Steps in Business Valuation Professor Grant W. Newton, Executive Director Association of Insolvency & Restructuring Advisors Suggested Inquiries and Challenges in Current Environment When the company being valued is in distress or in bankruptcy, the steps in the valuation do not change; however, specific issues that often come into play in distress and bankruptcy must be considered on a case-by-case basis. Step 1: Define the Legal Interest For many of the purposes of valuation in distress and bankruptcy the legal interest being valued will be the company, or the business enterprise. Often the equity interest is out of the money and is ascribed zero value. Other legal interests that may be valued include secured claims (such as asset-based loans or equipment leases) and unsecured claims (equity, bonds, trade claims). Note: In the case of recovery actions involving multiple entities, some of which may be foreign, inquire as to the reasons why entities were included or not included as the case may be. Step 2: Identify Ownership Interest Characteristics This step involves identifying the ownership characteristics of marketability and control. Marketability relates to the ability to quickly convert property to cash at minimal cost; all other things being equal, an asset is worth more if it is readily marketable. As for control, a minority interest does not enjoy the same rights as a controlling interest, therefore minority interests are usually worth much less in proportion to majority interests. Many of the uses of valuation in distress and bankruptcy typically require that the valuation of the business enterprise reflect control and marketability. Control premiums might play a role in valuation if the Guideline Public Company Method of the Market Approach is utilized and a control premium is deemed to be appropriate in the distressed situation.
In addition, discounts for control and marketability come into play in distressed situations where creditors receive a minority equity interest in satisfaction of their claims. The discounts for minority interest, control premium and marketability are illustrated in the following chart: Note: Inquire as to the basis for the minority discount and whether that discount should be reduced because of actions of management prior to a potential fraudulent transfer. Any attempt to market the company by management prior to an IPO, for example, may reduce the control premium. Step 3: Define the Purpose of the Valuation No single valuation method is universally applicable to all valuation purposes. The context in which the appraisal is to be used is a critical factor. It is important to document the intended purpose of each valuation as well as to identify the client for whom the valuation is prepared and any other intended users. The intended use of the valuation generally determines the valuation date, the standard of value and the premise of value. Note: Be very careful in asking a financial advisor to do a relatively quick valuation when the benefit of insolvency is limited (i.e., cost is greater than the benefit). - 2 -
Step 4: Select Valuation Date The selection and indication of the valuation date is critical because information used in the valuation or circumstances surrounding the valuation may change and have a material impact on the results of the valuation. Selection of the valuation date depends on the purpose of the valuation. For example, for a plan of reorganization, the valuation should represent the value of the company upon the date of emergence; for fraudulent transfers the valuation date will be the date of the transfer; for the purpose of adequate protection, the valuation date is often the filing date. Note: Inquire as to the type of assessment made by the appraiser to determine that the value did not change when potential fraudulent transfers were made at more than one date. Step 5: Identify Applicable Standard of Value The appropriate standard of value will depend on the facts and circumstances of the specific valuation. Guidance related to the applicable standard of value can be found in statutory law, case law and administrative rulings. In many situations, the standard of value may be legally mandated. Standards of value include fair market value, investment value and intrinsic value. 1. Fair Market Value Fair Market Value is a widely recognized and accepted standard for business valuations. It is the applicable standard required in many federal and state tax matters. Fair Market Value is defined in the International Glossary of Business Valuation Terms as: The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms-length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. (NOTE: In Canada, the term "price" should be replaced with the term "highest price.") - 3 -
Thus, Fair Market Value assumes a hypothetical willing buyer and seller, an arm s length transaction, and reasonable time for market exposure. The effect of events subsequent to the valuation date is not considered. The term Market Value is generally used interchangeably with Fair Market Value and is often used with respect to real estate appraisals. 