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Medtronic, Inc.

Financial Statement Analysis and


Comparison to St. Jude

November 12, 2014

Table of Contents
Introduction ................................................................................................................................................................1
Industry Competition ..............................................................................................................................................1
Ratio Analysis .............................................................................................................................................................2
ROE disaggregation into the operating and non-operating components .....................................2
ROE disaggregation using DuPont Model ..................................................................................................3
Short-term liquidity ............................................................................................................................................4
Capital structure and long-term solvency .................................................................................................5
Turnover analysis ................................................................................................................................................6
Common-size balance statement and income statement ....................................................................6
Investment analysis .................................................................................................................................................6
Solvency Ratios ................................................................................................................................................7
Cash Flow Analysis .........................................................................................................................................9
Capital Structure........................................................................................................................................... 10
LONG-TERM EQUITY INVESTMENT ......................................................................................................... 10
ROE..................................................................................................................................................................... 11
Stock Repurchase ......................................................................................................................................... 12
Total Shareholder Return ......................................................................................................................... 13
Cash Flows ...................................................................................................................................................... 13
Conclusion ................................................................................................................................................................ 15
Appendix A: Medtronic Financial Statements and Ratios ........................................................................1
Appendix B: St. Jude Financial Statements and Ratios ..............................................................................1
Appendix C: Competitors Analysis ....................................................................................................................1
Appendix D: Calculation of ROE disaggregation into operating and non-operating return ......3

Table of Tables
Table 1: Fiscal Year Definition.............................................................................................................................1
Table 2: ROE Disaggregation ...............................................................................................................................3
Table 3: ROE Disaggregation using DuPont Model .....................................................................................4
Table 4: Short Term Liquidity Ratios ...............................................................................................................4
Table 5: Capital Structure and Long-term Solvency Ratios.....................................................................5
Table 6: Turnover Analysis...................................................................................................................................6
Table 7: MDT Stock Repurchasing .................................................................................................................. 12
Table 8:
STJ Stock Repurchasing............................................................................................................... 13
Table 9: Cash Flows for MDT and STJ............................................................................................................ 14
Table 10: Free Cash Flows to the Firm for MDT and STJ ....................................................................... 14

Table of Figures
Figure 1: Stock Price Performance for MDT and STJ..11

Introduction
This financial accounting analysis is about Medtronic, Inc. (MDT) and St. Jude Medical (STJ),
two medical device companies. These two companies prepare the financial statements in
conformity with generally accepted accounting principles in the United States (GAAP). This
project report is mainly based on four years annual reports of these two companies. MDT
reports their financials in April of each year, whereas STJ reports in December/January. For the
purposes of this report each companys financial information will be stated in terms of fiscal
years according to Table 1.
Table 1: Fiscal Year Definition
MDT Reporting Date

Apr. 25, 2014

Apr. 26, 2013

Apr.26, 2012

Apr. 26, 2011

STJ Reporting Date

Dec. 28, 2013

Dec. 29, 2012

Dec. 31, 2011 Jan. 1, 2011

Fiscal Year

Fiscal Year 4

Fiscal Year 3

Fiscal Year 2

Fiscal Year 1

The goal of this project is to make long-term debt and equity investment decisions based on the
financial analysis of the firm's operating performance, profitability, short-term liquidity, capital
structure and long-term solvency risks, and stability.

Industry Competition
Medical device industry is a highly competitive industry. This industry has been adversely
affected by financial crisis in the past four years, however, the inelasticity of medical service
demand, technology advances, and aging populations continue to bolster market growth. In
addition, recent healthcare reform and regulation have had complex impacts on the medical
device industry. For example, 2010 Obama Care includes subsidies and new taxes on medical
device manufacturers. Moreover, consolidation among health care providers and large
investment on advanced technology increase the competition on basis of price and drive
merger and acquisition within the industry.
MDT has a diversified business portfolio, operating three segments: Cardiac and Vascular
(including cardiac rhythm disease management (CRDM), coronary, structural heart, and
endovascular), Restorative Therapies (including spine, neuromodulation, and surgical
technologies), and Diabetes.
MDT faces competition from business such as large manufacturers with multiple business lines
to small manufacturers that offer a limited selection of products. MDT identified its competitors
in each division of its main products in its annual report. All the competitors in the each division
were examined and it was found that Boston Scientific, Johnson & Johnson, and STJ were the
main competitors in MDTs significant product divisions. See Appendix C.
For the purpose of this financial analysis, Johnson and Johnson was ruled out because of its
complex business structure. Medical devices and diagnostics only took up approximately 40% of
Johnson and Johnsons total sales, while pharmaceutical and consumer goods took up
approximately 60% of total sales in 2013. There was an insufficient breakdown of information
1

