Durable Results

Transform Your Business By

Simplifying Your Metrics

Presented by

Don Davis

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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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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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

Quick Primer on Cash Flow

Information Available in Your Monthly Financial Statements

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Cash FlowStatement

Financial Financial StatementsStatements

The Three PillarsThe Three Pillars

Financial Financial StatementsStatements

The Three PillarsThe Three Pillars

Earnings Statement

Balance Sheet

Sales

Cost of Sales

Gross Profit

Operating & Admin

EBIT

Interest & Taxes

Net Income

Net Income

Change in Working Capital

Cash from Operations

CAPEX

Cash from Financing Activities

Cash

CashARRental Equipment

Total Assets

AP & AccrualsDebt

Total Liabilities

Equity

Total Liabilities & Equity

Consolidated Statement of Operations In $ millions 2008 2007 2006

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 Margin 24% 24% 25%

Earnings per Share $3.17 $2.58 $2.16

P/E 8.3 13.0 17.6

EBITDA Multiple 4.9X 7.7X 10.8X

Consolidated Statement of Cash Flows

In $ millions 2008 2007 2006

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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Ratio Analysis

In $ millions 2008 2007 2006

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

AR 176.8 198.9 146.6

Debt 556.9 838 357.4

EBIT Margin 24% 24% 25%

EBITDA Margin 31% 31% 32%

Net Margin 14% 14% 15%

Sales Converted to Cash 26% 25% 23%

Cash to EBITDA 85% 81% 73%

Debt to EBITDA 1.1X 1.7X 0.8X

Days Sales Outstanding 39 45 38

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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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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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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?

Company Comparison and Ratio Analysis

As of December 31, 2008In $ millions Rotech

Sales 1,664.6 266.9 544.5 1,755.7

Cost of Sales 400.8 65.2 220.2 1,266.8

Bad Debt Write-offs 25.0 4.6 19.3 14.3

S G & A 326.9 19.8 300.8 398.3

EBIT 398.7 21.4 4.2 87.7

EBITDA 516.2 51.6 73.7 131.4

Net Income 237.2 0.5 (246.9) 38.6

Cash from Operations 439.1 35.4 68.4 76.4

AR 176.8 39.1 61.8 270.6

Debt 556.9 234.3 500.1 478.8

EBIT Margin 24% 8% 1% 5%

COS to Sales 24% 24% 40% 72%

Bad Debt to Sales 2% 2% 4% 1%

SG&A to Sales 20% 7% 55% 23%

Sales Converted to Cash 26% 13% 13% 4%

Debt to EBITDA 1.1X 4.5X 6.8X 3.6X

Days Sales Outstanding 38.8 days 53.5 days 41.4 days 56.3 days

Cash Flow

P&LKey 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

Balanc

e

Sheet

Gauging Sales by Employee

2008 2007

Under $50,000 3% 21%

$51K to $75K 2% 9%

$76K to $100K 8% 12%

$101K to $125K 16% 18%

$126K to $150K 19% 18%

$150+K 52% 21%

Per Steven Richards & Associates, Inc

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Major Players: Sales, PROFIT & Cash per Employee

At 12.31.08 Lincare AHOM Rotech Invacare

Employees

Per Employee $’s

Sales

EBITDA

Cash from Operations

DSO: a Matter of Opinion?

0%

5%

10%15%

20%

25%

30%

35%40%

<30days

30-45days

45-60days

60-75days

75-90days

>90days

200620072008

Per Steven Richards & Associates, Inc

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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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DSO:The Assorted Math

Lincare Example(in $ Millions)

4th Quarter 2009

Full Year 2009

Sales

Accounts Receivable

DSO

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DSO:The Assorted Math

Timing of Write-offs Matter

ABC XYZ

Sales 3,600 3,600

Bad Debt (Reported)

108 0

Bad Debt to Sales

3% 0%

Accounts Receivable

450 558

DSO 45 56

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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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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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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

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

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