2. Investment Value Investment Value differs from Fair Market Value as it is the value to a particular buyer rather than a hypothetical buyer and is often used for investment decisions. Investment Value is defined in the International Glossary of Business Valuation Terms as: The value to a particular investor based on individual investment requirements and expectations. (NOTE: in Canada, the term used is "Value to the Owner"). The Dictionary of Real Estate Appraisal, 3 rd ed., Chicago: Appraisal Institute, 1993, p.190, defines Investment Value as: The specific value of an investment to a particular investor or class of investors based on individual investment requirements; distinguished from market value, which is impersonal and detached. Investment value may differ from Fair Market Value due to differences in estimates of future earning power by either the buyer or the seller. A valuation for investment purposes will reflect anticipated operational synergies with the buyer (e.g., strategic vs. investment) and the cost of capital of the buyer (based on both financing rates and the buyer s proposed capital structure), as well as a tax rate specific to the buyer. 3. Intrinsic Value Intrinsic Value is the perceived actual value inherent in the investment based on the fundamental characteristics of the investment. It is not market driven and is also referred to as fundamental value. It is the standard of value often used by security analysts in determining the true or real value of a stock. To the extent that an analyst determines that a stock has greater intrinsic value than the current price, the analyst will issue a buy recommendation. To the extent - 4 -
that an analyst determines that a stock has less intrinsic value than the current price, the analyst will issue a sell recommendation. 4. Fair Value Fair Value usually relates to a legal standard of value applicable to certain transactions. In most states, it is the statutory standard of value for dissenting stockholders appraisal rights and is also used in valuations in state minority oppression cases. Fair Value has been defined as: The value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable. (Revised Model Business Corporation Act). 5. Standards of Value in Bankruptcy Fair valuation is generally interpreted by bankruptcy case law as fair market value. Other terms interpreted by the courts to have similar meaning include reasonably equivalent value and present fair salable value. The standard of value referenced in the State Fraudulent Transfer Act is fair valuation, and the standard of value referenced in the State Fraudulent Conveyance Act is present fair salable value. Step 6: Identify Applicable Premise of Value The premise of value is defined as an assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation. (International Glossary of Business Valuation Terms). The appropriate premise of value will depend on the facts and the circumstances of the specific valuation. Guidance related to the applicable premise of value can be found in statutory law, case law, and administrative rulings. The premise of value is typically a function of the highest and best use in a control valuation. However, a premise may be legally mandated or otherwise determined by the party requesting the appraisal. Valuation premises generally used in bankruptcy include: - 5 -
Going Concern: Under a Going Concern premise, the business is assumed to continue to operate as a going concern and the value is based upon the income-generating characteristics of all of the tangible and intangible assets as a going concern enterprise. Liquidation Value - Orderly: Under an Orderly Liquidation Value premise, the assets are sold piecemeal with a reasonable amount of time allowed for market exposure. Liquidation Value - Forced: Under a Forced Liquidation Value premise, the assets are sold piecemeal with less than normal market exposure. This assumes a distressed sale, wherein the enterprise must sell all its assets at or around the same time, in a public auction. Note: Inquire as to which operating characteristics were considered by the appraiser in deciding on the premise of value to use. Operating characteristics that may be considered in identifying the correct premise of value include the following: Did the company have recent losses? Was the company operating under normal operating conditions? Was the company able to pay its bills on time or was it operating on a C.O.D. basis? If the company was not paying its bills on time, what was being told to creditors? Has the company, in part or in whole, been offered for sale? Have crisis management or turnaround professionals been employed? Has the company s employee turnover increased? What information has been in the press regarding the company? When presenting a valuation in the context of a plan of reorganization, the premise would be going concern. Conversely, the premise of value for the liquidation analysis in the disclosure statement should be orderly liquidation value. In solvency analysis, premise of value must be based on the characteristics of the entity at the valuation date. Subsequent events, such as filing for bankruptcy, should not be considered. Courts generally require that a going-concern premise be employed unless explicit, credible evidence exists supporting the use of a liquidation value. Premise of value may change over time. For example the going concern assumption may be used for a potential fraudulent transfer occurring one year prior to bankruptcy and a liquidation assumption may be used for preferential payments made 90 days prior to the chapter 11 filing because of the continued decline in the operations of the business. - 6 -