for an analysis and comparison to MDT of Johnson and Johnsons medical devices and
diagnostics segment.
It was found that STJ and Boston Scientific have very similar business as MDT. Boston
Scientifics stock price is only $13, while stock prices of both MDT and STJ are around $65,
which leads to the conclusion that STJ is more comparable with MDT.
STJ has two business divisions: implantable electronic systems division (which combines cardiac
rhythm management and neuromodulation) and the cardiovascular and ablation technologies
division (which combines cardiovascular and atrial fibrillation).
Compared with MDT, STJ has a smaller scale of sales revenue. The revenues of MDT are$15,508
$ 16,184, $16,590, $17,005 in fiscal year 1 to 4 respectively. Alternatively, the revenues of STJ
are $5,165, $5,612 ,$5,503, $5,501 in fiscal years 1 to 4 respectively.

Ratio Analysis
ROE disaggregation into the operating and non-operating components
As manufacturing companies, MDT and STJ highly rely on their operating activities. High
operating return indicated companies growth came form it operation of main business. When
calculating operating return for MDT, the following items should be specially noted as operating
or non-operating items:
Special charges, restricting charge, and litigation charge, acquisition-related items
Special charge in fiscal year 4 is $40 million charitable contribution should not be
considered as operating expense. Restructuring charge including employee termination
cost, inventory write-offs of discontinued products lines and production-related
impairment should be considered as operating expense. Litigation charge that is related
to patent should be included in operating expense. Acquisition-related items primarily
including IPR&D and long-lived asset impairment should be considered as operating
expense.
Other accrued expense and other long-term liabilities
MDT includes the warranty obligation, all derivatives, contingent consideration
associated with acquisitions, and litigation charge in other accrued expenses and other
long-term liabilities. Warranty obligation, contingent consideration associated with
acquisition and litigation charge should be considered as operation liabilities, while
derivatives should be classified as investment liabilities.
When calculating operating return for STJ, the following items should be specially noted as
operating or non-operating items:
Special charges:

Special charges contained restricting charges, impairment charges and certain


settlement or litigation charges. Special charges should be considered as operation
charges.
Other assets:
STJ classified securities trading investment, consideration of acquisition as other assets,
which should be excluded from operating assets.
Other liabilities:
STJ included deferred compensation liability, contingent consideration, and derivatives
are other liabilities and other current liabilities. Derivatives should be considered as
investing liabilities.
Because it is not clear that how much investment assets and liabilities were included in other
assets and other liabilities, the estimated STJ operating return may be underestimated or
overestimated.
From the average ratio of operating return, MDT relied more on operating activities than STJ. It
should be noted that non-operating return of MDT is negative, which indicates that MDT did
not perform well on investing or financing. For the recent four year, MDT recognized
impairment or loss on its investment activities. See Appendix D for calculation details.
Table 2: ROE Disaggregation
Year 4
Medtronic
ROE
Operating Return
Non-operating Return
St. Jude
ROE
Operating Return
Non-operating Return

Year 3

Year 2

Year 1

Average

0.1608
0.1938
0.1753
0.1949
(0.0144) (0.0011)

