and analysis corning - texas tech...

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 [email protected]

[email protected] [email protected]

[email protected] [email protected]

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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



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First Mover Advantage 32


Distribution Access 33


Relationships 34


Conclusion 35

Industry 3 – Environmental Technologies 36





Differentiation 38


Conclusion 39

Industry 4 – Life Sciences 39



Switching Costs 40

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Importance of Product for Cost and Quality 41


Volume per Supplier 42


Conclusion 43

Analysis of Key Success Factors 43

Cost Leadership 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


Conclusion 55

Formal Accounting Analysis 55

Key Accounting Policies 56


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


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Goodwill 72

Currency 74

Evaluation of Accounting Principles 75




Goodwill 79

Currency 81

Qualitative Analysis 82




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 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 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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(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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(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


(% 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.


(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


(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


(in millions)

Corning ‐ Environmental Technologies 87 87 102 121 126

NGK ‐ Company Overall 113 118 134 125 137

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(%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.


(in millions)

Corning ‐ Life Sciences 28 38 40 49 55

Becton Dickinson Co. 224 236 272 302 360

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(%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 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.


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.


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

-30-25-20-15-10

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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.

-200

-150

-100

-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

-10000

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

-100

-80

-60

-40

-20

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


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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


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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.


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/ Inventory 1.2741 2.0804 3.0561 3.3308 4.141

Corning (Telecommunications) 2003 2004 2005 2006 2007



Sales/ Inventory 3.0535 2.8766 2.8474 2.7058 2.8114

Corning (Life Sciences) 2003 2004 2005 2006 2007



Sales/ Inventory 0.6017 0.5682 0.4947 0.4491 0.4865

Corning (Environmental) 2003 2004 2005 2006 2007



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/ Inventory 6.8921 8.8871 9.8241 10.22 9.3678

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Nippon Electric Glass 2003 2004 2005 2006 2007



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/ Inventory 6.1036 6.8388 6.4139 6.5228 7.0732

Furukawa Electric 2003 2004 2005 2006 2007



Sales/ Inventory 7.1141 7.8966 8.3326 8.7614 9.4491

Fujikura 2003 2004 2005 2006 2007



Sales/ Inventory 8.45 8.7043 10.038 11.466 11.742

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Becton Dickinson 2003 2004 2005 2006 2007



Sales/ Inventory 5.6144 6.6243 6.8829 6.5522 6.0456

NGK 2003 2004 2005 2006 2007



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


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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Sales/ Cash from Sales (Change) n/a 1.0463 0.84 1.7667 -22.5




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


Sales/ Cash from Sales (Change) n/a 1.0746 0.6667 -3.182 1.4947


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


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


113 | P a g e

Asahi Glass 2003 2004 2005 2006 2007


Sales/ Accounts Receivables (Change) -23.41 11.219 1.7685 -6.54 -7.038



Sales/ Cash from Sales (Change) n/a -36.88 1.2317 2.6825 2.4024


Sales/ Inventory (Change) 0.0216 -4.722 -62.22 14.928 13.403

Fujikura 2003 2004 2005 2006 2007



Sales/ Inventory (Change) n/a 21.106 -11.83 17.929 12.827




Sales/ Inventory (Change) 4.4225 -7.654 12.023 3.9804 3.528

114 | P a g e

NGK 2003 2004 2005 2006 2007

Sales/ Cash from Sales (Change) 0.0254 -0.195 0.9481 1.3193 0.9252


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.

115 | P a g e

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

116 | P a g e

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


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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


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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

124 | P a g e

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

125 | P a g e

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.

126 | P a g e

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)

127 | P a g e

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


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 $ $ $ $ $

129 | P a g e

(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,

130 | P a g e

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

133 | P a g e

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


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


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


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


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


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


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


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


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


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


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


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


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)


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)


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


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


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


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


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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)



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’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


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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


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



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Corning’s Restated Comparables

Market PPS



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

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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

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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 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%


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

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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 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

194 | P a g e

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 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

196 | P a g e

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


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.

197 | P a g e

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.

198 | 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 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

199 | P a g e


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



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

200 | P a g e

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.

