Running head: LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 1. LTP Comprehensive Financial Analysis Paper

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1 Running head: LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 1 LTP Comprehensive Financial Analysis Paper Jessica Cusac, Melania Estes, Russell Furst, Connie Lane, Careea Norde, Mary Stephens Siena Heights University LDR 640 Financial Systems Management Prof. Lihua Dishman May 25, 2013

2 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 2 Abstract This paper is presented as an exercise in applying financial analysis techniques to a large, multinational, publically-traded, manufacturing concern. Stryker is chosen as the organization to evaluate and a general description of Stryker is provided. Financial ratio analysis is the primary mechanism used to evaluate Stryker s financial health and performance. The financial ratios used include those that are designed to assess liquidity, solvency, debt management, asset management and utilization, profitability, and market value. The authors discuss various ratios and describe how each is calculated. Financial statements from Stryker s form 10-K annual report to the Securities and Exchange Commission are included. Accounting data from Stryker s income statement and balance sheet are used to calculate many commonly used ratios. Ratios calculated from Stryker s financial statements are provided and used as the basis of a trend analysis. Financial ratios from two of Stryker s competitors are compared with Stryker s as part of a peer-group analysis. An analytical summary of Stryker s overall financial condition and performance is included. Retrospective and prospective analyses of what Stryker might have done differently along with recommendations for future strategy are discussed.

3 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 3 LTP Comprehensive Financial Analysis Paper Successful executives, financial managers, and others tasked with financial management responsibilities make decisions that add value to their organizations. Understanding how to read and interpret financial statements are key elements of making informed decisions. Applying analytical techniques such as ratio analysis is a systematic and evidence-based approach to evaluating historical, current, and the possible future performance of an organization. This paper establishes financial ratio analysis as a key analytical tool, applies these techniques to Stryker Corporation, and draws conclusion regarding Stryker s performance. Financial Statement Analysis Judgments about the financial health of a company can be informed by analyzing data from its financial statements. Ratio analysis is one useful method often employed to accomplish this undertaking (Gapenski, 2009). Beyond considering accounting data as discrete bits of information, comparing values and understanding their relationship to one another provides insight into an organization s financial health and possible future performance. Financial ratios are utilized to understand an organization s (a) liquidity, (b) solvency and debt management, (c) asset management and utilization, (d) profitability, and (e) indications of market value (Hawawini & Viallet, 2011). Measures of liquidity emphasize a, firm s ability to pay off short-term obligations as they come due (Block & Hirt, 2008, p. 55). Solvency and debt management ratios put a company s level of debt into perspective. Debt-based ratios illustrate the balance that exists between equity and debt financing. The ability to effectively utilize assets and manage inventory can be demonstrated by asset management ratios. Profitability indicators compare earnings to sales, assets, and equity. Financial analysts often favor ratios that combine market data with an

4 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 4 organization s accounting data to help understand and compare market value while organizations use this information internally to drive managerial decisions (Hawawini & Viallet, 2011). Investors, analysts, and other interested parties in the financial community also utilize financial ratios calculated from publically reported data as they evaluate and value a company (Hawawini & Viallet, 2011). Other analytical techniques sometimes employed include the common size analysis and percentage change analysis (Gapenski, 2009). Common size analysis evaluates items on the income statement as a percentage of total revenue and items on the balance sheet as a percentage of total assets. This technique helps eliminate size bias when comparing companies. Percentage change analysis involves calculating the percentage change in income statement and balance sheet items from year to year which is a simple way to see the magnitude of change over time. Although multiple financial analysis tools are available, the focus of this paper is on ratio analysis. Financial Statement Analysis for Stryker Corporation Introduction to Stryker Stryker Corporation is a worldwide leader in the medical technology industry. Founded in 1941 by orthopedic surgeon Dr. Homer Stryker and headquartered in Kalamazoo, Michigan, Stryker has grown into an international organization with a presence in over 100 countries. Specializing in implants and materials used in reconstructive surgery, medical and surgical equipment, and neuro-technology and spine implants, Stryker has enjoyed 33 years of continuous sales growth. In 2013, Stryker was named as one of the 100 best places to work by Fortune magazine (Stryker, 2013). Financial statements for Stryker s 2012 fiscal year are included in their form 10-K annual report to the Securities and Exchange Commission (SEC). The 2012