0.2187
0.1979
0.0208

0.2024
0.1971
0.0053

0.1939
0.1913
0.0026

0.1702
0.1393
0.0309

0.1869
0.1411
0.0458

0.2358
0.1492
0.0866

0.1921
0.1414
0.0508

0.1755
0.1358
0.0397

ROE disaggregation using DuPont Model


Return on equity indicates how much the shareholders can earn for their investment. See
Table 3 below for MDT and STJs ROE ratios for each of the four fiscal years. MDT and STJ both
experienced a decreased ROE. A decreasing ROE means that the company utilized its equity less
efficiently and was less capable of earning returns to its investors.
Disaggregated ROE can be calculated using the DuPont Model by breaking ROE into tax burden,
interest burden, profit margin, asset turnover, and financial leverage. By using DuPont Model,
which factors caused the decreased ROE for MDT and STJ can be identified.
MDTs interest burden and financial leverage ratios were stable from fiscal years 1 to 4. Profit
margin, tax burden and asset turnover caused ROE to decline. Declined profit margin and tax
burden discovered some risks of MDT operation. Net income declined because of the
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fluctuating expenses, including restructuring charges, certain litigation charges, and acquisitionrelated items. Restructuring charges and acquisition-related items reflect the trend of
acquisition and advanced technology in medical device manufacturing industry. MDT needed to
restructure some of its factories by paying employee termination compensation and cutting off
some products line due to change of techonlogies. Certain litigation charges gave investors a
sign of regulation risks because MDT paid extremely high amount of litigation charge ($ 770
millions) in fiscal year 4.
STJs profit margin and tax burden ratio were stable, but interest burden, financial leverage,
and asset turnover ratio decreased from fiscal years 1 to 4. Total short-term debt and long-term
debt increased significantly from years 1 to 4.
Table 3: ROE Disaggregation using DuPont Model

MDT
Profit Margin
Asset Turnover Ratio
Financial Leverage
ROE
STJ
Profit Margin
Asset Turnover Ratio
Financial Leverage
ROE

Year 4

Year 3

Year 2

Year 1

Average

0.180
0.467
1.910
0.161

0.209
0.490
1.890
0.194

0.223
0.510
1.920
0.219

0.200
0.528
1.920
0.202

0.203
0.499
1.910
0.194

0.131
0.564
2.297
0.170

0.137
0.602
2.133
0.176

0.147
0.639
1.986
0.187

0.176
0.689
1.948
0.236

0.148
0.623
2.091
0.192

Short-term liquidity
The short-term liquidity ratios for MDT and STJ are found in Table 4.
MDTs current ratio, quick ratio and cash ratios for four fiscal years are above 2, indicating that
MDT is able to pay off short-term debts due in the very near future and have enough money to
finance its day-to-day business operations.
For four fiscal years, STJs current ratio and quick ratio are above 2, but cash ratio is less than 1.
In fiscal year 1, the cash ratio was only 0.492. The low cash ratio indicated higher risk for STJ to
pay off its short-term debts in fiscal year 1 when cash was $500 million and current liability was
$1,017 million. Since STJ increased its sales and profit, cash and cash equivalent increased from
fiscal year 2 to 4. With the stable growth of operating income and cash, a cash ratio slightly less
than 1 does not mean STJ has a liquidity issue.
MDT has improved its cash conversion cycle significantly by encouraging customer to pay cash
earlier, selling inventory faster, and delaying payment to its suppliers. STJ did a good job to
improving inventory turnover rate. But since the purchasing power of customers is high and STJ
with smaller scale of business, STJ have to wait longer for cash payment on credit sales.
Table 4: Short Term Liquidity Ratios

Year 4

Year 3

Year 2

Year 1

Average

3.815
3.247
2.562
164

4.519
3.761
2.818
179

2.756
2.220
1.578
196

1.936
1.310
0.514
190

3.257
2.635
1.868
182

2.833
2.025
0.995
187

2.001
1.433
0.673
179

3.193
2.216
0.928
178

2.863
1.800
0.492
202

2.723
1.869
0.772
187

MDT
Current ratio
Quick ratio
Cash ratio
Cash conversion cycle
STJ
Current ratio
Quick ratio
Cash ratio
Cash conversion cycle

Capital structure and long-term solvency


The capital structure and long-term solvency ratios for MDT and STJ are found in Table 5.
MDT has a stable capital structure with a debt-to-equity ratio close to 1, which means that the
external lenders bear a similar degree of risk as the owners are bearing.
STJs debt-to-equity ratio increased from 0.96 to 1.33 from years 1 to 4, which indicates that
the company relied more on debt to finance its operations. STJ has increased long-term debt
since year 1 in order to conduct consolidation and acquisition. More detailed analysis with
related to capital structure and solvency risks would be found in following discussion of Longterm Debt Investment.
Table 5: Capital Structure and Long-term Solvency Ratios

