competitors follow a constant trend with the exception of NGK, whose DSO decreased
significantly in 2004 resulting from accounts receivables decreasing by half its amount
in 2003. Corning’s DSO stays in a relatively constant range and is consistently lower
than the industry average each year.
Cash-to-Cash Cycle = DSI + DSO
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 138.06 138.06 155.27 170.46 211.91 186.5 181.042004 135.45 135.45 142.03 168.73 175.3 107.85 148.482005 130.36 130.36 149.38 161.57 186.2 165.6 165.692006 131.47 131.47 140.87 162.59 227.64 170.78 175.472007 127.35 127.35 113.79 148.42 218.86 187.16 167.062008 122.16 122.21 133.6 137.88 203.38 167.95 160.70
The cash to cash cycle, is calculated by adding day’s supply of inventory and
days sales outstanding. In an attempt to calculate the number of number of days a firm
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takes to produce, sell, and collect cash for beginning to end. It helps compare firms in
terms of liquidity and production cycle. If a firm is able to convert its assets into cash
quickly its cash-to-cash cycle will be a low number of days. If a firm has a low cash-to-
cash cycle they are viewed to be more credit worthy. The number of days it takes
Corning to convert assets to cash, on average over the past six years, is 131 days.
Corning’s cash-to-cash cycle remains below the industry average and the lowest
number of days out of all competitors, except Becton Dickinson in 2004 and Asahi glass
in 2007. Asahi glass experienced a decrease DSI as a result of inventory turnover
increasing, which also decreased the cash-to-cash cycle. It is not necessary for Corning
to reduce cash-to-cash cycle being that it already has one of the lowest in the industry.
Working Capital Turnover = Sales/WC
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 2.7 2.7 13.4 ‐5.87 2.85 1.87 3.062004 4.07 4.07 14.89 ‐10.46 1.94 1.9 2.072005 2.78 2.78 15.07 15.51 2.35 3.19 9.032006 2.09 2.09 15.47 16.47 2 2.08 9.012007 2.1 2.1 51.76 14.37 1.79 3.85 17.942008 2.32 2.32 ‐37.21 14.27 1.83 3.26 ‐4.46
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The working capital turnover is used to analyze the relationship between the
firms assets used in operations and the sales resulting from operations. It is used to
measure how effectively a firm uses its working capital to generate sales. The working
capital turnover is calculated by dividing sales by working capital. Working capital is
equal to current assets minus current liabilities. A high turnover exists when a firm has
more sales dollars produced from working capital, which reveals the amount of sales
that cover working capital. Corning’s working capital turnover trend has remained lower
than the industry average for the past four years, with the exception of 2008, when
Asahi Glass drastic decrease in working capital turnover lowered the industry average.
Its turnover has remained fairly constant and relates closely to competitors, NGK and
Becton Dickinson, turnovers. Asahi Glass has a dramatic increase in turnover in 2007
and decease in 2008. The large decrease in turnover for Asahi Glass, caused by a drop
in current assets, appears to decrease the industry average, while all other competitors’
turnover remains fairly constant from 2007 to 2008.
Conclusion
After calculating the previous liquidity ratios we are able to compare Corning’s
liquidity to its competitors and the industry. When comparing Corning’s current ratio
with competitors we see that it remains between its four competitors and follows
closely with the industry average. Corning’s quick asset ratio increased in 2006 resulting
in a quick asset ratio higher than the industry average and other competitors. Corning’s
high accounts receivable turnover indicates it effectiveness in debt collections compared
to its competitors. Corning’s current ratio, quick asset ratio, inventory turnover, and
day’s supply of inventory all relate very closely to the industry average. This shows that
Corning is successful at covering its short-term debt. Corning’s accounts receivable
turnover is much higher than the industry average, which means they collect cash from
sales on account faster than their competitors. Corning has an average trend compared
to the industry when analyzing liquidity ratios.
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Profitability Analysis
Profitability ratios show how effectively a company creates profits. Six different
ratios are used to help analyze profitability. The ratios examined are the gross profit
margin, operating profit margin, net profit margin, asset turnover, return on assets, and
return on equity.
Gross Profit Margin = Gross Profit/Sales
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 0.27 0.27 0.24 0.12 0.22 0.49 0.272004 0.37 0.37 0.27 0.16 0.26 0.49 0.302005 0.43 0.43 0.25 0.17 0.28 0.51 0.302006 0.44 0.44 0.25 0.17 0.29 0.51 0.312007 0.47 0.47 0.29 0.16 0.32 0.52 0.322008 0.46 0.46 0.29 0.15 0.34 0.51 0.32
The gross profit margin is calculated by gross profit divided by sales, which
shows changes in cost of goods sold from one period to the next. To obtain gross profit
you must subtract cost of goods sold from net sales. Gross profit measures how
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effectively a company generates a profit compared to how much it cost to produce a
good. If gross profits are high it means that cost to produce a product are high and the
company must either find a more cost effective production process or increase the
selling price of the product. A high gross profit margin generally means that the
company maintains high sales and a normal amount of cost of goods sold. A higher
gross profit margin is better for a company as it shows they are capable of making
profits form sales and will be able to pay off expense and cost in the future. Corning’s
gross profit margin begins above but very closely related to the industry average in
2003 and continues to move above the industry average more and more in the
following years. Becton Dickinson has the highest six year average gross profit margin
of .51 and is followed by Corning with a six year gross profit margin of .41. Corning’s
average is lower than Becton Dickinson, but in 2008 their gross profit margins are much
closer with Becton Dickinson’s at .51 and Corning’s at .46. The data given supports that
Corning is becoming more effective at generating profits compared to cost to produce a
good each year.
Operating Profit Margin = Operating Income/Sales
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 ‐0.21 ‐0.19 0.07 ‐0.06 0.05 0.17 0.062004 ‐0.38 ‐0.36 0.09 ‐0.004 0.075 0.16 0.082005 0.13 0.15 0.08 0.03 0.09 0.13 0.082006 0.16 0.18 0.08 0.04 0.11 0.14 0.092007 0.18 0.2 0.12 0.05 0.16 0.13 0.122008 0.26 0.28 0.11 0.04 0.19 0.16 0.13
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The operating profit margin is calculated by dividing operating income by net
sales. It determines how effective a firm is converting sales into profits. Corning’s
operating profit margin is much lower than the industry average in 2003 and 2004.
Operating income decreased in 2003 as a result of the asbestos settlement and
decreased in 2004 as a result of restructuring impairment and other charges and
credits. Although Corning’s sales increase each year their operating profit margin was
negatively impacted in 2003 and 2004 due to a negative operating income. In 2005
income from operations greatly increases and continues to gradually increases in the
following years. For the four most recent years, Corning has maintained an operating
profit margin above the industry average which indicates their profits from operations
are slightly greater than competitor’s profits from operations.
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Net Profit Margin = Net Income/Sales
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 ‐0.07 ‐0.05 0.04 ‐0.16 0.03 0.12 0.012004 ‐0.57 ‐0.55 0.05 ‐0.19 0.03 0.09 ‐0.012005 0.13 0.15 0.04 0.02 0.05 0.14 0.062006 0.36 0.38 0.03 0.03 0.06 0.13 0.062007 0.37 0.39 0.04 0.03 0.09 0.14 0.082008 0.89 0.88 0.03 0.01 0.13 0.16 0.08
The net profit margin is calculated by taking net income and dividing it by net
sales. The ratio determines the amount of profit gained or lost after expenses in
relation to sales. A high net profit ratio shows a firm’s ability to manage cost as well as
maintain high net sales. The industry average trend for net profit margin stays within a
relatively constant range. Corning displays the greatest variance from the industry
average when compared to competitors. In 2004 Corning’s net profit margin is
significantly lower than the industry average resulting from a large decline in net
income. In 2005 Corning’s net income tremendously increases and is no longer
negative. The increase in net income boost Corning’s net profit margin above industry
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average where it remains through 2008. All other competitors follow similar trends and
do not have significant changes over the past six years.
Asset Turnover = Sales/Total Assets
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 0.27 0.27 0.65 0.47 0.67 0.89 0.672004 0.36 0.36 0.82 0.63 0.57 0.89 0.732005 0.47 0.46 0.81 0.7 0.64 0.93 0.772006 0.46 0.45 0.78 0.88 0.67 0.95 0.822007 0.45 0.44 0.78 1.05 0.65 0.93 0.852008 0.39 0.38 0.69 1.07 0.71 0.98 0.86
Asset turnover is calculated by taking sales revenue for the current year and
dividing it by the total assets from the previous year. This ratio shows the amount of
return a firm receives relative to the dollar amount a firm has in their asset accounts.
Companies desire a high asset turnover because it shows how well assets generate
sales. Corning’s asset turnover is well below the industry average and is the lowest
among competitors. Corning’s ratio increases slightly and levels out around 2005, while
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competitor Furuwaka has the large increases each year until 2008 when it obtains the
highest asset turnover ratio among the industry. Clearly, Corning is not efficiently using
assets to generate sales as well as its competitors.
Return on Assets = Net Income/Total Assets
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 ‐0.02 ‐0.01 0.03 ‐0.08 0.02 0.11 0.022004 ‐0.2 ‐0.2 0.04 ‐0.12 0.02 0.08 0.012005 0.06 0.07 0.03 0.01 0.03 0.13 0.052006 0.17 0.17 0.02 0.03 0.04 0.12 0.052007 0.16 0.17 0.03 0.03 0.06 0.13 0.062008 0.35 0.34 0.02 0.01 0.09 0.15 0.07
Return on assets is calculated by taking net income of the current year and
dividing it by total assets of the previous year. This ratio indicates profitability of a firm
by determining the amount of return a firm receives in relation to its total assets. A lag
effect is used to observe how effective the previous year’s total assets affect the current
year’s net income. A high ratio explains successful management of maintain cost and
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using assets to create income for a company. Corning’s return on assets does not relate
to the industry average. It is lower in 2003, drops in 2004 and dramatically increases in
2006 to the highest return on assets among competitors. The variety in Corning’s ratio
is explained by its negative net income in 2003 and 2004, followed by and large
increase in net income over the next four years. Becton Dickinson ratio remains within a
constant range over the six year period with a ratio nearly twice the industry average.
It can be concluded that Corning and Becton Dickinson have both been more successful
than their competitors in maintaining cost and using assets to create income over the
past three years.
Return on Equity = Net Income/Total Equity
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 ‐0.05 ‐0.03 0.09 ‐0.23 0.04 0.22 0.032004 ‐0.4 ‐0.38 0.13 ‐0.47 0.04 0.16 ‐0.042005 0.15 0.17 0.09 0.09 0.05 0.24 0.122006 0.33 0.34 0.06 0.15 0.07 0.23 0.132007 0.3 0.3 0.09 0.17 0.11 0.23 0.152008 0.56 0.53 0.05 0.08 0.15 0.26 0.14
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Return on Equity is calculated by taking a firm’s net income of a given year and
dividing it by the firm’s shareholders’ equity of the previous year. Return on Equity is
similar to return on assets as it helps examine a firm’s performance. This ratio helps
determine how well managers use funds invested by stockholders to create returns.
Corning’s return on equity, like return on assets, is also affected in 2003 and 2004 by a
negative net income. It is much lower than the industry average but in 2005 an
increase in net income allows the company to increase its return on equity. Furuwaka
follows a very similar trend as Corning but in most recent years it is closer related to
the industry average, while Corning is much higher than the industry average. Becton
Dickinson return on equity ratio has little variance and remains above the industry
average over the past six years. Relative to the industry, Corning’s most recent return
on equity ratios support that its managers are the most effective in creating returns
from funds provided by shareholders.
Conclusion
When comparing the profitability ratio we can see how efficient Corning is
compared to its competitors and the industry. Corning’s operating profit margin, met
profit margin, return on assets, and return on equity, are all significantly lower than the
industry average from 2003 to 2005. In 2005 those ratios began increasing yearly until
2008 when they are the highest among its competitors and well above the industry
average. Corning’s gross profit margin remains constant and above the industry
average for the past six years. This shows that Corning has the greatest ability to
generate profits from sales compared to its competitors. Corning’s profitability ratios
reveal that Corning was less effective in 2003 and 2004 compared to the industry, but
in the most recent years they have become more effective than most of their
competitors. Corning is above average in how profitably efficient they are compared to
its competitors and the industry.
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Firm Growth Rate Ratios
Calculating growth rate ratios help determine if a firm can maintain future
growth with out the help of outside financing or changing their capital structure. These
ratios allow analyst to compare firms of different sizes by eliminating distortion errors.
The internal growth rate and sustainable growth rate explain how a company grows.
These ratios show how well a company is doing internally and how much they have to
use outside financing.
Internal Growth Rate = ROA (1-Div/NI)
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 ‐0.02% ‐0.01% 0.02% ‐0.08% 0.01% 0.11% 0.02%2004 ‐0.2% ‐0.19% 0.03% ‐0.12% 0.01% 0.08% 0%2005 0.06% 0.07% 0.02% 0.01% 0.02% 0.12% 0.04%2006 0.17% 0.17% 0.01% 0.03% 0.03% 0.12% 0.05%2007 0.18% 0.18% 0.02% 0.03% 0.05% 0.13% 0.06%2008 0.33% 0.36% 0.01% 0.01% 0% 0.15% 0.04%
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The internal growth rate can be calculated by multiplying return on assets by one
minus dividends paid divided by net income, or (ROA) (1-Div/NI). The internal growth
rate is the highest rate a firm can expand to without using outside financing, and it is
financed by cash flows retained by the firm. Corning’s IGR is not closely related to the
industry average. Its IGR is much less than competitors in 2004 and then increases
yearly until it obtain the highest IGR among its competitors in 2006. Corning’s pattern
for the IGR ratio closely resembles its pattern for its ROA ratio over the past six years.
The internal growth rate ratio is greatly impacted by firms return on assets ratios since
it is a major factor used in its calculation. The internal growth rates for competitors
Furuwaka, NGK, and Asahi Glass are all below the industry average in the past four
years. Due to smaller internal growth rate ratios it can be determined that there is
minimal growth opportunity for those firms in future years. Firms such as Corning and
its competitor Becton Dickinson have internal growth rates twice the size of the industry
average in 2008. These firms are more likely to experience internal growth in the next
few years compared to competitors.