Step 7: Identify Applicable Approach(es) As with the premise of value and the standard of value, the applicable valuation approach or approaches will be determined by the facts and circumstances of the valuation. The three generally accepted valuation approaches are: 1) Income, 2) Market and 3) Asset. Two primary methods within the Market Approach are: a) the comparable company method; and b) the comparable transactions method. 1. Income Approach The Income Approach indicates the Fair Market Value of a business based on the present value of the cash flows the business is expected to generate in the future. The Income Approach is commonly applied using the Discounted Cash Flow ( DCF ) Method. The DCF Method estimates the discounted present value of a company using the company s cash flow projections over some period of time in the future, usually a period sufficient to achieve cash flow stability. The DCF Method is comprised of four steps: 1) Estimate future cash flows for a certain discrete projection period. Note 1: Inquire as to the basis for the selection of the discrete period. Generally, the period should be based on the nature of the business and economic conditions, rather than just five years, which is common. Note 2: In estimating cash flows in distressed situations cash flows should be adjusted to account for: a. decline in economic activity (volume) b. changes in cost of service or products c. reduction of work force d. changes in utility costs 2) Discount those cash flows to present value at a rate referred to as the weighted average cost of capital (WACC) of return that considers the relative risk of the investment and the time value of money. Several methods are available for estimating a required return on equity. Two common methods are the: - 7 -
Modified Capital Asset Pricing Model; and Duff & Phelps Risk Premiums. For purposes of this discussion I have used the Modified Capital Asset Pricing Model ( MCAPM ), a method which incorporates certain adjustments to the CAPM to determine the required return on equity. The CAPM estimates the rate of return on common equity as the current risk-free rate of return on U.S. Treasury bonds, plus a market risk premium expected over the risk-free rate of return, multiplied by the beta. Beta is a risk measure that reflects the sensitivity of a company s stock return to the changes in returns for the stock market as a whole. The CAPM calculates a required return on equity using the following formula: K e = R f + β * (R m - R f ) The MCAPM modifies the calculation of the rate of return on equity capital using the CAPM formulas follows: K e = R f + β * (R m - R f ) + SP + CSR where: K e = Rate of return on equity capital; R f = Risk-free rate of return; β = Beta or systematic risk for this type of equity investment; R m - R f = Market risk premium the expected return on a broad portfolio of stocks in the market -(R m ) less the risk-free rate (R f ); SP = Size premium an additional premium related to the size of a company; and CSR = Company specific risk adjustment an adjustment to the required rate of return based on factors specific to the subject company Note: Inquire as to how each of the above components of the model was determined, how the company specific risk was determined, the date used for and how the risk free rate was determined. Note: In determining weighted average cost of capital in an uncertain economy, a different approach should be considered: - 8 -
For example, as of December 2007, the yield on 20-year U.S. government bonds was 4.5% and the average risk premium in the SBBI Yearbook for 1926-2007 was 7.1%. One year later, the yield on 20-year U.S. government bonds was 3.0% and the SBBI average risk premium for 1926-2008 was 6.5%. During the time the risk in the economy increased to maybe its highest point, the base cost of equity capital using realized risk premiums decreased from 11.6% (4.5% plus 7.1%) to 9.5% (3.0% plus 6.5%). 1 Roger Grabowski recommended that once we suspect that the market interest rates are abnormally low, we use a build-up approach to estimate a normalized risk-free rate by looking at the real rate of interest earned historically and long-term inflation estimates. 2 The general formula for calculating the WACC is: WACC = K d * (d%) + K e * (e%) where: WACC = Weighted average cost of capital; K d = After-tax cost of debt capital; d% = Debt capital as a percentage of the sum of the debt and equity capital ( Total Invested Capital ); K e = Rate of return on common equity capital; and e% = Common equity capital as a percentage of the Total Invested Estimation of Capital Structure --Estimate of the typical capital structure may be based on observing the proportions of interest-bearing debt and common equity of the selected comparable companies used in the analysis. Note: Inquire as to the method used to determine percent of the capital structure that is debt and percent that is equity. Calculation of After-Tax Cost of Debt -- The cost of debt is the rate a prudent debt investor would require on interest-bearing debt. Since the interest on debt is deductible for income tax purposes, an after-tax interest rate is used. To determine the borrowing rate for purposes of the WACC calculation, in a recent case the bond ratings of comparable publicly traded companies used elsewhere in the analysis were used. These 1 Roger Grabowski, AIRA Journal (August 8, 2011), p. 1-2. 2 Id. - 9 -
companies typically had a bond rating of BB as of the Solvency Date. An interest rate based on a composite index of BB rated 20-year corporate bonds as of the Solvency Date, as reported by Bloomberg, as a measure of long-term borrowing costs. The formula to calculate the after-tax cost of debt is as follows: K d = K * (1 - t) where: K d = After-tax rate cost of debt capital; K = Pre-tax cost of debt capital; and t = Corporate tax rate (blended federal and state corporate income tax rate). 3) Estimate the residual (terminal) value of cash flows subsequent to the discrete projection period. Note: Inquire as to (a) the percent of the value that is in the residual(not uncommon to have around 65%) and (b) whether the normalized cash flow in the residual represents the EBITDA margin over periods of peaks and valleys, especially in a cyclical business. If so, inquire as to how this was determined. One method is to use the EBITDA margin over a long enough period to include at least one peak and one valley. 