MDT
Debt-to-equity
Debt-to-capital
Debt-to-assets
Financial leverage
Interest coverage
STJ
Debt-to-equity
Debt-to-capital
Debt-to-assets
Financial leverage
Interest coverage

Year 4

Year 3

Year 2

Year 1

Average

0.951
0.488
0.488
1.951
10

0.869
0.465
0.465
1.869
11

0.918
0.479
0.479
1.918
12

0.921
0.479
0.479
1.921
9

0.915
0.478
0.478
1.915
11

1.327
0.570
0.570
2.327
9

1.265
0.558
0.558
2.265
10

1.012
0.503
0.503
2.012
12

0.960
0.490
0.490
1.960
14

1.141
0.530
0.530
2.141
11

Turnover analysis
MDT has higher A/R turnover ratio and lower A/P turnover ratio than STJ, which probably
because MDT has larger market share and stronger bargain power than STJ. MDT and STJ have
similar inventory turnover ratio, which indicate they both maintain proper inventory stock level.
The total asset turnover and working capital turnover for MDT are lower than those for STJ over
recent four fiscal years, while fixed asset turnover ratios for MDT is higher than STJ as shown in
Table 6. Lower turnover ratios indicate that MDT has less efficiency of operation for total asset
and working capital, more efficiency of operation for fixed assets. For the same amount of total
asset and working capital, MDT generated less revenue than STJ. For the same amount of fixed
asset, MDT generated more revenue than STJ.
Please find more detailed analysis as for turnover ratios in following discussion of Long-Term
Debt Investment.
Table 6: Turnover Analysis
MDT
Receivables Turnover
Inventory Turnover
Payables Turnover
Total asset turnover
Fixed asset turnover
Working capital turnover
STJ
Receivables Turnover
Inventory Turnover
Payables Turnover
Total asset turnover
Fixed asset turnover
Working capital turnover

Year 4

Year 3

Year 2

Year 1

Average

4.512
2.521
6.108
0.467
6.966
1.151

4.403
2.350
6.482
0.490
6.685
1.365

4.276
2.275
7.679
0.510
6.524
2.182

4.371
2.387
8.389
0.528
6.318
3.393

4.391
2.383
7.165
0.499
6.624
2.023

3.970
2.388
6.675
0.56
3.88
2.56

4.052
2.492
6.675
0.60
3.91
2.68

4.160
2.372
5.956
0.64
4.14
2.66

4.129
2.124
6.592
0.69
4.17
3.05

4.078
2.344
6.475
0.623
4.025
2.736

Common-size balance statement and income statement


The common-size balance and income statement found in the Appendices was useful in
completing our analysis of the financial performance and financial condition across time and
across companies.
Analyzing the statements reaffirmed our analysis on ROE presented above. One significant
change worth noting was the drastic increase in investments in MDT. Investment increased
from 3.4% in fiscal year 1 to 33.8% in fiscal year 4, this dramatic change because MDT
reclassified long-term investment into short-term investment.