Sustainable Growth Rate = IGR (1+Debt/Equity)
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 ‐0.04% ‐0.03% 0.07% ‐0.3% 0.04% 0.21% 0.01%2004 ‐0.51% ‐0.48% 0.08% ‐0.76% 0.03% 0.16% ‐0.12%2005 0.12% 0.13% 0.05% 0.08% 0.06% 0.23% 0.11%2006 0.3% 0.3% 0.03% 0.14% 0.09% 0.22% 0.12%2007 0.28% 0.28% 0.05% 0.14% 0.14% 0.22% 0.14%2008 0.47% 0.5% 0.02% 0.06% 0% 0.25% 0.08%
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The sustainable growth rate can be calculated by multiplying a firm’s internal
growth rate times 1 plus debt divided by equity, or (IGR) (1+D/E). The sustainable
growth rate is the highest rate of growth a firm can sustain without increasing its
financial leverage or changing its capital structure. The sustainable growth rates ratios
follow a similar trend of the internal growth rate ratios, but increase in value when
analyzing the SGR. Corning and Becton Dickinson each remain above industry average
in 2008, and Furuwaka, NGK, and Asahi Glass remain slightly over and below the
industry average. It can be concluded that Corning and Becton Dickinson will
outperform the industry and remain above the industry average in the short-run.
Conclusion
Corning had a growth rate much lower than the industry average in 2003 and
2004 cause by a low return on assets compared to its competitors. In 2005 the IGR and
SGR both begin to increase each year and in 2008 Corning has the highest ratio for
both IGR and SGR which is now greater than the industry average.
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Capital Structure Analysis
Capital structure ratios explain how a firm finances their assets, which can either
be mostly through debt or mostly through equity. Debt financing comes from loans or
bonds the company has and Equity financing comes from the company selling shares of
their stock. A firm that is financed mostly by debt and has little equity will have poor
credit ratings and high interest rates. A firm that is financed mainly through equity will
have greater credit worthiness and an easier ability to pay off debts. The three capital
structure ratios used in this analysis are debt-to-equity, times interest earned, and debt
service margin.
Debt-to-Equity Ratio = Liabilities/Equity
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 0.96 0.95 1.72 2.88 2 0.92 1.882004 1.54 1.48 1.52 5.4 1.74 0.88 2.392005 0.98 0.95 1.55 4.39 1.79 0.85 2.152006 0.8 0.76 1.53 4.37 1.89 0.78 2.142007 0.6 0.57 1.34 3.92 1.69 0.68 1.912008 0.43 0.42 1.27 3.5 1.65 0.6 1.76
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The debt to equity ratio is calculated by dividing total liabilities by total equity.
Firms must increase assets to create growth in profits and equity. Firms with larger
amounts of debt than equity have a greater risk of defaulting than those that have
larger amounts of equity than debt. It is important to have the right amount of debt; no
debt can also be a bad thing. Corning and Becton Dickinson have about the same debt
to equity ratio which is lower than the industry average. Furuwaka’s debt to equity ratio
started above the industry average, increased from more debt and then became
relatively constant at a level still much higher than the industry average. Corning is in a
good position having a low debt to equity which is one of the lowest among its
competitors.
Times Interest Earned = NIBIT/Interest Expense
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 4.25 3.81 7.41 ‐11.42 10.7 20.83 6.882004 10.3 9.8 13.02 ‐12.45 17.3 26.59 11.122005 5.48 ‐6.3 10.6 4.69 22.79 19.11 14.302006 11.13 ‐12.49 9.05 5.93 31.57 17.28 15.962007 13.18 ‐14.56 11.85 6.99 28.2 25.92 18.242008 25.46 ‐27.89 8.84 4.54 28.17 42.71 21.07
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Times interest Earned is calculated by taking net income before interest and
taxes (NIBIT) and dividing it by the interest expense. It is used to measure the amount
of income from operations that is used to pay interest expenses. If firm’s do not have
enough money to cover interest expense they will experience a great risk of defaulting.
A high number is desirable because it ensures shareholders the firm can cover their
interest expense. Corning’s times interest earned ratio is below the industry average
until 2008. In 2008 Corning’s times interest earned ratio was 25.46, which means they
are have $25.46 for every dollar of interest expense. Corning is in a very stable position
and has a little threat of not being able to cover its interest payments. NGK and Becton
Dickinson have the highest debt to equity ratio and very little risk of default.
Debt Service Margin = OCF/Current Notes Payable
Year Corning Corning (Restated) Asahi Glass Furukawa Electric NGK Becton Dickinson Industry
2003 0.39 0.6 0.95 0.07 0.82 2.08 0.982004 3.03 3.24 1.44 0.09 0.61 9.03 2.792005 2.84 2.97 1.02 0.24 0.75 24.77 6.702006 2.61 2.67 0.84 0.17 0.89 5.35 1.812007 3.29 3.47 1.36 0.34 0.92 2.89 1.382008 2.3 3.49 1.16 0.5 1.81 8.13 2.90
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The debt service margin is calculated by taking current operating cash flows and
dividing it by the previous year’s current portion of long term notes payable. This ratio
determines how much cash is available to cover current portions of long term notes.
The higher the ratio the more cash a company has available to cover the debt. Becton
Dickinson has a ratio above the industry average which causes the industry average to
increase a noticeable amount in 2005. The increase in Becton Dickinson’s debt service
margin was caused by a large decrease in current notes payable in the previous year.
Corning’s debt service margin is above the industry average except for 2004 when
Becton Dickinson’s ratio increased causing the industry average to increase as well.
Furuwaka has the lowest debt service margin which reveals it has the least amount of
cash to cover its current portion of long term debt out of its competitors. Corning’s ratio
is similar to the industry average and they have the second highest debt service margin
out of its competitors.
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Altman Z-Scores
The Altman Z-Score is a model used to help identify companies who may
potentially be under distress and how near bankruptcy they may be. It is made up of
five separate components (X1 – X5) each with its own specific weight and purpose for
being in the model. The first, X1, is meant to measure liquidity by creating a ratio
between net working capital and total assets. The second, X2, is a measure of the firms
cumulative profitability; retained earnings divided by total assets. The third, X3, is to
reflect the firms return on its assets by divided earnings before interest and taxes by
total assets. The fourth, X4, is a measure of the firm’s level of leverage; market
capitalization divided by book value of equity. Lastly, X5, sales divided by total assets is
used as a broad overall measure of the firms profit earning potential. There are a few
different rages that analyst look at to help determine the current condition of the firm
but generally a Z-score of around 1.81 or less predicts a strong change of firm
bankruptcy. A score between 1.81 and 2.67 is considered to be in the gray area and
should warrant further investigation by an analyst or potential investor. Firms with a Z-
score greater than 2.67 should be thought of as being in good financial condition with
little risk of default (Palepu & Healy). The chart below illustrates the breakdown of
each individual component and its corresponding year and weight. Corning’s six year
average is 2.25, above the threshold of high bankruptcy risk but still in that middle gray
area. Also, three of the five years Corning’s score was either very near or in the range
of being considered high default risk and further analysis should be performed to better
understand Corning’s overall risk of default.
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Corning Restated Z-Scores
Year Weight 2003 2004 2005 2006 2007 2008
X1 1.2 0.13 0.13 0.20 0.25 0.25 0.18
X2 1.4 ‐0.66 ‐1.02 ‐0.80 ‐0.49 ‐0.23 0.17
X3 3.3 ‐0.18 ‐0.46 0.20 0.23 0.25 0.28
X4 0.06 1.76 2.78 3.15 2.31 2.26 0.64
X5 1 0.29 0.39 0.40 0.39 0.37 0.30
Z‐Scores 1.35 1.83 3.15 2.70 2.90 1.57
Average = 2.25
Unfortunately, properly calculating a Z-score for three of four Corning’s main
competitors is made impossible due to the fact that Asahi Glass, Furukawa, and NGK
are not publicly traded corporations and therefore do not have a market capitalization.
Becton Dickinson is then the only main competitor for whom a Z-score can also be
calculated. As illustrated in the chart below, Becton Dickinson had an average score of
2.82 over the past six years with a range of 2.57 to 3.11. Unlike Corning the majority
of their scores were either near or above the 2.67 mark, making them less likely to
declare bankruptcy according to the Altman Z-score model. Given the lack of
competitor Z-scores, comparing the industry average to either Corning or Becton
Dickenson would not produce conclusive results.
2003 2004 2005 2006 2007 2008Corning Restated 1.35 1.83 3.15 2.70 2.90 1.57
Corning 1.33 1.85 3.2 2.72 2.93 1.53
Asahi Glass N/A N/A N/A N/A N/A N/AFurukawa N/A N/A N/A N/A N/A N/A
NGK N/A N/A N/A N/A N/A N/A
Becton Dickinson 2.57 2.70 2.92 2.79 2.85 3.11Industry Average 1.75 2.13 3.09 2.74 2.89 2.07
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Conclusion
Capital structure ratios determine a firm’s ability to manage its finances and
make interest payments. Corning’s debt-to-equity ratio is the lowest among its
competitors and much lower than the industry average. This mean the company has
more equity than debt and a greater ability to pay off debts. Corning’s times interest
earned ratio increases to above the industry average in 2008, which means they have
enough income before interest and taxes to pay for their interest expense. Corning’s
debt service margin remains steadily above the industry average, with the exception of
2004 when Becton Dickinson experienced a significant decrease in their current portion
of notes payable. As debts become payable, Corning’s ratio remains constant and above
the industry average, which shows their ability to pay off debts when needed. Corning’s
capital structure ratios reveal that it performs above average compared to others in the
industry. Furthermore, even after capitalizing the research and development expense,
the restated financials did not produce any significant changes in the liquidity,
profitability, and the capital structure ratio analyses.
Forecasting Financial Statements
Methodology
Firms develop financial forecasts in order to predict future values and to make
necessary adjustments accordingly. This method of due diligence will create a basis for
what the firm needs and expects. Although forecasts are highly susceptible to
inaccuracy, the estimations made will give a firm a small glimpse into the future. These
estimations are derived from present and historical data found in the company’s
financial statements. Using this information, firms are able to predict future trends
which reflect those from prior years. Some trends seem to follow an observable pattern
while others do not. Analysts can use ratios, averages, and growth rates in order to
accurately forecast these trends and future values. This evaluation will forecast
accounts from the balance sheet, the income statement, and the statement of cash
flows for the next ten years.
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Balance Sheet
The first financial statement to be forecasted will be the balance sheet. Many of
the accounts on the balance sheet will be forecasted using sales and total assets as a
function. Therefore, many of the strengths and limitations found in these accounts will
be reflected in the following forecasted accounts.
Total Assets
Total assets were forecasted using the five year average from asset turnover of
.4. We feel this is a good figure to use based upon the level of consistency of the asset
turnover ratio over the past five years. Given that asset turnover is derived by dividing
sales by total assets, the forecasted total assets will have the same inherent strengths
and limitations as the forecasted sales.
Current Assets
The forecasted current assets were calculated by dividing the total assets by 3
since current assets made up 32.98 percent of total assets on average over the past
five years.
Cash
The cash account was forecasted based on the five year average of cash divided
by total assets. The average was calculated at 10.32 percent which was then multiplied
by total assets. Therefore, cash represents approximately 10 percent of total assets on
a yearly basis.
Accounts Receivables
Accounts receivables were forecasted by using the five year average of the
accounts receivables turnover ratio of 7.57. This figure provides an accurate reflection
of the forecasted accounts receivables balance due to the consistency of the values
from the past five years.
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Inventory
Inventory was forecasted based on the five year average of the inventory
turnover ratio of 4.56. This ratio seems to be stable throughout the previous five years
with a variance of only .49. Given that cost of goods sold is the direct function of the
difference between sales and gross profit, the forecasted inventory is limited not only
by the forecasted COGS, but the sales and gross profit as well.
Current Liabilities
Current liabilities were forecasted using the five year average of the current
ratio: 1.88.
Retained Earnings
Retained earnings was forecasted by adding the previous year’s retained
earnings balance to the current year’s net income less dividends paid. The largest
weakness of the forecasted results is that Corning has only paid dividends three of the
past six years and only twice in the past three. This makes determining an approximate
dividend per share rate increasingly difficult thus making the forecasting dividends paid
account merely a fictitious one at best. Corning’s annual financial statements list total
dividend payments of 19 million and 7 million in 2003 and 2004 respectively, however
according to both Yahoo and Google Finance before 2007 Corning has not paid
dividends since the second quarter of 2001. Corning seems to be using an almost “dart
board” like approach to declaring and issuing dividends which in turn definitely
tarnishes the validity of the forecasted retained earnings. Further explanation will be
provided in subsequent paragraphs.
Shareholders’ Equity
Shareholders’ equity was forecasted by adding the change in retained earnings
to the previous year’s shareholders’ equity balance. Since both retained earnings plays
a substantial role in determining the forecasted value for shareholders’ equity, the
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shareholders’ equity balance faces the same limitations mentioned in the retained
earning explanation above.
Income Statement
The next financial statement to be forecasted will be the income statement.
Since many of the accounts in the balance sheet and statement of cash flows are a
function of the accounts from the income statement, any limitations in the income
statement may influence the forecasted figures in the balance sheet and the statements
of cash flows.
Sales
During the previous recession in 2001 Corning experienced a decline in sales of
12 percent. Taking into account the severity of the current recession in comparison to
the 2001 recession, we initially estimated a more severe decline in sales during the
years of 2008 and 2009. However, after the release of Corning’s 2008 annual report,
the firm’s actual sales growth increased by two percent in 2008. During 2009, we
predict a similar sales growth of two percent followed by a constant sales growth rate
of nine percent. At first glance nine percent growth may seem high, however given
that nine percent was the average sales growth for the past three years and is also the
average internal growth rate (IGR) for the past six years; the rate of nine percent is
both reasonable and sustainable. One limitation of using the internal growth rate as a
metric for determining a sales growth rate is that for 2003 and 2004 Corning had a net
loss while still experiencing an increase in sales. Since net income was negative for
2003 through 2004, the resulting figures for both IGR and sustainable growth rate
(SGR) will be negative as well. By including the 6 year IGR average into the forecasted
sales growth rate, the resulting figure will reflect the net losses Corning experienced in
2003 and 2004. The five year averages are 9 percent and 11 percent for IGR and SGR
respectively. If the IGR and SGR for 2003 and 2004 were not used in computing the
average, the resulting averages would be 19 and 31 percent respectively. Both should
be considered way too high and not reasonable nor sustainable.