4) Combine the present value of the residual cash flows with the present value of the discrete projection period cash flows to indicate the fair market value of a marketable, controlling interest in the business. Note: In determining the residual value, some appraisers use the market approach (as discussed below) rather than the discounted cash flow. If the market approach is used, consider inquiring as to why the appraiser deviated from a general proven methodology. 2. Market Approach The two primary methods within the Market Approach are the comparable company method and the comparable transactions method. Comparable Publicly Traded Company Method The comparable company method indicates the Fair Market Value of the business based on a comparison of the subject business to comparable publicly traded companies with similar characteristics. The valuation process is essentially that of comparison and correlation between the subject business and - 10 -
the comparable companies. Once the comparable companies are identified, market multiples of the publicly traded companies are calculated. These market multiples are then applied to the subject company s operating results to indicate the value on a marketable, minority basis. Finally, a control premium may be applied, to the extent warranted, to arrive at the Fair Market Value of the business on a marketable, controlling basis. Determination of the Fair Market Value based on comparable companies consists of the steps described below. 1) Identify and Select Comparable Companies The first step in performing the Market Approach is the identification and selection of comparable companies. Criteria are established for the selection. Some of the factors considered are industry similarity, size (including sales, assets or market capitalization), financial risks, growth, and operational risks. Careful in-depth analysis is necessary to identify and select companies similar enough to be comparable with the subject company. When identifying and selecting comparable companies, consider competitors and other publicly traded companies with similar lines of business and basis of competition to the subject company. Note: Inquire about source of comparable companies broad search or just companies in a data bank? Are companies from general industry or specific industry? Are companies comparable in size? 2) Normalize Financial Statements so they are Comparable After selecting a sample of appropriate comparable companies, the next step is to normalize the financial statements across the company being valued and the comparable companies so that the financial statements themselves are comparable to the company being valued. Examples of adjustments commonly made to the financial statements include accounting or Generally Accepted Accounting Principles ( GAAP ) adjustments and adjustments for nonrecurring items, impact of non-operating assets, and offbalance sheet items, including under-funded (or over-funded) value of pensions and other postemployment benefit (OPEB) liabilities, off-balance sheet accounts receivable securitization, and reserves for environmental liabilities. The objective is to provide a basis for a valuation of the subject company free and clear of such liabilities. EBITDA and EBIT for both the subject company and the comparable companies are adjusted to remove unusual and non-recurring items such as gains (or losses) on asset sales and currency conversion, impairment charges, restructuring costs, pension, OPEB and losses from discontinued operations. - 11 -
Note: Inquire if this analysis was performed. 3) Perform Comparative Financial Analyses The next step is to perform comparative financial analyses of the subject company and the comparable companies in selected areas such as size, LTM profitability, asset utilization and leverage and liquidity. Information for the analysis is generally taken from contemporaneous SEC filings. In terms of LTM profitability measured by gross margin, EBITDA margin and EBIT margin. Note: Inquire as to whether subject company compares in profitability to both the mean and median of the comparable companies? If any inconsistencies in the profitability measures exist between subject company and comparable companies, inquire as to the underlying cause. For example in a manufacturing industry if the difference in EBIT margins is greater than the difference in EBITDA margins between the subject company and comparable companies it may suggest failure of subject company to properly maintain its equipment. Putting too much emphasis on EBITDA may result in an incorrect valuation. 4) Calculate Comparable Company Multiples The next step is to calculate comparable company multiples that can be applied to financial measures for the company being valued. For each comparable company, the MVIC is determined by adding the market capitalization of common stock plus interest bearing debt, preferred stock and minority interests. Market capitalization of common stock is measured as the shares outstanding multiplied by the market prices of common stock as of the valuation date. Note 1: To ensure comparability among the comparable companies, inquire as to whether the MVIC was adjusted to include under-funded (or over-funded) value of pension and other postemployment benefit (OPEB) liabilities, off-balance sheet accounts receivable securitization, reserves for environmental liabilities, and unfunded pension liabilities. Note 2: Inquire if this analysis is consistent with the adjustments made to EBIT and EBITDA. The multiples are determined by dividing MVIC by the EBITDA and EBIT for the last twelve months. Market value may also be calculated by dividing the MVIC by the projected market multiples from sources of consensus analysis such as Reuters. - 12 -
