" Economic Value Added ""EVA"" " Economic Value Added or EVA is a tool for gauging the real economic performance of a business and its ability to create shareholder value. EVA provides a means for coupling the two fundamental drivers of economic or share holder value– operating earnings and capital efficiency. The EVA Example worksheet details the calculation of EVA over five years for a middle-market manufacturing company operating in a capital intensive industry. The EVA Template worksheet provides a simple template for the calculation of EVA from annual financial statement inputs provided by the user. ##### Sheet/List 2 ##### Economic Value Added Example Subject Company: XYZ Consolidated "XYZ Consolidated is an example of a manufacturing company operating in a capital intensive industry. Over five years, revenue grew at a compound annual growth rate (CAGR) of 9.6%. At the same time, operating earnings expanded at a CAGR of 9.0%. The company also invested approximately 86¢ in new fixed assets for each $1.00 of incremental sales. From an income statement perspective, this company is a successful middle-market business, even though the company's EVA was negative in two of the five years. On a cumulative present value basis, the firm generated positive EVA over the full period and, therefore, built economic or shareholder value in excess of the required return on invested capital." "The economic value calculation is based upon the company's historical annual Profit & Loss Statements and Balance Sheets summarized on pages 2 & 3. Net operating profit after tax (""NOPAT""), on page 4, is determined by adjusting GAAP operating earnings to reflect any difference between book and economic depreciation, the recognition of R&D expenditures over the period that they are expected to benefit the business, and the capitalization of operating lease obligations. Total capital employed in the business, on page 5, is determined by adjusting book value of interest bearing debt and equity to include capitalized R&D expenditures, any excess book depreciation in prior periods, all previously amortized goodwill, and the present value of future operating lease obligations. Different or additional adjustments may be appropriate depending on the circumstances of the subject business." The conclusions regarding the company's ability to generate economic value added are presented on page 6. EVA is a trademark of Stern Stewart & Co XYZ Consolidated Unadjusted Annual Performance Data ($ in Thousands) Summary Profit and Loss Statement Year 1 2 3 4 5 Sales " 130,984 " " 124,530 " " 134,801 " " 152,327 " " 181,173 " Sales Growth 14.4% -4.9% 8.2% 13.0% 10.0% Cost of Sales " 95,749 " " 93,425 " " 100,293 " " 111,953 " " 137,567 " Gross Profit " 35,235 " " 31,105 " " 34,509 " " 40,374 " " 43,606 " Gross Margin 26.9% 25.0% 25.6% 26.5% 24.1% " S, G & A " " 15,256 " " 16,258 " " 16,173 " " 17,487 " " 19,291 " Depreciation & Amortization " 9,602 " " 9,225 " " 9,016 " " 8,995 " " 8,322 " Operating Profit " 10,377 " " 5,622 " " 9,320 " " 13,892 " " 15,993 " Operating Margin 7.9% 4.5% 6.9% 9.1% 8.8% Interest Expense " 1,813 " " 1,823 " " 1,802 " " 1,869 " " 2,064 " Other (Income) Expense 150 (65) (39) 215 " 1,395 " Pre-tax Profit " 8,414 " " 3,863 " " 7,557 " " 11,808 " " 12,534 " Tax Expense " 2,861 " " 1,314 " " 2,569 " " 4,015 " " 4,262 " Net Profit " 5,554 " " 2,550 " " 4,988 " " 7,794 " " 8,272 " Net Profit Margin 4.2% 2.0% 3.7% 5.1% 4.6% EBITDA " 19,830 " " 14,912 " " 18,375 " " 22,672 " " 22,920 " EBITDA Margin 15.1% 12.0% 13.6% 14.9% 12.7% XYZ Consolidated Unadjusted Annual Balance Sheet ($ in Thousands) Summary Balance Sheet Year 1 2 3 4 5 Cash " 7,084 " " 9,208 " " 10,071 " " 14,428 " " 5,190 " Trading Assets " 14,072 " " 12,472 " " 13,262 " " 18,028 " " 19,358 " Total Current Assets " 21,156 " " 21,681 " " 23,333 " " 32,457 " " 24,548 " Property & Equipment " 95,430 " " 103,596 " " 113,045 " " 122,537 " " 136,762 " Less: Accumulated Depreciation " (45,169)" " (54,180)" " (60,283)" " (68,120)" " (72,286)" Net Property & Equipment " 50,261 " " 49,416 " " 52,763 " " 54,417 " " 64,476 " Deposits an Other Assets " 1,074 " " 1,964 " " 1,472 " " 1,398 " " 3,623 " Goodwill - - - - - Total Assets " 72,491 " " 73,061 " " 77,568 " " 88,272 " " 92,647 " Bank Credit Line - - - - - Accounts Payable " 3,892 " " 3,574 " " 3,846 " " 5,950 " " 4,759 " Other Accrued Liabilities " 11,195 " " 12,093 " " 12,805 " " 19,056 " " 14,706 " Current Portion of Long-term Debt " 1,177 " " 1,198 " 62 " 3,679 " " 3,638 " Total Current Liabilities " 16,263 " " 16,865 " " 16,713 " " 28,685 " " 23,103 " " Long Term Debt, less current portion " " 34,072 " " 33,215 " " 33,077 " " 29,395 " " 25,408 " Other LT Liabilities 724 929 " 1,065 " " 1,522 " " 1,865 " Net Worth " 21,432 " " 22,052 " " 26,712 " " 28,670 " " 42,270 " Total Liabilities & Net Worth " 72,491 " " 73,061 " " 77,568 " " 88,272 " " 92,647 " XYZ Consolidated Assumptions in red bold Annual EVA Summary ($ in Thousands) Net Operating Profit After Taxes Year 1 2 3 4 5 Comments Operating Profit " 10,377 " " 5,622 " " 9,320 " " 13,892 " " 15,993 " Net of depreciation and amortization Adjustments: Depreciation - - - - - No adjustment made - book and economic depreciation are reasonably equivalent Other Expense (150) 65 39 (215) " (1,395)" LIFO Adjustment - - - " 1,041 " (376) Change in the LIFO Reserve Research & Development 335 (150) (89) 18 (80) Difference between expensing all R&D and capitalizing and amortizing over 5 years Operating Lease Expense " 3,257 " " 3,224 " " 3,412 " " 3,471 " " 3,218 " Add back annual rents and operating lease payments Miscellaneous - - - - - Taxes " (4,699)" " (2,979)" " (4,312)" " (6,190)" " (5,902)" Taxes payable on adjusted operating profits excluding the tax shield from interest expense. NOPAT " 9,121 " " 5,782 " " 8,370 " " 12,017 " " 11,458 " XYZ Consolidated Assumptions in red bold Annual EVA Summary ($ in Thousands) Total Invested Capital and Cost of Capital Year 1 2 3 4 5 Comments Capital Employed: Debt " 35,249 " " 34,413 " " 33,139 " " 33,074 " " 29,046 " All interest bearing debt Equity " 21,432 " " 22,052 " " 26,712 " " 28,670 " " 36,942 " Book value of equity Book Value of Capital " 56,681 " " 56,465 " " 59,851 " " 61,744 " " 65,989 " Adjustments: Capitalized R&D " 6,901 " " 6,751 " " 6,662 " " 6,680 " " 6,600 " "Total R&D expenditures, net of amortization" Depreciation - - - - - No adjustment necessary Goodwill - - - - - Add back all cumulative goodwill amortization Present Value of Operating Leases " 10,558 " " 12,645 " " 11,678 " " 9,700 " " 7,400 " Add present value of operating leases discounted at Kd. Total Adjusted Capital " 74,140 " " 75,860 " " 78,191 " " 78,123 " " 79,988 " Cost of Capital: Pre-Tax After-Tax Weighting Debt (Kd) 6.5% 4.3% 55% " Average over 5 years, should be based on the capitalization norm within the industry" Equity 20.0% 20.0% 45% Weighted Average (Kw) 12.6% 11.4% Tax Rate 34.0% XYZ Consolidated Annual EVA Summary ($ in Thousands) Economic Value Added Year 1 2 3 4 5 NOPAT " 9,121 " " 5,782 " " 8,370 " " 12,017 " " 11,458 " Capital Cost " 8,441 " " 8,636 " " 8,902 " " 8,894 " " 9,106 " Annual EVA 681 " (2,854)" (532) " 3,123 " " 2,351 " Current Value of Cumulative EVA 442 " (1,623)" " (2,052)" 751 " 3,103 " NOPAT Return on Adjusted Capital 12.3% 7.6% 10.7% 15.4% 14.3% Return Hurdle (cost of capital) 11.4% 11.4% 11.4% 11.4% 11.4% 4 3 2 1 - Value Added / -Shortfall 0.9% -3.8% -0.7% 4.0% 2.9% Other Performance Measures EBIT " 10,228 " " 5,687 " " 9,359 " " 13,677 " " 14,598 " EBITDA " 19,979 " " 14,847 " " 18,336 " " 22,887 " " 24,315 " Sales Growth 14.4% -4.9% 8.2% 13.0% 18.9% Operating Earnings Growth 50.3% -45.8% 65.8% 49.1% 15.1% Net Profit Growth -21.4% -54.1% 95.6% 56.3% 6.1% Operating Margin 7.9% 4.5% 6.9% 9.1% 8.8% Net Profit Margin 4.2% 2.0% 3.7% 5.1% 4.6% EBITDA Margin 15.1% 12.0% 13.6% 14.9% 12.7% Return on Equity(ROE) 25.9% 11.6% 18.7% 27.2% 19.6% Return on Net Assets (RONA) 9.7% 4.4% 8.2% 12.3% 11.3% Sales / Gross Fixed Assets 1.4 1.2 1.2 1.2 1.3 ##### Sheet/List 3 ##### EVA Template Subject Company: "This worksheet is intended as a simple template for calculating economic value added (EVA) from annual financial statement inputs provided by the user. Depending on the circumstances of the subject company, it may not provide all of the adjustments that would be appropriate for a technically precise EVA calculation. A more detailed explanation of the calculation of EVA and the underlying financial theory can be found in ""The Quest for Value"" by G. Bennett Stewart III, published by HarperBusiness. EVA is a trademark of Stern Stewart & Co." Unadjusted Annual Performance Data Insert assumptions ($ in Thousands) Summary Profit and Loss Statement Year 1 2 3 4 5 Sales " 100,000 " " 110,000 " " 121,000 " " 133,100 " " 146,410 " Sales Growth -12.7% 10.0% 10.0% 10.0% 10.0% Cost of Sales " 75,000 " " 82,500 " " 90,750 " " 99,825 " " 109,808 " Gross Profit " 25,000 " " 27,500 " " 30,250 " " 33,275 " " 36,603 " Gross Margin 25.0% 25.0% 25.0% 25.0% 25.0% " S, G & A " " 12,000 " " 13,200 " " 14,520 " " 15,972 " " 17,569 " Depreciation & Amortization " 8,500 " " 9,000 " " 9,000 " " 9,000 " " 9,000 " Operating Profit " 4,500 " " 5,300 " " 6,730 " " 8,303 " " 10,033 " Operating Margin 4.5% 4.8% 5.6% 6.2% 6.9% Interest Expense " 1,813 " " 1,823 " " 1,802 " " 1,869 " " 2,064 " Other (Income) Expense 150 (65) (39) 215 " 1,395 " Pre-tax Profit " 2,537 " " 3,541 " " 4,967 " " 6,219 " " 6,574 " Tax Expense 863 " 1,204 " " 1,689 " " 2,114 " " 2,235 " Net Profit " 1,674 " " 2,337 " " 3,278 " " 4,105 " " 4,339 " Net Profit Margin 1.7% 2.1% 2.7% 3.1% 3.0% EBITDA " 12,850 " " 14,365 " " 15,769 " " 17,088 " " 17,638 " EBITDA Margin 12.9% 13.1% 13.0% 12.8% 12.0% - Insert assumptions Unadjusted Annual Balance Sheet ($ in Thousands) Summary Financial Position Year 1 2 3 4 5 Cash " 7,300 " " 9,000 " " 10,100 " " 14,700 " " 5,400 " Trading Assets " 14,000 " " 12,500 " " 13,000 " " 18,000 " " 19,300 " Total Current Assets " 21,300 " " 21,500 " " 23,100 " " 32,700 " " 24,700 " Property & Equipment " 95,000 " " 103,500 " " 113,000 " " 122,000 " " 136,700 " Less: Accumulated Depreciation " (45,200)" " (54,200)" " (60,300)" " (68,100)" " (72,300)" Net Property & Equipment " 49,800 " " 49,300 " " 52,700 " " 53,900 " " 64,400 " Deposits an Other Assets " 1,000 " " 2,000 " " 1,500 " " 1,400 " " 3,600 " Goodwill - - - - - Total Assets " 72,100 " " 72,800 " " 77,300 " " 88,000 " " 92,700 " Bank Credit Line - - - - - Accounts Payable " 3,900 " " 3,700 " " 3,800 " " 5,950 " " 4,750 " Other Accrued Liabilities " 11,200 " " 12,100 " " 12,800 " " 19,000 " " 14,700 " Current Portion of Long-term Debt " 1,200 " " 1,200 " 50 " 3,700 " " 3,600 " Total Current Liabilities " 16,300 " " 17,000 " " 16,650 " " 28,650 " " 23,050 " " Long Term Debt, less current portion " " 34,100 " " 32,900 " " 32,850 " " 29,150 " " 25,550 " Other LT Liabilities 700 900 " 1,100 " " 1,500 " " 1,900 " Net Worth " 21,000 " " 22,000 " " 26,700 " " 28,700 " " 42,200 " Total Liabilities & Net Worth " 72,100 " " 72,800 " " 77,300 " " 88,000 " " 92,700 " - Annual EVA Summary ($ in Thousands) Net Operating Profit After Taxes Year 1 2 3 4 5 Comments Operating Profit " 4,500 " " 5,300 " " 6,730 " " 8,303 " " 10,033 " Net of depreciation and amortization Adjustments: Depreciation - - - - - Adjust for the difference between book and economic depreciation Other Expense (Income) (150) 65 39 (215) " (1,395)" Deduct other expenses LIFO Adjustment - - - " 1,041 " (376) Change in the LIFO Reserve Research & Development 335 (150) (89) 18 (80) Add back difference between current period R&D expense and amortization of capitalized R&D Operating Lease Expense " 3,257 " " 3,224 " " 3,412 " " 3,471 " " 3,218 " Add back annual rents and operating lease payments Miscellaneous - - - - - Taxes " (2,700)" " (2,869)" " (3,431)" " (4,290)" " (3,876)" Deduct taxes payable on adjusted operating profits excluding the tax shield from interest expense. NOPAT " 5,242 " " 5,569 " " 6,660 " " 8,328 " " 7,524 " - Insert assumptions Annual EVA Summary ($ in Thousands) Total Invested Capital and Cost of Capital Year 1 2 3 4 5 Comments Capital Employed: Debt " 35,300 " " 34,100 " " 32,900 " " 32,850 " " 29,150 " All interest bearing debt Equity " 21,000 " " 22,000 " " 26,700 " " 28,700 " " 33,039 " Book value of equity Book Value of Capital " 56,300 " " 56,100 " " 59,600 " " 61,550 " " 62,189 " Adjustments: Capitalized R&D " 6,901 " " 6,751 " " 6,662 " " 6,680 " " 6,600 " "Add historical R&D expenditures, net of amortization. Amortize over period that value is expected to be derived" Depreciation - - - - - Add back excess book depreciation in prior periods Goodwill - - - - - Add back all cumulative goodwill amortization Present Value of