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SIBC Goldman Sachs : Stryker/Smith & Nephew

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SIBC Goldman Sachs : Stryker/Smith & Nephew

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SIBC Goldman Sachs : Stryker/Smith & Nephew

  1. 1. University of Notre Dame – Goldman Sachs Team Wolfpack Project: Stryker Team: James Ganas, Mark Grasberger, Nathaniel Marti, Mitchell Revich, Maria Rolon Leader: Stephen Schafer
  2. 2. SIBC The Team 2 Mark Grasberger Major: Finance Minor: Energy Studies Hometown: Lancaster, PA Mitchel Revich Major: Finance Minor: Entrepreneurship Hometown: Brooklyn, NY Nathaniel Marti Major: Finance and Medieval Studies Hometown: Cedar Rapids, IA James Ganas Major: Finance and Math Hometown: Palatine, IL Maria Rolon Major: Finance Hometown: Cochabamba, Bolivia Stephen Schafer Major: Finance and Economics Hometown: Edgewood, KY
  3. 3. SIBC Executive Summary 3 Proposed Merger Target Profile Synergies Stryker Overview Investment Thesis Stryker and Smith & Nephew Plc enter into a merger of equals benefitting both sides as their new company becomes a dominant player in the orthopedic market. Smith & Nephew is an English-based medical device company specifically focused on delivering advanced technologies in orthopedics. It is globally competitive with a presence in over 100 countries. There are an estimated $130 million dollars worth of synergies attributable to cost synergies. There would be lower R&D costs, facility costs, labor costs, and marketing and sales costs. Stryker is a medical technologies company focused on Orthopedics, MedSurg, and Neurotechnology & Spine. With $9.68 billion in revenue, stable growth YOY, and numerous strategic acquisitions, Stryker is considered a global market leader. Stryker’s acquisition of Smith & Nephew will not only establish a leading position in the hip and knee replacement market, but it will also allow Stryker to take advantage of potential growth in emerging markets.
  4. 4. SIBC Agenda 4 I. Macroeconomic Overview II. Industry Overview III. Company Overview: Stryker IV. Valuation: Stryker V. Target Overview: Smith & Nephew VI. Valuation: Smith & Nephew VII. Strategic Alternatives VIII. Appendix
  5. 5. SIBC Macroeconomic Overview 5 Global Currencies Against the USD 0.7 0.9 1.1 1.3 1.5 1.7 1.9 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 EURUSD GBPUSD CADUSD United States Increasing obesity levels among children Strengthening economic recovery Aging population Rate increase expected 3Q 2015 Europe Stronger policy towards easing Unemployment and low inflation still concerns Negative population growth EU raising funds to encourage investment Asia Pacific Increased public health care spending in China China has lowest growth target in 20+ years Weaker-than-expected growth in Japan Easy monetary policy Globe Slowing expansion in emerging markets Low oil prices supporting moderate GDP growth 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 0 10 20 30 40 50 60 2010 2012 2014 2016E 2018E 2020E Million % change US Population Over Age of 65 Slowing population growth Source: World Bank, U.S. Census Bureau, IMF Potential mkt reactions to U.S. QE withdrawal Increasing obesity levels among children Strengthening economic recovery Aging population Rate increase expected 3Q 2015 Stronger policy towards easing Unemployment and low inflation still concerns Negative population growth EU raising funds to encourage investment Increasing obesity levels among children Strengthening economic recovery Aging population Rate increase expected 3Q 2015
  6. 6. SIBC Agenda 6 I. Macroeconomic Overview II. Industry Overview III. Company Overview: Stryker IV. Valuation: Stryker V. Target Overview: Smith & Nephew VI. Valuation: Smith & Nephew VII. Strategic Alternatives VIII. Appendix
  7. 7. SIBC7 • Technological innovation will slow • Less favorable risk-reward profile for investors due to increasing development timelines and regulatory burdens “One Size Fits All” • Trend for having customized products for individual needs can make the use of generic equipment obsolete • Developing customized solutions takes time Regulations/Legal Compliance • Devices in other parts of the world are less regulated than they are in the US and Europe • Possible future repeal of Obama Care would bring down population that has access to healthcare Reduced Venture Capital Investment Industry Revenue $361B CAGR (2014-2019) 4.4% Annual Growth (09-14) 4.0% Annual Growth (14-19) 4.8% Federal Funding for Medicare & Medicaid (2014) $827.6B Federal Funding for Medicare and Medicaid (2016) $929.5B Developing Markets Aging Population • Adoption of more advanced medical device technology in China, Asia-Pac and Latin America • Demand for medical supplies in third world countries is increasing • Baby Boomers started reaching ages of 65+; proportional increase from 7 to 16% by 2050 • Amount of medical expenditures and physicians visits positively correlated with age Adoption of National Healthcare • Increase in the amount of people that now have access to Healthcare • Overall market increases • Introduction of new consumer segment Sources: IBIS World, Company Filings, Global Market for Medical Devices, 5th Ed. • Industry revenues are expected to continue to grow as developing markets continue to adopt medical device technology, but investor confidence is yet to recover due to increasing development timelines and demand for personal customized products which present the risk of changing the industry’s product mix 38% 28% 9% 8% 5% 7% 5% USA Europe Japan China Asia-Pacific Latin America ROW 4% 30% 29% 28% 9% Dental Equipment Orthopedic Devices and Hospital Supplies Electromedical Equipment Surgical and Medical Instruments Other Medical Device Industry Overview Key Statistics (2014) Potential Growth Factors Potential Risk Factors Sales By ProductSales By Geography
  8. 8. SIBC Global Medical Device Landscape 8 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 0 100 200 300 400 500 2013 2014 2015 2016 2017 2018 Global Medical Device Market Company Payment Johnson & Johnson $200 million Boston Scientific $73 million Covidien $60 million Stryker $55 million Hill-Rom $12 million • New excise taxes hinder R&D • FDA requires stricter guidelinesUnited States • Covered by EU • Devices approved more quickly to market • Release devices an average of 3 years sooner than US Europe • Thorough safety examinations by government • No special taxation on medical devices Japan • Significantly less costly than developed countries • Open market for advanced medical technologies China • Recent tax provisions will stunt US growth in coming years • Hamper startups by delaying profitability • Negligible global healthcare reform provides a market ripe for R&D elsewhere • In 2013-2014, key market players were active in acquiring companies • Reimbursement cuts in US and Europe will disrupt even the most innovative of device companies • Increasing preference for European product launches dues to speed of approval leading to lower costs Overview Medical Device Excise Tax Payment in US (2013) Regulation Severity by Country Sources: IBIS World, Global Market for Medical Devices, 5th Ed. • Favorable market and government regulatory conditions elsewhere are tempting companies to migrate their sales efforts to emerging markets.