5) Select and Calculate Applicable Parameters The next step is to select and calculate applicable parameters such as EBIT and/or EBITDA for the company being valued. 6) Select and Apply Multiple for Subject Company The next step is to select and apply the comparable company multiples to the applicable parameters for the company being valued. Note 1: Inquire as to the reason why the appraiser selected the parameters used.(ebit, EBITDA, revenue, etc.) For example (as noted above) for a company with older facilities, equipment, etc. the use of EBIT may be more appropriate. Note 2: Inquire if the appraiser considered adjusting the multiple to account for the alpha risks (such as small business) that were considered in determining the weighted average cost of capital. 7) Apply Appropriate Control Premium The final step in performing the Market Approach is to apply an appropriate control premium to account for the fact that the valuation is being performed on a controlling interest basis. In the ordinary course, the market values of the comparable publicly traded companies used in the Market Approach are based upon freely traded shares of small blocks of stock on major exchanges. As such, absent a control adjustment, the market comparables represent minority interest values in the comparable companies. As noted above a control premium is defined as the additional consideration that an investor would pay over a marketable, minority equity value (i.e., current, publicly traded stock prices) to own a controlling interest in the common stock of the company. A common method for benchmarking control premiums involves considering premiums paid by control buyers over exchange-traded prices of publicly traded targets. The premiums paid in transactions considered in the comparable transaction approach (see below) may reveal premiums paid over the market value of the invested capital. However, it should be realized that these observed premiums commonly involve elements of strategic or synergistic value in addition to value derived purely from control characteristics, making it difficult in practice to observe premiums for control. Note: Inquire as to how the control premium was determined and if the premium is a general estimate or specifically related to the subject company. - 13 -
Comparable Transaction Method In addition to the Comparable Company Method, a second commonly utilized indication of value under the Market Approach is the Comparable Transaction Method, which relies on the valuation multiples implied from the acquisition of target companies in similar lines of business as the subject company. Target companies in the Comparable Transaction Method may be either public or private prior to the acquisition. 1) Select Comparable Transactions The first step in the application of the comparable transaction method is the selection of comparable transactions. Generally companies considered are acquisitions involving target companies with similar lines of business as the subject company. Sources of comparable transactions include press releases about the acquisition and announcements in databases such as Capital IQ and Mergerstat. Note: Inquire as to whether the comparable transactions occurred during economic conditions different from those at the time of valuation and whether the acquired company is in the same line of business and similar size as the subject company. 2) Calculate Market Multiples The second step in the application of the Comparable Transaction Method is calculating the market multiples by dividing the total enterprise value implied by each acquisition by the LTM operating results (as of the announcement date) of each target company. Commonly used basis for calculating the multiples is the ratios of TEV to EBITDA and EBIT. Note: Inquire as to the reasonableness of the method used to determine any control premium. 3) Select and Apply Market Multiples for Indication of Value The third step in the application of the Comparable Transaction Method is the selection of market multiples as a result of the calculated market multiples in step two above. After calculating the multiples for the comparable transactions, the selected multiples are applied to the subject company s historical and projected operating results to arrive at an indication of value. 3. Asset-Based Approach In an asset-based approach, the value of the subject company is estimated by developing a fair market value balance sheet. The Underlying Asset Approach requires a valuation of each of the - 14 -
assets of a company and it is not commonly used for valuing operating businesses when other approaches are available. 4. Weights Given to Methods for Valuation While it is not necessary, appraisers often find it helpful to explicitly weight the various valuation indications to arrive at their respective valuation conclusion. While the choice to weight or not is at the appraiser s discretion at minimum the appraiser should consider the appropriateness of each method as well as quality and quantity of evidence used in developing each value indication. Factors in weighing each indication of value can be grouped into two key categories: the nature of the methods and the quality of the application. The nature of each method may assist in determining an indication of value s relative merit. For example, a transaction method incorporating previous sales of the subject company s stock may be on a minority-interest level of value. If so, then the valuation of a controlling interest would require an