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Gross Profit
Gross profit was forecasted using the five year average of the gross profit margin
of 41 percent. Since the forecasted gross profit is a direct function of the forecasted
sales figures, gross profit will have the same strengths and limitations as the forecasted
sales.
Cost of Goods Sold
The forecasted cost of goods sold is simply the difference between the
forecasted sales and forecasted gross profit. Consequently, the main limitation of the
forecasted cost of goods sold figures is inherent upon the same limitations of both the
forecasted sales and gross profit.
Operating Income
Operating income was forecasted using a three year average of the net profit
margin of 20 percent. We feel that there is no discernable trend whatsoever over the
past five years given that two of the five years shows a operating loss and one of the
five years has a growth rate of 345 percent.
Net Income
Like Operating Income net income was forecasted using a three year average of
the net profit margin of 54 percent. Again we feel that there is no discernable trend
whatsoever over the past five years given that two of the five years shows a net loss
and one of the five years has a growth rate of 317 percent. Consequently, the
forecasted net income does not reflect any changes to operating costs, interest
expenses, and equity earnings of affiliated companies. The forecasted net income
balance from the income statement will be transferred to the statement of cash flows.
Statement of Cash Flows
The statement of cash flows will be the final financial statement to be forecasted
in this analysis. Forecasting cash flows may be relatively difficult since values are
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volatile and fluctuate from year to year. Observable patterns and trends may not exist
in historical data which make forecasting more difficult. However, forecasting the
statement of cash flows provides analysts with a model for the way cash moves within
a firm. The accounts in the statement of cash flows that will be forecasted are cash flow
from operating activities, cash flow from investing activities, cash flow from financing
activities, and finally dividends.
Cash Flow from Operating Activities
Future CFFO was calculated based on a six year average from years 2003
through 2008. The ratio of 29.82 percent was calculated by dividing CFFO by net sales.
Since both net sales and CFFO were stable throughout the past five years, the
CFFO/Net Sales ratio was an appropriate metric to use.
Cash Flow from Investing Activities
CFFI was forecasted based on a five year average as a function of capital
expenditures. According to the data, capital expenditures made up 84.78 percent of
CFFI on average.
Cash Flow from Financing Activities
CFFA was calculated by subtracting CFFO from cash equivalents and then adding
the difference to CFFI.
Dividends
Dividends were forecasted on an annual basis and were calculated by assuming
a quarterly dividend per share rate of 5 cents for the next two years. Shares were
forecasted to increase 2 cents for the next four years and then 1 cent per share for
another 4 years after that.
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Restated Methodology
The capitalization of twenty percent of the yearly Research and Development
expenses yielded some minor changes to both the actual and forecasted financial
statements. The capitalization increased earnings, assets, and retained earnings as well
as decreased operating expenses.
Balance Sheet
Assets
The capitalization created an increase in the yearly cash balance due to the
increase in net income adding to the final cash balance at the end of each year. This
new total was then brought forth to the next accounting period as the new beginning
balance. This increase in cash of course led to the increase in the current asset account
and subsequently to the total asset account as well.
Liabilities and Stockholder’s Equity
Due to the increase in net income the retained earnings balance also increased
assuming that the dollar amount of dividends paid by Corning remained constant. The
additional net income earned each year was added to the retained earnings balance
and there was no effect to liabilities.
Income Statement
The immediate effect of capitalizing twenty percent of the yearly research and
development expenses was of course the decrease in the amount of the recorded
research and development cost. The most notable effect was that due to the decrease
in the overall operating expenses, both the operating and net income balances were
increased.
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Statement of Cash Flows
Since net income is a major component in calculating net cash provided by
operating activities the account balance, like net income, increased as a result of the
capitalization of the research and development expense. The net cash used for
investing activities balance remained unchanged but given that the forecasted net cash
from financing activities is the difference between the previous two accounts did
increase as well. This overall increase in the cash flows balance led to an increase in
the years ending cash balance as observed in the restated statement of cash flows and
restated balance sheet.
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Cost of Capital Estimation
Cost of Equity using the Capital Asset Pricing Model Cost of equity (Ke) is calculated by adding the risk free rate (Rf) to beta (β) and
then multiplying the sum by the market risk premium (MRP). The market risk premium
is calculated by subtracting the risk free rate from the expected market return (E (Ri)).
Ke = Rf +β(E(Ri -Rf)
Listed below are the results from the regression analysis performed. The
regression was calculated by comparing Corning’s monthly stock price change with the
monthly price per share change of the market risk premium. The market risk premium
used was determined by subtracting 3-month, 1, 2, 5, and 10 year bond rates each
with 24, 36, 48, 60, and 72 month maturities from the Standard and Poor’s 500 stock
market index.
3 Month Regression Results
Beta Adj. R2 % 24 Month 1.32 0.45 36 Month 1.24 0.28 48 Month 1.36 0.27 60 Month 1.36 0.45 72 Month 1.35 0.45
1 Year Regression Results
Beta Adj. R2 % 24 Month 1.32 0.45 36 Month 1.24 0.28 48 Month 1.36 0.27 60 Month 1.36 0.45 72 Month 1.32 0.45
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2 Year Regression Results
Beta Adj. R2 % 24 Month 1.32 0.45 36 Month 1.24 0.28 48 Month 1.36 0.27 60 Month 1.36 0.45 72 Month 1.32 0.45
5 Year Regression Results
Beta Adj. R2 % 24 Month 1.32 0.45 36 Month 1.24 0.28 48 Month 1.36 0.27 60 Month 1.36 0.21 72 Month 1.33 0.21
10 Year Regression Results
Beta Adj. R2 % 24 Month 1.34 45.4 36 Month 1.27 28.38 48 Month 1.38 26.84 60 Month 1.38 25.29 72 Month 1.35 20.88
We have selected the 10 year, 24 month Beta to use in calculating Corning’s cost
of equity estimation because it has the highest explanatory power (Adj. R2) of 45.40%.
Using the formula above, we have estimated that Corning has a cost of equity of 11.98
percent. We have also added a size adjustment factor of .7%
2.87% + 1.34 (6.80%) = 11.98% + .7 = 12.68%
The 2.87 percent used for the risk free rate is the yield on a 10 year treasury
bond as of March 2009. The market risk premium of 6.80% is commonly used in long-
run historic market risk premium.
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We also calculated an alternative “back door” cost of equity with the formula
P/B = 1 + ((ROE – ke) / (ke – g)); 1.56 = 1+ ((.3 – ke) / (ke - .13); ke = 23.90%.
In the above equation P/B is the price to book ratio and g is the firm’s growth rate. We
feel this cost of equity estimation is entirely too high, primarily due to the abnormally
high growth rate experienced by Corning over the past 5 years.
Weighted Average Cost of Debt
Weighted average cost of debt is calculated by the sum of each weighted portion
of the different types of debt that the company has incurred. The three month
commercial paper interest rate used was taken from the St. Louise Fed
(http://research.stlouisfed.org). The interest rates for the current and long-term debt,
and the post-retirement and pension liabilities were taken from Corning’s 10-K annual
report. The following chart illustrates the different types of debt, their amounts, and
their respective interest rates.
Interest Rate Dollar Amount Weight Weight Adjusted Rate
Commercial Paper 5.28% 609 0.21 1.11%Current Debt 2.40% 23 0.01 0.02%
Long Term Debt 7.25% 1514 0.52 3.80%Post‐Retirement and Pension Liabilities 6.00% 744 0.26 1.54%Total 2890 1 6.47% Weighted Average Cost of Capital All firms finance operations through combinations of both debt and equity. By
calculating the weighted average cost of capital (WACC), analysts are able to accurately
measure the average of the costs of these sources of financing. Analysts use WACC as
a valuation tool to identify the balance between debt and equity of a firm. Furthermore,
calculating WACC before and after taxes may be useful to an analyst in recognizing the
firm’s use of available tax shields. According to the following data, Corning’s cost of
debt was 6.47 and their weighted average cost of capital before and after taxes were
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10.99 and 10.4 percent respectively. This shows that the firm’s WACC before taxes is
approximately 59 percent higher than cost of debt. Therefore, Corning may be under-
leveraged and may not be taking advantage of available tax shields. In addition, the
firm’s WACC before and after taxes is not significantly different from one another, thus
providing further evidence that Corning is not taking advantage of available tax shields.
WACC (before taxes)
Weight Rate
Cost of Debt 0.27 6.47% Cost of Equity 0.73 12.68% Total 10.99%
10.99 % = (.27*.0647) + (.73*.1268)
WACC (after taxes)
Weight Rate
Cost of Debt 0.27 6.47% (1‐.34)
Cost of Equity 0.73 12.68%
Total 10.40%
10.4 % = (.27*.0647) (1-.34) + (.73*.1268)
Valuation Analysis
Methods of Comparables
The following are valuation multiples used by analysts and potential investors to
compare firm’s value relative to its competitors and to help identify whether or not a
firm may be over or undervalued. Different industries have different values of what
would be considered average or typical for each comparable in a given industry.
Because of this it is important to identify the specific industry segment in which you are
studying and likewise each industry segment average. Consistency is also important for
comparison purposes, whether it be comparing individual firms or industry segments as
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a whole. All of the following comparable valuation multiples are deemed to be over,
under, or fairly valued based on 15 percent analyst perspective. Meaning that any
comparable above 15 percent of the current price per share would be considered
undervalued and any comparable under 15 percent of the current market price would
be considered overvalued. In the case of Corning and its current price per share of
14.92, a comparable of over $17.16 is considered undervalued and any comparable
under 12.68 is considered overvalued. Any comparable that falls in between 12.68 and
17.16 is considered fairly valued.
Price to Earnings Ratio (ttm)
Corning’s twelve month trailing (ttm) price to earnings ratio was calculated by
dividing its current price per share (PPS) by its twelve month trailing earnings per share
(EPS). The EPS (ttm) uses the firm’s actual earnings over the past twelve months
rather than a forecasted estimate as used in the forward EPS ratio. The EPS (ttm) can
be considered more accurate than the forward EPS ratio because it uses actual earnings
figures however it only gives an analyst an historical perspective for a potential future
investment.
PPS EPS P/E (ttm)
Industry Average Comparable PPS
Corning 14.92 3.37 4.43 8.94 30.12Corning (Restated) 14.92 3.37 4.43 8.94 30.12Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 62.47 4.64 13.45 8.94 41.52
Normally the industry average would not include the subject firm (Corning),
however given that there was only one other company to compare it to Corning’s
trailing P/E is included in the industry average. The figures used in the Valuation
Analysis section for Becton Dickinson (BD) and other competitors were obtained online
from Yahoo Finance. Values for Asahi Glass, Furukawa Electric, and NGK are not
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available because they are not publicly traded corporations. Based on a 15 percent
analyst perspective and the comparable PPS shown in the table above, Corning is
considered undervalued.
Price to Earnings (Forward)
Corning’s forward price to earnings ratio was calculated by dividing its current
price per share (PPS) by its forward earnings per share (EPS). As mentioned above, the
trailing EPS ratio can be considered more accurate than the forward EPS ratio because
it uses actual figures but only provides an historical perspective.
PPS EPS P/E (forward)
Industry Average Comparable PPS
Corning 14.92 2.1 7.10 9.28 19.49Corning (Restated) 14.92 2.1 7.10 9.28 19.49Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 62.47 5.45 11.46 9.28 50.59
Corning’s forward P/E ratio is higher than its twelve month trailing due in large
part to its abnormally high earnings of 2008 combined with the a forecasted two
percent sales growth in 2009. Corning’s long term earnings growth rate used in the
forecasting section is nine percent but as previously mentioned was adjusted down to
reflect the current recessionary market conditions. Those factors considered, the
trailing earnings per share ratio would be better used for valuation purposes than the
forward. Based on a 15 percent analyst perspective and the comparable PPS shown in
the table above, Corning is considered undervalued.
Price to EBITDA
The price to EBITDA ratio is calculated by dividing the firm’s price per share by
its earnings before interest, taxes, depreciation, and amortization. The ratio is similar
to the previous EPS (ttm) ratio except the earnings part of the equation includes
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interest, taxes, and any depreciation and amortization the company may have. For
companies who have large amounts of capital investments and subsequently have to
pay large of amounts of interest on that debt EBITDA may be a more accurate measure
of the firm’s profitability (Palepu & Healy).
PPS EBITDA P/EBITDA Industry Average Comparable PPS
Corning 14.92 1,091 0.01 0.02 23.76Corning (Restated) 14.92 1204 0.01 0.02 24.08Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 62.47 2,090 0.03 0.02 41.80
The price to EBITDA ratio for Corning is probably not the best measure to use
because their 2008 EBITDA of $1,091 is almost one fifth of its 2008 net income of
$5,257 billion. This is because of the $5,257 billion, $3,928 billion (74.7 percent) of
that is equity earnings from minority interests which is not included in the EBITDA
calculation. Based on a 15 percent analyst perspective and the comparable PPS shown
in the table above, Corning is considered undervalued.
Price to Book
The price to book ratio presented below was calculated by dividing Corning’s
price per share by its book value per share. The book value per share was calculated
by the book value of equity by the number of shares outstanding. The ratio is used to
compare a firm’s market value with the firm’s book value on a per share basis. This
provides a simple figure to identify potential over or undervalued companies. A price to
book ratio greater than one means that the market asset value of the firm is greater
than the asset value recorded on the firm’s financial statements. A ratio of less than
one could signal an undervalued company or that the company is understating there
the value of their assets. Understating assets would produce a higher return on assets
ratio which could be used to make the company appear more profitable. Likewise, a
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firm with a ratio greater than one could signal an overvalued company or an
overstatement of assets. Since assets are frequently looked at as a measure of firm
value there is as much motivation, if not more, to overstate asset value.