Investment analysis
LONG-TERM DEBT INVESTMENT
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Based on the financial statement analysis performed on MDT and STJ, we are more inclined to
invest in the long-term debt of MDT for the following reasons:
1) Solvency ratios, both leverage and coverage, of MDT are generally better than STJ
2) Cash flow analysis (i.e., operating performance, financial flexibility, and liquidity) yields
better performance ratios from MDT, which reflect better ability to pay out interest and
long term obligations
3) Capital structure of MDT still permits growth for debt, a cheaper source of financing than
equity
Solvency Ratios
Leverage ratios of STJ are generally higher than those of MDT, which indicate that STJ is
financing its assets and operations by using more debt than equity.
Debt-to-Equity
Given its lower debt relative to equity, MDT is in a better position to pay off interests and other
debt obligations than STJ in the future. For its 4-year fiscal performance, STJ had an average
debt-to-equity ratio of 1.14 compared to 0.91 of MDT. From Fiscal Years 1 to 4, STJs total
liabilities have increased steadily driven mainly by the growth in its long-term debt from about
US$2.4 billion in year 1 to US$3.5 billion in year 4. As a percentage of total assets, STJs total
liabilities likewise grew from 49% in year 1 to 57% in year 4 as a result of higher debt financing
coupled with a slower growth in total assets. STJs long-term debt as a proportion of total
assets consequently increased from only 28% in year 1 to 34% in year 4. On the other hand,
while MDTs total liabilities have increased from fiscal Years 1 to 4, total assets grew at the
same pace of 8% on average, resulting to a relatively stable proportion of total liabilities to total
assets of about 48% for the 4-year period. Similarly, MDTs long-term debt rose from years 1 to
4 which helped the company pay off its other maturing short-term and long-term obligations as
well as finance its stock repurchase program.
Debt-to-Capital
Given its lower debt-to-capital ratio, MDT is a more attractive choice than STJ because the
former has lower default risk. For its 4-year fiscal performance, MDTs debt-to-capital ratio
averaged 0.48, lower than STJs 0.53 for the same period. A greater proportion of debt in total
capitalization meant increased likelihood of default risk for a company. Moreover, default risk
increased because of dividends payments. STJs equity was hurt more by paying out increasing
annual dividends beginning year 2 despite declining net income from years 1 to 4. Thus,
retained earnings decreased in year 3 and 4, and the proportion of debt to total capital
increased. While MDT posted back-to-back decline in net income in year 3 and4, its ability to
pay dividends was somehow buoyed by the companys strong cash flow from operations as well
as its short-term and long-term borrowings.
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Debt-to-Assets
Given its lower debt-to-asset ratio, MDT is exposed to less default risk. Total debt-to-assets
ratio of STJ averaged 0.53 from year 1 to 4 compared to 0.48 of MDT for its 4-year fiscal
performance. In addition, total liabilities of STJ outpaced the growth of its total assets, which is
indicative of a deteriorating financial risk profile as the company needs more dollars to finance
one unit of asset. Thus, investing in MDTs long-term debt is still more desirable than STJ after
evaluating the debt-to-asset ratio.
On the other hand, the two firms coverage ratios reveal a more interesting pattern. While
financial leverage still supports the argument for investing in MDTs long-term debt, the
interest coverage ratio deserves a closer look into STJs financial performance.
Financial Leverage
Financial leverage measures the amount of assets that is supported by debt. A high leverage
indicates a higher degree of debt financing than equity. MDTs financial leverage was almost
steady throughout its 4-year reporting period ranging from 1.87 to 1.95, or about 1.91 on
average. STJs financial leverage, on the other hand, was higher and ranged between 1.96 and
2.33 for an average of 2.14 from years 1 to 4. Being a more leveraged company, STJ faces
greater default risk compared to MDT. Thus, investing in the long-term debt of MDT is still
preferable.
Interest Coverage
Interest coverage ratio measures the companys ability to meet its interest obligations. STJ
seemed to be paying lower interest on their loans than MDT, hence, the former had higher
interest coverage ratio for its 4-year reporting period. STJs interest expense as a percentage of
revenues was stable at 1% from years 1 to 4, while MDTs interest expense as a share of
revenues ranged from 2% to 3% from years 1 to 4. One possible reason for low interest
payments would be because in absolute amounts, STJ has lower long-term debt compared to
MDT. However, as the leverage ratios have shown, STJ is more exposed to default risk because
of its higher debt proportion relative to equity compared to MDT. In addition, MDT recorded
litigation charges for some of its patent settlement agreements that comprised about 2% of
sales on average for its 4-year reporting period. These charges even increased sharply in the
fourth year and accounted for 5% of sales. While these expenses hurt EBIT and consequently
the interest coverage ratio, they were non-cash in nature and were only provisions recorded to
account for probable liabilities or charges in the future, and therefore, should not really affect
MDTs capacity to pay its interest obligations. Thus, despite a lower interest coverage ratio,
MDTs long-term debt would still be attractive for an investor because of its overall ability to
pay long-term obligations given strong cash flows generated from operations and lower debt
financing as a percentage of total capitalization.
8