Operating Leases " 10,558 " " 12,645 " " 11,678 " " 9,700 " " 7,400 " Add present value of operating leases discounted at Kd. Total Adjusted Capital " 73,759 " " 75,495 " " 77,940 " " 77,929 " " 76,188 " Cost of Capital: Pre-Tax After-Tax Weighting Debt (Kd) 6.5% 4.3% 55% Equity 20.0% 20.0% 45% Weighted Average (Kw) 12.6% 11.4% Kw should be weighted based upon the capitalization norm for the industry Tax Rate 34.0% - Annual EVA Summary ($ in Thousands) Economic Value Added Year 1 2 3 4 5 NOPAT " 5,242 " " 5,569 " " 6,660 " " 8,328 " " 7,524 " Capital Cost " 8,379 " " 8,576 " " 8,854 " " 8,852 " " 8,655 " Annual EVA " (3,137)" " (3,006)" " (2,193)" (525) " (1,130)" Current Value of Cumulative EVA " (2,040)" " (4,217)" " (5,985)" " (6,457)" " (7,587)" NOPAT Return on Adjusted Capital 7.1% 7.4% 8.5% 10.7% 9.9% Return Hurdle (cost of capital) 11.4% 11.4% 11.4% 11.4% 11.4% 4 3 2 1 - Value Added (-Shortfall) -4.3% -4.0% -2.8% -0.7% -1.5% Other Performance Measures EBIT " 4,350 " " 5,365 " " 6,769 " " 8,088 " " 8,638 " EBITDA " 13,000 " " 14,300 " " 15,730 " " 17,303 " " 19,033 " Sales Growth -12.7% 10.0% 10.0% 10.0% 10.0% Operating Earnings Growth -34.8% 17.8% 27.0% 23.4% 20.8% Net Earnings Growth -76.3% 39.6% 40.2% 25.2% 5.7% Operating Margin 4.5% 4.8% 5.6% 6.2% 6.9% Net Profit Margin 1.7% 2.1% 2.7% 3.1% 3.0% EBITDA Margin 12.9% 13.1% 13.0% 12.8% 12.0% Return on Equity (ROE) 8.0% 10.6% 12.3% 14.3% 10.3% Return on Net Assets (RONA) 2.9% 4.1% 5.4% 6.5% 5.9% Sales / Gross Fixed Assets 1.1 1.1 1.1 1.1 1.1 ##### Sheet/List 4 ##### Net Present Value of Future Lease Payments Year 1 2 3 4 5 1 " 2,334,221 " " 2,735,208 " " 3,011,233 " " 3,071,418 " " 3,010,866 " 2 " 1,696,125 " " 2,710,737 " " 2,960,080 " " 2,940,123 " " 2,134,333 " 3 " 1,639,393 " " 2,675,574 " " 2,829,568 " " 2,073,865 " " 1,679,883 " 4 " 1,616,180 " " 2,586,436 " " 2,006,933 " " 1,655,423 " " 1,460,848 " 5 " 1,528,059 " " 1,785,436 " " 1,627,610 " " 1,459,475 " " 225,865 " 6 " 4,584,977 " " 3,148,357 " " 1,678,993 " " 225,865 " - " 3,257 " " 3,224 " " 3,412 " " 3,471 " " 3,218 " NPV " 10,558 " " 12,645 " " 11,678 " " 9,700 " " 7,400 " LIFO Adjustment Year 1 2 3 4 5 Market " 5,644 " " 6,323 " " 6,314 " " 6,652 " FIFO Balance " 5,644 " " 6,323 " " 6,314 " " 6,652 " " 7,699 " " 7,979 " LIFO Balance " 6,375 " " 6,486 " " 6,757 " " 7,431 " " 6,658 " " 7,314 " LIFO Reserve (731) (162) (442) (778) " 1,041 " 665 Capitalized R&D Year 1 2 3 4 5 R&D Expenses " 2,781 " " 3,451 " " 3,618 " " 3,309 " " 3,330 " " 3,346 " " 3,218 " " 3,833 " Amort 1 (927) " (1,150)" " (1,206)" " (1,103)" " (1,110)" " (1,115)" " (1,073)" " (1,278)" Amort 2 (927) " (1,150)" " (1,206)" " (1,103)" " (1,110)" " (1,115)" " (1,073)" Amort 3 - - (927) " (1,150)" " (1,206)" " (1,103)" " (1,110)" " (1,115)" Capital Balance " 6,901 " " 6,751 " " 6,662 " " 6,680 " " 6,600 " " 6,967 " 335 (150) " (3,419)" " (3,328)" " (3,298)" " (3,466)" " (3,283)" " (3,459)" " (3,419)" " (3,328)" " (3,298)" " (3,466)" Difference Expense 335 (150) (89) 18 (80) 367 Depreciation CGS " 9,128 " " 8,717 " " 8,456 " " 8,269 " " 7,646 " SGA 360 399 452 619 578 Cash flow " 9,488 " " 9,116 " " 8,909 " " 8,888 " " 8,223 " " 9,488 " " 9,116 " " 8,909 " " 8,888 " " 8,223 "