GMED Mesfin Symons and Andrew Shaw

Stock Summary 

• NYSE:GMED• Sector: Health Care • Industry: Medical Supplies & Devices  • Market Cap: $2.02B• 52 Weeks low: $19.25 • 52 Weeks High: $28.6• Current Price: $21.30• Recommend: HOLD

• Price target: $23.88 • 12.12% upside  

Overview • Headquarter Audubon, PA.• Over 1,200 Employees • Founded in 2003  • Operates in USA and Internationally  • Revenue: $544.75 Million

• P/E: 17.97• P/B: 2.69• P/S: 3.8• D/E: 0%• Beta : 0.64

Investment Thesis

• Increasing margins by manufacturing own products• Entering new high-growth markets• Robust product pipeline

Corporate Governance

• David Paul – CEO • Founded: GMED

• Steven Payne – CAO• Been with company since it went public in 2012

• Daniel T. Scavilla - CFO • Worked for J&J 28 years• Previous position VP of Finance

1 Year Performance

Revenue by Segments

• Innovative fusion: $288,062 m• 53.17%

• Disruptive Technology: $226,691 m• 46.83%

Geographic Revenue

• US – 91%• Y/Y growth: 16.64%

• International: 9%• Y/Y growth: -1.52%• Y/Y growth consistent currency: 10.2%

Geographic Revenue

US International

Segments

• Innovative Fusions• Disruptive Technology

Innovative Fusions 

• Traditional implants• Deformity• Trauma conditions

Disruptive Technology

• Minimally invasive surgeries• Motion preservation• Bone void filler• Robotics 

Distribution Model

• Corporate sales to doctors/hospitals • Independent sales reps• Hire from other companies• Training

Industry Growth Drivers

• Favorable population demographic• Increasing population• Increased spending on healthcare

Financials Metrics Metric GMED ZBH JNJ MDT SYK Industry

Gross Margin 75.41% 65.39% 68.15% 68.77% 67.03% 64.87%

Operating Margin 31.64% 11.04% 14.71% 19.89% 33.51% 11.41%

Net Margin 26.37% 6.55% 18.05% 14.58% 19.23% 7.25%

P/E 18.13 111.92 20.24 31.88 26.94 41.42

P/B 2.74 2.56 4.36 2.23 4.7 3.84

P/S 3.87 3.25 4.41 3.94 4.09 3.32

D/E 0% 116.87% 27.92% 60.00% 46.97% 25.07%

Consolidated Balance Sheets - USD ($) $ in Thousands

Sep. 30, 2016

Dec. 31, 2015

ASSETS Cash and cash equivalents $

90,192 $

60,152 Restricted cash 477 26,119 Short-term marketable securities 167,727 220,877 Accounts receivable, net of allowances of $2,694 and $2,513, respectively

86,708 77,681

Inventories 115,606 105,260 Prepaid expenses and other current assets 11,605 7,351 Income taxes receivable 5,895 8,672 Deferred income taxes 0 38,687 Total current assets 478,210 544,799 Property and equipment, net of accumulated depreciation of $159,314 and $139,114, respectively

127,084 114,743

Long-term marketable securities 64,451 48,762 Note receivable 25,000 0 Intangible assets, net 67,438 33,242 Goodwill 110,250 91,964 Other assets 1,015 590 Deferred income taxes 28,295 0 Total assets 901,743 834,100 LIABILITIES AND EQUITY Accounts payable 13,936 15,971 Accrued expenses 43,287 53,769 Income taxes payable 3,696 763 Business acquisition liabilities, current 4,888 12,188 Total current liabilities 65,807 82,691 Business acquisition liabilities, net of current portion

15,020 21,126

Deferred income taxes 9,013 13,260 Other liabilities 1,784 1,699 Total liabilities 91,624 118,776 Commitments and contingencies (Note 13) Equity: Additional paid-in capital 207,182 192,629 Accumulated other comprehensive loss (1,760) (1,958)Retained earnings 604,601 524,558 Total equity 810,119 715,324 Total liabilities and equity 901,743 834,100 Class A Common Equity: Common stock 72 71