5 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 5 consolidated statement of earnings, consolidated balance sheet, and consolidated cash flow statement are depicted in Appendix A, Appendix B, and Appendix C respectively. Reviewing these statements provides a window through which Stryker s financial health may be evaluated. Key Financial Ratios Financial ratio analysis, is a technique that helps interpret the data contained in a business s financial statements (Gapenski, 2009, p. 377). Comparing various values on the financial statements in the form of ratios and integrating market data provides a much more meaningful understanding of an organization s past and possibly future financial performance. Gapenski (2009) explains that, Ratio analysis combines data to create single numbers that have easily interpreted significance (p. 377). Hawawini and Viallet (2011) describe a number of standard financial ratios that are helpful in determining the financial health of an organization. Table 1 depicts many of these financial ratios along with values calculated using data from Stryker s 2012 financial statements. Measures of liquidity provide insight into an organization s ability to meet current expenses with current assets such as cash and other easily convertible assets (Hawawini & Viallet, 2011). The current ratio simply compares current assets with current liabilities. The limitation on the efficacy of this comparison is that some current assets such as inventories may not be easily liquidated and doing so is not something an ongoing concern would likely do in any event (Hawawini & Viallet, 2011). The quick ratio removes inventories from current assets in the liquidity calculation to provide a more realistic picture of an organization s ability to pay its obligations in the short term. The quick ratio generally includes accounts receivable and if the receivables turnover ratio is low, this asset may not be readily convertible either (Loth, 2013a). A liquidity ratio of 1:1 (or simply, 1) implies that an organization has just enough

6 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 6 Table 1 Stryker s 2012 Financial Ratio Calculation Ratio Name Formula Calculation Ratio Current Ratio Current Assets / Current 8148 / 1, Liabilities Quick Ratio (Current Assets - (8148-1,265) / 1, Inventories) / Current Liabilities Debt Ratio Total Debt a / Total Assets 1,746 / 13, Debt-to-Equity Ratio Total Debt a / Total Equity 1,746 / 8, Times-Interest- Earnings Before Interest 1,741 / 63 b Earned Ratio and Tax / Interest Inventory Turnover Cost of Goods Sold / 2,781 / 1, Ratio Inventories Fixed Asset Sales / Net Fixed Assets 8,657 / Turnover Ratio Total Asset Turnover Sales / Total Assets 8,657 / 13, Ratio Return On Sales Earnings After Tax / Sales 1,298 / 8, Return on Total Earnings After Tax / Total 1,298 / 13, Assets Assets Return on Total Earnings After Tax / Equity 1,298 / 8, Equity Earnings Per Share Earnings After Tax / 1,298 / 380 $3.42 Outstanding Common Stock c Price to Earnings Ratio Share Price d / Earnings per Share / Note: Calculation values are in millions except for earnings per share and share price. Values are taken from Stryker s form 10-K annual report to the SEC for 2012 retrieved from Ratio names and formulas are found in Hawawini and Viallet (2011). a Total debt is long-term debt excluding current maturities as stated on the balance sheet. b Interest expense is taken from note 7 on page 34 of the 2012 form 10-K. c Outstanding common stock number taken from 2012 balance sheet. d Share price is from the opening price on January 2, 2013 retrieved at cash and easily convertible assets to pay its short term expenses. A 1:1 liquidity ratio indicates a very tenuous situation and organizations should maintain greater liquidity thus demonstrating