  9. 9. SIBC Orthopedic Market 9 Market Cap: $283.78 B 2014 EBITDA: $24.99 B % Revenue: 25.4% Market Cap: $19.95 B 2014 EBITDA: $1.79 B % Revenue: 12.3% Market Cap: $76.67 B 2014 EBITDA: $5.70 B % Revenue: 8.6% •$35 Billion, expected to grow to $41 Billion by 2019 Global Market Cap •Expected CAGR of 4.9% (2013 – 2019) Growth •Sports Medicine, Trauma, orthopedic knee devices, orthopedic hip, and orthopedic consumables Main Areas of Development Favorable Secular Demographic Trends • The Orthopedics Market faces a stable and growing demand driven by an aging population. This includes a rise in osteoporosis-related fractures and musculoskeletal diagnoses. Key Market Participants 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Dislocations Infective Arthritis Back Problems Rheumatoid Arthritis Sprains/ Strains Osteoarthritis Osteoperosis Hip Fracture % of Musculoskeletal Diagnoses Which are for Individuals 65 or Older 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Japan Italy France Germany Australia UK Mexico USA Global Obesity Growth 1990 2000 2010 2020E Sources: IBIS World, Global Market for Medical Devices, 5th Ed.
  10. 10. SIBC10 Agenda I. Macroeconomic Overview II. Industry Overview III. Company Overview: Stryker IV. Valuation: Stryker V. Target Overview: Smith & Nephew VI. Valuation: Smith & Nephew VII. Strategic Alternatives VIII. Appendix
  11. 11. SIBC Company Overview 11 Overview: Stryker designs and manufactures medical technologies. Their products include implants used in joint replacement, surgical equipment and surgical navigation systems, patient handling and emergency medical equipment, neurosurgical and neurovascular devices, and other medical device products. Orthopedics Implants used in joint replacements and trauma/extremities surgeries MedSurg Instruments, Endoscopy, Medical, Sustainability, and other medical device products Neurotechnology and Spine Neurosurgical and neurovascular devices Founded: 1941 Headquarters: Kalamazoo, Michigan Employees: 22,000+ worldwide Key Executives: Kevin A. Lobo, Chairman, President, & CEO (2011) Announced Date Target Size ($mm) Jan-05-2015 CHG Hospital Beds, Inc. - Jul-07-2014 Stryker Corporation, Bone Morphogenetic Protein-7 - Jun-30-2014 Small Bone Innovations, Inc. $375 Apr-25-2014 CoAlign Innovations Inc. - Feb-19-2014 Pivot Medical, Inc. - Feb-18-2014 BERCHTOLD GmbH & Co. KG $184 Dec-31-2013 Patient Safety Technologies, Inc. $112.57 Oct-22-2013 ActiViews, Ltd. $20 Oct-02-2013 Pipeline Biomedical, Inc. $119.33 Sep-25-2013 MAKO Surgical Corp. $1,511.28 Sources: Company Filings, Capital IQ Three Main Sectors Revenue Breakdown by Segment Recent Acquisitions Key Statistics Revenue $9.68B EBITDA $2.60B EBITDA Margin 26.9% Market Cap $34.58B Enterprise Value $33.55B P/E 16.93x EPS $2.79 TEV/EBITDA 12.9x Long-term Debt $3.25B Neurotech & Spine 18% Orthopaedics 43% MedSurg 39% $9.7B 2014 Sales • Company-wide growth of 7.3% in 2014, including 5.8% organic growth • In continuation of its capital allocation strategy, SYK invested $916M in acquisitions, paid $462M in dividends, and used $100M for a share buyback
  12. 12. SIBC Segment Overviews and Growth 12 • $4.153B in 2014 sales (43% of total) • Technologies include robotic-arm assisted surgery support instruments • Competitors: Zimmer Holdings Inc., DePuy Synthes Company, Biomet Inc., Smith & Nephew • Recent Transactions: • Acquired assets of Small Bone Innovations Inc. to focus on small joint repair • Acquired MAKO in September 2013 to advance the growth of robotic arm assisted surgery • Implants used in hip and knee replacements, trauma & extremities, foot & ankle, bone cement, and other reconstructions. • Surgical instruments, endoscopy, emergency medical equipment as well as various remanufactured medical devices. • Neurovascular and interventional spinal products, biosurgery products, and equipment for brain and skull surgeries • $3.781B in 2014 sales (39% of total) • Surgical instruments and endoscopy make up majority or revenue • Instrument competitors: Zimmer, Medtronic PLC., ConMed Linvatec, Inc. • Endoscopy competitors: Smith & Nephew Endoscopy, ConMed Linvatec, Inc., Arthrex, Inc., Karl Storz GmbH & Co. and Olympus Optical Co. Ltd. • Recent Transactions: • Acquired CHG Hospital Beds, Inc. which manufactures and markets low-height hospital beds and accessories in Canada • Acquired Berchtold Holding, AG which expands the global endoscopy exposure • $1.741B in 2014 sales (18% of total) • Recently received clearance to market proprietary Stentriever Technology, as well as innovative clot remover Trevo ProVEU Retriever • Makes up only about 18% of revenue stream • Neurotechnology competitors: Medtronic, Covidien, Johnson & Johnson • Spine competitors: Medtronic, Sofamor Danek, Inc., DePuy Synthes, Nuvasive, Inc., Globus Medical, Inc. Orthopedic Implants MedSurg Equipment Neurotechnology & Spine Growth by Segment • Stryker’s growth is primarily dependent on a diverse product offering across three main sectors. Stryker’s revenue has increased in each of these categories over the last three years. $- $1,000 $2,000 $3,000 $4,000 $5,000 2012 2013 2014 Orthopaedics MedSurg Neurotechnology and Spine Sources: Company Filings, Capital IQ