201 | P a g e


stated Restated






Residual Income 14.92 -12.67 12.68 - 17.19 17.17 + 13.15 13.39

Fairly Valued


Fairly Valued

202 | P a g e

Appendices


Corning 2003 2004 2005 2006 2007



Sales/ Inventory 6.6167 7.2037 8.0333 8.097 9.2868




Sales/ Inventory 1.2741 2.0804 3.0561 3.3308 4.141




Sales/ Inventory 3.0535 2.8766 2.8474 2.7058 2.8114

203 | P a g e




Sales/ Inventory 0.6017 0.5682 0.4947 0.4491 0.4865




Sales/ Inventory 1.0193 1.0243 1.0176 0.9624 1.1997

Sumitomo 2003 2004 2005 2006 2007



Sales/ Inventory 6.8921 8.8871 9.8241 10.22 9.3678




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/ Inventory 6.1036 6.8388 6.4139 6.5228 7.0732

204 | P a g e




Sales/ Inventory 7.1141 7.8966 8.3326 8.7614 9.4491

Fujikura 2003 2004 2005 2006 2007



Sales/ Inventory 8.45 8.7043 10.038 11.466 11.742




Sales/ Inventory 5.6144 6.6243 6.8829 6.5522 6.0456

NGK 2003 2004 2005 2006 2007



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/ Cash from Sales (Change) n/a 1.0097 0.9752 1.1333 1.1085


Sales/ Inventory (Change) -2.065 7.6176 17.971 5.6667 -60


Sales/ Cash from Sales (Change) n/a 1.0463 0.84 1.7667 -22.5



206 | P a g e


Sales/ Cash from Sales (Change) n/a 1.2778 3.6667 -0.122 -0.741




Sales/ Cash from Sales (Change) n/a 1.0746 0.6667 -3.182 1.4947


Sales/ Inventory (Change) -0.891 1.0588 0.9143 0.5072 -17.75

Sumitomo 2003 2004 2005 2006 2007



Sales/ Inventory (Change) n/a -61.2 31.419 13.005 4.1263



Sales/ Accounts Receivables (Change) 12.632 -13.76 -1.759 2.3828 11.973


Asahi Glass 2003 2004 2005 2006 2007


Sales/ Accounts Receivables (Change) -23.41 11.219 1.7685 -6.54 -7.038


207 | P a g e


Sales/ Cash from Sales (Change) n/a -36.88 1.2317 2.6825 2.4024


Sales/ Inventory (Change) 0.0216 -4.722 -62.22 14.928 13.403

Fujikura 2003 2004 2005 2006 2007



Sales/ Inventory (Change) n/a 21.106 -11.83 17.929 12.827




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/ 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


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


209 | P a g e

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



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


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


210 | P a g e

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


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


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


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


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


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


ANOVA


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


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


e F


7 0.21299

719.8431

5 3.11E‐05

Residual 70 0.75138

2 0.01073

4

Total 71 0.96437

9

Coefficien


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


ANOVA


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


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


ANOVA


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


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


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


ANOVA


e F

Regression 1 0.185003 0.18500

3 20.9035 2.58E‐05 Residual 58 0.51332 0.00885

Total 59 0.698323

226 | P a g e

Coefficien


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


ANOVA


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


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


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


e F


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


ANOVA


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


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


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


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


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


ANOVA


e F

Regression 1 0.211269 0.21126

919.6369

7 3.38E‐05

Residual 70 0.75311 0.01075

9

230 | P a g e

Total 71 0.964379

Coefficien


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


ANOVA


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


ANOVA


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


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


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


ANOVA


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


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

233 | P a g e

SUMMARY OUTPUT

Regression Statistics Multiple R 0.468281 R Square 0.219287 Adjusted R Square 0.208134 Standard Error 0.10371

Observations 72

ANOVA


e F


6 0.21147

619.6616

7 3.35E‐05

Residual 70 0.75290

3 0.01075

6

Total 71 0.96437

9

Coefficien


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


Multiple R 0.6912235

9

R Square 0.4777900

51 Adjusted R Square

0.454053236

234 | P a g e

Standard Error

0.078525012

Observations 24

ANOVA


e F


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


ANOVA


e F


5 0.130545 14.86719 0.000489

Residual 34 0.29854

5 0.008781 Total 35 0.42909

235 | P a g e

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


ANOVA


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


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


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


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


ANOVA


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

237 | P a g e

Coefficien


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






238 | P a g e





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)

239 | P a g e

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)



Price to Earnings (Forward)

PPS EPS P/E (forward)



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


Dividend to Price

PPS DPS P/DIV Industry Average Comparable PPS


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


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


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



243 | P a g e

Corning’s Restated Comparables

Market PPS



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%


Discounted Free Cash Flow Model (Restated)

Growth Rate%


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


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


247 | P a g e

Long Run Residual Income Model


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



248 | P a g e


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



249 | P a g e


stated Restated






Residual Income 14.92 -12.67 12.68 - 17.19 17.17 + 13.15 13.39

Fairly Valued


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

and analysis corning - texas tech...

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