Debt Coverage and Debt Payment


Both debt coverage and debt payment ratios are higher for MDT on average for its 4-year
reporting period compared to STJ. With higher cash flow from operations, MDT is able to fund
its investing and financing requirements, and thus, places the company in a good position to
still increase leverage by issuing debt.
Cash Flow Analysis
Cash flow analysis helps to understand better the ability of a firm to generate cash from
operations and pay its interest and long-term debt obligations.
Cash Flow-to-Revenue
MDT generates stronger cash flows from its operations because of its improving management
of working capital. Despite net income declining in fiscal years 3 and 4, MDTs cash flow from
operations actually grew for the same periods. MDT has actually improved its cash conversion
cycle from 196 days in year 2 to 179 days in year 3, and 164 days in year 4. STJ, on the other
hand, also reported declining net income for fiscal years 2 to 4, but cash flows from operations
posted a significant decline in year 4. STJs cash conversion cycle has actually deteriorated from
year 2 to 4, because STJ extended more days of credit to its customers and paid its suppliers
faster. Thus, in terms of cash flow-to-revenue performance, MDT has the advantage over STJ
and places the former in a much better position to take on new debt and pay both interest and
principal as necessary.
Cash Return-on-Assets
Cash return-on-assets measures the operating cash flow attributed to sources of capital. While
on average MDT and STJ had the same ratio of 0.14 for their respective 4-year fiscal periods, a
closer look at STJs cash return-to-assets ratio indicates a downward trend and a sharp decline
in the fourth year. For the same reasons mentioned above, STJs cash flow from operations is
not as stable and strong as MDTs, hence, investing in MDTs long-term debt is still better given
its higher capacity to pay.
Cash Return-on-Equity
Cash return-on-equity, meanwhile, is higher for STJ than MDT. STJ has higher debt-to-equity
and debt-to-capital ratios, and therefore, has slightly higher cash return-on-equity ratio than
MDT. However, given its higher debt exposure, STJ faces greater default risk. Thus, investing in
MDTs long-term debt is still preferable
Cash-to-Income
Cash-to-income ratio measures the firms ability to generate cash from operations which can be
obtained by dividing cash flow from operations by operating income. Since MDTs average
cash-to-income ratio of 1.10 for its 4-year reporting period is above SDTs 1.07, MDT is more
9

likely to cover and meet its interest and debt obligations. Given its strong cash flows from
operations, MDT is still preferred for a long-term debt investment.
Financial Flexibility
MDT also has easy access to other credit facilities. Its commercial paper program allows the
company to have $2.25 billion in commercial paper outstanding with maturities up to 364 days
from the date of issuance, but as of fiscal year 3, MDT has only $125 million of outstanding
commercial paper. MDT also has a $2.25 billion syndicated loan facility to provide backup
funding for its commercial paper program and for general use in operations. As of the most
recent reporting period, MDT has no outstanding amounts on the committed line of credit.
While STJ also has its own commercial paper program and credit facility to finance its shortterm and long-term funding requirements, MDTs stronger cash flows and healthier cash
balances place the company in a better position to pay off short-term and long-term obligations.
Moreover, STJ had issued foreign currency-denominated notes that again exposed the company
to foreign exchange risk, which could eventually hurt its cash flows and its ability to meet other
obligations.
Liquidity
As mentioned above, MDT has better management of working capital. Cash conversion cycle of
MDT improved, while STJs was more irregular and deteriorated in the fourth year. Liquidity
ratios of MDT are also better than those of STJ given the formers healthy cash balances and
substantial liquid investment portfolio, and better management of accounts receivable and
inventory levels. Given its ability to convert liquid assets into cash, coupled with strong cash
coming from operations, MDT is again more positioned to issue debt and meet interest and
principal payments.
Capital Structure
As discussed in the previous two sections, MDTs debt-to-total capitalization ratio is only about
0.48 for its 4-year reporting period. MDT utilizes equity more than debt in financing its
operations. Equity is more expensive to maintain than debt given the costs associated in issuing
new shares, transaction fees for share repurchases, and dividend payments to shareholders.
Given MDTs healthy cash flows from operations, substantial cash balances, and liquid
investment portfolio, the company still has room to increase its leverage by issuing long-term
debt without necessarily weakening its financial risk profile.
By raising capital through debt issuance, MDT will also get tax shields from the interest
payments, as well as improve its ROE.
LONG-TERM EQUITY INVESTMENT
While the figure 2 below easily shows that STJ stock has been outperforming MDT stock on a 4year period, a closer look at the financial performance of both companies provides a better
10