PPS BVPS P/B Industry Average Comparable PPS
Corning 14.92 12.34 1.21 2.21 27.33Corning (Restated) 14.92 12.63 1.18 2.48 31.32Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 62.47 19.40 3.22 3.22 62.47
Corning’s price to book ratio is significantly closer to one than its competitor BD
and the industry average; meaning that its asset market value is much closer to its
book value and potentially less overvalued than its competitors. Based on a 15 percent
analyst perspective and the comparable PPS shown in the table above, Corning is
considered undervalued.
Dividend to Price
The dividend to price ratio is calculated by dividing dividends per share by price
per share. This ratio can be used to measure how much of the firms current stock price
is because of the dividend paid by the company on an annual basis or when used as a
comparable what the stock price should be based on the dividends paid.
PPS DPS P/DIV Industry Average Comparable PPS
Corning 14.92 0.20 0.01 0.017 11.76Corning (Restated) 14.92 0.20 0.01 0.017 11.76Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 62.47 1.32 0.02 0.017 76.44
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Given Corning’s sporadic policy on increasing and decreasing dividends this model
should not be the preferred method in deciding if Corning is either over or undervalued.
Consequently, based on a 15 percent analyst perspective and the comparable PPS
shown in the table above, Corning is considered overvalued.
Price Earnings Growth
The price earnings growth (PEG) ratio is calculated by dividing the firms EPS
(ttm) by its growth rate. The ratio is very similar to the EPS (ttm) but also factors in
the firm’s potential growth. The PEG ratio allows an analyst to see how much they
would be paying per one unit of growth for a firm and its competitors.
PPS PEG Industry Average
Comparable PPS
Corning 14.92 0.37 1.185 17.68 Corning (Restated) 14.92 0.37 1.185 17.68 Asahi Glass N/A N/A N/A N/A Furukawa Electric N/A N/A N/A N/A NGK N/A N/A N/A N/A Becton Dickinson 62.47 2.00 1.185 74.03
Corning is well below both the industry average and its competitor Becton Dickenson
mainly due to its lower earnings per share. Based on a 15 percent analyst perspective
and the comparable PPS shown in the table above, Corning is considered undervalued.
Price to Free Cash Flow
Price to free cash flow is calculated by dividing market capitalization by free cash
flow. It is similar to the price to cash flow ratio but is considered more accurate
because it takes into account changes to net working capital and capital expenditures
(Palepu & Healy).
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Market Cap. FCF P/FCF
Industry Average Comparable P/FCF
Corning 23,275 3,452 6.74 18.46 40.85Corning (Restated) 23,275 3,259 7.14 18.46 38.56Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 14,970 496 30.18 18.46 4.90
The comparable PPS was calculated by multiplying the industry average by free
cash flow divided by the number of shares outstanding. Based on a 15 percent analyst
perspective and the comparable PPS shown in the table above, Corning is considered
undervalued.
Enterprise Value to EBITDA
The enterprise value to EBITDA ratio is calculated by dividing enterprise value by
earnings before interest, taxes, depreciation, and amortization. Enterprise value is
calculated by market capitalization plus debt, and minority interest less cash. Enterprise
value is sometimes known as “takeover price” because an acquiring company would
need to buy the subject firms equity at market value as well as absorb the current
firm’s debt and any minority interests it currently holds. Cash is subtracted from that
amount because otherwise it would the equivalent of paying one dollar to purchase one
dollar which would be superfluous calculation.
Enterprise Value EBITDA EV/EBITDA
Industry Average Comparable P/FCF
Corning 31,003 1,091 28.42 35.76 25.01Corning (Restated) 30,650 1,204 25.46 35.76 27.60Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 15,350 2,090 7.34 35.76 39.99
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Corning’s EV/EBITDA is higher than its competitors and the industry average
again due its low EBITDA and high amount of minority interests. Based on a 15
percent analyst perspective and the comparable PPS shown in the table above, Corning
is considered undervalued.
Conclusion
Of the eight comparables calculated, seven of them (87.5%), concluded that
according to their respective comparable price per share Corning would be considered
undervalued. It is not surprising given Corning’s shaky history regarding dividends that
the dividend to price ratio would conclude that Corning is overvalued. However, as
previously mentioned, any comparisons made between Corning and the industry
average should be regarded as irrelevant given that the industry average was calculated
using only two firms and Corning itself was one of them. The chart below illustrated
Corning’s as stated comparable results and whether they should be considered over,
under, or fairly valued.
Market PPS
Comparable PPS (as stated) Overvalued Fairly Valued Undervalued Conclusion
P/E (ttm) 14.92 30.12 .01 ‐ 12.68 12.69 ‐ 17.15 17.16 + UndervaluedP/E (forward) 14.92 19.49 .01 ‐ 12.69 12.69 ‐ 17.16 17.16 + UndervaluedP/EBITDA 14.92 23.76 .01 ‐ 12.70 12.69 ‐ 17.17 17.16 + UndervaluedP/Book 14.92 27.33 .01 ‐ 12.71 12.69 ‐ 17.18 17.16 + UndervaluedDividend to Price 14.92 11.76 .01 ‐ 12.72 12.69 ‐ 17.19 17.16 + Overvalued PE Growth 14.92 17.68 .01 ‐ 12.73 12.69 ‐ 17.20 17.16 + UndervaluedP/FCF 14.92 40.85 .01 ‐ 12.74 12.69 ‐ 17.21 17.16 + UndervaluedEV/EBITDA 14.92 25.01 .01 ‐ 12.75 12.69 ‐ 17.22 17.16 + Undervalued
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Corning’s Restated Comparables
Market PPS
Comparable PPS (as stated) Overvalued Fairly Valued Undervalued Conclusion
P/E (ttm) 14.92 30.12 .01 ‐ 12.68 12.69 ‐ 17.15 17.16 + UndervaluedP/E (forward) 14.92 19.49 .01 ‐ 12.69 12.69 ‐ 17.16 17.16 + UndervaluedP/EBITDA 14.92 24.08 .01 ‐ 12.70 12.69 ‐ 17.17 17.16 + UndervaluedP/Book 14.92 31.32 .01 ‐ 12.71 12.69 ‐ 17.18 17.16 + UndervaluedDividend to Price 14.92 11.76 .01 ‐ 12.72 12.69 ‐ 17.19 17.16 + Overvalued PE Growth 14.92 17.68 .01 ‐ 12.73 12.69 ‐ 17.20 17.16 + UndervaluedP/FCF 14.92 38.56 .01 ‐ 12.74 12.69 ‐ 17.21 17.16 + UndervaluedEV/EBITDA 14.92 27.60 .01 ‐ 12.75 12.69 ‐ 17.22 17.16 + Undervalued
Intrinsic Valuation Models
The purpose for calculating intrinsic valuation models is to estimate a firm’s
market price per share in order to better understand the firm’s value and aid in
investment decisions. The charts below are used to help illustrate the price per share
sensitivity when variables such as cost of equity, earnings growth rate, or weighted
average cost of capital are changed. The price per share listed in the tables will
determine whether or not the subject firm should be considered over, under, or fairly
valued based on a 15 percent analyst perspective. Meaning that any price per share 15
percent below the current observed market price is deemed overvalued and any price
per share 15 above current observed market price is deemed undervalued. Any price
falling in-between those two thresholds should be considered fair valued. For Corning
and their current $14.92 price per share, the fair value range is any price per share
between 12.68 and 17.16 and any prices above and below that range being
undervalued and overvalued, respectively.
Discounted Dividend Model
The valuation for the discounted dividends model is based exclusively on the
cash flows investors receive in the form of dividends; however this is also the source of
the model’s greatest limitation. The discounted dividends model ignores any capital
190 | P a g e
gains or loss that can be made upon the sale of the stock. Also, the model employs a
constant growth rate and constant cost of equity used when finding the present value
of future dividends and for the present value of the dividend perpetuity. The model is
also very sensitive to changes in the growth rate, especially when the growth rate is
close to the cost of equity used to find the present value of the perpetuity. This is often
referred to the “denominator effect” and it occurs when the growth rate is subtracted
from the cost of equity and a very small denominator is the result. This causes the
present value of the perpetuity to be significantly larger than normal and distorts the
results of the model. As illustrated in the chart below, the price per share jumps from
$7.04 to $22.68 just from increasing the growth rate 50 basis points, this is due to the
very close proximity between the cost of equity 9.68 percent and the growth rate 9.50
percent.
The price per share amounts listed in the table below were calculated by dividing
the total present value of both the annual dividends and dividend perpetuity by the
number of shares outstanding. The dividend perpetuity was calculated by dividing the
final year’s annual dividend per share by the net result of the cost of equity less the
growth rate. That value was then multiplied by a present value factor based on the
cost of equity used to discount it back to year zero also known as the present time
period.
Discounted Dividends Model
g 0.03 0.05 0.07 0.09 0.095 0.1 0.105 0.0968 3.85 4.76 7.04 22.68 80.92 N/A N/A 0.1068 3.36 3.96 5.22 9.48 12.8 21.01 74.8
0.1168 2.98 3.4 4.17 6.11 7.16 8.82 11.89ke 0.1268 2.67 2.97 3.49 4.57 5.05 5.71 6.67
0.1368 2.42 2.65 3.01 3.67 3.94 4.28 4.72 0.1468 2.22 2.39 2.65 3.09 3.25 3.45 3.7 0.1568 2.04 2.17 2.37 2.67 2.78 2.91 3.06 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
191 | P a g e
Unlike the rest of the models used in this section, the discounted dividends
model did not need to be recalculated using the restated financials. This is because the
models sole component, dividends, was not affected by the capitalization of Corning’s
research and development costs. According the table above, the calculated price per
share for Corning of $4.57 is not in the fairly valued range. In fact all but seven of the
49 computed price per share valued fell into the category of overvalued. The specific
price per share used in making a valuation decision will be $4.57 because it was
calculated using the firms actual cost of equity and growth rate. As a result of that
specific price per share falling below the fairly valued threshold, according to the
discounted dividends model, Corning is regarded to be overvalued.
Discounted Free Cash Flow Model
The valuation for the discounted dividends model is based on the present value
of firm’s forecasted future free cash flows. Like free cash flow, the model allows
investors to look at the cash a firm is able to generate after depreciation, amortization,
changes to working capital, and capital expenditures are taken into consideration
(Palepu & Healy). The main limitation of the model is that both the weighted average
cost of capital before taxes the earnings growth rates are held constant.
The price per share amounts listed in the table below were calculated by dividing
the total present value of both the annual free cash flows and a free cash flow
perpetuity by the number of shares outstanding. The perpetuity was calculated by
dividing the final year’s free cash flow by the net result of the weighted average cost of
capital before taxes less the growth rate. That value was then multiplied by a present
value factor based on the weighted average cost of capital before taxes used to
discount it back to year zero also known as the present time period. Like the
discounted dividend model above the discounted free cash flow model is sensitive to
changes in growth rates and suffers from the same denominator effect.
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Discounted Free Cash Flow Model (As Stated)
Growth Rate%
3 5 7 9 9.5 10 10.5 8 28.20 44.37 125.21 N/A N/A N/A N/A 9 21.99 31.22 58.93 N/A N/A N/A N/A 10 17.59 23.39 36.91 104.50 205.89 N/A N/A WACC(BT)% 10.48 15.92 20.66 30.85 68.58 102.09 205.38 N/A 12 11.83 14.53 19.39 30.73 36.40 44.91 59.08 13 9.85 11.80 15.05 21.55 24.34 28.05 33.25 14 8.25 9.70 11.97 16.06 17.65 19.64 22.20 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
Discounted Free Cash Flow Model (Restated)
Growth Rate%
3 5 7 9 9.5 10 10.5 8 31.25 47.90 131.20 N/A N/A N/A N/A 9 24.79 34.30 62.85 N/A N/A N/A N/A 10 20.21 26.18 40.11 109.76 214.23 N/A N/A WACC(BT)% 10.48 18.45 23.34 33.84 72.72 107.24 213.68 N/A 12 14.17 16.95 21.96 33.65 39.49 48.25 62.86 13 12.09 14.10 17.44 24.14 27.01 30.84 36.20 14 10.40 11.89 14.23 18.44 20.08 22.13 24.76 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
The discounted free cash flow model was calculated using both the as-stated and
restated financials because both cash flow from operations and cash flow from investing
activities were affected by the capitalization of Corning’s research and development
expenses. The restated prices per share values are higher than the as-stated values
because of the larger amount of free cash flow caused by the restatements. The higher
value of free cash flow was the direct result of reduced expenses and higher net income
yielded by the research and development capitalization. According the tables above,
the calculated price per share for both the as-stated and restated model for Corning of
$68.58 and $72.72 respectively, are not in the fairly valued range. The specific prices
per share used in making a valuation decision will be $68.58 and 72.72 because they
193 | P a g e
were calculated using the firms actual weighted average cost of capital before taxes
and growth rate. As a result of those specific prices per share being above the fairly
valued threshold, according to the discounted free cash flow model, Corning is regarded
to be undervalued for both the as-stated and restated financial data sets.
Abnormal Earnings Growth Model
The valuation for the abnormal earnings growth model is based on the present
value of firm’s forecasted future abnormal earnings growth. Abnormal earnings growth
is the difference between the forecasted cumulative dividend earnings and forecasted
benchmark net income. Benchmark net income, as mentioned above, is the product of
the firm’s book value of equity multiplied by the firms cost of equity. Cumulative
dividend earnings are the annual dividends per year minus reinvested dividends (DRIP).
Reinvested dividends being the product of the previous year’s total dividends paid
multiplied by the firms cost of equity. Again, the main limitation of the model is that
both the cost of equity and the respective growth rates are held constant. The
advantage of the model is that because of the different negative growth rates it gives
an investor a look at how quickly the price per share returns to its long term mean.
The model is also more stable than the previous models and produces per share results
within close proximity to one another while still allowing room for comparison for a 15
percent analyst perspective.
