Budget Planning, Implementation and Monitoring Second Step: Building the Projections – Corporate Approach

Chris DroussiotisSeptember 2011

Lecture Series #2

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Table of Contents

Top to Bottom / Bottom to Top Line (Government Approach) Revenue Growth & Operating Assumptions Striving for Cash Flow / Profit Performance measurements

These slides could be obtain via the Instructor’s Web page at www.celeritymoment.com

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Top to Bottom Line Drivers

Revenue Drivers– Growth Assumptions (increase/decrease)

Historical averages Future assumptions / views Demand and Supply: Volume Vs Price

– “Volume” concept “Same Store Sales” “Acquisitions / “New Stores”

– “Price” concept Market Conditions / Pass-through concepts

Revenue Segments (subsidiaries, product/services, geographical, departments)

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Top to Bottom Line Drivers

Cost / Expense Drivers– Direct Expenses / Gross Profit

Cost of Revenue as % of Revenue– Material / Labor / Overhead

Cost per Unit / Hourly Wages– Indirect Expenses / EBIT or EBITDA Margins

Operating Assumptions as % of Revenues– Selling / General / Administrative– Utility Expenses– Depreciation Expenses (% of Revenue / Based on Assets and Average Life)

– Interest Expense New or Existing Debt

– Taxes / Tax Rate

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Bottom to Top Line Approach

Cost Drives Revenue– Gross Margin / Operating Margin– EBITDA / Net Income

REVENUE

Price

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Operating Assumptions / Drivers

Ratio Analysis / Assumptions 2009 2010 2011 2012 2013 2014 2015

123 Trend Analysis Ratios124 Revenue Growth - USA 15.0% 5.0% 5.0% 5.0% 5.0% 5.0%125 Revenue Growth - Europe 16.7% 5.0% 5.0% 5.0% 5.0% 5.0%126 Revenue Growth - Asia 25.0% 10.0% 10.0% 10.0% 10.0% 10.0%127 Revenue Growth 15.6%

129 Liquidity Ratios130 Current Ratio 1.75x 2.56x 3.53x 4.04x 4.38x 4.60x 4.74x131 Quick ratio 1.23x 1.91x 2.82x 3.32x 3.66x 3.88x 4.02x132 Accounts Receivable Turnover (ART) 21.14x 21.14x 21.14x 21.14x 21.14x 21.14x133 Accounts Receivable Days 17.26 17.26 17.26 17.26 17.26 17.26

135 Solvency Ratios136 Debt/Equity Ratio 68.7% 61.5% 54.3% 47.0% 39.6% 32.3% 25.3%137 LTD / Total Capitalization 40.7% 38.1% 35.2% 32.0% 28.4% 24.4% 20.2%138 EBITDA / Interest (Coverage Ratio) 2.96x 3.61x 3.84x 4.25x 4.75x 5.46x 6.47x139 EBIT / Interest 2.50x 3.07x 3.26x 3.61x 4.04x 4.63x 5.49x140 Fixed Charge Coverage Ratio 1.72x 1.81x 1.86x 1.82x 1.81x 1.82x141 Cash Avail.for Debt Service / Debt Svce 0.97x 1.26x 1.21x 1.16x 1.12x 1.10x142 LTD / EBITDA (Leverage Ratio) 3.12x 2.73x 2.48x 2.22x 1.93x 1.63x 1.32x

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Operating Assumptions / Drivers

Ratio Analysis / Assumptions 2009 2010 2011 2012 2013 2014 2015

144 Activity Ratios / Operating Ratios145 Inventory Ratio (IR) 12.92x 12.92x 12.92x 12.92x 12.92x 12.92x146 Inventory Ratio - Days 28.24 28.24 28.24 28.24 28.24 28.24 147 Fixed Asset Turnover Ratio 0.407x 0.418x 0.430x 0.442x 0.454x 0.467x148 Asset Turnover Ratio 0.36x 0.36x 0.37x 0.37x 0.38x 0.39x

150 Profitability Ratios151 Gross Margin 64.1% 62.2% 62.1% 62.0% 61.9% 61.9% 61.8%152 EBITDA Margin 40.1% 39.0% 38.9% 38.9% 38.8% 38.7% 38.6%153 EBIT Margin 33.9% 33.2% 33.1% 33.0% 32.9% 32.9% 32.8%154 Return on Assets (ROA) 4.8% 5.0% 5.3% 5.6% 5.9% 6.3%155 Gross Return on Assets 11.8% 11.9% 12.1% 12.3% 12.6% 12.8%156 Return on Equity (ROE) 8.1% 8.0% 8.1% 8.2% 8.2% 8.3%157158 Operating Assumptions159 Cost of Revenues % of Revenues160 U.S. 27.5% 29.3% 29.3% 29.3% 29.3% 29.3% 29.3%161 Europe 83.3% 82.1% 82.1% 82.1% 82.1% 82.1% 82.1%162 Asia 62.5% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%163 Operating Expense % of Revenues164 Administrative & General 15.1% 14.9% 14.9% 14.9% 14.9% 14.9% 14.9%165 Marketing Expenses 7.8% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2%166 Other Operating Expenses 1.0% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1%167 Depreciation Expense % of Revenues 6.3% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9%168 Tax Rate 40% 40% 40% 40% 40%