view of the drivers of the share price growth. After performing financial analysis, we have
decided to invest long-term in MDTs stock for the following reasons:
1) STJs ROE has been declining for 3 years given decreasing profitability
2) Stock repurchase is a good strategy to maximize return to shareholders, but between MDT
and STJ, MDT is in a better position because of its stronger cash flows
3) Comparison of total shareholder return somehow provides better trend in MDT stock
investment than STJ
4) Value of company will still depend on its ability to generate cash; MDT generates stronger
cash flows from operations and is in a better position to support share price growth through
dividend payouts and share repurchase than STJ
5) Upside for MDT stock price growth: excess cash may be used to pay dividends, continue
with stock repurchase program, or acquire companies to increase leverage and take
advantage of its benefits; improved leverage provides higher ROE and maximizes
shareholder return
Figure 1: Stock Price Performance for MDT and STJ

Stock Price Perormance

200.00

Base Prices = 1/4/10

180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00

MDT

STJ

20.00
1/4/2010

1/4/2011

1/4/2012

1/4/2013

1/4/2014

ROE
STJs ROE has been under pressure for the past 3 years because of decreasing net income.
Coming off a year with high profitability, STJ decided to pay out dividends in year 2 in addition
to its stock repurchase program to further maximize shareholder return. Unfortunately, net
income dropped in year 2 which somehow hurt the companys ability to pay out dividends. In
order to maximize shareholder return, STJ continued to pay dividends that even increased in
the next 2 years, albeit at a decreasing annual rate. With net income declining, lower earnings
were plowed back to the business. On the other hand, while MDTs net income also declined in
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its most recent 2 fiscal years, MDTs ability to pay out dividends was not really affected because
of its strong operating cash flows. MDTs ROE in the latest fiscal year, however, stood lower
than STJ as the formers net income declined faster than STJs. Despite this, MDT still had a
generally higher ROE than STJ if previous years results were taken into account. In addition,
MDT still has potential to improve its ROE by increasing leverage. Thus, return to stockholders
still has an upside when investing in MDT stock.
Stock Repurchase
Stock repurchase is a good way to support a firms share price, especially in times when the
market is not doing well and management sees that its share is undervalued. Stock repurchase
is also a form of return to shareholders, sometimes used as a substitute to dividends. MDT and
STJ implemented a stock repurchase program aside from paying out dividends. Thus, both
companies had good strategies of maximizing shareholder return. However, given MDTs
stronger ability to generate cash flows, it is in a better position to sustain both dividend payouts
and stock repurchase than STJ. Another effect of stock repurchase is increasing the companys
EPS, thereby creating incentive to own the companys share. A high EPS also leads to a lower
P/E ratio. A low P/E ratio compared to industry or competition means that the stock is
somehow undervalued and thus, also provides incentive to buy the stock. A high P/E ratio
compared to industry or competition, on the other hand, might signal that the companys stock
is overvalued. For MDT and STJ, a quick-and-dirty computation shows that P/E ratios of MDT
are lower than those of STJ. This means that MDT stock still has room to increase in value and
be at par with competition. On the other hand, STJ stock might be a little overvalued given its
lower operating margins, the downtrend in its profitability and its lower cash flows relative to
MDT. For these reasons, investing long-term in MDT stock is preferable as it provides
opportunity for capital appreciation, which is supported by higher operating and net profit
margins, and strong cash flows from operations.
Table 7: MDT Stock Repurchasing

MDT
Beginning price
Ending price
Dividends per share
Capital Gain
Dividend Yield
Total Shareholder Return
Dividend growth
Dividend payout

2010
43.90
37.09
0.8800
-16%
2%
-14%

2011
37.41
38.25
0.9525
2%
3%
5%

2012
38.69
41.02
1.0225
6%
3%
9%

2013
41.88
57.39
1.1000
37%
3%
40%

2014*
57.24
68.70
1.1950
20%
2%
22%

8%
31%

7%
33%

8%
29%

9%
32%

EPS, diluted
2.79
2.86
3.41
3.37
P/E, using YE price
13.29
13.37
12.03
17.03
*Ending price on 11/5/14; dividends per share include last payout for the year

12

Table 8: STJ Stock Repurchasing

STJ
Beginning price
Ending price
Dividends per share
Capital Gain
Dividend Yield
Total Shareholder Return
Dividend growth
Dividend payout