The price per share amounts listed in the table below were calculated by dividing
the total present value of both the annual abnormal earnings growth and the abnormal
earnings growth perpetuity by the number of shares outstanding. The perpetuity was
calculated by dividing the final year’s abnormal earnings growth by the net result of the
cost of equity less the growth rate. That value was then multiplied by a present value
factor based on the cost of equity used to discount it back to year zero also known as
the present time period. Unlike the previous models above the abnormal earnings
growth model is not as sensitive to changes in growth rates and likewise does not
suffer from the aforementioned denominator effect. This is in large part due to the
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high values of the growth rates used in the model and the fact that they are negative
so no matter what growth rate is used the denominator will always become larger when
subtracted from the cost of equity. As mentioned above, these factors create a much
more stable model and a higher level of explanatory power.
Abnormal Earnings Growth Model (As Stated)
Growth Rate
-0.1 -0.2 -0.3 -0.4 -0.5 0.0968 20.84 20.83 20.86 20.82 20.81 0.1068 13.39 14.67 11.4 15.7 15.97 0.1168 7.53 9.7 4.26 11.51 11.98
Ke 0.1268 2.84 5.62 7.1 8.02 8.64 0.1368 N/A 2.24 3.98 5.07 5.81 0.1468 N/A N/A 1.33 2.55 3.39 0.1568 N/A N/A N/A 0.37 1.29 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
Abnormal Earnings Growth Model (Restated)
Growth Rate
-0.1 -0.2 -0.3 -0.4 -0.5 0.0968 20.5 20.5 20.5 20.5 20.5 0.1068 13.03 14.32 14.97 15.37 15.63 0.1168 7.15 9.33 10.47 11.16 11.63
Ke 0.1268 2.45 5.25 6.72 7.66 8.28 0.1368 N/A 1.85 3.6 4.7 5.45 0.1468 N/A N/A 0.94 2.17 3.02 0.1568 N/A N/A N/A N/A 0.91 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
The abnormal earnings growth model was calculated using both the as-stated
and restated financials because net income, the key component in the model, was
affected by the capitalization of Corning’s research and development expenses. The
restated prices per share values are lower than the as-states values because of the
larger amount of net income caused by the restatements. The higher value of net
income was the direct result of reduced expenses yielded by the research and
development capitalization. The higher net income caused the value for abnormal
earnings growth to increase as well. According the tables above, the calculated price
195 | P a g e
per share for both the as-stated and restated model for Corning of $7.10 and $6.72
respectively, are below the fairly valued range. The specific prices per share used in
making a valuation decision will be $7.10 and 6.72 because they were calculated using
the firms actual cost of equity and the median growth rate. As a result of those specific
prices per share being below the fairly valued threshold, according to the abnormal
earnings growth model, Corning is regarded to be overvalued for both the as-stated
and restated financial data sets.
Residual Income Model
The valuation for the residual income model is based on the present value of
firm’s forecasted future residual income. Residual income is the difference between the
firms forecasted net income and forecasted benchmark net income. Benchmark net
income being the product of the firm’s book value of equity multiplied by the firms cost
of equity. Again, the main limitation of the model is that both the cost of equity and
the respective growth rates are held constant. The advantage of the model is that
because of the different negative growth rates it gives an investor a look at how quickly
the price per share returns to its long term mean. The model is also very stable and
produces per share results within close proximity to one another while still allowing
room for comparison for a 15 percent analyst perspective.
The price per share amounts listed in the table below were calculated by dividing
the total present value of both the annual residual income and the residual income
perpetuity by the number of shares outstanding. The perpetuity was calculated by
dividing the final year’s residual income by the net result of the cost of equity less the
growth rate. That value was then multiplied by a present value factor based on the
cost of equity used to discount it back to year zero also known as the present time
period. Unlike some of the previous models above the residual income model is not as
sensitive to changes in growth rates and likewise does not suffer from the denominator
effect. This is in large part due to the high values of the growth rates used in the
model and the fact that they are negative so no matter what growth rate is used the
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denominator will always become larger when subtracted from the cost of equity. As
mentioned above, these factors create a much more stable model and a higher level of
explanatory power.
Residual Income Model (As Stated)
Growth Rate -0.1 -0.2 -0.3 -0.4 -0.5 0.0968 16.49 15.93 15.38 14.83 14.27 0.1068 15.34 15.01 14.68 14.36 14.03 0.1168 14.26 14.09 13.93 13.76 13.60
Ke 0.1268 13.24 13.19 13.15 13.10 13.05 0.1368 12.29 12.33 12.37 12.41 12.45 0.1468 11.41 11.51 11.62 11.72 11.82 0.1568 10.60 10.74 10.89 11.03 11.18 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
Residual Income Model (Restated)
Growth Rate Ke -0.1 -0.2 -0.3 -0.4 -0.5 0.0968 16.76 16.22 15.69 14.15 14.61 0.1068 15.59 15.28 14.97 14.66 14.34 0.1168 14.48 14.34 14.19 14.04 13.89
Ke 0.1268 13.45 13.42 13.39 13.36 13.32 0.1368 12.49 12.54 12.59 12.65 12.70 0.1468 11.59 11.70 11.82 11.93 12.05 0.1568 10.76 10.92 11.08 11.23 11.39 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
The residual income model was calculated using both the as-stated and restated
financials because both net income and equity book value were affected by the
capitalization of Corning’s research and development expenses. The restated prices per
share values are higher than the as-stated values because of the larger amount of net
income and book value of equity caused by the restatements. The higher value of net
income was the direct result of reduced expenses created by the research and
development capitalization. The higher value of equity book value was an indirect
outcome of higher retained earnings caused by the additional net income from the
capitalization being flowed into the existing retained earnings account balance.
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According the tables above, the calculated price per share for both the as-stated and
restated model for Corning of $13.15 and $13.39 respectively, are within the fairly
valued range. The specific prices per share used in making a valuation decision will be
$13.15 and 13.39 because they were calculated using the firms actual cost of equity
and the median growth rate. As a result of those specific prices per share being within
the fairly valued threshold, according to the residual income model, Corning is regarded
to be fairly valued for both the as-stated and restated financial data sets.
Long Run Residual Income Model
The valuation for the long run residual income model is based on derived value
for market value of equity. The market value of equity used in the model was
calculated by multiplying the firm’s current book value of equity by a market value
factor. The market value factor used in the model was determined by the following
formula: MVF = ((1+ (ROE – Ke)) / (Ke – g). The main advantage of the model is that
three different variables are used to determine the valuation basis instead of two.
Because of this an investor has more manipulation options for making a valuation
decision. With the exception of a few results, the model is fairly stable and produces
per share results within a closer proximity to that of the discounted dividends and
discounted free cash flow models and definitely allows for enough room for comparison
for a 15 percent analyst perspective. All this again allows for a higher level of stability
and better explanatory power.
The prices per share amounts listed in the table below were calculated by
dividing the calculated market value of equity by the number of shares outstanding.
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Long Run Residual Income Model (As Stated)
ROE 0.08 0.12 0.15 0.2 0.24 0.1068 N/A 15.78 31.57 57.87 78.92 0.1168 N/A 9.92 19.83 36.36 49.58
Ke 0.1268 N/A 7.02 14.48 25.54 36.19 0.1368 N/A 5.70 11.41 20.91 28.52 0.1468 N/A 4.71 9.42 17.27 23.55
g
5.00
7.00
9.00
9.50
10.00
0.1068 15.56
19.21
31.57
41.20
64.99
0.1168 13.26
15.14
19.83
22.35
26.36
Ke 0.1268 11.56
12.50
14.48
15.36
16.56
0.1368 10.25
10.66
11.41
11.71
12.09
0.1468 9.21
9.29
9.42
9.47
9.53
ROE
0.08 0.12 0.15 0.2 0.24
5 3.47
8.09
11.56
17.34
21.96
7 1.56
7.82
12.50
20.32
26.57
g 9 N/A 7.24
14.48
26.54
36.19
9.5 N/A 6.98
15.36
29.32
40.48
10 N/A 6.63
16.56
33.13
46.38
Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 +
Valued Valued Valued
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Long Run Residual Income Model (As Stated)
ROE 0.08 0.12 0.15 0.2 0.24 0.1068 N/A 16.31 32.61 59.79 81.53 0.1168 N/A 10.24 20.49 37.56 51.22
Ke 0.1268 N/A 7.48 14.95 26.61 36.39 0.1368 N/A 5.89 11.79 21.61 29.46 0.1468 N/A 4.87 9.73 17.84 24.33
g
5.00
7.00
9.00
9.50
10.00
0.1068 16.08
19.85
32.61
42.56
67.14
0.1168 13.70
15.64
20.49
23.09
27.24
Ke 0.1268 11.94
12.92
14.95
15.86
17.11
0.1368 10.59
11.01
11.79
12.10
12.49
0.1468 9.52
9.60
9.73
9.78
9.84
ROE
0.08 0.12 0.15 0.2 0.24
5 3.58
8.36
11.94
17.91
22.69
7 1.61
8.07
12.92
20.99
27.45
g 9 N/A 7.48
14.95
27.42
37.39
9.5 N/A 7.21
15.86
30.29
41.82
10 N/A 6.84
17.11
34.22
47.91
Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 +
Valued Valued Valued
The long run residual income model was calculated using both the as-stated and
restated financials because the equity book value was affected by the capitalization of
Corning’s research and development expenses. The restated prices per share values
are higher than the as-stated values because of the book value of equity caused by the
restatements. The higher value of equity book value was an indirect outcome of higher
retained earnings caused by the additional net income from the capitalization being
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flowed into the existing retained earnings account balance. According the tables above,
the calculated price per share for both the as-stated and restated model for Corning of
$14.48 and $14.95 respectively, are within the fairly valued range. The specific prices
per share used in making a valuation decision will be $14.48 and 14.95 because they
were calculated using the firms actual cost of equity, growth rate, and return on equity.
As a result of those specific prices per share being within the fairly valued threshold,
according to the long run residual income model, Corning is regarded to be fairly valued
for both the as-stated and restated financial data sets.
Conclusion
Of the five valuation models used two of them concluded Corning to be
overvalued, two fairly valued, and one undervalued. Given the varied results, no clear
cut conclusion can be drawn based on these results alone. In the two models that
found Corning to be overvalued, the model prices per share produced were almost all
substantially different from the firm’s current market price bringing into question the
explanatory power of the model rather than the firm being over or under valued.
Likewise for the discounted free cash flow model that concluded Corning was
undervalued, the model price per share used to determine the firm’s valuation was 460
percent higher than Corning’s current market price per share. In both residual income
based models, the per share model prices were only 11.68 percent lower than and .2
percent greater than current market price. Considering all the model results the
intrinsic model valuation section suggests that Corning is currently fairly valued.
