Equity Analysis and Valuation Analysis Team Oscar Aguilar Bayle Butler Bryan Fetterman Reece Macdonald Jonathan Warren Joshua Yueng 1 Contents Executive Summary .................................................................................................................................... 6 Industry Analysis ........................................................................................................................................ 7 Firm Overview ........................................................................................................................................... 14 FIVE FORCES MODEL ........................................................................................................................... 18 Rivalry among existing firms ............................................................................................................... 18 Threat of New Entrants ....................................................................................................................... 31 Threat of Substitute Products ............................................................................................................. 35 Bargaining Power of Customers ......................................................................................................... 38 Bargaining Power of Suppliers ............................................................................................................ 41 Accounting Analysis .................................................................................................................................. 55 Key Accounting Policies ....................................................................................................................... 55 Research and Development ................................................................................................................ 56 Currency Risk ........................................................................................................................................ 57 Operating and Capital Leases ............................................................................................................. 59 Goodwill .................................................................................................................................................. 60 Warranties ............................................................................................................................................. 62 Accounting Flexibility ................................................................................................................................ 62 Research and Development ................................................................................................................ 63 Operating Leases .................................................................................................................................. 64 Goodwill .................................................................................................................................................. 64 Warranties ............................................................................................................................................. 66 2 Evaluate Accounting Strategy ................................................................................................................. 67 Research and Development ................................................................................................................ 67 Currency Risk ........................................................................................................................................ 68 Operating Leases .................................................................................................................................. 69 Goodwill .................................................................................................................................................. 70 Warranties ............................................................................................................................................. 72 Quality of Disclosure ................................................................................................................................ 75 Research and Development ................................................................................................................ 75 Operating Leases .................................................................................................................................. 76 Goodwill .................................................................................................................................................. 76 Warranties ............................................................................................................................................. 78 Quantitative Analysis ................................................................................................................................ 78 Sales Manipulation Diagnostics ........................................................................................................... 79 Net Sales/Cash from Sales .................................................................................................................. 79 Net Sales/Net Accounts Receivable ................................................................................................... 80 Net Sales/Warranty Liabilities ............................................................................................................. 81 Net Sales/Deferred Revenue ............................................................................................................... 82 Net Sales/Inventory .............................................................................................................................. 83 Sales Diagnostics Conclusion .............................................................................................................. 84 Expense Manipulation Diagnostics ......................................................................................................... 86 CFFO/OI ................................................................................................................................................. 87 CFFO/NOA .............................................................................................................................................. 89 Total Accruals/Sales ............................................................................................................................. 90 Expense Diagnostics Conclusion ......................................................................................................... 91 Potential Red Flags ................................................................................................................................... 92 3 Operating Leases .................................................................................................................................. 93 Goodwill .................................................................................................................................................. 93 Sales and Expense Manipulation Ratios ............................................................................................ 94 Undo Distortions ................................................................................................................................... 94 Goodwill .................................................................................................................................................. 97 Appendices .............................................................................................................................................. 178 Sales Manipulation Diagnostics ......................................................................................................... 178 Expense Manipulation Diagnostics ................................................................................................... 179 Liquidity Ratios .................................................................................................................................... 180 Profitability Ratios ............................................................................................................................... 182 Capital Structure Ratios ..................................................................................................................... 183 Weighted Average Cost of Debt ....................................................................................................... 185 Weighted Average Cost of Capital ................................................................................................... 185 Forecasted Income Statement .......................................................................................................... 187 Common Size Income Statement ..................................................................................................... 188 Forecasted Income Statement .......................................................................................................... 189 Common Size Income Statement ..................................................................................................... 190 Forecasted Balance Sheet ................................................................................................................