  13. 13. SIBC Historical Stock Chart 13 -40.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 3/29/2010 9/29/2010 3/29/2011 9/29/2011 3/29/2012 9/29/2012 3/29/2013 9/29/2013 3/29/2014 9/29/2014 SYK IHI S&P 500 12/30/13: FDA clearance received for Neptune 2 Waste Mgt System, estimated to increase revenue growth by 70 bp in upcoming year. 10/19/10: Acquisition of Boston Scientific (BSX) neurovascular business, with proceeds to be invested in expanding portfolio. 2/9/12: CEO Stephen MacMillan resigns due to family reasons. His exit is “not good news” reports Collins Stewart. 3/3/15: Board of Directors authorizes new $2B share repurchase, bringing total buyback amount to $2.583B. 9/25/13: Announces $1.65B acquisition of Mako Surgical (MAKO) for $30/share. SYK suffers in Aug 2011 market fall, a result of Europeans sovereign debt crises and a wave of US credit downgrades. • Steady revenue growth, a string of strategic acquisitions, and a general uptrend in the medical device market have contributed to Stryker’s steady returns over recent years. Source: Capital IQ, Seeking Alpha, Morningstar Direct
  14. 14. SIBC14 Agenda I. Macroeconomic Overview II. Industry Overview III. Company Overview: Stryker IV. Valuation: Stryker V. Target Overview: Smith & Nephew VI. Valuation: Smith & Nephew VII. Strategic Alternatives VIII. Appendix
  15. 15. SIBC Comparable Companies 15 Best Comparable Companies Medtronic and Abbott Laboratories • Focus on medical device development and manufacturing • Aim to serve similar market with product lines • Similar price range of products Implied Valuation EV/Revenue: 3.4x-3.8x (2015) 3.1x-3.5x (2016) EV/EBITDA: 13.0x-16.2x (2015) 11.3x-13.2 (2016) • Stryker falls below average on EBITDA and P/E multiples as a result of a lack of continuity in its revenue segments Stryker Corporation Trading Comparables Trading Multiples Price on EV/Revenue EV/EBITDA P/E Ratio Company 4/15/2015 Market Cap Enterprise Value LTM 2015E 2016E LTM 2015E 2016E LTM 2015E 2016E Medtronic PLC $77.91 $110,227.0 $108,019.9 6.2x 3.8x 3.8x 18.9x 19.2x 10.9x 25.6x 18.4x 18.6x Abbott Laboratories $46.83 $70,589.0 $70,590.0 3.7x 3.5x 3.3x 16.8x 14.6x 13.4x 41.8x 21.6x 19.7x Boston Scientific, Inc $18.04 $23,723.0 $27,549.6 3.8x 3.7x 3.5x 16.4x 14.4x 13.3x 22.4x 20.0x 17.6x Zimmer Holdings, Inc $115.62 $19,963.0 $19,975.7 4.2x 4.3x 4.1x 11.1x 10.7x 10.0x 28.0x 18.4x 17.2x St. Jude Medical Inc $68.55 $18,513.0 $18,437.6 3.7x 3.8x 3.6x 11.9x 12.2x 11.4x 19.0x 16.6x 15.1x Intuitive Surgical Inc $533.71 $18,119.0 $17,084.0 8.1x 7.3x 6.6x 24.4x 18.0x 16.3x 44.8x 28.6x 25.3x Smith and Nephew PLC $34.47 $16,300.0 $16,763.0 3.8x 3.5x 3.4x 13.4x 11.8x 10.9x 30.5x 19.8x 17.9x Edwards Lifesciences Corp $141.28 $15,494.0 $14,654.0 6.3x 6.1x 7.7x 26.0x 21.9x 20.1x 19.2x 34.1x 30.7x Varian Medical Systems $94.58 $9,380.0 $8,934.0 2.9x 2.8x 2.6x 13.6x 13.1x 12.1x 24.5x 21.8x 19.5x Mean 119.7 33,590 33,556 4.7x 4.3x 4.3x 16.9x 15.1x 13.2x 28.4x 22.2x 20.2x Median 77.4 18,513 18,438 3.8x 3.8x 3.6x 16.4x 14.4x 12.1x 25.6x 20.0x 18.6x Min 17.0 9,380 8,934 2.9x 2.8x 2.6x 11.1x 10.7x 10.0x 19.0x 16.6x 15.1x Max 497.3 110,227 108,020 8.1x 7.3x 7.7x 26.0x 21.9x 20.1x 44.8x 34.1x 30.7x Stryker 92.29 37,078.10 34,051 3.5x 3.41x 3.24x 13.1x 12.94x 12.06x 69.1x 18.51x 16.85x Source: Capital IQ
  16. 16. SIBC Precedent Transactions 16 Implied Enterprise Implied Implied Implied Date Announced Target/Issuer Buyer Transaction Status Target Description Transaction Value EV/EBITDA EV/EBIT Premium 10/5/2014 CareFusion Corporation The VanGuard Group, Inc. Closed Sells medical devices that reduce medication errors and prevent health care- associated infections $12,384.40 13.2x 17.7x 25.6% 4/24/2014 Biomet Incorporated Zimmer Holdings Pending Medical device manufacturer that sells reconstructive products for orthopedic surgery $13,350.00 14.9x 33.1x NV 6/15/2014 Covidien Ltd. Medtronic plc. Closed Manufactures and sells a diverse range of medical device & supply products to support surgery $46,235.92 17.1x 21.7x 29.1% 2/3/2014 ArthroCare Corporation Smith & Nephew plc. Closed Sells medical devices focused on soft tissue repair and ablation technology in joints and spines $1,181.82 23.9x 34.8x 5.6% 4/27/2011 Synthes Inc Johnson & Johnson Closed Medical device manufacturer that sells orthopedic trauma devices for internal and external fixation $18,040.18 11.4x 14.1x 11.3% Premium Implied 20% • Recent previous transactions suggest an implied premium of around 20% is necessary to make a realistic offer for SYK’s equity stake Source: Capital IQ, Bloomberg
  17. 17. SIBC Discounted Cash Flow Model Cont’d Source: CapIQ, Bloomberg, Company Filings Assumptions Market Risk Premium (Rm - Rf) 5.5% Multiplied by: SYK Beta 1.03 Adjusted Market Risk Premium 5.7% Add: Risk-Free Rate of Return (Rf)(1) 1.9% Cost of Equity 7.6% Multiply by: Subject Company E/(D+E) 90.0% Cost of Equity Portion 6.8% Subject Company Assumed Cost of Debt 3.9% Subject Company Tax Rate 19.8% After-tax Cost of Debt 3.1% Multiply by: Subject Company D/(D+E) 10.0% Weighted Average Cost of Debt Portion 0.3% WACC 7.1% Enterprise Value Cumulative Present Value of FCF $6,916 Terminal Value Terminal Year EBITDA (2019E) $3,033 Exit Multiple 13 Terminal Value (Exit Multiple) $39,424 Terminal Value (Perpetuity of 1.5%) $32,834 Average Terminal Value $36,129 Present Value of Terminal Value $26,483 % of Enterprise Value 79% Enterprise Value $33,398 Exit Multiple $89.93 12 12.5 13 13.5 14 5.6% $ 104.13 $ 105.68 $ 107.23 $ 108.77 $ 110.32 WACC 6.1% $ 97.37 $ 98.88 $ 100.40 $ 101.91 $ 103.43 6.6% $ 91.77 $ 93.25 $ 94.73 $ 96.22 $ 97.70 7.1% $ 87.03 $ 88.48 $ 89.93 $ 91.38 $ 92.83 7.6% $ 82.94 $ 84.36 $ 85.78 $ 87.21 $ 88.63 8.1% $ 79.37 $ 80.76 $ 82.15 $ 83.54 $ 84.94 8.6% $ 76.20 $ 77.56 $ 78.93 $ 80.29 $ 81.65 Implied Equity and Share Price Enterprise Value $33,398 Less: Total Debt 3973 Less: Preferred Securities 0 Less: Noncontrolling Interest 0 Plus: Cash and Cash Equivalents 5000 Implied Equity Value $34,425 Fully Diluted Share Outstanding 382.8 Implied Share Price $89.93 Current Overvaluation 3.10% Present Value of Free Cash Flow 2015 2016 2017 2018 2019 1360 1419 1426 1371 1339 17