adjustment to the indication of value. Such adjustments add a level of uncertainty and as such, the more similar the indication of value is to the basis of the subject interest, the more applicable it is (all things being equal). Furthermore, some valuation methods are more applicable to operating companies or holding companies. As Section 5(a) of IRS Revenue Ruling 59-60 states: In general, the appraiser will accord primary consideration to earnings when valuing stocks of companies which sell products and services to the public; conversely, in the investment or holding type of company, the appraiser may accord the greatest weight to the assets underlying the security to be valued. In assessing relative merit of each method, the quantity and quality of a method s support is important to providing a defensible valuation opinion. Note: Inquire as to the reasons for the weights assigned or if weights the basis for the judgment of the appraiser as to the manner in which final value was determined. Income Approach When the premise of the valuation is going-concern, cash flow and earnings based metrics are normally given greater weight. A company s earnings are ultimately the source of all value, reflected either in dividends paid or in retained earnings, which are realized upon sale. Based on the nature of the business and the metrics that affect cash flows, it is possible to project available cash flows with a certain degree of confidence. However, the projections should always be - 15 -
evaluated in light of the purpose of the analysis. The stability and consistency of historical revenue and expense results should also be evaluated when assessing management projections. A weakness associated with this approach is that it is not based primarily on arm s-length market assumptions (i.e., inputs), other than the required rate of return applied in the model. The quality of information and the number of sources supporting the discount rate should also be considered when assessing how strongly to weight the income approach in concluding upon a value. However, recognizing the primary strengths associated with the application of this method, the income approach is frequently given strong weight in a final conclusion of value. Market Approach Guideline Publicly Traded Company Method. The primary strength of the guideline publicly traded company method is that the market prices on which this approach is based are objective, arm slength evidence of value. Additionally, quality information is often readily available in the form of various public market data sources and industry analyst reports. Therefore, given the availability of information, it is typically possible to draw specific comparisons between the subject company and the guideline companies in deriving an appropriate valuation multiple. Merger and Acquisition Transaction Method. The merger and acquisition transaction method involves an examination of the terms, prices and conditions found in transactions involving companies operating within similar industries as the subject company. Thus, the strength of this approach is that it provides market evidence of pricing relationships based on actual transactions completed in the marketplace. However, there are several weaknesses that are often associated with the application of this method. First, for many of the observed transactions, sufficient financial information is often not available to make meaningful comparisons. Second, there is typically a lack of detailed knowledge regarding the size and nature of the operations of the target companies which reduces the ability to draw comparisons to the subject company. Finally, it is often difficult to obtain relevant information regarding the concluded deal structures and earnings estimates of the target companies. In addition to the above, the valuation multiples derived from merger and acquisition data are not necessarily indicative of fair market value. Often, buyers will pay higher prices in order to take advantage of various synergies that may arise from the purchase of a company with similar operations. With either market approach methodology, the following must be considered when evaluating how heavily to weight the market approach indications of value in reaching a conclusion of value: (a) Magnitude of price differentials caused by acquisition premiums (typically caused by premiums paid for anticipated synergies); - 16 -
(b) (c) (d) (e) Quality of transactions or guideline companies; Degree of consistency in pricing multiples derived from transactions or guideline companies; Quality of information regarding prices, financial data, and company descriptions; and Degree of similarity in the underlying economics between the subject company and the guideline companies or the companies involved in the transactions. Non-operating Assets and Liabilities After calculating an MVIC for the subject company based on operations, the next step involves adding the value of any non-operating assets, and subtracting the value of any nonoperating liabilities. Non-operating assets and liabilities consist of resources and obligations that are not essential to the ongoing operations of the business, but nonetheless still generate income or result in costs. Non-operating liabilities include term loans, unfunded and underfunded pension and OPEB obligations, and tax liabilities for prior years. Non-operating assets are often valued separately from operating assets when evaluating a company. Their value is counted towards the total worth of the company, but may be excluded from financial models that estimate the future profit earning potential of the core business segments and the assets used to generate core revenues. - 17 -