7 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 7 their ability to meet short-term obligations while maintaining an operating reserve. Stryker s current ratio of 4.34 and quick ratio of 3.67 indicates that the organization is in a good position to meet short-term obligations. An organization s solvency is typically evaluated using debt-based ratios. Debt management ratios are used as measures of leverage: the level of debt capital employed. The higher the ratio, the more leveraged an organization is and the greater the risk. More debt indicates that creditors are bearing a higher level of a company s risk compared to shareholders (Gapenski, 2009). It is important to note that debt can be defined several ways and any debt ratio analysis should take into consideration what actual components make up that debt. For instance, debt may include operational liabilities such as accounts payable and tax payable which are not usually considered as money having been borrowed. The debt-to-asset ratio compares total debt to total assets while the debt-to-equity (D/E) ratio compares total liabilities to equity (Hawawini & Viallet, 2011). In either case the organization s leverage is being evaluated. Debt management ratios are easily understood if displayed in a percentage form. For example, a D/E ratio that results in a value of.25 indicates that the level of debt is 25% of equity. Stryker s debt and D/E ratios are 13% and 20% respectively indicating a relatively low level of debt and a very solid equity position. By comparison, the medical equipment and supplies industry average debt-to-equity ratio for 2012 was 52% ( Financial Strength, 2013). The ability to service debt is another measure of solvency. The times-interest-earned ratio, or interest-coverage ratio as it is often called, indicates the likelihood of being able to continue paying interest on outstanding debt using earnings before interest and tax (Hawawini & Viallet, 2011). The higher this ratio the more able a company is to continue covering interest expenses implying lower risk (Loth, 2013b). Stryker s interest coverage ratio of means

8 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 8 that it has $27.63 of earnings before interest and taxes (EBIT) for every dollar of interest expense. This puts Stryker in a great position to continue meeting its interest expense obligations. By comparison, the 2012 medical equipment and supplies industry average was ( Financial Strength, 2013). How efficient an organization utilizes assets can be evaluated by assessing how effectively inventory and other assets are being used to generate sales (Hawawini & Viallet, 2011). The inventory turnover ratio compares sales to the cost of goods sold and is a measure of how quickly inventory items are being used and turned into sales. Higher turnover rates require less working capital which is advantageous (Hawawini & Viallet, 2011). Comparing sales to total assets help us understand if the amount invested in assets is reasonable for the amount of revenue that is being produced. If the asset turnover ratio is low it may indicate that the company has a capital cost higher than necessary (Gapenski, 2009). Stryker experienced a total asset turnover ratio of.66 as compared to 1.51 for the industry in 2012 ( Industry Efficiency, 2013) suggesting that Stryker does have a higher than normal working capital requirement. Profitability can be measured by comparing earnings after tax (EAT) with sales, assets, and equity (Hawawini & Viallet, 2011). These comparisons illustrate how well an organization is creating profits from these activities and investments. Each comparison varies in importance to the range of interested parties depending on what role they have related to the organization. A sales manager may be most interested in return on sales (ROS) since sales are what they are directly responsible for while an investor may be more interested in profit generated from their investment. The return on assets (ROA) ratio indicates how successful an organization is at generating profits with the assets that are at their disposal. Higher ratios indicate an organization is generating higher levels of profit from a fixed level of investment (Gapenski, 2009).

9 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 9 Similarly, ROS illustrates the profitability of sales. Unfortunately, ROS and ROA are affected by interest and tax expenses which limit the value to operational manager that have no control over these expenses. Hawawini and Viallet (2011) state that return on equity (ROE), is the most comprehensive indicator of profitability because it is the final outcome of all the firm s activities and decisions made during the year (p. 144). ROE is a very valuable measure to investors since it tells them what amount of return they will be receiving for each dollar of their investment. However, when evaluating and comparing profitability ratios it is important to note that profitability levels range significantly from industry to industry and fair comparisons can only be made within a particular industry (Hawawini & Viallet, 2011). Stryker s 2012 ROE of 15% compares favorably with the 2012 medical equipment and supply industry average of 12.87% ( Management Effectiveness, 2013). Stryker s solid ROE demonstrates an attractive return on investment for shareholders and perspective investors. Combining market data with accounting data from financial statements provides another perspective of profitability. Earnings-per-share (EPS) and the price-to-earnings (P/E) ratio are widely used as profitability indicators by investors with the P/E ratio being a multiple of earnings (Hawawini & Viallet, 2011). EPS compares EAT with the number of shares outstanding while the P/E ratio compares the share price with the EPS. P/E values indicate what value the market is placing on each dollar of company earnings (Hawawini & Viallet, 2011). Sisson (2013) states that, A market-value ratio is a metric used to gauge a company's viability in terms of such variables as profitability and the market valuation of its stock (para. 1) and goes on to explain that, A market-value ratio is an indicator that expresses the value of a company's stock in terms of a specific item in its financial statements (para. 2). Stryker s 2012 year-end EPS of $3.42