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Operating Assumptions / Drivers

Ratio Analysis / Assumptions 2009 2010 2011 2012 2013 2014 2015

169170 Cash Flow Statement Assumptions as % of Revenues171 Prepaid Expenses 1.0% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%172 Accrued Income Taxes 1.3% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%173 Accounts Payable 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6%174 Accrued Income Taxes 1.3% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%175 Accrued Expenses 1.0% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7%176 Capital Expenditures 11.3% 11.3% 11.3% 11.3% 11.3% 11.3%177 Deferred Income Taxes 1.3% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%178179 Debt Assumptions180 Short-term Outstanding Debt 20,000 10,000 - - - - - 181 Principal Payments - Short-Term (10,000) (10,000) - - - - 182 Long-term Outstanding Debt 1,200,000 1,180,000 1,130,000 1,060,000 970,000 860,000 730,000 183 Principal Payments - LongTerm (20,000) (50,000) (70,000) (90,000) (110,000) (130,000) 184 Total Outstanding 1,220,000 1,190,000 1,130,000 1,060,000 970,000 860,000 730,000 185 Interest Payments 118,506 112,531 105,560 96,598 85,643 186 Average Interest Rate 10.0% 10.0% 10.0% 10.0% 10.0%187188 Total Interest + Principal payments (Debt Service) 178,506 182,531 195,560 206,598 215,643

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Results

Historical ProjectionsIncome Statement (000's) 2009 2010 2011 2012 2013 2014 2015

50 Revenues by Geography51 U.S. 800,000 920,000 966,000 1,014,300 1,065,015 1,118,266 1,174,179 52 Europe 120,000 140,000 147,000 154,350 162,068 170,171 178,679 53 Asia 40,000 50,000 55,000 60,500 66,550 73,205 80,526 54 Total Revenue 960,000 1,110,000 1,168,000 1,229,150 1,293,633 1,361,642 1,433,384 5556 Cost of Revenues by Geography57 U.S. 220,000 270,000 283,500 297,675 312,559 328,187 344,596 58 Europe 100,000 115,000 120,750 126,788 133,127 139,783 146,772 59 Asia 25,000 35,000 38,500 42,350 46,585 51,244 56,368 60 Total Cost of Revenue 345,000 420,000 442,750 466,813 492,271 519,213 547,736

62 Gross Profit 615,000 690,000 725,250 762,338 801,362 842,428 885,648 6364 Operating Expenses65 Administrative & General 145,000 165,000 173,622 182,711 192,297 202,406 213,071 66 Marketing Expenses 75,000 80,000 84,180 88,587 93,235 98,136 103,307 67 Other Operating Expenses 10,000 12,000 12,627 13,288 13,985 14,720 15,496 68 Total Operating Expenses 230,000 257,000 270,429 284,587 299,517 315,263 331,874 6970 EBITDA 385,000 433,000 454,821 477,751 501,845 527,165 553,774

72 Depreciation 60,000 65,000 68,396 71,977 75,753 79,736 83,937

74 EBIT 325,000 368,000 386,425 405,773 426,092 447,429 469,837

76 Interest Expense 130,000 120,000 118,506 112,531 105,560 96,598 85,643

78 EBT 195,000 248,000 267,919 293,242 320,532 350,832 384,194

80 Taxes 78,000 99,200 107,167 117,297 128,213 140,333 153,678 8182 Net Income 117,000 148,800 160,751 175,945 192,319 210,499 230,516

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Results

Historical ProjectionsCash Flow Statement (000's) 2010 2011 2012 2013 2014 2015

86 Net Income 148,800 160,751 175,945 192,319 210,499 230,516 87 Plus Depreciation 65,000 68,396 71,977 75,753 79,736 83,937 88 Plus Deffered Taxes 5,000 888 937 988 1,042 1,099 89 Cash Income 218,800 230,036 248,859 269,060 291,277 315,552

91 Working Capital Activities92 Change in Accounts Receivable (15,000) 4,757 (2,892) (3,050) (3,217) (3,393) 93 Change in Inventory (5,000) 740 (1,862) (1,970) (2,085) (2,207) 94 Change in Prepaid Expenses 1,000 (470) (496) (523) (551) (582) 95 Change in Accounts Payable 5,000 2,090 2,204 2,324 2,451 2,585 96 Change in Accrued Income Taxes (2,000) 523 551 581 613 646 97 Change in Accrued Expenses (2,000) 418 441 465 490 517 98 Total Change in Working Capital (18,000) 8,057 (2,055) (2,173) (2,299) (2,433) 99