  18. 18. SIBC Valuation Football Field $84 $106 $79 $84 $88 $91 $76 $92 $116 $90 $99 $99 $101 $98 $60 $70 $80 $90 $100 $110 $120 $130 DCF Output 20% Implied Premium 11.3x-13.2x 2016 EV/EBITDA 13.0x-16.2x 2015 EV/EBITDA 3.1x-3.5x 2016 EV/Revenue 3.4x-3.8x 2015 EV/Revenue 52 Week Trading Range DCF Valuation Precedent Transaction Comparable Companies Implied Valuation: $84.92 – $93.32Current Price: $92.29 Trading History 18
  19. 19. SIBC19 Agenda I. Macroeconomic Overview II. Industry Overview III. Company Overview: Stryker IV. Valuation: Stryker V. Target Overview: Smith & Nephew VI. Valuation: Smith & Nephew VII. Strategic Alternatives VIII. Appendix
  20. 20. SIBC 25 27 29 31 33 35 37 39 41 Apr-14 Jul-14 Oct-14 Jan-15 Target: Smith & Nephew Plc Management A Focus on Orthopaedics • Advanced Surgical Devices (ASD) • Orthopaedic Reconstruction, Trauma & Extremities, Sports Medicine Joint Repair, Arthroscopy, Other ASD • Advanced Wound Management (AWM) • Advanced Wound Care, Advanced Wound Devices, and Advanced Wound Bioactives • Smith & Nephew (SNN) is a global orthopedics company that develops surgical products to meet needs in advanced medical devices and advanced wound management markets through calculated R&D and strategic acquisitions. Key Statistics (2014) Share Price (4/10/15) $34.98 Market Cap (4/12/15) $15.63B Enterprise Value (4/12/15) $17.25B Revenue $4.62B Adjusted EBITDA $1.31B EBITDA Margin 32.15% Adjusted EPS $1.11 Net Debt $1.61B 52 Week Range: $28.87 - $40.38 Median Share Price: $34.18 SNN $34.98 Roberto Quarta, 65 Chairman of the Board – 1 year Olivier Bohuon, 56 CEO – 4 years Julie Brown, 52 CFO – 2 years Gordon Howe, 51 Pres. of Global Operations – 8 years • Trades as SN on the London Stock Exchange (SNN on NYSE) • Founded in Hull, UK in 1856. Headquartered in London, UK • Over 14,000 employees worldwide 20Source: Capital IQ, Bloomberg, Company Filings
  21. 21. SIBC Source: Company Filings SNN: Product Developments and Industry Presence Strategic Priorities • Smith & Nephew’s product development and sales efforts aim to grow market share within four primary sectors through responding to industry needs and focusing on innovation, efficiencies, and strategic operational expansion. S&N 11% Stryker 19% Zimmer 23% DePuy Synthes 21% Other 14% Biomet 12% Hip & Knee Implants S&N 10% Stryker 22% Biomet 6% Zimmer 6% Other 9% DePuy Synthes 47% Trauma &Extremities S&N 20% MoInlycke 12% Convatec 8% Other 38% KCI 22% Advanced Wound Management S&N 24% Stryker 11% DePuy Mitek 15% Arthrex 29% Linvatec 5% Other 16% Sports Medicine • Segment Size: $14B • 2014 Growth: +3% • Segment Size: $4.9B • 2014 Growth: +7% • Segment Size: $7B • 2014 Growth: +4% • Segment Size: $4.6B • 2014 Growth: +6% • Established Markets – expand existing positions through innovation and increased efficiencies • Emerging & International Markets – build strong customer relationships and introduce targeted products to earn emerging and international market share • Organic Growth through Innovation – invest in R&D to remain on the front end of clinical and cost boundaries • Improve Operating Model – pursue maximum efficiency by streamlining operations and management, removing duplications, and commercializing globally • Supplement Growth with Acquisitions – grow by acquiring technologies, manufacturing, and distribution in complementary or higher growth segments Selected Initiatives • Capitalize on forecasted growth in emerging markets by developing products like PICO – a portable, single use wound healing product in the middle economic tier. (Sep 2014) • Optimize global manufacturing footprint by expanding operations in Suzhou, China, including a construction effort that doubled production capacity to over 100 million wound dressings per year. (June 2014) PICO: a single use Negative Pressure Wound Therapy Device • Provide hospitals with added value and efficiency through Syncera, an orthopedic supply chain model that streamlines inventory management, training, and product sourcing for hip, knee, and other joint procedures. 21
  22. 22. SIBCSource: Company Filings Potential Benefits and Risks Core Competencies Strong Partnership Agreements Product Development Strategic Acquisitions Geographic Expansion Innovative R&D Pipeline Leader in Orthopedics Risks Opportunities • Smith & Nephew’s opportunities and competencies outweigh the potential risks presented within the acquisition. • Unsuccessful product releases or unrealized synergies • Transitional risk and potential agency issues • Market risks and challenging competitive environment • Regulatory restrictions • Exposure to faulty product design and subsequent recalls, write-downs, or litigation OpportunitiesRisks • Strengthened market share in orthopedic restructuring • High growth opportunities in Advanced Wound Management and Sports Medicine • Geographic expansion into European and emerging markets • Source of innovation with a track record of contributing significant technologies • Jump in share price for current stockholders • Elimination of current vulnerability that is due to relatively small size • Improved distribution channels • Greater resources for innovative R&D process • Recognition of value, fueled by strong positioning and manageable COGS • Change of management or switch of business model presents risks • Increased regulation and/or reduced flexibility in product development Including strategic partnership with Osiris Therapeutics Extensive resources for R&D and marketing Available capital and proven history of success Unique presence in Europe and emerging markets Impressive history of medical technology contributions Competitive supply and distribution presence 22
