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Durable Results Transform Your Business By Simplifying Your Metrics Presented by Don Davis
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Duckridge Advisors Release Your Inner Bean Counter Simplify your Financial Statements and Drive Improved Results Understand the Impact of Metric Management Introduction
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Duckridge Advisors Agenda Cash Flow as the Ultimate Metric How Your Financial Statements Fit Together What Metrics Are Best For Your Business Industry Examples Lincare, Invacare, American Home Patient Using Ratio Analysis for Quick Review
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Duckridge Advisors Cash Flow: The Ultimate Metric “Too often we measure everything and understand nothing. The three most important things you need to measure in a business are customer satisfaction, employee satisfaction, and cash flow. If you’re growing customer satisfaction, market share is sure to grow, too. Employee satisfaction feeds you productivity, quality, pride and creativity. And cash flow is the pulse -- the key vital sign of a company” Jack Welch - former CEO, GE
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Quick Primer on Cash Flow Information Available in Your Monthly Financial Statements
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Duckridge Advisors Cash Flow Statement Financial Statements The Three Pillars Earnings Statement Balance Sheet Sales Cost of Sales Gross Profit Operating & Admin EBIT Interest & Taxes Net Income Change in Working Capital Cash from Operations CAPEX Cash from Financing Activities Cash AR Rental Equipment Total Assets AP & Accruals Debt Total Liabilities Equity Total Liabilities & Equity
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Consolidated Statement of Operations In $ millions200820072006 Net revenues 1,664.6 1,596.0 1,409.8 Cost of goods and services 400.8 389.9 316.1 Operating expenses 395.7 365.0 331.9 Selling & Administrative 326.9 317.7 291.6 Bad Debt expense 25.0 23.9 21.1 Depreciation and Amortization 117.5 116.3 102.0 EBIT 398.7 383.1 347.1 EBITDA 516.2 499.4 449.0 Interest & Tax (161.5) (157.1) (134.1) Net Income 237.2 226.1 213.0 EBIT Margin24% 25% Earnings per Share $3.17 $2.58 $2.16 P/E8.313.017.6 EBITDA Multiple4.9X7.7X10.8X
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Consolidated Statement of Cash Flows In $ millions200820072006 Net Income 237.2 226.1 213.0 Depreciation and amortization 117.5 116.3 102.0 Provision for losses on receivables 25.0 23.9 21.1 Stock-based compensation expense 19.3 18.0 20.3 Deferred income tax 31.7 24.6 18.2 Increase in AR (2.3) (52.3) (49.6) Increase in AP and Accruals 4.7 26.4 27.0 Other Operating 6.0 23.2 (23.3) Net Cash Provided by Operating Activities 439.1 406.2 328.7 Net Cash Used for Investing Activities (108.4) (232.9) (127.6) Net Borrowings & Finance Costs (287.2) 480.7 47.8 Stock Repurchase and Stock Options (22.6) (627.3) (232.4) Net Cash Provided (Used) by Financing Activities (309.8) (146.7) (184.6) Increase in cash 20.9 26.6 16.5 Cash at beginning of year 51.7 25.1 8.5 Cash and cash equivalents at end of year 72.7 51.7 25.1
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Duckridge Advisors Ratio Analysis In $ millions200820072006 Sales 1,664.6 1,596.0 1,409.8 EBIT 398.7 383.1 347.1 EBITDA 516.2 499.4 449.0 Net Income 237.2 226.1 213.0 Cash from Operations 439.1 406.2 328.7 AR176.8198.9 146.6 Debt556.9838 357.4 EBIT Margin24% 25% EBITDA Margin31% 32% Net Margin14% 15% Sales Converted to Cash26%25%23% Cash to EBITDA85%81%73% Debt to EBITDA 1.1X 1.7X 0.8X Days Sales Outstanding394538
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Duckridge Advisors What Are Most Effective Cash Flow Metrics? Daily Cash Report How Much Cash Did You Begin the Day With? How Much Cash Came In? How Much Cash Went Out? How Much Cash Do I Have at End Of Day? Month End Cash Flow Statement Compare to Prior Months for Orientation Develop Sales Converted to Cash Orientation
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Duckridge Advisors Simplify Your Metrics Drive Results Compare Either versus prior year or prior months The more comparison points the better Summarize Always have a one page summary prepared. Use the summary to evaluate the detail Divide Use ratios to your advantage Benchmark yourself against yourself
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Duckridge Advisors Industry Examples Quick Snap Shot of Publicly Traded Industry Leaders Focus on Simplicity and Relevancy Incorporates the Idea of Compare, Summarize and Divide What Other Metrics Would You Add?