10 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 10 compares favorably with their direct competitor s current trailing-twelve-month average of.82 ( Competitors, 2013). Stryker s P/E ratio of compares unfavorably with their direct competitor s current trailing-twelve-month average of ( Competitors, 2013). Trend Analysis Financial ratios have more meaning when they are evaluated over a period of time. Trends that emerge can indicate the direction a company is heading financially (Gapenski, 2009). Table 2 tracks Stryker s key financial ratios over the last three years. Stryker s liquidity ratios have experienced some volatility during the years 2010 to The quick ratio dropped significantly from 2010 to 2011 due to current assets decreasing by $421 million while current liabilities increased by $223 million (Stryker, 2012, p.21). However, 2012 saw a nice recovery in the quick ratio due to a significant increase in current assets compared to current liabilities (Stryker 2013, p.23). Debt management ratios have skewed slightly downward. Debt-to-equity jumped significantly from 2010 to 2011 resulting in a correspondingly lower interest coverage rate. Stryker s long-term debt increased $755 million from 2010 to 2011 while total shareholder equity increased $509 million resulting in a capital structure with greater leverage (Stryker, 2012, p.21). The issuance of $750 million in senior unsecured notes in 2011 contributed significantly to this increase (Stryker, 2012, p.32). Asset and inventory management ratios have remained very steady suggesting solid control of sales related operations. Profitability has trended down slightly and Stryker will need to stop this erosion of returns. Peer-group Analysis Comparing Stryker s financial performance with similar organizations within their industry provides insight into how well they are performing compared to their competitors. This peer-group contrast prevents analytical judgments made in isolation from what the overall

11 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 11 Table 2 Three Year Financial Ratios Trend Ratio Name Current Ratio Quick Ratio Debt Ratio a Debt-to-Equity Ratio a Times-Interest-Earned Ratio Inventory Turnover Ratio Fixed Asset Turnover Ratio Total Asset Turnover Ratio Return on Sales Return on Total Assets Return on Total Equity Earnings Per Share $3.42 $3.53 $3.26 Price to Earnings c 14.4 d 15.5 e Note: All values except price-to-earnings are calculated from Stryker s form 10-K annual reports filed with the SEC for years retrieved from a Total debt is long-term debt excluding current maturities as stated on the balance sheet. b Interest expenses used are from the long-term debt and credit facilities notes in the form 10-K annual reports. c Share prices used in P/E calculation for 2012 was $55.54 which was the opening price on January 2, 2013; for 2011 was $50.65 which was the opening price on January 3, 2012; for 2010 was which was the opening price on January 3, 2011, all retrieved at industry is experiencing. Two companies similar to Stryker that are useful for comparison are Smith & Nephew (S & N) and Zimmer. Both companies are large, multi-national, publically traded, medical equipment manufacturing concerns. Comparisons of many common financial ratios can be made from data depicted in Table 3. S & N enjoys a higher level of liquidity than either Stryker or Zimmer suggesting that they are more prepared to meet their short- term obligations. S & N has a relatively small amount of debt compared to Stryker of Zimmer.

12 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 12 Table 3 Peer-Group Financial Ratio Comparison for 2012 Ratio Name Stryker Zimmer Smith & Nephew Current Ratio Quick Ratio Debt Ratio Debt-to-Equity Ratio Times-Interest-Earned Ratio Inventory Turnover Ratio Fixed Asset Turnover Ratio Total Asset Turnover Ratio Return on Sales Return on Total Assets Return on Total Equity Earnings Per Share $3.42 $3.22 $ d Price to Earnings Ratio 16.2 a 21 b c Notes: All values except P/E are calculated from Stryker s 10-K, Zimmer s 10-K, and Smith & Nephew s 20-F annual reports that were submitted to the SEC for S & N s form 20-F retrieved at Zimmer s form 10-K retrieved from &type=sect&dcn= Stryker s form 10-K retrieved from a Stryker s January 2, 2013, opening share price of $55.70 was used to calculate P/E ratio and was retrieved from b Zimmer s January opening share price of $67.60 is used to calculate their P/E ratio. Retrieved from c S & N s January 2, 2013 opening share price of $59.47 was used to calculate P?E ratio and was retrieved from d S & N s earnings per share are stated on page 244 of their form 20-F SEC filing and is calculated based on the 897M shares outstanding and attributable profit for the year of $729M. Zimmer s solvency ratios are noticeably higher than those of Stryker or S & N indicating that they are more highly leveraged and a greater risk for investors. Relatedly, Zimmer s higher leverage drives its debt coverage capacity lower again indicating higher risk. Stryker has demonstrated a greater ability for generating sales from fixed assets compared to Zimmer and S