100 Operating Cash Flow (OCF) 200,800 238,093 246,804 266,887 288,977 313,119

102 Investment Activities103 Capital Expenditures (125,000) (131,532) (138,418) (145,679) (153,338) (161,417) 104 Investments (Change) (50,000) - - - - - 105 Total Financing Activities (175,000) (131,532) (138,418) (145,679) (153,338) (161,417) 106107 Cash Available Before Financing Activities 25,800 106,561 108,386 121,207 135,639 151,702

109 Financing Activities110 ST Debt Payments (10,000) (10,000) - - - - 111 LT Payments (20,000) (50,000) (70,000) (90,000) (110,000) (130,000) 112 Equity Contribution / (Dividend) 24,200 - - - - - 113 Total Financing Activities (5,800) (60,000) (70,000) (90,000) (110,000) (130,000)

115 Free Cash Flow 20,000 46,561 38,386 31,207 25,639 21,702

117 Beginning Cash 50,000 70,000 116,561 154,947 186,155 211,794

119 Ending Cash 70,000 116,561 154,947 186,155 211,794 233,496

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Results

Historical ProjectionsBalance Sheet (000's) 2009 2010 2011 2012 2013 2014 2015

Current Assets Cash 50,000 70,000 116,561 154,947 186,155 211,794 233,496 Accounts Receivable 45,000 60,000 55,243 58,135 61,185 64,402 67,795 Inventories 30,000 35,000 34,260 36,122 38,092 40,177 42,384 Prepaid Expenses 10,000 9,000 9,470 9,966 10,489 11,040 11,622 Total Current Assets 135,000 174,000 215,535 259,171 295,921 327,413 355,297

Property and Equipment Land 2,500,000 2,500,000 Building 450,000 550,000 Furniture & Equipment 50,000 75,000 Total Gross P&E 3,000,000 3,125,000 3,256,532 3,394,949 3,540,629 3,693,967 3,855,384 Less Accumulated Depreciaition (300,000) (365,000) (433,396) (505,374) (581,127) (660,863) (744,800) Net P&E 2,700,000 2,760,000 2,823,135 2,889,576 2,959,502 3,033,104 3,110,584

Long-Term Investments 200,000 250,000 250,000 250,000 250,000 250,000 250,000

Total Assets 3,035,000 3,184,000 3,288,670 3,398,747 3,505,423 3,610,517 3,715,881

Liabilities and Owners Equity

Current Liabilities Accounts Payable 35,000 40,000 42,090 44,294 46,617 49,068 51,653 Accrued Income Taxes 12,000 10,000 10,523 11,073 11,654 12,267 12,913 Accrued Expenses 10,000 8,000 8,418 8,859 9,323 9,814 10,331 Current Portion of Long Term Debt 20,000 10,000 - - - - - Total Current Liabilities 77,000 68,000 61,031 64,226 67,595 71,149 74,898

Long-Term Debt: 1,200,000 1,180,000 1,130,000 1,060,000 970,000 860,000 730,000

Deferred Income Taxes 12,000 17,000 17,888 18,825 19,812 20,854 21,953

Total Liabilties 1,289,000 1,265,000 1,208,919 1,143,051 1,057,408 952,003 826,850

Owners' Equity Common Stock 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Paid-in-Capital - 24,200 24,200 24,200 24,200 24,200 24,200 Retained Earnings 746,000 894,800 1,055,551 1,231,496 1,423,815 1,634,315 1,864,831 Total Owners' Equity 1,746,000 1,919,000 2,079,751 2,255,696 2,448,015 2,658,515 2,889,031

Total Liabilities & Owner's Equity 3,035,000 3,184,000 3,288,670 3,398,747 3,505,423 3,610,517 3,715,881

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Performance Measurements

Quick & Dirty Cash Flow 2012 % of Rev

192 Revenues 1,229,150 100.0%193 Less Cost of Revenue (466,813) -38.0%194 Less Operating Expenses (284,587) -23.2%195 EBITDA 477,751 38.9%

197 Less Interest (112,531) -9.2%198 Less Cash Taxes (116,360) -9.5%199 Less Working Capital (2,055) -0.2%200 Less Capex (138,418) -11.3%201 Cash Flow Available for Debt Service 108,386 8.8%

203 Less Principal Payments (70,000) -5.7%204 Free Cash Flow 38,386 3.1%

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Performance Measurements

Solvency Ratios – Managing Debt– Leverage Ratio / Debt Capacity– Coverage Ratio / Adequate coverage of Obligations

Profitability Ratios– Cost efficiencies / Cost Rationalization– Revenue Drivers / Acquisition Growth Rationale– Striving for Higher Margin Business

Activity Ratios– Inventory Management– Working Capital Management