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Company Comparison and Ratio Analysis As of December 31, 2008 In $ millions Rotech Sales 1,664.6 266.9544.5 1,755.7 Cost of Sales 400.8 65.2220.2 1,266.8 Bad Debt Write-offs 25.0 4.619.3 14.3 S G & A 326.9 19.8300.8 398.3 EBIT 398.7 21.44.2 87.7 EBITDA 516.2 51.673.7 131.4 Net Income 237.2 0.5(246.9) 38.6 Cash from Operations 439.1 35.468.4 76.4 AR 176.8 39.161.8 270.6 Debt 556.9 234.3500.1 478.8 EBIT Margin24%8%1%5% COS to Sales24% 40%72% Bad Debt to Sales2% 4%1% SG&A to Sales20%7%55%23% Sales Converted to Cash26%13% 4% Debt to EBITDA1.1X4.5X6.8X3.6X Days Sales Outstanding38.8 days53.5 days41.4 days56.3 days
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Cash Flow P&L Key Ratios Gross Margin EBIT Margin Sales Converted to Cash Sales by Employee Payroll to Sales Other Identified Costs to Sales Days Sales Outstanding Inventory Turns Gross Margin by Product Line Quick Ratios Debt to EBITDA Debt to Equity Balance Sheet
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Gauging Sales by Employee 20082007 Under $50,0003%21% $51K to $75K2%9% $76K to $100K8%12% $101K to $125K16%18% $126K to $150K19%18% $150+K52%21% Per Steven Richards & Associates, Inc
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Duckridge Advisors Major Players: Sales, PROFIT & Cash per Employee At 12.31.08 LincareAHOMRotechInvacare Employees Per Employee $’s Sales EBITDA Cash from Operations
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DSO: a Matter of Opinion? Per Steven Richards & Associates, Inc
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Duckridge Advisors DSO: The Assorted Math Calculations Differ by Organization Some use rolling average Some annualize Timing of Write-offs Has Impact What Impact Does a Day Mean?
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Duckridge Advisors DSO: The Assorted Math Lincare Example (in $ Millions) 4 th Quarter 2009 Full Year 2009 Sales Accounts Receivable DSO
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Duckridge Advisors DSO: The Assorted Math Timing of Write-offs Matter ABCXYZ Sales3,600 Bad Debt (Reported) 108 0 Bad Debt to Sales3%0% Accounts Receivable 450 558 DSO4556
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Duckridge Advisors DSO: The Assorted Math What Is A Day Worth? Sales $ 3,650,000 One Day’s Sales (One time effect) $ 10,000 Write-off 1% (annually) $ 36,500
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Duckridge Advisors So What? Summarize, Compare and Divide For High Level Review Establish Your Own Metrics Quick Summaries allow for Quick Reviews for Busy Executives Different Comparisons provide Different Points of View Focus on Cash
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Duckridge Advisors Transform Your Business By Simplifying Your Metrics Daily Cash Report Monthly Review of Cash Flow Sales converted to Cash Compare all Metrics Prior Months Prior Year to Date Budget
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Where to Get More Information Get remote electronic access to your Financial Reporting Software and Explore Learn more about your own Company by Understanding Your Industry Leaders www.sec.gov/edgar.shtml Click on Search for Company Filings Focus on 10-K Annual Reports Contact me at ddavis@duckridge.com or 412-805-0662 D uckridge A dvisors
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