  23. 23. SIBCSource: Company Filings Strategic Rationale Cost Synergies R&D and Marketing Emerging Markets $130 Million in Total Estimated Savings • The acquisition creates value through cost synergies that include reductions in R&D and marketing, along with increased emerging market exposure Merger Timeline June 2015 FY 2016 • Begin the year as “New” Stryker • Initiate cost savings and other synergies • Fully realize all synergies • Complete integration with few signs of merger FY 2017Summer 2015 December 2015 • Initial Offer and discussions with Smith & Nephew • Begin looking at feasibility (i.e. transaction details, regulatory hurdles) • Receive Shareholder approvals • Complete due diligence and adequate evaluation of partner company • Execute share exchange and amendments to existing debentures • Begin trading as one company • With Smith & Nephew, Stryker will hold almost one-third of the hip market and over 40% of the knee market • Optimized efficiency and added local and emerging market exposure will allow for more competitive positioning • Smith & Nephew’s track record of innovation and accelerated product development pipeline will be enhanced by Stryker’s extensive resources in manufacturing and distribution • Smith and Nephew’s international position will increase exposure, especially in emerging markets • Currently there is a shift in orthopedic growth potential away from developed markets $0 $20 $40 $60 $80 $100 $120 $140 2015E 2016E 2017Emm 23
  24. 24. SIBC24 Agenda I. Macroeconomic Overview II. Industry Overview III. Company Overview: Stryker IV. Valuation: Stryker V. Target Overview: Smith & Nephew VI. Valuation: Smith & Nephew VII. Strategic Alternatives VIII. Appendix
  25. 25. SIBC Comparable Companies 25 Smith & Nephew Trading Comparables Trading Multiples Price on EV/Revenue EV/EBITDA P/E Ratio Company 4/15/2015 Market Cap Enterprise Value LTM 2015E 2016E LTM 2015E 2016E LTM 2015E 2016E Medtronic PLC $77.91 $110,227.0 $108,019.9 6.2x 3.8x 3.8x 18.9x 19.2x 10.9x 25.6x 18.4x 18.6x Abbott Laboratories $46.83 $70,589.0 $70,590.0 3.7x 3.5x 3.3x 16.8x 14.6x 13.4x 41.8x 21.6x 19.7x Stryker $92.29 $37,078.1 $34,051.1 3.5x 3.4x 3.2x 13.1x 12.9x 12.1x 69.1x 18.5x 16.9x Boston Scientific, Inc $115.62 $23,723.0 $27,549.6 3.8x 3.7x 3.5x 16.4x 14.4x 13.3x 22.4x 20.0x 17.6x Zimmer Holdings, Inc $115.62 $19,963.0 $19,975.7 4.2x 4.3x 4.1x 11.1x 10.7x 10.0x 28.0x 18.4x 17.2x St. Jude Medical Inc $65.55 $18,513.0 $18,437.6 3.7x 3.8x 3.6x 11.9x 12.2x 11.4x 19.0x 16.6x 15.1x Coloplast A/S $75.79 $17,322.1 $17,284.6 9.6x 8.6x 7.9x 26.2x 23.0x 20.7x 34.7x 34.7x 29.0x Edwards Lifesciences Corp $141.58 $15,494.0 $14,654.0 6.3x 6.1x 7.7x 26.0x 21.9x 20.1x 19.2x 34.1x 30.7x Varian Medical Systems $94.58 $9,380.0 $8,934.0 2.9x 2.8x 2.6x 13.6x 13.1x 12.1x 24.5x 21.8x 19.5x Mean 91.8 35,810 35,500 5.1x 4.6x 4.6x 17.6x 16.1x 14.0x 26.9x 23.2x 20.9x Median 92.3 19,963 19,976 4.0x 3.8x 3.7x 16.6x 14.5x 12.7x 25.1x 20.8x 19.0x Min 46.8 9,380 8,934 2.9x 2.8x 2.6x 11.1x 10.7x 10.0x 19.0x 16.6x 15.1x Max 141.6 110,227 108,020 9.6x 8.6x 7.9x 26.2x 23.0x 20.7x 41.8x 34.7x 30.7x Smith and Nephew PLC $34.5 $16,300.0 $16,763.0 3.8x 3.5x 3.4x 13.4x 11.8x 10.9x 30.5x 19.8x 17.9x Coloplast A/S and Abbot Laboratories • Focus on medical device development and manufacturing • Coloplast incorporated in Denmark • Similar business strategies Implied Valuation EV/Revenue: 3.7x-4.0x (2015) 3.8x-4.1x (2016) EV/EBITDA: 14.5x-16.1x (2015) 12.7x-14.0 (2016) Source: Capital IQ Implied Valuation • Given the similarities between Stryker and Smith & Nephew, the valuation implied is relatively similar to the past analysis
  26. 26. SIBC SNN - Discounted Cash Flow Model Cont. • Expect strong ability to maintain current revenue through FY2019 due to easily manageable cost of goods sold Source: Capital IQ, Bloomberg, Company Filings 26 Assumptions Market Risk Premium (Rm - Rf) 5.5% Multiplied by: SNN Beta 1.07 Adjusted Market Risk Premium 5.9% Add: Risk-Free Rate of Return (Rf)(1) 1.9% Cost of Equity 7.8% Multiply by: Subject Company E/(D+E) 93.1% Cost of Equity Portion 7.3% Subject Company Assumed Cost of Debt 4.0% Subject Company Tax Rate 33.7% After-tax Cost of Debt 2.7% Multiply by: Subject Company D/(D+E) 6.9% Weighted Average Cost of Debt Portion 0.2% WACC 7.5% Enterprise Value Cumulative Present Value of FCF $5,285 Terminal Value Terminal Year EBITDA (2019E) $1,174 Exit Multiple 13 Terminal Value (Exit Multiple) $15,261 Terminal Value (Perpetuity of 1.5%) $22,940 Average Terminal Value $19,101 Present Value of Terminal Value $13,820 % of Enterprise Value 72% Enterprise Value $19,105 Implied Equity and Share Price Enterprise Value $19,105 Less: Total Debt 1142 Less: Preferred Securities 0 Less: Noncontrolling Interst 0 Plus: Cash and Cash Equivalents 93 Implied Equity Value $18,056 Fully Diluted Share Outstanding 447 Implied Share Price $40.39 Current Overvaluation (Undervaluation) -14.8% Present Value of Free Cash Flow 2015 2016 2017 2018 2019 1121 1128 1059 1004 974 Exit Multiple 40 12 12.5 13 13.5 14 5.96% $ 48.44 $ 48.95 $ 49.46 $ 49.96 $ 50.47 6.46% $ 44.89 $ 45.38 $ 45.88 $ 46.37 $ 46.87 WACC 6.96% $ 41.93 $ 42.42 $ 42.90 $ 43.39 $ 43.87 7.46% $ 39.43 $ 39.90 $ 40.38 $ 40.85 $ 41.33 7.96% $ 37.27 $ 37.74 $ 38.20 $ 38.67 $ 39.13 8.46% $ 35.39 $ 35.84 $ 36.30 $ 36.75 $ 37.21 8.96% $ 33.72 $ 34.17 $ 34.62 $ 35.06 $ 35.51
  27. 27. SIBC Valuation Football Field $37 $39 $36 $39 $42 $38 $29 $42 $45 $40 $44 $48 $45 $40 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 DCF Output 20% Implied Premium 12.7x-14x 2016 EV/EBITDA 14.5x-16.1x 2015 EV/EBITDA 3.8x-4.1x 2016 EV/Revenue 3.7x-4.0x 2015 EV/Revenue 52 Week Trading Range DCF Valuation Precedent Transaction Comparable Companies Implied Valuation: $38.00 - $42.36Current Price: $34.52 Trading History 27
