x US Dollars, Millions Performance Drivers / Assumptions Year % Growth in revenues CoGS % of revenue SG&A % of revenue R&D % of revenue D&A as % Revenue Effective interest rate Taxes Days Sales Outstanding Days Inventory Outstanding Days Payable Outstanding CapEx as % Revenue Working capital (excluding cash) Debt repaid Dividend payout ratio Min Required cash balance Days in a year -2 51.7% 6.2% 4.1% 6.9% 8.6% 35.7% 14.9 9.9 12.0 7.5 Historical -1 Base Year 6.2% 9.7% 55.8% 58.6% 7.8% 10.1% 5.2% 8.3% 7.1% 10.1% 5.5% 5.0% 42.9% 40.0% 18.7 24.9 12.6 20.0 8.4 10.0 3% 2.37% 9.0 14.5 +1 $ +2 8% 58% 12% 8% 7% 6% 40% 25 20 10 7% 16 2 50% 5.00 360 8% 57% 12% 8% 7% 6% 40% 25 20 10 7% 17 2 50% Forecast +3 8% 56% 12% 8% 7% 6% 40% 25 20 10 7% 18 2 50% +4 +5 8% 55% 12% 8% 7% 6% 40% 25 20 10 7% 19 2 50% x 8% 54% 12% 8% 7% 6% 40% 25 20 10 7% 21 2 50% x Income Statements Year Revenues $ CoGS Gross profits SG&A R&D EBITDA Depreciation & amortization EBIT Interest expenses EBT Taxes Net income Historical -2 -1 Base Year 145.0 $ 154.0 $ 169.0 75.0 86.0 99.0 70.0 68.0 70.0 9.0 12.0 17.0 6.0 8.0 14.0 55.0 48.0 39.0 10.0 11.0 17.0 45.0 37.0 22.0 3.0 2.0 2.0 42.0 35.0 20.0 15.0 15.0 8.0 27.0 20.0 12.0 Forecast +1 +2 +3 +4 +5 $ 182.5 $ 197.1 $ 212.9 $ 229.9 $ 248.3 105.9 112.4 119.2 126.5 134.1 x 76.7 84.8 93.7 103.5 114.2 21.9 23.7 25.5 27.6 29.8 14.6 15.8 17.0 18.4 19.9 40.2 45.3 51.1 57.5 64.6 12.8 13.8 14.9 16.1 17.4 27.4 31.5 36.2 41.4 47.2 27.4 31.5 36.2 41.4 15.0 x 27.2 0.00 Balance Sheets Assets -2 Cash $ Accounts receivable $ Inventory Current assets 3.0 6.0 4.0 13.0 Historical -1 Base $ 2.0 $ 1.0 $ 8.0 $ 11.7 3.0 5.50 13.0 18.2 +1 $ $ 5.4 12.7 $ 5.88 23.9 47.2 x 0.00 Forecast +3 +2 13.7 $ 6.2 19.9 14.8 $ 6.6 21.4 +4 $ 16.0 $ 7.0 23.0 +5 36.5 17.2 7.4 61.2 Gross PPE Accumulated depreciation Net PPE Good will Other assets Total assets 35.0 12.0 23.0 32.0 16.0 84.0 40.0 14.0 26.0 40.0 18.0 97.0 44.0 18.0 26.0 40.0 18.0 102.2 56.8 30.8 26.0 40.0 18.0 107.9 70.6 44.6 26.0 40.0 18.0 85.5 59.5 26.0 40.0 18.0 101.6 75.6 26.0 40.0 18.0 119.0 93.0 26.0 40.0 18.0 145.2 Accounts payable Current liabilities 2.5 2.5 2.0 2.0 2.75 2.8 2.94 2.9 3.1 3.1 3.3 3.3 3.5 3.5 3.7 3.7 Long term debt Provisions and other liabilities Total liabilities Shareholders equity Common stock Retained earnings Total shareholders equity 35.0 10.0 47.5 36.5 12.0 50.5 40.0 15.0 57.8 44.0 11.9 55.9 44.0 44.0 44.0 44.0 4.7 48.7 25.0 11.5 36.5 30.0 16.5 46.5 30.0 14.5 44.5 30.0 22.0 52.0 Total liabilities & shareholders equity BALANCE CHECK 84.0 - 97.0 - 102.2 0.04 107.9 Liabilities x 145.2 x Cashflow Statements Year Operating Activities Net income Add depreciation & amortization -2 -1 Base Year +1 +2 Forecast +3 +4 +5 Rounding difference from IS Changes in operating assets/liabilities: Increase in accounts receivable Increase in inventory Increase in accounts payable Cash flow from operations Investing Activities Investments in PPE (CAPEX) Sale of PPE Investments in other assets Sale of other assets Cash flow from investment activities 26.7 30.2 34.1 38.4 43.1 - - - - - - - - - - Financing Activities Issue of equity Equity retirement or treasury buybacks Dividends paid New debt / borrowings Retirement or repayment of debt Cash flow from financing activities Net cash flow for the year Beginning cash balance Ending cash balance x x x Debt & Dividend Payment Schedule Year Cash balance before debt & dividends Debt drawn to meet min balance Debt repaid Dividends paid Ending cash balance 1.0 6.0 2.0 5.0 5.0 2.0 2.0 5.0 Forecast +3 5.0 2.0 2.0 5.0 +1 40.0 6.0 2.0 44.0 2.5 +2 44.0 2.0 2.0 44.0 2.6 Forecast +3 44.0 2.0 2.0 44.0 2.6 +1 $ 1.0 +2 +4 +5 5.0 2.0 2.0 5.0 5.0 2.0 2.0 5.0 +4 44.0 2.0 2.0 44.0 2.6 +5 44.0 2.0 2.0 44.0 2.6 x Debt Schedules Long term debt Opening balance Debt added Debt repaid Ending balance Interest Rounding difference from IS Notes on Forecasting Project Projecting Working Capital: Working capital figures in a balance sheet such as like accounts receivable, inventories and accounts payables will depend on the size of the operations. Accounts Receivable: We therefore linked to the revenues in terms of the days outstanding. We linked inventory and accounts payable to the cost of goods sold in terms of the days outstanding in the assumptions section. We use days receivables outstanding, days inventory outstanding, days payable outstanding assumptions to estimate each type of current asset and current liability to arrive at the working capital required to run the business. We estimate the components of working capital as follows: Accounts Receivable: We project accounts receivables' figures. We start