LTP Comprehensive Financial Analysis Paper Jessica Cusac...

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

LTP COMPREHENSIVE FINANCIAL ANALYSIS PAPER 2

Abstract

This paper is presented as an exercise in applying financial analysis techniques to a large, multi-

national, 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 2010 – 2012 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.


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


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


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


Table 1

Stryker’s 2012 Financial Ratio Calculation

Ratio Name Formula Calculation Ratio

Current Ratio Current Assets / Current

Liabilities

8148 / 1,876 4.34

Quick Ratio (Current Assets -

Inventories) / Current

Liabilities

(8148 - 1,265) / 1,876 3.67

Debt Ratio Total Debta / Total Assets 1,746 / 13,206 0.13

Debt-to-Equity Ratio Total Debta / Total Equity 1,746 / 8,597 0.2

Times-Interest-

Earned Ratio

Earnings Before Interest

and Tax / Interest

1,741 / 63b

27.63

Inventory Turnover

Ratio

Cost of Goods Sold /

Inventories

2,781 / 1,265 2.2

Fixed Asset

Turnover Ratio

Sales / Net Fixed Assets 8,657 / 948 9.13

Total Asset Turnover

Ratio

Sales / Total Assets 8,657 / 13,206 0.66

Return On Sales Earnings After Tax / Sales 1,298 / 8,657 0.15

Return on Total

Assets

Earnings After Tax / Total

Assets

1,298 / 13,206 0.1

Return on Total

Equity

Earnings After Tax / Equity 1,298 / 8,579 0.15

Earnings Per Share Earnings After Tax /

Outstanding Common

Stockc

1,298 / 380 $3.42

Price to Earnings

Ratio

Share Priced / Earnings per

Share

55.54 /3.42 16.24

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

http://www.dailyfinance.com/quote/NYSE/stryker/SYK/sec-filings?source=itxwebtxt0000014. Ratio names and

formulas are found in Hawawini and Viallet (2011). aTotal debt is long-term debt excluding current maturities as stated on the balance sheet.

bInterest expense is taken

from note 7 on page 34 of the 2012 form 10-K. cOutstanding common stock number taken from 2012 balance

sheet. dShare price is from the opening price on January 2, 2013 retrieved at

http://finance.yahoo.com/q/hp?s=SYK&a=00&b=2&c=2013&d=00&e=2&f=2013&g=d.

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


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 27.63 means


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

18.07 (“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).


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


compares favorably with their direct competitor’s current trailing-twelve-month average of .82

(“Competitors,” 2013). Stryker’s P/E ratio of 16.24 compares unfavorably with their direct

competitor’s current trailing-twelve-month average of 20.11 (“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 2012. 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


Table 2

Three Year Financial Ratios Trend

Ratio Name 2012 2011 2010

Current Ratio 4.34 3.94 4.75

Quick Ratio 3.67 3.24 4.1

Debt Ratioa 0.13 0.14 0.15

Debt-to-Equity Ratioa

0.2 0.23 0.14

Times-Interest-Earned Ratio 27.63 14.31 32.92

Inventory Turnover Ratio 2.2 2.2 2.16

Fixed Asset Turnover Ratio 9.13 9.35 9.17

Total Asset Turnover Ratio 0.66 0.67 0.67

Return on Sales 0.15 0.16 0.17

Return on Total Assets 0.1 0.11 0.12

Return on Total Equity 0.15 0.17 0.18

Earnings Per Share $3.42 $3.53 $3.26

Price to Earnings 16.24c

14.4d

15.5e

Note: All values except price-to-earnings are calculated from Stryker’s form 10-K annual reports filed with the SEC

for years 2010-2012 retrieved from http://www.dailyfinance.com/quote/NYSE/stryker/SYK/sec-

filings?source=itxwebtxt0000014. aTotal debt is long-term debt excluding current maturities as stated on the balance sheet.

bInterest expenses used are

from the long-term debt and credit facilities notes in the form 10-K annual reports. cShare 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 53.93 which was the opening price on January 3, 2011, all

retrieved at http://finance.yahoo.com/q/hp?s=SYK&a=00&b=2&c=2013&d=00&e=2&f=2013&g=d.