13 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 13 & N although when considering all assets, the three company s efficiency in creating sales from assets show less variability. This suggests that Stryker has a lower percentage of debt and equity tied up in property, plant, and equipment (PP&E) and they are utilizing their PP&E more efficiently to generate sales than Zimmer or S & N. S&N experiences greater profitability than either Stryker or Zimmer whose profitability ratios are similar. Investors in S & N enjoyed a 19% return on their investments in 2012 as opposed the 15% return Stryker s investors received. S & N s P/E ratio is significantly higher than Stryker and Zimmer indicating that the market believes S & N is undervalued. If these differences in market indicators were to persist over several years it may tempt investors to shift their investments from Stryker to S & N. Analytical Report of Financial Performance Stryker s financial statements and ratios indicate that Stryker is financially stable and well-placed within the medical equipment and supplies industry. Stryker s cash and other shortterm assets provide adequate working capital and liquidity. Levels of debt indicate a low default risk. Stryker s shifting debt-to- equity ratio from year to year demonstrates a willingness to change their capital structure as their needs require. Inventory and assets have been consistently managed over the last three years. Total asset turnover lags the broad industry average but asset and inventory managements as a whole compares more favorably to their direct competitors. Profitability has been trending slightly downward which is a cause for concern although earnings per share for 2012 compare favorably with S & N and Zimmer. Stryker s financial statements and financial ratios reveal a well-run organization that increases value for its shareholders. Assessment and Recommendations Retrospective Financial Assessment

14 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 14 International revenue was an area of weakness for Stryker in Stryker experienced a 2011 to 2012 sales reduction of 9.2% in the geographic areas of Europe, the Middle East, and Africa. During this period they also experienced an increase in net PP&E of 5.1% (Stryker Corporation, 2013, p. 40). Revenue from international markets was flat while the domestic market experienced healthy growth ( Revenue, 2013). More attention should have been focused on generating greater sales from their PP&E investments in the international market. Like most manufacturers of medical products, Stryker is subject to product liability lawsuits and recalls of their products by the Food and Drug Administration (FDA). Stryker faces a number of FDA recalls and the financial implications are not yet fully known. These costs have lowered Stryker s earnings. Stryker reported in its K report to the SEC that its, hip recall ultimately could cost the company between $190 [million] and $390 [million], including the cost of patient testing and treatment, revision surgeries, insurance claims and lawsuits (Stryker, 2013, p. 32). Stryker (2013) goes on to state that, Accordingly, in December 2012 we recorded a charge to earnings of $174 [million] representing the excess of the $190 [million] minimum of the range over the previously recorded reserves (p. 32). This reduction in earnings for 2012 should have been avoided by better product design and quality control. Stryker did not control selling, general, and administrative (SG&A) expenses during 2012 as well as they should have. Accounting data from Stryker s consolidated statement of earnings shown in Appendix A indicates that SG&A expenses increased 10% over 2011 significantly surpassing sales increases of 4.2%. Although the cost of sales actually decreased 1% from 2011 to 2012, the disproportionate increase in SG&A expenses was a missed opportunity for cost control. Ultimately, this increase in SG&A expenses, coupled with a reduction of interest expense, resulted in a decrease in EAT of 3.6% during this period of sales