with our assumption on the number of days sales outstanding (DSO). This is also referred to as days receivables outstanding and indicates how many days of sales is yet to be collected as cash from customers. This assumption is based on historical trends and management policy. We divide the annual revenue by the number of days in the year to gives us the average daily sales. We then multiply the average daily sales by the number of days sales outstanding to get the accounts receivable outstanding at the end of the year. Inventory: We project inventory. To arrive at the inventory levels at the end of each year, we start with our assumption on the number of days inventory outstanding (DIO). The days inventory outstanding indicates how many days of worth of costs is unfinished and in inventory at the end of the year. So we divide the CoGS by the number of days in the year which gives us the average daily CoGS used. We then multiply the average daily CoGS by our assumption on the days inventory outstanding to get the inventory held at the end of each year. Accounts Payable: We project accounts payables' figures. Here we start with our assumption on the number of days payables outstanding (DPO). The days payable outstanding indicates how many days worth of costs is yet to be paid to vendors and suppliers. We divide the CoGS by the number of days in the year which gives us a proxy for the average daily purchases. We multiply the average daily purchases by our assumption on the number of days payables outstanding to get the accounts payable outstanding at the end of the year. More helpful hints Income Statement Hints We assumed that revenues grow at 8% per year for the 5 year forecast period. We therefore grow the most recent year's revenue by the growth rate assumption for the first year to arrive at the revenue for the first year. Each subsequent year's revenue is arrived at by growing the previous year's revenue by the corresponding growth rate. We follow the income statement structure by first subtracting CoGS from revenues to arrive at the gross profits. We then subtract SG&A and R&D from the gross margin to arrive at the earnings before interest, tax, depreciation and amortization (EBITDA). From here we subtract D&A to arrive at earnings before interest and tax (EBIT). Balance Sheet Hints Accounts Receivable We start with our assumption on the number of days sales outstanding (DSO). This is also referred to as days receivables outstanding and indicates how many days of sales is yet to be collected as cash from customers. Inventory To arrive at the inventory levels at the end of each year, we start with our assumption on the number of days inventory outstanding (DIO). Accounts payable Here we start with our assumption on the number of days payables outstanding (DPO). The days payable outstanding indicates how many days worth of costs is yet to be paid to vendors and suppliers. Other Free Cash Flows We are ready to compute free cash flows once we have income statement, the working capital figures, debt schedules and the capital expenses estimates. We will use the following formula to computing free cash flows: Free cash flows = Net income + depreciation and amortization - investment in working capital - investment in capital expenditure Investments in working capital: To arrive at the next component of the free cash flow formula - the investments required in working capital each year, we first need to compute the working capital required in a business each year. This free cash flow is the free cash flow generated by the business after meeting its operating and capital needs. Debt & Dividends schedules What should the firm do if it has excess cash or free cash flow after meeting its operating and capital needs? The firm can either use this excess cash to pay back debt and/or pay dividends to its shareholders. We layout how much excess cash the firm has and if it can or should pay back debt and/or pay dividends to its shareholders in the debt and dividends schedule. We start computing the cash available at the end of the first year before debt and dividends are paid by adding the ending cash balance from the most recent prior year to this year's free cash flow. This is the cash available to run operations for the next year, pay down debt and/or pay dividends. At this point, we check if we have the minimum cash balance required to run the business and pay back mandatory debt payments. The ending cash balance is arrived at by adding the new debt drawn to the ending free cash flow before debt and/or dividends and subtracting any debt repayment and dividends paid