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.

http://www.dailyfinance.com/quote/NYSE/stryker/SYK/sec-filings?source=itxwebtxt0000014



Table 3

Peer-Group Financial Ratio Comparison for 2012

Ratio Name Stryker Zimmer Smith & Nephew

Current Ratio 4.34 4.28 6.07

Quick Ratio 3.67 3.13 5.10

Debt Ratio 0.13 0.36 0.08

Debt-to-Equity Ratio 0.2 0.55 0.12

Times-Interest-Earned Ratio 27.63 13.37 122.22

Inventory Turnover Ratio 2.2 1.13 1.19

Fixed Asset Turnover Ratio 9.13 3.69 5.22

Total Asset Turnover Ratio 0.66 0.50 0.73

Return on Sales 0.15 0.19 0.18

Return on Total Assets 0.1 0.09 0.13

Return on Total Equity 0.15 0.14 0.19

Earnings Per Share $3.42 $3.22 $0.81.3d

Price to Earnings Ratio

16.2a

21b

69.96c

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 2012. S & N’s form 20-F retrieved at

http://markets.ibtimes.com/ibtimes/action/getedgarwindow?accesscode=119312513082636. Zimmer’s form 10-K

retrieved from http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9119391-805-

426245&type=sect&dcn=0001193125-13-079914. Stryker’s form 10-K retrieved from

http://www.dailyfinance.com/quote/NYSE/stryker/SYK/sec-filings?source=itxwebtxt0000014. aStryker’s January 2, 2013, opening share price of $55.70 was used to calculate P/E ratio and was retrieved from

http://finance.yahoo.com/q/hp?s=SNN&a=00&b=2&c=2013&d=00&e=2&f=2013&g=d bZimmer’s January 2 2013 opening share price of $67.60 is used to calculate their P/E ratio. Retrieved from

http://finance.yahoo.com/q/hp?s=ZMH&a=00&b=2&c=2013&d=00&e=2&f=2013&g=d cS & N’s January 2, 2013 opening share price of $59.47 was used to calculate P?E ratio and was retrieved from

http://finance.yahoo.com/q/hp?a=00&b=2&c=2013&d=00&e=2&f=2013&g=d&s=SNN%2C+&ql=1. dS & 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

http://markets.ibtimes.com/ibtimes/action/getedgarwindow?accesscode=119312513082636

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9119391-805-426245&type=sect&dcn=0001193125-13-079914

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9119391-805-426245&type=sect&dcn=0001193125-13-079914

http://finance.yahoo.com/q/hp?s=ZMH&a=00&b=2&c=2013&d=00&e=2&f=2013&g=d

http://finance.yahoo.com/q/hp?a=00&b=2&c=2013&d=00&e=2&f=2013&g=d&s=SNN%2C+&ql=1


& 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 short-

term 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


International revenue was an area of weakness for Stryker in 2012. 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 2012 10-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


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


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.


Appendix A

Consolidated Statement of Earnings for Years 2010 – 2012.

Year ended December 31

2012 2011 2010

Net sales

8657 8,307 7,320

Cost of sales

2,781 2,811 2,286

Gross profit

5,876 5,496 5,034

Research, development and engineering

expenses

471 462 394

Selling, general and administrative expenses

3,466 3,150 2,707

Intangible asset amortization

123 122 58

Property, plant and equipment impairment

— — 124

Restructuring charges

75 76 —

Total operating expenses

4,135 3,810 3,283

Operating income

1,741 1,686 1,751

Other income (expense), net

-36 — -22

Earnings before income taxes

1,705 1,686 1,729

Income taxes

407 341 456

Net earnings

1,298 1,345 1,273

Net earnings per share of common stock:

Basic net earnings per share of common stock

3.41 3.48 3.21

Diluted net earnings per share of common

stock

3.39 3.45 3.19

Weighted-average shares outstanding—in

millions:

Basic

380.6 386.5 396.4

Net effect of dilutive employee stock options

2.4 3 3.1

Diluted

383 389.5 399.5

Anti-dilutive shares excluded from the

calculation of net effect of dilutive employee

stock options

6.4 7.8 7.5

Note: Numbers are in millions of dollars except for earnings per share values. Retrieved from



Appendix B

Consolidated Balance Sheets for Years 2011 – 2012.

Year Ending December 31 2012 2011 2010

ASSETS

Current assets

Cash and cash equivalents 1,395 905

Marketable securities 2,890 2,513

Accounts receivable, less allowance of $58 ($56 in 2011) 1,430 1,417

Inventories

Materials and supplies 202 185

Work in process 71 46

Finished goods 992 1,052

Total inventories 1,265 1,283

Deferred income taxes 811 777

Prepaid expenses and other current assets 357 312

Total current assets 8,148 7,207

Property, plant and equipment

Land, buildings and improvements 625 600

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 948 888

Other assets

Goodwill 2,142 2,072

Other intangibles, net 1,424 1,442

Other 544 537

Total assets 13,206 12,146

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Accounts payable 288 345

Accrued compensation 467 444

Income taxes 70 155

Dividend payable 101 81

Accrued expenses and other liabilities 934 798


Current maturities of debt 16 17

Total current liabilities 1,876 1,840

Long-term debt, excluding current maturities 1,746 1,751

Other liabilities 987 872

Shareholders' equity

Common stock, $0.10 par value:

Authorized: 1 billion shares, outstanding: 380 million shares (381

million in 2011) 38 38

Additional paid-in capital 1,098 1,022

Retained earnings 7,332 6,497

Accumulated other comprehensive income 129 144

Total shareholders' equity 8,597 7,683

Total liabilities & shareholders' equity 13,206 12,146

Notes: Numbers are in millions of dollars. Retrieved from



Appendix C

Consolidated Statement of Cash Flow for Years 2010-2012

Year Ending December 31 2012 2011 2010

Operating activities

Net earnings 1,298 1,345 1,273

Adjustments to reconcile net earnings to net cash

provided by operating activities:

Depreciation 154 160 165

Intangibles amortization 123 122 58

Share-based compensation 75 75 69

Restructuring charges 75 76 —

Property, plant and equipment impairment — — 124

Sale of inventory stepped up to fair value at

acquisition 18 143 7

Deferred income tax credit -39 -164 -104

Changes in operating assets and liabilities, net of

effects of acquisitions:

Accounts receivable -20 -152 -121

Inventories 18 -166 -131

Accounts payable -48 44 96

Accrued expenses and other liabilities 180 158 91

Income taxes -159 -95 -24

Other -18 -112 44

Net cash provided by operating activities 1,657 1,434 1,547

Investing activities

Acquisitions, net of cash acquired -154 -2,066 -265

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 -210 -226 -182

Proceeds from sales of property, plant and equipment — 67 61

Net cash used in investing activities -736 -2,135 -795

Financing activities

Proceeds from borrowings 178 178 100

Payments on borrowings -182 -190 -81

Proceeds from issuance of long-term debt, net — 749 996


Dividends paid -324 -279 -238

Repurchase and retirement of common stock -108 -622 -426

Other -13 3 59

Net cash (used in) provided by financing activities -449 -161 410

Effect of exchange rate changes on cash and cash

equivalents 18 9 -63

Change in cash and cash equivalents 490 -853 1,099

Cash and cash equivalents at beginning of year 905 1,758 659

Cash and cash equivalents at end of year 1,395 905 1,758

Supplemental cash flow disclosure:

Cash paid for income taxes, net of refunds 599 574 579

Notes: Numbers are in millions of dollars. Retrieved from



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