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Market Over Fairly Under As
stated Restated
Model PPS Valued Valued Valued Model PPS
Model PPS Conclusion
Discounted Dividend 14.92 -12.67 12.68 - 17.16 17.17 + 4.57 N/A Overvalued
Discounted Free Cash Flow 14.92 -12.67 12.68 - 17.17 17.17 + 68.58 72.72 Undervalued
Abnormal Earnings Growth 14.92 -12.67 12.68 - 17.18 17.17 + 7.1 6.72 Overvalued
Residual Income 14.92 -12.67 12.68 - 17.19 17.17 + 13.15 13.39
Fairly Valued
Long Run Residual Income 14.92 -12.67 12.68 - 17.20 17.17 + 14.48 14.95
Fairly Valued
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Appendices
Sales Manipulation Diagnostics
Corning 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.0181 1.0158 1.0097 1.0177 1.0239
Sales/ Accounts Receivables 5.8857 6.588 7.2798 7.1961 6.8458
Sales/ Inventory 6.6167 7.2037 8.0333 8.097 9.2868
Corning (Displays) 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.1019 1.057 1.0259 1.0441 1.0553
Sales/ Accounts Receivables 1.1333 1.9026 2.7695 2.9666 3.0526
Sales/ Inventory 1.2741 2.0804 3.0561 3.3308 4.141
Corning (Telecommunications) 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.0401 1.0406 1.0279 1.0549 1.0837
Sales/ Accounts Receivables 2.7162 2.6308 2.5803 2.4047 2.0724
Sales/ Inventory 3.0535 2.8766 2.8474 2.7058 2.8114
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Corning (Life Sciences) 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.2434 1.2459 1.1849 1.4569 1.8059
Sales/ Accounts Receivables 0.5352 0.5197 0.4483 0.3992 0.3586
Sales/ Inventory 0.6017 0.5682 0.4947 0.4491 0.4865
Corning (Environmental) 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.1306 1.123 1.0821 1.1714 1.221
Sales/ Accounts Receivables 0.9067 0.9368 0.9221 0.8554 0.8843
Sales/ Inventory 1.0193 1.0243 1.0176 0.9624 1.1997
Sumitomo 2003 2004 2005 2006 2007
Sales/ Cash from Sales N/A 1.0095 1.0068 1.0228 1.0302
Sales/ Accounts Receivables 3.3134 3.995 4.4697 4.7486 4.4063
Sales/ Inventory 6.8921 8.8871 9.8241 10.22 9.3678
Nippon Electric Glass 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.004 1.0078 0.9769 0.9809 1.01
Sales/ Accounts Receivables 4.1236 3.6246 4.1527 4.301 4.6554
Sales/ Inventory 5.5133 5.6465 6.7011 7.2662 8.4582
Asahi Glass 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1 1.0001 1.0001 1 1.0001
Sales/ Accounts Receivables 4.783 5.2588 4.9334 5.4919 5.8689
Sales/ Inventory 6.1036 6.8388 6.4139 6.5228 7.0732
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Furukawa Electric 2003 2004 2005 2006 2007
Sales/ Cash from Sales 0.9989 1.0412 1.0487 1.1246 1.2661
Sales/ Accounts Receivables 3.2592 0.3121 0.2974 0.3076 0.281
Sales/ Inventory 7.1141 7.8966 8.3326 8.7614 9.4491
Fujikura 2003 2004 2005 2006 2007
Sales/ Cash from Sales N/A 1.021 1.0325 1.0611 1.0281
Sales/ Accounts Receivables 3.4211 3.3484 3.2542 3.5982 4.1018
Sales/ Inventory 8.45 8.7043 10.038 11.466 11.742
Becton Dickinson 2003 2004 2005 2006 2007
Sales/ Cash from Sales 1.032 1.0075 0.988 1.0264 1.008
Sales/ Accounts Receivables 5.7126 5.3933 6.337 6.4781 5.8715
Sales/ Inventory 5.6144 6.6243 6.8829 6.5522 6.0456
NGK 2003 2004 2005 2006 2007
Sales/ Cash from Sales 0.9768 1.0157 1.012 1.0495 1.0255
Sales/ Accounts Receivables 5.5127 5.1107 5.0653 4.6671 4.9542
Sales/ Inventory 4.9429 5.4201 5.3161 5.572 5.2708
205 | P a g e
Sales Manipulation Diagnostic (Change form)
Corning 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) -0.024 1.0066 0.9784 1.0838 1.0736
Sales/ Accounts Receivables (Change) -1.345 12.733 16.477 6.6111 5.0073
Sales/ Inventory (Change) 0.8043 11.235 20.714 8.6232 -85.75
Corning (Displays) 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a 1.0097 0.9752 1.1333 1.1085
Sales/ Accounts Receivables (Change) 3.4545 8.6333 14.295 4.3444 3.5037
Sales/ Inventory (Change) -2.065 7.6176 17.971 5.6667 -60
Corning (Telecommunications) 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a 1.0463 0.84 1.7667 -22.5
Sales/ Accounts Receivables (Change) -3.727 1.8833 1.9091 1.1778 0.3285
Sales/ Inventory (Change) 2.2283 1.6618 2.4 1.5362 -5.625
206 | P a g e
Corning (Life Sciences) 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a 1.2778 3.6667 -0.122 -0.741
Sales/ Accounts Receivables (Change) 0.0182 0.3833 -0.5 0.0556 0.146
Sales/ Inventory (Change) -0.011 0.3382 -0.629 0.0725 -2.5
Corning (Environmental) 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a 1.0746 0.6667 -3.182 1.4947
Sales/ Accounts Receivables (Change) 1.4909 1.2 0.7273 0.3889 1.0365
Sales/ Inventory (Change) -0.891 1.0588 0.9143 0.5072 -17.75
Sumitomo 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a n/a 0.9893 1.1173 1.1589
Sales/ Accounts Receivables (Change) n/a 21.463 19.834 7.1086 2.0996
Sales/ Inventory (Change) n/a -61.2 31.419 13.005 4.1263
Nippon Electric Glass 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) 0.0867 0.9695 0.5727 0.8985 1.2953
Sales/ Accounts Receivables (Change) 12.632 -13.76 -1.759 2.3828 11.973
Sales/ Inventory (Change) -0.744 4.509 -2.026 2.5045 -39.04
Asahi Glass 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) 0.2344 1.0004 1.0014 0.9969 1.003
Sales/ Accounts Receivables (Change) -23.41 11.219 1.7685 -6.54 -7.038
Sales/ Inventory (Change) 8078.6 19.173 2.2914 9.1964 -5.752
207 | P a g e
Furukawa Electric 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a -36.88 1.2317 2.6825 2.4024
Sales/ Accounts Receivables (Change) 0.0245 2.2663 -162.3 2.5638 5.529
Sales/ Inventory (Change) 0.0216 -4.722 -62.22 14.928 13.403
Fujikura 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) n/a n/a 1.1953 1.141 0.9268
Sales/ Accounts Receivables (Change) n/a 2.367 2.429 4.9153 8.0859
Sales/ Inventory (Change) n/a 21.106 -11.83 17.929 12.827
Becton Dickinson 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) 0.0972 1.267 0.701 1.3713 1.3306
Sales/ Accounts Receivables (Change) 12.175 3.4142 -6.918 9.248 3.1494
Sales/ Inventory (Change) 4.4225 -7.654 12.023 3.9804 3.528
NGK 2003 2004 2005 2006 2007
Sales/ Cash from Sales (Change) 0.0254 -0.195 0.9481 1.3193 0.9252
Sales/ Accounts Receivables (Change) -1.095 0.4131 4.3523 3.2549 6.9984
Sales/ Inventory (Change) -1.151 -0.386 3.927 7.587 4.1944
208 | P a g e
Expense Manipulation Diagnostics
Corning 2003 2004 2005 2006 2007Sales/ Assets .287388 .39691 .408584 .39602 .385146 CFFO/OI -.20305 -.69443 3.275338 2.131206 1.921369 CFFO/NOA .03674 .256026 .414759 .347198 .346976 Total Accruals/ Sales -.02913 -.29995 .295698 -.01005 -.01246
Sumitomo 2003 2004 2005 2006 2007Sales/ Assets .342073 .360375 .391497 .419492 .354964 CFFO/OI 4.054039 1.779219 1.338321 1.84634 1.017502 CFFO/NOA .234622 .175887 .231154 .242002 .241669 Total Accruals/ Sales .101383 .034552 .036091 .027943 .021634
Nippon Electric 2003 2004 2005 2006 2007Sales/ Assets .658174 .577641 .625945 .60994 .647309
CFFO/OI .183439 1.578907 1.405708 1.37265 1.274267
CFFO/NOA .32727 .219007 .314806 .305786 .392396
Total Accruals/ Sales .736386 .820083 .735716 .786689 .81651
Asahi Glass 2003 2004 2005 2006 2007Sales/ Assets .688044 .782753 .733292 .753899 .797531
CFFO/OI 1.777720 1.670603 1.569492 1.271466 1.244594
CFFO/NOA .24433 .214338 .314564 .302578 .374395
Total Accruals/ Sales .075821 .104764 .082244 .079417 .104755
Furukawa 2003 2004 2005 2006 2007Sales/ Assets .6025238 .066614716 .7826577 .829205 1.0072946 CFFO/OI -.091935 -.0833452 2.0626382 .8906618 1.7251302
CFFO/NOA .0250104 .03166344 .0971143 .0698348 .1502137
Total Accruals/ Sales .0653845 .321744 .095437 .349365 .374394
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Fujikura 2003 2004 2005 2006 2007
Sales/ Assets 0.751622839 .807970 .8764221 1.0810817 1.2034741
CFFO/OI 3.782779 1.98617669 2.675152 1.1486617 2.1870505
CFFO/NOA .2347038 .2059679 .390058 .3875813 .3537565
Total Accruals/ Sales .06593 .117633 .091882 .0187733 .053774
Becton Dickinson 2003 2004 2005 2006 2007
Sales/ Assets .801016 .850728 .870858 .840794 .867721
CFFO/OI 1.186193 1.255671 1.147537 .967398 1.027261
CFFO/NOA .49292 .581647 .631303 .517516 .494935
Total Accruals/ Sales .07972 .129821 .093329 .061314 .054405
NGK 2003 2004 2005 2006 2007
Sales/ Assets .760804 .767717 .746428 .737595 .833536
CFFO/OI 2.183027 1.169371 1.383319 .878795 .663136
CFFO/NOA .356925 .267538 .405806 .362305 .291316
Total Accruals/ Sales .151921 .057445 .078552 .008455 .027969
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Expense Manipulation Diagnostics (Change Form)
Corning 2003 2004 2005 2006 2007
Sales/ Assets (Change) 0.1132 -0.733 0.4843 0.3202 0.3191
Sales/ Assets (Displays) (Change) 0.0553 0.1146 0.1554 0.1633 0.1717
Sales/ Assets (Telecomm) (Change) 0.1363 0.1585 0.1448 0.1323 0.1166
Sales/ Assets (Life Sciences) (Change) 0.0261 0.0313 0.0252 0.022 0.0202
Sales/ Assets (Environmental) (Change) -0.013 -0.069 0.0214 0.0188 0.066
CFFO/ OI (Change) 0.2213 -1.098 0.4548 -0.535 1.166
CFFO/NOA (Change) -5.376 2.729 1.267 -0.263 0.3455
Sumitomo 2003 2004 2005 2006 2007
Sales/ Assets (Change) N/A 0.4571 0.8959 0.6596 0.1072
CFFO/OI (Change) N/A -1.915 0.6987 0.6646 0.2591
CFFO/NOA (Change) N/A 1.2626 -1.438 0.3358 0.235
Nippon Electric 2003 2004 2005 2006 2007
Sales/ Assets (Change) 0.564 -2.083 -0.067 1.4403 1.1864
CFFO/OI (Change) 2.0519 2.8195 1.0669 -0.633 1.1176
CFFO/NOA (Change) 0.1767 -15.29 -1.193 -0.107 0.8794
211 | P a g e
Asahi Glass 2003 2004 2005 2006 2007
Sales/ Assets (Change) 0.7601 2.9589 0.2591 1.3883 -1.46
CFFO/OI (Change) 0.047 1.5121 2.2341 -0.641 1.1843
CFFO/NOA (Change) -2.341 1.9687 -0.684 -0.138 1.5997
Furukawa Electric 2003 2004 2005 2006 2007
Sales/ Assets (Change) 5.2229 1.5869 0.302 -0.426 0.0025
CFFO/OI (Change) 0.0404 0.0294 0.7778 -0.722 1.7284
CFFO/NOA (Change) 0.0332 -0.024 -0.631 0.9536 2.2669
Fujikura 2003 2004 2005 2006 2007
Sales/ Assets (Change) n/a -1.742 -39.62 2.6487 2.0011
CFFO/OI (Change) n/a -1.584 5.3795 0.0213 -0.176
CFFO/NOA (Change) n/a 0.4932 -1.317 0.2438 0.9127
Becton Dickinson 2003 2004 2005 2006 2007
Sales/ Assets (Change) 0.8093 2.3871 1.1754 0.5742 1.2318
CFFO/OI (Change) 0.7825 1.7077 0.6359 -1.503 2.134
CFFO/NOA (Change) 1.0126 4.061 2.2395 -0.584 0.3625
212 | P a g e
NGK 2003 2004 2005 2006 2007
Sales/ Assets (Change) -0.2991 -1.8418 0.49382 0.69238 2.1794
CFFO/OI (Change) 3.9524 -2.0865 2.21368 0.02527 -0.159
CFFO/NOA (Change) -1.4853 1.68923 -6.8108 0.03316 -0.0932
214 | P a g e
215 | P a g e
216 | P a g e
217 | P a g e
218 | P a g e
219 | P a g e
Altman Z-Scores
Corning Restated Z-Scores
Year Weight 2003 2004 2005 2006 2007 2008
X1 1.2 0.13 0.13 0.20 0.25 0.25 0.18
X2 1.4 ‐0.66 ‐1.02 ‐0.80 ‐0.49 ‐0.23 0.17
X3 3.3 ‐0.18 ‐0.46 0.20 0.23 0.25 0.28
X4 0.06 1.76 2.78 3.15 2.31 2.26 0.64
X5 1 0.29 0.39 0.40 0.39 0.37 0.30
Z‐Scores 1.35 1.83 3.15 2.70 2.90 1.57
Average = 2.25
2003 2004 2005 2006 2007 2008Corning Restated 1.35 1.83 3.15 2.70 2.90 1.57
Corning 1.33 1.85 3.2 2.72 2.93 1.53
Asahi Glass N/A N/A N/A N/A N/A N/AFurukawa N/A N/A N/A N/A N/A N/A
NGK N/A N/A N/A N/A N/A N/A
Becton Dickinson 2.57 2.70 2.92 2.79 2.85 3.11Industry Average 1.75 2.13 3.09 2.74 2.89 2.07
220 | P a g e
Regressions
3 Month
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.68977315
2
R Square 0.47578700
1 Adjusted R Square
0.451959137
Standard Error
0.078675468
Observations 24
ANOVA
df SS MS F Significanc
e F
Regression 1 0.12359
6 0.12359
619.9676
7 0.000192
Residual 22 0.13617
6 0.00619
Total 23 0.25977
3
Coefficients Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.01620614
9 0.01804