Income StatementConsolidated Statements of Income - USD ($) shares in Thousands, $

in Thousands 12 Months Ended

Dec. 31, 2015 Dec. 31, 2014 Dec. 31, 2013Income Statement [Abstract]Sales $ 544,753 $ 474,371 $ 434,459 Cost of goods sold 132,803 110,857 100,343 Gross profit 411,950 363,514 334,116 Operating expenses:Research and development 36,982 31,687 26,870 Selling, general and administrative 214,014 187,798 182,518 Provision for litigation (11,268) 5,667 23,055 Total operating expenses 239,728 225,152 232,443 Operating income 172,222 138,362 101,673 Interest income, net 1,304 805 467 Foreign currency transaction loss (1,159) (899) (804)Other income 438 374 665 Other income, net 583 280 328 Income before income taxes 172,805 138,642 102,001 Income tax provision 60,021 46,157 33,389 Net income $ 112,784 $ 92,485 $ 68,612 Earnings per share:Basic $ 1.19 $ 0.98 $ 0.74 Diluted $ 1.17 $ 0.97 $ 0.73 Weighted average shares outstanding:Basic 95,046 94,227 92,647

Competitors

CompetitorsSpinal inmplant revenue growth

2015 2014

GMED 14.84% 9.19%

ZBH 95.17% 2.42%

JNJ -5.52% 0.22%

MDT -1.58% -2.30%

SYK 0.00% -0.40%

EPS Growth

2015 2014

GMED 21.43% 32.43%

ZBH -81.69% -7.39%

JNJ -4.14% 17.89%

MDT -1.58% -2.30%

SYK 2.40% -0.48%

YTD Performance

GMED -20.45%

ZBH 3.44%

JNJ 15.21%

MDT 8.24%

SYK 25.34%

% of Revenue from Spinal Implants

GMED 100%

ZBH 6.74%

JNJ 5.57%

MDT 10.14%

SYK 7.40%

R&D

R&D Spending as %

2015 2014 2013

GMED 6.79% 6.68% 6.18%

ZBH 4.48% 4.00% 4.39%

JNJ 12.91% 11.43% 11.47%

MDT 7.70% 8.10% 8.70%

SYK 6.20% 6.35% 5.90%

Number of spinal products

GMED 150

ZBH 50

JNJ 39

MDT 14

SYK 47

Risks

• Sale force • Larger competitors • Currency exchange • Disruptive segment • FDA• Product expectance• Obsolete inventory

Why GMED

• Superior margin vs their competitors and plan to increase • Robust pipeline• Recent entrance into high-growth market

Q3 Performance

• EPS: $0.29 • EPS: $0.29

• Revenue: $135.75m (-0.9% Y/Y) • $-3.95m • U.S. -4.1% • International Sale Increased: 34.1% • Completed acquisition of Alphatec’s

• 1% worldwide decreased

Full year Guidance: 2016

• Revenue: $560m • -2.8% • 2017 full year sales of $625m

• -2.34%

• EPS: $1.13 • -3.42%

• Increased Spending: Robotics and trauma.• Launched 7 new products, total of 15 2016

Analyst Overview

• Strong Buy: 2• Buy: 4• Hold : 5• Sell: 1• Strong Sell: 0• Price Target Range: $23- $30• Average Price Target: $26.33

 Historical Financial DataHISTORICAL FINANCIAL DATA 2011 2012 2013 2014 2015 LTM 5 Yr.