  28. 28. SIBC Accretion/Dilution 28 Stryker Company Statistics Share Price $ 92.72 Fully Diluted Shares Outstanding 382.8 Maximum Debt Level (xEBITDA) 5.0x Current Debt Level (xEBITDA) 1.6x Maximum Debt $ 12,665.44 Current Long Term Debt $ 3,973.00 Potential New Debt $ 8,692.44 10-Year Note Default Spread (bps) 200 10-Year Treasury Yield 1.90% Term Loan B Cost of Debt 3.90% Current Cash & Equivalents $ 5,000.00 Necessary Cash & Equivalents $ 2,000.00 Available Cash & Equivalents $ 3,000.00 Smith & Nephew Company Statistics Share Price $ 34.41 Fully Diluted Shares Outstanding (M) 447 Deal Statistics Form of Transaction Stock Purchase Premium Offered 20% Offer Value For Equity $ 18,457.52 Repayment of SNN Debt $ 1,142.00 SNN Cash Available $ 93.00 Total Needed Financing $ 19,506.52 Cash Portion of Deal $ 11,692.44 Stock Portion of Deal $ 7,814.09 New SYK Shares Issued 84.28 Fully Diluted SYK Shares Outstanding 467.08 SNN % Ownership of Combined Firm 18.04% Merged Firm Debt/EBITDA 3.37 Recomputed Stryker WACC 6.58% Target Cost Synergies (% of COGS) 10% First Year Synergy Realization 20% Second Year Synergy Realization 50% **Transaction Expenses are not included in Accretion/Dilution because they are nonrecurring items.** Source: Capital IQ, Bloomberg, Company Filings
  29. 29. SIBC Accretion/Dilution 29 Combined Income Statements Millions FY2015 FY2016 FY2017 Total Revenue $ 14,720.92 $ 15,500.13 $ 16,239.93 % growth 5.3% 4.8% Gross Profit $ 10,124.17 $ 10,694.87 $ 11,209.99 annual growth 5.6% 4.8% margin % 68.8% 69.0% 69.0% EBITDA $ 3,530.40 $ 3,757.93 $ 4,008.97 annual growth 6.4% 6.7% margin % 24.0% 24.2% 24.7% Less: Depreciation and Amortization $ 382.75 $ 400.28 $ 418.98 % of Revenue 2.6% 2.6% 2.6% EBIT $ 3,147.66 $ 3,357.65 $ 3,590.00 annual growth 6.7% 6.9% margin % 21.4% 21.7% 22.1% Pretax Income $ 3,019.35 $ 3,515.92 $ 3,909.11 Less: Income Tax $ 777.87 $ 803.73 $ 903.48 25.76% 22.86% 23.11% Net Income $ 2,241.48 $ 2,712.19 $ 3,005.63 Source: Capital IQ, Bloomberg, Company Filings
  30. 30. SIBC Accretion/Dilution 30 Adjustments to Net Income Pre-Tax Impact of new debt interest expense $ 339.01 $ 302.60 $ 262.48 Pre-Tax impact of additional depreciation & amortization $ 100.00 $ 100.00 $ 100.00 Pre-Tax impact of synergies $ 24.11 $ 62.72 $ 130.38 Pre-Tax savings from debt retirement $ 45.68 $ 45.68 $ 45.68 Pre-Tax opportunity cost of cash used $ 117.00 $ 117.00 $ 117.00 Total Pre-Tax Impact $ (486.21) $ (411.20) $ (303.42) After-Tax Impact $ (360.95) $ (317.20) $ (233.29) Proforma Fully Diluted Shares 467.08 467.08 467.08 Proforma Net Income $ 1,880.53 $ 2,395.00 $ 2,772.34 Proforma EPS $ 4.03 $ 5.13 $ 5.94 Stryker Stand-alone EPS $ 4.88 $ 5.31 $ 5.73 Accretion/Dilution -17% -3% 4% Source: Capital IQ, Bloomberg, Company Filings • While Stryker’s acquisition of Smith & Nephew will initially be dilutive, a further outlook will show 70% of its cost synergies realized in the first two years that result in it becoming accretive in the third year.
  31. 31. SIBC I. Macroeconomic Overview II. Industry Overview III. Company Overview: Stryker IV. Valuation: Stryker V. Target Overview: Smith & Nephew VI. Valuation: Smith & Nephew VII. Strategic Alternatives VIII. Appendix 31 Agenda
  32. 32. SIBC Issuance and Buybacks 32 Pros: • No repayment (including interest payments) • Accessible source of funds • Flexibility in use of capital Cons: • Dilution of current stockholders’ stake • Potential conflicts of interests with shareholders Pros: • No dilution of equity or EPS • SYK has A+ credit rating • Low risk of default on debt Cons: • Coupon payments cut into cash flows and could hurt profitability • Trade at a discount to firms with lower debt • Possibly restrictive debt covenants Pros: • Reduce dilution and return value to SYK • Potential tax benefits • Enhance control over company Cons: • Increases risk of default • Current high cost of equity • Possibly restrictive covenants In order for Stryker to continue to grow its revenue and expand its brand, investment is needed in physical capital and the adoption of technological improvement. Invest in organic growth through new product development Expand corporate infrastructure internationally, focusing on European and Asian markets Defend market share through acquisitions of new companies and technology Issuance of Equity Issuance of Debt Share Buyback Opportunities to Invest Capital for GrowthGrowth Strategy •Commit high amounts of capital to internal R&D and strategic growth Expand market share •Acquisition will bolster innovation and contribute valuable operational efficiencies Acquisitions •A focus on international expansion will allow Stryker to improve brand awareness Geographic Expansion Source: Company filings, S & P
  33. 33. SIBC Recent Equity Issues 33 Business Summary Transaction Features Issue Details Offer Date PPS Amount (mm) Market Receptiveness Envision Healthcare Holdings, Inc (NYSE: EVHC) • Offers an array of healthcare services to patients, hospitals, and healthcare systems • 27.5 million shares offered • Holding company that operates a diversified portfolio of niche healthcare companies Secondary Offering 07/10/14 $34.00 $935.0 • Opened at $34.39, closed at $34.61 • Stock dropped over 8% starting 06/25/14 in anticipation of the offering PRA Health Science (NASDAQ: PRAH) • Leading pharmaceutical and biotechnology company • Offered 17 million shares at an initial price of $18 • Backed by private equity firm KKR who decided not to sell their stake IPO 11/13/14 $18.00 $126.0 • Price rose to $18.60 by end of opening day • Investors believed it was underpriced • Stock rose considerably to a current price of $28.71 Avinger, Inc (NASDAQ: AVGR) • Bay Area based