5 0.89808
90.37886
2 ‐0.02122 0.05363 ‐
0.02122 0.05363
X Variable 1 1.34976029
4 0.30206 4.468520.00019
2 0.7233271.97619
4 0.72332
7 1.97619
4
SUMMARY OUTPUT
Regression Statistics Multiple R 0.551737 R Square 0.304413 Adjusted R Square 0.283955 Standard 0.093694
221 | P a g e
Error Observations 36
ANOVA
df SS MS F Significanc
e F
Regression 1 0.130621 0.13062
1 14.8796
1 0.000486
Residual 34 0.298469 0.00877
8 Total 35 0.42909
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.005739 0.016595 0.34585
5 0.73158
3 ‐0.027990.03946
4 ‐
0.02799 0.03946
4
X Variable 1 1.284057 0.332881 3.85741 0.00048
6 0.6075621.96055
1 0.60756
2 1.96055
1
SUMMARY OUTPUT
Regression Statistics Multiple R 0.533598 R Square 0.284727 Adjusted R Square 0.269178 Standard Error 0.096629 Observations 48
ANOVA
df SS MS F Significanc
e F
Regression 1 0.170974 0.17097
4 18.3111
1 9.41E‐05
Residual 46 0.42951 0.00933
7 Total 47 0.600484
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
222 | P a g e
Intercept 0.022133 0.014491 1.52730
6 0.13353
2 ‐0.007040.05130
2 ‐
0.00704 0.05130
2
X Variable 1 1.397715 0.326634 4.27914
9 9.41E‐
05 0.7402352.05519
5 0.74023
5 2.05519
5
SUMMARY OUTPUT
Regression Statistics Multiple R 0.514861 R Square 0.265082 Adjusted R Square 0.252411 Standard Error 0.094066 Observations 60
ANOVA
df SS MS F Significanc
e F
Regression 1 0.185113 0.18511
3 20.9203
2 2.57E‐05
Residual 58 0.513211 0.00884
8 Total 59 0.698323
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.016156 0.012451 1.29753
1 0.19958
6 ‐0.00877 0.04108 ‐
0.00877 0.04108
X Variable 1 1.392987 0.304553 4.57387
3 2.57E‐
05 0.7833582.00261
6 0.78335
8 2.00261
6
SUMMARY OUTPUT
Regression Statistics Multiple R 0.469962 R Square 0.220864 Adjusted R 0.209734
223 | P a g e
Square Standard Error 0.103605 Observations 72
ANOVA
df SS MS F Significanc
e F
Regression 1 0.21299
7 0.21299
719.8431
5 3.11E‐05
Residual 70 0.75138
2 0.01073
4
Total 71 0.96437
9
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.022169 0.01225
1 1.809590.07465
3 ‐0.002260.04660
2 ‐
0.00226 0.04660
2
X Variable 1 1.359935 0.30529 4.45456
53.11E‐
05 0.7510531.96881
7 0.75105
3 1.96881
7
1 Year
SUMMARY OUTPUT
Regression Statistics Multiple R 0.689334 R Square 0.475182 Adjusted R Square 0.451326 Standard Error 0.078721 Observations 24
ANOVA
df SS MS F Significanc
e F
Regression 1 0.123439 0.12343
9 19.9192
7 0.000195
Residual 22 0.136333 0.00619
7
224 | P a g e
Total 23 0.259773
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.017961 0.018241 0.98465
3 0.33550
1 ‐0.01987 0.05579 ‐
0.01987 0.05579
X Variable 1 1.316556 0.294987 4.46310
1 0.00019
5 0.7047911.92832
2 0.70479
1 1.92832
2
SUMMARY OUTPUT
Regression Statistics Multiple R 0.546892 R Square 0.299091 Adjusted R Square 0.278476 Standard Error 0.094051 Observations 36
ANOVA
df SS MS F Significanc
e F
Regression 1 0.128337 0.12833
7 14.5084
2 0.000558
Residual 34 0.300753 0.00884
6
Total 35 0.42909
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.005482 0.016652 0.32922
9 0.74400
2 ‐0.028360.03932
4 ‐
0.02836 0.03932
4
X Variable 1 1.229368 0.322754 3.80899
2 0.00055
8 0.5734531.88528
3 0.57345
3 1.88528
3
SUMMARY OUTPUT
Regression Statistics Multiple R 0.533141
225 | P a g e
R Square 0.284239 Adjusted R Square 0.268679 Standard Error 0.096662
Observations 48
ANOVA
df SS MS F Significanc
e F
Regression 10.17068
1 0.17068
1 18.2672
69.56251E‐
05
Residual 460.42980
3 0.00934
4
Total 470.60048
4
Coefficien
ts Standard Error t Stat P‐value Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.0214190.01445
3 1.48201
9 0.14515
4
‐0.0076725
920.05051
1 ‐
0.00767 0.05051
1
X Variable 1 1.3462920.31499
4 4.27402
2 9.56E‐
050.7122413
991.98034
2 0.71224
1 1.98034
2
SUMMARY OUTPUT
Regression Statistics Multiple R 0.514709 R Square 0.264925 Adjusted R Square 0.252251 Standard Error 0.094076 Observations 60
ANOVA
df SS MS F Significanc
e F
Regression 1 0.185003 0.18500
3 20.9035 2.58E‐05 Residual 58 0.51332 0.00885
Total 59 0.698323
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Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.015678 0.01243 1.26131
5 0.21224
5 ‐0.0092 0.04056 ‐0.0092 0.04056
X Variable 1 1.345461 0.294281 4.57203
4 2.58E‐
05 0.7563941.93452
8 0.75639
4 1.93452
8
SUMMARY OUTPUT
Regression Statistics Multiple R 0.467468 R Square 0.218527 Adjusted R Square 0.207363 Standard Error 0.10376 Observations 72
ANOVA
df SS MS F Significanc
e F
Regression 1 0.210743 0.21074
3 19.5744
1 3.47E‐05
Residual 70 0.753637 0.01076
6
Total 71 0.964379
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.022464 0.012275 1.83005
7 0.07149
9 ‐0.002020.04694
6 ‐
0.00202 0.04694
6
X Variable 1 1.322407 0.298897 4.42429
8 3.47E‐
05 0.7262771.91853
8 0.72627
7 1.91853
8
2 Year
SUMMARY OUTPUT
Regression Statistics
227 | P a g e
Multiple R 0.68969 R Square 0.475673 Adjusted R Square 0.45184 Standard Error 0.078684
Observations 24
ANOVA
df SS MS F Significanc
e F
Regression 1 0.12356
7 0.12356
719.9585
2 0.000193
Residual 22 0.13620
6 0.00619
1
Total 23 0.25977
3
Coefficient
s Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.018227 0.01825
8 0.99829
10.32899
2 ‐0.019640.05609
3
‐0.0196
4 0.05609
3
X Variable 1 1.317484 0.29490
4 4.46749
60.00019
3 0.705891.92907
8 0.7058
9 1.92907
8
SUMMARY OUTPUT
Regression Statistics Multiple R 0.547525 R Square 0.299783 Adjusted R Square 0.279189 Standard Error 0.094005 Observations 36
ANOVA
df SS MS F Significanc
e F
Regression 1 0.128634 0.128634
14.55639 0.000548
Residual 34 0.300 0.008837
228 | P a g e
456
Total 35 0.429
09
Coefficients
Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.005924 0.016681 0.355127
0.724688 ‐0.02798
0.039824
‐0.0279
80.0398
24X Variable 1 1.232846
0.323134 3.815284
0.000548 0.57616
1.889533
0.57616
1.889533
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.53355
6
R Square 0.28468
2 Adjusted R Square
0.269132
Standard Error
0.096632
Observations 48
ANOVA
df SS MS F Significan
ce F
Regression 1 0.170947 0.170947 18.3071 9.42E‐05
Residual 46 0.429537 0.009338
Total 47 0.600484
Coefficie
nts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.02187
9 0.014476 1.511389
0.137529 ‐0.00726
0.051017
‐0.00726
0.051017
X Variable 1 1.34934
7 0.315365 4.278
689.42E‐
05 0.714551.98414
4 0.71455 1.98414
4
SUMMARY OUTPUT
Regression Statistics
229 | P a g e
Multiple R 0.515209 R Square 0.26544 Adjusted R Square 0.252776 Standard Error 0.094043 Observations 60
ANOVA
df SS MS F Significanc
e F
Regression 1 0.185363 0.18536
3 20.9588
8 2.53E‐05
Residual 58 0.51296 0.00884
4 Total 59 0.698323
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.016163 0.012448 1.29841
7 0.19928
3 ‐0.00875 0.04108 ‐
0.00875 0.04108
X Variable 1 1.348872 0.294637 4.57808
7 2.53E‐
05 0.7590931.93865
2 0.75909
3 1.93865
2
SUMMARY OUTPUT
Regression Statistics Multiple R 0.468052 R Square 0.219072 Adjusted R Square 0.207916 Standard Error 0.103724 Observations 72
ANOVA
df SS MS F Significanc
e F
Regression 1 0.211269 0.21126
919.6369
7 3.38E‐05
Residual 70 0.75311 0.01075
9
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Total 71 0.964379
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.022893 0.01228 1.86434
60.06646
6 ‐0.0016 0.04738
4 ‐0.0016 0.04738
4
X Variable 1 1.325266 0.299065 4.43136
33.38E‐
05 0.7288 1.92173
3 0.7288 1.92173
3
5 Year
SUMMARY OUTPUT
Regression Statistics Multiple R 0.689099 R Square 0.474858 Adjusted R Square 0.450988 Standard Error 0.078745 Observations 24
ANOVA
df SS MS F Significan
ce F Regression 1
0.123355 0.123355 19.89342 0.000196
Residual 220.1364
18 0.006201
Total 230.2597
73
Coefficients
Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.0186090.0183
17 1.015941 0.320701 ‐0.019380.05659
6 ‐
0.019380.0565
96X Variable 1 1.320608
0.296087 4.460204 0.000196 0.706562
1.934655
0.706562
1.934655
231 | P a g e
SUMMARY OUTPUT
Regression Statistics Multiple R 0.547961 R Square 0.300262 Adjusted R Square 0.279681 Standard Error 0.093973 Observations 36
ANOVA
df SS MS F Significan
ce F
Regression 1 0.128839 0.1288
39 14.5895
8 0.000541
Residual 34 0.300251 0.0088
31
Total 35 0.42909
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.006649 0.01674 0.3971
72 0.69372
3 ‐0.027370.04066
8 ‐
0.02737 0.04066
8X Variable 1 1.240443 0.324755
3.819631
0.000541 0.580462
1.900425
0.580462
1.900425
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.53257
2
R Square 0.28363
3 Adjusted R Square 0.26806 Standard Error
0.096703
Observations 48
232 | P a g e
ANOVA
df SS MS F Significance F
Regression 1 0.170317 0.17031
718.212
87 9.76E‐05
Residual 46 0.430167 0.00935
1
Total 47 0.600484
Coefficie
nts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.0228 0.014548 1.56725
70.1239
09 ‐0.006480.0520
83 ‐0.00648 0.052083
X Variable 1 1.35510
5 0.317529 4.26765
59.76E‐
05 0.7159521.9942
58 0.71595
2 1.994258
SUMMARY OUTPUT
Regression Statistics Multiple R 0.514682 R Square 0.264897 Adjusted R Square 0.252223 Standard Error 0.094078 Observations 60
ANOVA
df SS MS F Significanc
e F
Regression 1 0.184984 0.18498
4 20.9005
6 2.59E‐05
Residual 58 0.513339 0.00885
1 Total 59 0.698323
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.017161 0.012503 1.37252 0.17518
6 ‐0.007870.04218
9 ‐
0.00787 0.04218
9
X Variable 1 1.355922 0.296589 4.57171
3 2.59E‐
05 0.762233 1.94961 0.76223
3 1.94961
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SUMMARY OUTPUT
Regression Statistics Multiple R 0.468281 R Square 0.219287 Adjusted R Square 0.208134 Standard Error 0.10371
Observations 72
ANOVA
df SS MS F Significanc
e F
Regression 1 0.21147
6 0.21147
619.6616
7 3.35E‐05
Residual 70 0.75290
3 0.01075
6
Total 71 0.96437
9
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.023724 0.01229
7 1.92926
60.05775
2 ‐0.0008 0.04825 ‐0.0008 0.04825
X Variable 1 1.33108 0.30018
8 4.43414
83.35E‐
05 0.7323731.92978
7 0.73237
3 1.92978
7
10 Year
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.6912235
9
R Square 0.4777900
51 Adjusted R Square
0.454053236
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Standard Error
0.078525012
Observations 24
ANOVA
df SS MS F Significanc
e F
Regression 1 0.1241168
29 0.1241
1720.128
650.0001838
35
Residual 22 0.1356559
07 0.0061
66
Total 23 0.2597727
35
Coefficient
s Standard Error t Stat P‐value Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.0175546
72 0.0181416
05 0.9676
470.3437
39
‐0.0200687
140.05517
81
‐0.0200
70.0551
78X Variable 1
1.339604449
0.298585876
4.486496
0.000184
0.720375245
1.9588337
0.720375
1.958834
SUMMARY OUTPUT
Regression Statistics Multiple R 0.551577 R Square 0.304237 Adjusted R Square 0.283773 Standard Error 0.093706 Observations 36
ANOVA
df SS MS F Significanc
e F
Regression 1 0.13054
5 0.130545 14.86719 0.000489
Residual 34 0.29854
5 0.008781 Total 35 0.42909
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Coefficients Standard Error t Stat P‐value Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.00644 0.01666 0.386561 0.70149 ‐0.027420.04029
7 ‐
0.027420.0402
97X Variable 1 1.267567
0.328743 3.8558 0.000489 0.599481
1.935653
0.599481
1.935653
SUMMARY OUTPUT
Regression Statistics Multiple R 0.532841 R Square 0.28392 Adjusted R Square 0.268353 Standard Error 0.096684 Observations 48
ANOVA
df SS MS F Significan
ce F
Regression 1 0.170489 0.1704
8918.2385
9 9.67E‐05
Residual 46 0.429995 0.0093
48 Total 47 0.600484
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.022936 0.014553 1.5760
350.12187
1 ‐0.006360.05223