15 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 15 growth. Stryker needs to do a better job of proportionately aligning their expenses with revenue so that sales growth will be better reflected in EAT. Future Business Strategies Over the next three years Stryker should continue looking for opportunities to expand its market presence into emerging markets and geographic areas where it is underrepresented. The emerging economies, comprised of China, India, Brazil, Russia, and South Africa represent the next big opportunity for the leading medical equipment and device manufacturers (Research, 2013, para. 4). China, in particular, is home to more than 120 million people who are aged 65 or older, a population in continuous need of medical care (Research, 2013, para. 4). Stryker made a significant foray into the Chinese market in the first quarter of 2013 when it used its strong cash flow to acquire Trauson Holdings, a Chinese orthopedics company, for $764 million in cash (Simpson, 2013). Some claim this move will be the revenue growth driver of the company (Portfolio, 2013) while others note that, Stryker acquired Trauson Holdings in order to expand its presence in China with a product portfolio and pipeline that is targeted at the large and fast growing value segment of the Chinese orthopedic market (Research on Stryker and Zimmer, 2103, para. 8). Stryker should also analyze the influences that are inhibiting profitability in its European markets (Porter, 2008). The sluggish European economy and, internal issues in the company s European wing (Portfolio, 2013, p. 3) demand that management take the appropriate actions (Simpson, 2013) to promote future growth in European markets. As the US population ages, Stryker should capitalize on the rebounding domestic orthopedic market (Portfolio, 2013, p.3) and should maintain headway by expanding new products in its Neurovascular, Knee, and Spine segments (Portfolio, 2013). The number of US

16 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 16 citizens over age 65 years of age is expected to nearly double by the year 2030 (Portfolio, 2013, p. 4), requiring more orthopedic implants, as their joints suffer from attrition (Portfolio, 2013). Conclusion This financial analysis based upon 2012 corporate financial statements has provided an accurate description of Stryker Corporation a global leader in the medical equipment industry. By utilizing ratio analysis as a tool for measuring financial health, Stryker Corporation has been shown to earn an adequate return on sales, be in a good position to pay short-term obligations, and manage its debt appropriately. Stryker s corporate managers have successfully created value for the organization. Although the organization will be challenged to continue seeking global opportunities, strengthen internal weaknesses, and monitor trends in order to maintain its strong financial position, Stryker s consistently solid past performance points to a bright future.

17 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 17 Appendix A Consolidated Statement of Earnings for Years Year ended December Net sales ,307 7,320 Cost of sales 2,781 2,811 2,286 Gross profit 5,876 5,496 5,034 Research, development and engineering expenses Selling, general and administrative expenses 3,466 3,150 2,707 Intangible asset amortization Property, plant and equipment impairment 124 Restructuring charges Total operating expenses 4,135 3,810 3,283 Operating income 1,741 1,686 1,751 Other income (expense), net Earnings before income taxes 1,705 1,686 1,729 Income taxes Net earnings 1,298 1,345 1,273 Net earnings per share of common stock: Basic net earnings per share of common stock Diluted net earnings per share of common stock Weighted-average shares outstanding in millions: Basic Net effect of dilutive employee stock options Diluted Anti-dilutive shares excluded from the calculation of net effect of dilutive employee stock options Note: Numbers are in millions of dollars except for earnings per share values. Retrieved from

18 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 18 Appendix B Consolidated Balance Sheets for Years Year Ending December ASSETS Current assets Cash and cash equivalents 1, Marketable securities 2,890 2,513 Accounts receivable, less allowance of $58 ($56 in 2011) 1,430 1,417 Inventories Materials and supplies Work in process Finished goods 992 1,052 Total inventories 1,265 1,283 Deferred income taxes Prepaid expenses and other current assets Total current assets 8,148 7,207 Property, plant and equipment Land, buildings and improvements Machinery and equipment 1,607 1,455 Total property, plant and equipment 2,232 2,055 Less allowance for depreciation 1,284 1,167 Net property, plant and equipment Other assets Goodwill 2,142 2,072 Other intangibles, net 1,424 1,442 Other Total assets 13,206 12,146 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable Accrued compensation Income taxes Dividend payable Accrued expenses and other liabilities

19 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 19 Current maturities of debt Total current liabilities 1,876 1,840 Long-term debt, excluding current maturities 1,746 1,751 Other liabilities Shareholders' equity Common stock, $0.10 par value: Authorized: 1 billion shares, outstanding: 380 million shares (381 million in 2011) Additional paid-in capital 1,098 1,022 Retained earnings 7,332 6,497 Accumulated other comprehensive income Total shareholders' equity 8,597 7,683 Total liabilities & shareholders' equity 13,206 12,146 Notes: Numbers are in millions of dollars. Retrieved from