medical device company focused on the manufacturing of life science equipment • Specialize in catheters and precision vascular equipment • Listed 5 million shares with a potential for another .75 million IPO 01/30/15 $13.00 $65.0 • Priced at middle range of $12 - $14 • Closed at $13.50 on opening day, but dropped consistently over the following weeks • Price currently at $10.98 Abbott Laboratories (NYSE: ABT) • Pharmaceuticals and health care products company • Board of directors authorized new stock repurchase program of up to $3 billion • Has returned $35 billion in cash to shareholders since 2004 in the form of dividends and share repurchases Share Repurchases 09/11/14 $42.55 $3,000.0 • Price of Abbot shares remained steady, with only a $1 increase over the week of the announcement • Abbot maintained a strong rating among investors, but experienced only industry average growth since its IPO • In general, recent initial public offerings and secondary equity offerings have gained modest to low investor confidence Sources: The Motley Fool, Capital IQ, Market Watch, Yahoo Finance
  34. 34. SIBC Stryker: Comparable Companies – Debt Analysis 34 Stryker Corporation Trading Comparables Trading Multiples Price on Credit Statistics Operating Statistics Company 4/15/2015 Enterprise Value Total Debt/Equity Net Debt/EBITDA EBITDA/Interest Expense EBITDA Margin Unlevered Free Cash Flow Margin 1 yr Sales Growth Credit Rating (S&P) Medtronic PLC $77.91 $108,019.9 61.4% NM 12.6x 33.4% 25.2% 2.0% A Abbott Laboratories $46.83 $70,590.0 36.3% 0.8x 29.3x 21.7% 12.8% 3.0% A+ Boston Scientific, Inc $18.04 $27,549.6 66.0% 2.2x 7.8x 22.9% 21.4% 3.4% BBB- Zimmer Holdings, Inc $115.62 $19,975.7 22.8% 0.2x 28.3x 38.3% 15.1% 1.1% A- St. Jude Medical Inc $68.55 $18,437.6 91.1% 1.4x 20.7x 31.3% 16.2% 2.2% A Smith and Nephew PLC $34.47 $16,763.0 42.2% 1.2x 37.5x 28.5% 11.2% 6.1% - Edwards Lifesciences Corp $141.28 $14,654.0 27.3% NM 32.8x 24.3% 15.3% 13.6% BBB- Varian Medical Systems $94.58 $8,934.0 32.4% NM 90.0x 21.4% 13.1% 3.4% - Mean 72.5 35,615 47% 1.2x 32.4x 28% 16% 4% - Median 71.6 19,207 39% 1.2x 28.8x 26% 15% 3% - Min 17.0 8,934 23% 0.2x 7.8x 21% 11% 1% - Max 143.7 108,020 91% 2.2x 90.0x 38% 25% 14% - Stryker $92.29 $34,051 46% 1.1x 23.0x 26.9% 24.8% 7.2% A+ • Stryker’s similar debt/equity and debt/EBITDA margins suggest it is in line with the industry, but its strong credit rating, sales growth, and unlevered free cash flow indicate its stronger debt capacity Sources: Capital IQ
  35. 35. SIBC35 Leveraged Buyout Analysis 2015E 2016E 2017E 2018E 2019E 2020E Debt/EBITDA 1.71x 7.50x 6.45x 5.41x 4.54x 3.67x EBITDA/Interest NM 1.73x 1.82x 2.11x 2.43x 2.85x Debt/FCF 2.16x 9.37x 8.43x 7.06x 5.91x 4.77x Sources And Uses of Funds Sources Uses Amount X of EBITDA Amount % of Total Equity $27,633.25 Equity Purchase Price $ 42,150.87 90.50% Cash 5,000.00 Refinancing Debt 3973 8.50% Revolver 0.00 Financing Fees (.5%) 19.87 Term Loan B 9,288.00 4.0x Advisory Fees (1%) 421.51 Unsecured Bonds 4,644.00 2.0x Total Sources $46,565.25 Total Uses $ 46,565.25 Transaction Summary Current Stock Price $ 91.76 Purchase Price Per Share $ 110.11 Buyout Premium 20% Shares Outstanding $ 382.80 Equity Value $42,150.90 Plus: Existing Debt $ 3,973.00 Less: Existing Cash $ (5,000.00) Total Enterprise Value $41,123.90 TEV as a Multiple of: 2015E EBITDA 17.7x 2016E EBITDA 16.9x • The company’s high trading multiple and high equity requirement will most likely deter many potential sponsors from acquiringStryker
  36. 36. SIBC Leveraged Buyout Risks & Rationale 36 Financial: • Favorable debt environment with increasing US-Euro yield and low interest rates • Strong company revenues would support favorable borrowing and financing terms Strategic: • LBO structuring ensures motivation and efficiency from management, and brings added expertise from PE firms • Delivers value to existing shareholders • Going private would allow for added flexibility and a longer timeline for expanding operations in Europe and Asia • Not subject to quarterly earnings pressure • Entering new markets and expanding brand recognition requires time to realize return • Revenue growth within primary sectors, as well as changing product mix • Stable earnings in U.S. markets, and increasing revenues and brand recognition across new geographic targets • Cash outflows and boosted market share from acquisitions • Revenues from new product offerings Reasons for Transaction Risks Performance Signs to Monitor • Development in new markets and products could encounter roadblocks or miss expectations • This would negatively impact revenues, turnaround potential, and investment holding period • Unrealized growth will significantly harm borrowing potential due to existing high leverage • High leverage may negatively influence SYK’s ability to expand through acquisitions • Medical equipment industry is unpredictable in its susceptibility to new innovations across many sectors • Unsure recovery in Europe, plateauing growth in emerging market, or reactions to QE withdrawal present macroeconomic risks to bootstrapping • High current share price represents added risk • Steep trading multiple along with the large size of the deal contribute significant risk to the deal Potential Sponsors: • SYK’s high trading multiple along with the transaction’s large size contribute to the significant risk of an LBO