1 ‐0.00636 0.05223
1
X Variable 1 1.379074 0.322918 4.2706
669.67E‐
05 0.7290742.02907
4 0.72907
4 2.02907
4
SUMMARY OUTPUT
Regression Statistics Multiple R 0.515343 R Square 0.265578 Adjusted R 0.252916
236 | P a g e
Square Standard Error 0.094034 Observations 60
ANOVA
df SS MS F Significanc
e F
Regression 1 0.18546 0.18546 20.9737
2 2.51E‐05
Residual 58 0.512864 0.00884
2
Total 59 0.698323
Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.01748 0.012513 1.39687
3 0.16777
4 ‐0.007570.04252
8 ‐
0.00757 0.04252
8
X Variable 1 1.381205 0.301592 4.57970
7 2.51E‐
05 0.7775021.98490
8 0.77750
2 1.98490
8
SUMMARY OUTPUT
Regression Statistics Multiple R 0.468952 R Square 0.219916 Adjusted R Square 0.208772 Standard Error 0.103668 Observations 72
ANOVA
df SS MS F Significanc
e F
Regression 1 0.212083 0.21208
3 19.7339
6 3.25E‐05
Residual 70 0.752296 0.01074
7
Total 71 0.964379
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Coefficien
ts Standard Error t Stat P‐value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.023884 0.012296 1.94240
5 0.05611
2 ‐0.000640.04840
7 ‐
0.00064 0.04840
7
X Variable 1 1.352179 0.304388 4.44229
3 3.25E‐
05 0.7450971.95926
2 0.74509
7 1.95926
2
Cost of Equity
3 Month Regression Results
Beta Adj. R2 % 24 Month 1.32 0.45 36 Month 1.24 0.28 48 Month 1.36 0.27 60 Month 1.36 0.45 72 Month 1.35 0.45
1 Year Regression Results
Beta Adj. R2 % 24 Month 1.32 0.45 36 Month 1.24 0.28 48 Month 1.36 0.27 60 Month 1.36 0.45 72 Month 1.32 0.45
2 Year Regression Results
Beta Adj. R2 % 24 Month 1.32 0.45 36 Month 1.24 0.28 48 Month 1.36 0.27 60 Month 1.36 0.45 72 Month 1.32 0.45
238 | P a g e
5 Year Regression Results
Beta Adj. R2 % 24 Month 1.32 0.45 36 Month 1.24 0.28 48 Month 1.36 0.27 60 Month 1.36 0.21 72 Month 1.33 0.21
10 Year Regression Results
Beta Adj. R2 % 24 Month 1.34 45.4 36 Month 1.27 28.38 48 Month 1.38 26.84 60 Month 1.38 25.29 72 Month 1.35 20.88
Weighted Average Cost of Debt
Interest Rate Dollar Amount Weight Weight Adjusted Rate
Commercial Paper 5.28% 609 0.21 1.11%Current Debt 2.40% 23 0.01 0.02%
Long Term Debt 7.25% 1514 0.52 3.80%Post‐Retirement and Pension Liabilities 6.00% 744 0.26 1.54%Total 2890 1 6.47%
Weighted Average Cost of Capital
WACC (before taxes)
Weight Rate
Cost of Debt 0.27 6.47% Cost of Equity 0.73 12.68% Total 10.99%
10.99 % = (.27*.0647) + (.73*.1268)
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WACC (after taxes)
Weight Rate
Cost of Debt 0.27 6.47% (1‐.34)
Cost of Equity 0.73 12.68%
Total 10.40%
10.4 % = (.27*.0647) (1-.34) + (.73*.1268)
240 | P a g e
Method of Comparables
Price to Earnings Ratio (ttm)
PPS EPS P/E (ttm)
Industry Average Comparable PPS
Corning 14.92 3.37 4.43 8.94 30.12Corning (Restated) 14.92 3.37 4.43 8.94 30.12Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 62.47 4.64 13.45 8.94 41.52
Price to Earnings (Forward)
PPS EPS P/E (forward)
Industry Average Comparable PPS
Corning 14.92 2.1 7.10 9.28 19.49Corning (Restated) 14.92 2.1 7.10 9.28 19.49Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 62.47 5.45 11.46 9.28 50.59
Price to EBITDA
PPS EBITDA P/EBITDA Industry Average Comparable PPS
Corning 14.92 1,091 0.01 0.02 23.76Corning (Restated) 14.92 1204 0.01 0.02 24.08Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 62.47 2,090 0.03 0.02 41.80
241 | P a g e
Price to Book
PPS BVPS P/B Industry Average Comparable PPS
Corning 14.92 12.34 1.21 2.21 27.33Corning (Restated) 14.92 12.63 1.18 2.48 31.32Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 62.47 19.40 3.22 3.22 62.47
Dividend to Price
PPS DPS P/DIV Industry Average Comparable PPS
Corning 14.92 0.20 0.01 0.017 11.76Corning (Restated) 14.92 0.20 0.01 0.017 11.76Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 62.47 1.32 0.02 0.017 76.44
Price Earnings Growth
PPS PEG Industry Average
Comparable PPS
Corning 14.92 0.37 1.185 17.68 Corning (Restated) 14.92 0.37 1.185 17.68 Asahi Glass N/A N/A N/A N/A Furukawa Electric N/A N/A N/A N/A NGK N/A N/A N/A N/A Becton Dickinson 62.47 2.00 1.185 74.03
242 | P a g e
Price to Free Cash Flow
Market Cap. FCF P/FCF
Industry Average Comparable P/FCF
Corning 23,275 3,452 6.74 18.46 40.85Corning (Restated) 23,275 3,259 7.14 18.46 38.56Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 14,970 496 30.18 18.46 4.90
Enterprise Value to EBITDA
Enterprise Value EBITDA EV/EBITDA
Industry Average Comparable P/FCF
Corning 31,003 1,091 28.42 35.76 25.01Corning (Restated) 30,650 1,204 25.46 35.76 27.60Asahi Glass N/A N/A N/A N/A N/AFurukawa Electric N/A N/A N/A N/A N/ANGK N/A N/A N/A N/A N/ABecton Dickinson 15,350 2,090 7.34 35.76 39.99
Market PPS
Comparable PPS (as stated) Overvalued Fairly Valued Undervalued Conclusion
P/E (ttm) 14.92 30.12 .01 ‐ 12.68 12.69 ‐ 17.15 17.16 + UndervaluedP/E (forward) 14.92 19.49 .01 ‐ 12.69 12.69 ‐ 17.16 17.16 + UndervaluedP/EBITDA 14.92 23.76 .01 ‐ 12.70 12.69 ‐ 17.17 17.16 + UndervaluedP/Book 14.92 27.33 .01 ‐ 12.71 12.69 ‐ 17.18 17.16 + UndervaluedDividend to Price 14.92 11.76 .01 ‐ 12.72 12.69 ‐ 17.19 17.16 + Overvalued PE Growth 14.92 17.68 .01 ‐ 12.73 12.69 ‐ 17.20 17.16 + UndervaluedP/FCF 14.92 40.85 .01 ‐ 12.74 12.69 ‐ 17.21 17.16 + UndervaluedEV/EBITDA 14.92 25.01 .01 ‐ 12.75 12.69 ‐ 17.22 17.16 + Undervalued
243 | P a g e
Corning’s Restated Comparables
Market PPS
Comparable PPS (as stated) Overvalued Fairly Valued Undervalued Conclusion
P/E (ttm) 14.92 30.12 .01 ‐ 12.68 12.69 ‐ 17.15 17.16 + UndervaluedP/E (forward) 14.92 19.49 .01 ‐ 12.69 12.69 ‐ 17.16 17.16 + UndervaluedP/EBITDA 14.92 24.08 .01 ‐ 12.70 12.69 ‐ 17.17 17.16 + UndervaluedP/Book 14.92 31.32 .01 ‐ 12.71 12.69 ‐ 17.18 17.16 + UndervaluedDividend to Price 14.92 11.76 .01 ‐ 12.72 12.69 ‐ 17.19 17.16 + Overvalued PE Growth 14.92 17.68 .01 ‐ 12.73 12.69 ‐ 17.20 17.16 + UndervaluedP/FCF 14.92 38.56 .01 ‐ 12.74 12.69 ‐ 17.21 17.16 + UndervaluedEV/EBITDA 14.92 27.60 .01 ‐ 12.75 12.69 ‐ 17.22 17.16 + Undervalued
Intrinsic Valuation Models
Discounted Dividend Model
Discounted Dividends Model
g 0.03 0.05 0.07 0.09 0.095 0.1 0.105 0.0968 3.85 4.76 7.04 22.68 80.92 N/A N/A 0.1068 3.36 3.96 5.22 9.48 12.8 21.01 74.8
0.1168 2.98 3.4 4.17 6.11 7.16 8.82 11.89ke 0.1268 2.67 2.97 3.49 4.57 5.05 5.71 6.67
0.1368 2.42 2.65 3.01 3.67 3.94 4.28 4.72 0.1468 2.22 2.39 2.65 3.09 3.25 3.45 3.7 0.1568 2.04 2.17 2.37 2.67 2.78 2.91 3.06 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
244 | P a g e
Discounted Free Cash Flow Model
Discounted Free Cash Flow Model (As Stated)
Growth Rate%
3 5 7 9 9.5 10 10.5 8 28.20 44.37 125.21 N/A N/A N/A N/A 9 21.99 31.22 58.93 N/A N/A N/A N/A 10 17.59 23.39 36.91 104.50 205.89 N/A N/A WACC(BT)% 10.48 15.92 20.66 30.85 68.58 102.09 205.38 N/A 12 11.83 14.53 19.39 30.73 36.40 44.91 59.08 13 9.85 11.80 15.05 21.55 24.34 28.05 33.25 14 8.25 9.70 11.97 16.06 17.65 19.64 22.20 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
Discounted Free Cash Flow Model (Restated)
Growth Rate%
3 5 7 9 9.5 10 10.5 8 31.25 47.90 131.20 N/A N/A N/A N/A 9 24.79 34.30 62.85 N/A N/A N/A N/A 10 20.21 26.18 40.11 109.76 214.23 N/A N/A WACC(BT)% 10.48 18.45 23.34 33.84 72.72 107.24 213.68 N/A 12 14.17 16.95 21.96 33.65 39.49 48.25 62.86 13 12.09 14.10 17.44 24.14 27.01 30.84 36.20 14 10.40 11.89 14.23 18.44 20.08 22.13 24.76 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
245 | P a g e
Abnormal Earnings Growth Model
Abnormal Earnings Growth Model (As Stated)
Growth Rate
-0.1 -0.2 -0.3 -0.4 -0.5 0.0968 20.84 20.83 20.86 20.82 20.81 0.1068 13.39 14.67 11.4 15.7 15.97 0.1168 7.53 9.7 4.26 11.51 11.98
Ke 0.1268 2.84 5.62 7.1 8.02 8.64 0.1368 N/A 2.24 3.98 5.07 5.81 0.1468 N/A N/A 1.33 2.55 3.39 0.1568 N/A N/A N/A 0.37 1.29 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
Abnormal Earnings Growth Model (Restated)
Growth Rate
-0.1 -0.2 -0.3 -0.4 -0.5 0.0968 20.5 20.5 20.5 20.5 20.5 0.1068 13.03 14.32 14.97 15.37 15.63 0.1168 7.15 9.33 10.47 11.16 11.63
Ke 0.1268 2.45 5.25 6.72 7.66 8.28 0.1368 N/A 1.85 3.6 4.7 5.45 0.1468 N/A N/A 0.94 2.17 3.02 0.1568 N/A N/A N/A N/A 0.91 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
246 | P a g e
Residual Income Model
Residual Income Model (As Stated)
Growth Rate -0.1 -0.2 -0.3 -0.4 -0.5 0.0968 16.49 15.93 15.38 14.83 14.27 0.1068 15.34 15.01 14.68 14.36 14.03 0.1168 14.26 14.09 13.93 13.76 13.60
Ke 0.1268 13.24 13.19 13.15 13.10 13.05 0.1368 12.29 12.33 12.37 12.41 12.45 0.1468 11.41 11.51 11.62 11.72 11.82 0.1568 10.60 10.74 10.89 11.03 11.18 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
Residual Income Model (Restated)
Growth Rate Ke -0.1 -0.2 -0.3 -0.4 -0.5 0.0968 16.76 16.22 15.69 14.15 14.61 0.1068 15.59 15.28 14.97 14.66 14.34 0.1168 14.48 14.34 14.19 14.04 13.89
Ke 0.1268 13.45 13.42 13.39 13.36 13.32 0.1368 12.49 12.54 12.59 12.65 12.70 0.1468 11.59 11.70 11.82 11.93 12.05 0.1568 10.76 10.92 11.08 11.23 11.39 Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 + Valued Valued Valued
247 | P a g e
Long Run Residual Income Model
Long Run Residual Income Model (As Stated)
ROE 0.08 0.12 0.15 0.2 0.24 0.1068 N/A 15.78 31.57 57.87 78.92 0.1168 N/A 9.92 19.83 36.36 49.58
Ke 0.1268 N/A 7.02 14.48 25.54 36.19 0.1368 N/A 5.70 11.41 20.91 28.52 0.1468 N/A 4.71 9.42 17.27 23.55
g
5.00
7.00
9.00
9.50
10.00
0.1068 15.56
19.21
31.57
41.20
64.99
0.1168 13.26
15.14
19.83
22.35
26.36
Ke 0.1268 11.56
12.50
14.48
15.36
16.56
0.1368 10.25
10.66
11.41
11.71
12.09
0.1468 9.21
9.29
9.42
9.47
9.53
ROE
0.08 0.12 0.15 0.2 0.24
5 3.47
8.09
11.56
17.34
21.96
7 1.56
7.82
12.50
20.32
26.57
g 9 N/A 7.24
14.48
26.54
36.19
9.5 N/A 6.98
15.36
29.32
40.48
10 N/A 6.63
16.56
33.13
46.38
Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 +
Valued Valued Valued
248 | P a g e
Long Run Residual Income Model (As Stated)
ROE 0.08 0.12 0.15 0.2 0.24 0.1068 N/A 16.31 32.61 59.79 81.53 0.1168 N/A 10.24 20.49 37.56 51.22
Ke 0.1268 N/A 7.48 14.95 26.61 36.39 0.1368 N/A 5.89 11.79 21.61 29.46 0.1468 N/A 4.87 9.73 17.84 24.33
g
5.00
7.00
9.00
9.50
10.00
0.1068 16.08
19.85
32.61
42.56
67.14
0.1168 13.70
15.64
20.49
23.09
27.24
Ke 0.1268 11.94
12.92
14.95
15.86
17.11
0.1368 10.59
11.01
11.79
12.10
12.49
0.1468 9.52
9.60
9.73
9.78
9.84
ROE
0.08 0.12 0.15 0.2 0.24
5 3.58
8.36
11.94
17.91
22.69
7 1.61
8.07
12.92
20.99
27.45
g 9 N/A 7.48
14.95
27.42
37.39
9.5 N/A 7.21
15.86
30.29
41.82
10 N/A 6.84
17.11
34.22
47.91
Over 0 - 12.67 Fairly 12.68 - 17.16 Under 17.17 +
Valued Valued Valued
249 | P a g e
Market Over Fairly Under As
stated Restated
Model PPS Valued Valued Valued Model PPS
Model PPS Conclusion
Discounted Dividend 14.92 -12.67 12.68 - 17.16 17.17 + 4.57 N/A Overvalued
Discounted Free Cash Flow 14.92 -12.67 12.68 - 17.17 17.17 + 68.58 72.72 Undervalued
Abnormal Earnings Growth 14.92 -12.67 12.68 - 17.18 17.17 + 7.1 6.72 Overvalued
Residual Income 14.92 -12.67 12.68 - 17.19 17.17 + 13.15 13.39
Fairly Valued
Long Run Residual Income 14.92 -12.67 12.68 - 17.20 17.17 + 14.48 14.95
Fairly Valued
250 | P a g e
References
1. Corning 10-K Annual Report, 2007
2. Nippon Electric Glass 10-K Annual Report, 2008
3. Asahi Glass 10-K Annual Report, 2008
4. Sumitomo Electric 10-K Annual Report, 2008
5. Furukawa Electric 10-K Annual Report, 2008
6. Fujikura Co. LTD. 10-K Annual Report, 2008
7. NGK 10-K Annual Report, 2008
8. Becton Dickinson 10-K Annual Report, 2008
9. The Wall Street Journal
10. Business Analysis & Valuation, Palepu & Healy, 2008
11. Yahoo! Finance
12. Professor Moore’s Lecture Notes
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