20 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 20 Appendix C Consolidated Statement of Cash Flow for Years Year Ending December Operating activities Net earnings 1,298 1,345 1,273 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation Intangibles amortization Share-based compensation Restructuring charges Property, plant and equipment impairment 124 Sale of inventory stepped up to fair value at acquisition Deferred income tax credit Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable Inventories Accounts payable Accrued expenses and other liabilities Income taxes Other Net cash provided by operating activities 1,657 1,434 1,547 Investing activities Acquisitions, net of cash acquired , Purchases of marketable securities -3,480-6,779-5,619 Proceeds from sales of marketable securities 3,108 6,869 5,210 Purchases of property, plant and equipment Proceeds from sales of property, plant and equipment Net cash used in investing activities , Financing activities Proceeds from borrowings Payments on borrowings Proceeds from issuance of long-term debt, net

21 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 21 Dividends paid Repurchase and retirement of common stock Other Net cash (used in) provided by financing activities Effect of exchange rate changes on cash and cash equivalents Change in cash and cash equivalents ,099 Cash and cash equivalents at beginning of year 905 1, Cash and cash equivalents at end of year 1, ,758 Supplemental cash flow disclosure: Cash paid for income taxes, net of refunds Notes: Numbers are in millions of dollars. Retrieved from

22 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 22 References Block, S. & Hirt, G. (2008). Foundations of financial management. New York, NY: McGraw Hill/Irwin. Competitors. (2013). Yahoo! Finance. Retrieved from ttp://finance.yahoo. com/q/co?s=syk+competitors Efficiency information and trends. (2013). CSI Market. Retrieved from Financial strength information and trends. (2013). Retrieved from Gapenski, L. (2009). Fundamentals of healthcare management. Chicago, IL: Health Administration Press. Hawawini, G., & Viallet, C. (2011). Finance for executives: Managing for value creation. Mason, OH: South-Western Cengage Learning. Loth, R. (2013a). Liquidity measurement ratios: Introduction. Investopedia. Retrieved from Loth, R. (2013b). Debt ratios: Interest coverage ratio. Investopedia. Retrieved from Management effectiveness information and trends (2013). CSI Market. Retrieved from Overview. (2013, March 11). Brokerage Research Digest. Retrieved from /ZER/rd_get_pdf.php?r=SYK

23 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 23 Porter, M. E. (2008). The five competitive forces that shape strategy. Retrieved from Harvard University, Harvard Business School Publishing for Educators website: harvard.edu.edu/cbmp/asset/ Portfolio manager executive summary. (2013, March 11). Brokerage Research Digest. Retrieved from Research and markets add report: Rigid endoscopes market outlook in BRICS (Brazil, Russia, India, China, South Africa) to (2013, April 29). Health & Beauty Close - Up. Retrieved from /13E4406EB845B010D5A/1?accountid=28644 Research on Stryker and Zimmer: What has population to do with medical equipment? (2013, February 20). Yahoo! Finance. Retrieved from Revenue. (2013, March 11). Brokerage Research Digest. Retrieved from Simpson, S. (2013, January 22). Stryker follows its rivals with a big investment in China. Investopedia. Retrieved from Sisson, N. B. (2013). The Definition of "market value ratio". ehow money. Retrieved from Smith & Nephew PLC (SN/:London): Financial Statements. (2013). Bloomberg Businessweek. Retrieved ticker=sn/:ln&dataset=balancesheet&period=a&currency=native

24 LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 24 Stryker Corporation. (2013, April 15) Annual Report on Form 10-K. Retrieved from Stryker Corporation Website: Stryker Corporation. (2012, February 13) Annual Report on Form 10-K. Retrieved from Stryker Corporation: Stryker Corporation. (2013) Stryker Annual Review. Retrieved from Stryker Corporation SYK. (2013). Morningstar. Retrieved from Stryker corporation competitors. (2013). Yahoo! Finance. Retrieved from com/q/co?s=syk+competitors