  37. 37. SIBC Final Recommendation 37 Investment Thesis: An acquisition of Smith & Nephew will allow Stryker to remain competitive as the medical device industry trends toward consolidation. SNN is an attractive target due to its stable cash flows, fundamental model, and unique positioning. Its innovative focus on orthopedics make it compatible with Stryker’s current strategy. Market: Medical Devices Realizable Value: Stryker’s global distribution and product variety, overvaluation, and growing regulatory landscape, coupled with Smith & Nephew’s innovative presence in orthopedics presents unique potential within both established and higher growth markets. Benefits: Steady Cash Flows, Future Growth, Cost Synergies, Brand Recognition, Distribution Channels, Global Presence, Worldwide Leader in Lucrative Market Stryker • Regulatory restrictions (Healthcare Reform) • Competitive industry characterized by large players and innovative disruption • Transitional risks in acquisition deal • Unrecognized synergies Smith & Nephew • Environmental risks in emerging markets • Possibility of faulty product design or unsuccessful development Final Recommendation: Stryker should acquire Smith & Nephew using a combination of new debt and equity issuances. Key Value Proposition Risks & Threats
  38. 38. SIBC Agenda 38 I. Macroeconomic Overview II. Industry Overview III. Company Overview: Stryker IV. Valuation: Stryker V. Target Overview: Smith & Nephew VI. Valuation: Smith & Nephew VII. Strategic Alternatives VIII. Appendix
  39. 39. SIBC Stryker - Discounted Cash Flow Model Source: CapIQ, Bloomberg, Company Filings Millions FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Total Revenue $ 7,320.00 $ 8,307.00 $ 8,657.00 $ 9,021.00 $ 9,675.00 $ 9,975.92 $ 10,507.13 $ 11,015.93 $ 11,435.80 $ 11,657.50 % growth 13.5% 4.2% 4.2% 7.2% 3.1% 5.3% 4.8% 3.8% 1.9% Gross Profit $ 5,034.30 $ 5,639.00 $ 5,894.00 $ 6,090.00 $ 6,412.00 $ 6,584.71 $ 6,956.35 $ 7,289.79 $ 7,673.42 $ 7,845.50 annual growth 12.0% 4.5% 3.3% 5.3% 2.7% 5.6% 4.8% 5.3% 2.2% margin % 68.8% 67.9% 68.1% 67.5% 66.3% 66.0% 66.2% 66.2% 67.1% 67.3% EBITDA $ 1,925.80 $ 2,093.00 $ 2,209.00 $ 2,248.00 $ 2,414.00 $ 2,533.09 $ 2,712.44 $ 2,931.13 $ 3,045.88 $ 3,032.61 annual growth 8.7% 5.5% 1.8% 7.4% 4.9% 7.1% 8.1% 3.9% -0.4% margin % 26.3% 25.2% 25.5% 24.9% 25.0% 25.4% 25.8% 26.6% 26.6% 26.0% Less: Depreciation and Amortization $ 58.20 $ 122.00 $ 123.00 $ 138.00 $ 188.00 $ 149.67 $ 158.56 $ 165.41 $ 157.88 $ 160.61 % of Revenue 0.8% 1.5% 1.4% 1.5% 1.9% 1.5% 1.5% 1.5% 1.4% 1.4% EBIT $ 1,867.60 $ 1,971.00 $ 2,086.00 $ 2,110.00 $ 2,226.00 $ 2,383.42 $ 2,553.89 $ 2,765.73 $ 2,888.00 $ 2,872.00 annual growth 5.5% 5.8% 1.2% 5.5% 7.1% 7.2% 8.3% 4.4% -0.6% margin % 25.5% 23.7% 24.1% 23.4% 23.0% 23.9% 24.3% 25.1% 25.3% 24.6% Pretax Income $ 1,729.60 $ 1,686.00 $ 1,705.00 $ 1,212.00 $ 1,160.00 $ 2,305.35 $ 2,480.37 $ 2,730.11 $ 2,758.50 $ 2,872.00 Less: Income Tax $ 456.20 $ 341.00 $ 407.00 $ 206.00 $ 645.00 $ 438.78 $ 448.26 $ 537.01 $ 581.50 $ 574.00 24.43% 17.30% 19.51% 9.76% 28.98% 19.03% 18.07% 19.67% 21.08% 19.99% Net Income $ 1,273.40 $ 1,345.00 $ 1,298.00 $ 1,006.00 $ 515.00 $ 1,866.57 $ 2,032.11 $ 2,193.10 $ 2,177.00 $ 2,298.00 Plus: Depreciation and Amortization $ 58.20 $ 122.00 $ 123.00 $ 138.00 $ 188.00 $ 149.67 $ 158.56 $ 165.41 $ 157.88 $ 160.61 Less: Capital Expenditures $ 131.30 $ 182.10 $ 226.00 $ 210.00 $ 195.00 $ 233.00 $ 288.75 $ 298.00 $ 253.69 $ 268.36 Capex % of Depr. & Amor. 225.60% 149.26% 183.74% 152.17% 103.72% 155.68% 182.11% 180.16% 160.69% 167.08% Less: Increase in Net Working Capital $ 517.30 $ 193.20 $ 415.00 $ (538.00) $ (925.00) $ 375.17 $ 327.79 $ 365.69 $ 335.37 $ 363.80 Free Cash Flow $ 683.00 $ 1,091.70 $ 780.00 $ 1,472.00 $ 1,433.00 $ 1,408.07 $ 1,574.12 $ 1,694.82 $ 1,745.82 $ 1,826.45 annual growth 60% -29% 89% -3% -2% 12% 8% 3% 5% 39
  40. 40. SIBC Smith & Nephew - Discounted Cash Flow Model • Expect strong ability to maintain current revenue growth through FY2019 due to easily manageable cost of goods sold Source: Capital IQ, Bloomberg, Company Filings 40 Millions FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Total Revenue $ 4,270.00 $ 4,137.00 $ 4,351.00 $ 4,617.00 $ 4,742.76 $ 4,885.04 $ 5,041.37 $ 5,192.61 $ 5,336.56 % growth -3.1% 5.2% 6.1% 2.7% 3.0% 3.2% 3.0% 2.8% Gross Profit $ 3,137.00 $ 3,070.00 $ 3,268.00 $ 3,490.00 $ 3,537.79 $ 3,657.69 $ 3,783.14 $ 3,895.77 $ 3,996.23 Annual growth -2.1% 6.4% 6.8% 1.4% 5.6% 4.9% 8.1% 6.6% Margin % 73.5% 74.2% 75.1% 75.6% 74.6% 74.9% 75.0% 75.0% 74.9% EBITDA $ 1,207.28 $ 1,228.30 $ 1,247.29 $ 1,358.29 $ 1,225.54 $ 1,280.56 $ 1,320.43 $ 1,363.26 $ 1,430.72 Annual growth 1.7% 1.5% 8.9% -9.8% 4.5% 3.1% 3.2% 4.9% Margin % 28.3% 29.7% 28.7% 29.4% 25.8% 26.2% 26.2% 26.3% 26.8% Less: Depreciation and Amortization $ 217.00 $ 212.00 $ 209.00 $ 222.00 $ 228.23 $ 235.07 $ 242.60 $ 249.87 $ 256.80 % of Revenue 5.1% 5.1% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% EBIT $ 990.28 $ 1,016.30 $ 1,038.29 $ 1,136.29 $ 997.32 $ 1,045.49 $ 1,077.84 $ 1,113.38 $ 1,173.92 Annual growth 2.6% 2.2% 9.4% -12.2% 4.8% 3.1% 3.3% 5.4% Margin % 23.2% 24.6% 23.9% 24.6% 16.1% 16.1% 15.8% 15.8% 16.0% Less: Income Tax $ 266.00 $ 371.00 $ 246.00 $ 213.00 $ 339.09 $ 355.47 $ 366.47 $ 397.25 $ 427.01 29.7% 43.8% 22.5% 26.6% 47.5% 34.3% 31.1% 33.6% 34.2% Net Income $ 724.28 $ 645.30 $ 792.29 $ 923.29 $ 658.23 $ 690.02 $ 711.37 $ 716.13 $ 746.91 Plus: Depreciation and Amoritization $ 217.00 $ 212.00 $ 209.00 $ 222.00 $ 228.23 $ 235.07 $ 242.60 $ 249.87 $ 256.80 Less: Capital Expenditures $ (321.00) $ (265.00) $ (340.00) $ (375.00) $ (353.21) $ (380.77) $ (392.62) $ (398.62) $ (413.75) Capex % of Revenue 7.5% 6.4% 7.8% 8.1% 7.4% 7.8% 7.8% 7.7% 7.8% Less: Increase in Net Working Capital $ (194.54) $ 147.12 $ (30.18) $ 95.88 $ 78.09 $ 49.33 $ 79.53 $ 73.28 $ 71.13 Free Cash Flow $ 1,456.82 $ 975.18 $ 1,371.47 $ 1,424.41 $ 1,161.58 $ 1,256.54 $ 1,267.06 $ 1,291.34 $ 1,346.33 Annual Growth -33.1% 40.6% 3.9% -18.5% 8.2% 0.8% 1.9% 4.3%

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