Avg.Revenue Growth Rate % 16.4% 12.6% 9.2% 14.8% NA 13.3%Operating Margin 29.4% 29.7% 23.5% 29.2% 31.6% 31.4% 28.7%Effective Tax Rate 37.3% 35.6% 32.7% 33.3% 34.7% 34.0% 34.7%Depreciation & Amortization as % of Revenue

5.1% 4.7% 4.5% 4.6% 4.4% 5.0% 4.7%

Capital Expenditures as % of Revenue 6.8% 6.4% 5.5% 5.2% 9.3% 7.4% 6.6%NWC as % of Revenue 34.6% 37.8% 40.0% 45.5% 48.4% 85.8% 41.3%

AssumptionsGLOBAL ASSUMPTIONS          

Shares Outstanding (Millions)

                        96

Risk Free Rate

2.07%

Current Price per Share  $21.30 Beta                     0.62

52 Week Low  $ 21.15

Credit Rating  

52 Week High  $28.60 Cost of Debt 1.28%

Analyst Low  $23.00 Terminal Shares Out (Millions)

                        96

Analyst High  $30.00 Market Rate 9.00%

WACC CalculationsCAPM

Risk Free Rate 2.07%Market Rate 9.00%Beta 0.62Cost of Equity (CAPM) 6.37%Cost of DebtUsing Credit Rating 0Cost of Debt used in WACC 1.28%Cost of Debt used in WACC 1.28%

Tax Rate 34.03%

Shares Outstanding             96 Price per Share      

21.30 Market Capitalization      

2,038 Cash + Short Term Investments           257 Book Value of Long Term Debt              -   

WACC 6.37%

Base Case

BASE CASE ASSUMPTIONS 2016F 2017F 2018F 2019F 2020FRevenue Growth Rate 3.0% 3.0% 3.3% 3.3% 3.3%Operating Margin 27.0% 27.0% 27.0% 29.0% 29.0%Effective Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0%Capital Expenditures as % of Revenue 8.0% 8.0% 8.0% 8.0% 8.0%Depreciation & Ammortization as % of Revenue

4.5% 4.5% 4.5% 4.5% 8.0%

NWC as % of Revenue 40.0% 40.0% 35.0% 35.0% 35.0%Terminal Growth Rate 1.5%

Upside

UPSIDE CASE ASSUMPTIONS 2016F 2017F 2018F 2019F 2020FRevenue Growth Rate 3.5% 4.0% 4.0% 4.0% 4.0%Operating Margin 29.0% 29.0% 29.0% 31.0% 31.0%Effective Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0%Capital Expenditures as % of Revenue 8.0% 8.0% 8.0% 8.0% 8.0%Depreciation & Ammortization as % of Revenue

4.5% 4.5% 4.5% 4.5% 8.0%

NWC as % of Revenue 40.0% 40.0% 35.0% 35.0% 35.0%Terminal Growth Rate 1.5%

Downside

DOWNSIDE CASE ASSUMPTIONS 2016F 2017F 2018F 2019F 2020FRevenue Growth Rate 2.0% 2.0% 2.0% 2.0% 2.0%Operating Margin 24.0% 24.0% 24.0% 26.0% 26.0%Effective Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0%Capital Expenditures as % of Revenue 8.0% 8.0% 8.0% 8.0% 8.0%Depreciation & Ammortization as % of Revenue

4.5% 4.5% 4.5% 4.5% 8.0%

NWC as % of Revenue 40.0% 40.0% 35.0% 35.0% 35.0%Terminal Growth Rate 1.5%

DCF OutputScenario Base Upsid

eDownside

Terminal Shares Outstanding

                   96 

                  96 

                   96 

PV of Total Cash Flow

             2,073 

            2,276 

             1,788 

Value of Debt                    -   

                   -   

                    -   

Value of Cash                 257 

                257 

                 257 

Value of Equity

             2,330 

            2,534 

             2,045 

Value of Equity per Share

 $          24.35 

 $         26.48 

 $          21.37 

Potential Upside

14.32%

24.30% 0.35%

Weight 50% 20% 30%

Target Price  $          23.88 

Upside/Downside

12.12%

Questions?