2010
37.03
42.75
15%
0%
15%

2011
42.28
34.30
0.8400
-19%
2%
-17%

2012
34.93
36.14
0.9200
3%
3%
6%

2013
36.61
61.95
1.0000
69%
3%
72%

2014*
61.71
65.22
1.0800
6%
2%
7%

10%
34%

9%
38%

8%

23%

EPS, diluted
2.75
2.52
2.39
2.49
P/E, using YE price
15.55
13.61
15.12
24.88
*Ending price on 11/5/14; dividends per share include last payout for the year

Total Shareholder Return


Breaking down total shareholder return for MDT and STJ stocks gives a better view of where
growth is coming from. Dividend yield seems to be at par between MDT and STJ stocks on an
annual basis. However, growth in dividend per share and the dividend payout levels offer a
different perspective. While STJ tried to maximize shareholder return by starting to pay out
dividends in 2011 on top of its stock repurchase program, dividend distributed actually grew at
a decreasing rate annually. Perhaps, this was a result of declining net income, which limited
STJs ability to pay out more dividends and drive up its share price. Further, pressure on
profitability can be seen from the increase in dividend payout. With net income declining for 3
years, distributing dividends that grew annually somehow hurt the balance sheet because lower
earnings were plowed back to the business. On the other hand, while MDT paid out dividends
that increased gradually, the amount plowed back to the business seemed to be steady at
around 69% (i.e., dividend payout of 31% on average for 4 years). This further showed the
strength of MDTs profitability since dividends grew annually and yet reinvested earnings
remained at the same proportion of net income. Since dividends are driven by profitability, and
actual pay out driven by cash flows, MDT still has the advantage over STJ. Thus, investing longterm in MDT stock is better than STJ stock.
Cash Flows
Quick-and-dirty calculation shows that the industry is not really capital-intensive. Capital
expenditures were estimated using additions to property. As a percentage of sales, capital
expenditures were at low single digits for both MDT and STJ. However, STJ may find it more
challenging to fund its capital spending since it comprises 5% of total sales compared to MDTs
3%. Looking closely at the cash flows generated from operations (CFO) will show that MDT has
a clear advantage over STJ given its larger scale. To make them comparable, CFO is taken as a
13

percentage of sales to measure the level of cash flows generated for each dollar of sales. On
average, MDT has stronger cash flows with about 28% of total sales in its 4-year reporting
period than STJ, which has CFO-to-sales ratio of about 22% for its past 4 fiscal periods. Since
MDT is able to generate heathier cash flows than STJ, the former is also in a much better
position to cover its capital expenditures as shown by the CFO-to-capex ratio. CFO-to-capex
ratio of STJ is below 5.0, while MDTs ratio ranges from about 7.5 to 12.5.
Table 9: Cash Flows for MDT and STJ

2010
Sales (in US$ Mn)
MDT
STJ
Additions to PPE (in US$ Mn)
MDT
STJ
Capex-to-Sales (%)
MDT
STJ
CFO (in US$ Mn)
MDT
STJ
CFO-to-Sales
MDT
STJ
CFO-to-Capex (x)
MDT
STJ

2011

2012

2013

2014

15,508
5,612

16,184
5,503

16,590
5,501

17,005

5,165

501
307

484
280

457
222

396

305

3%
5%

3%
4%

2%

6%

3%
5%
3,741
1,287

4,470
1,335

4,942
961

4,959

1,274

24%
23%

28%
24%

30%
17%

29%

25%

7.47
4.19

9.24
4.77

10.81
4.33

12.52

4.18

Another way to look at a companys ability to generate cash flows that will be available for both
its equity and debt investors is by measuring the free cash flows to the firm (FCFF). A quickand-dirty estimation of the FCFF still shows that MDT has an advantage over STJ. Since at the
end of the day the level of FCFF will determine the value of the company, MDT stock is more
attractive than STJ stock.
Table 10: Free Cash Flows to the Firm for MDT and STJ

14

(in US$ Mn)


CFO, MDT
Interest expense
Add: Int. exp., net of tax rate of 35%
Les: Capex
Est. FCFF, MDT
CFO, STJ
Interest expense
Add: Int. exp., net of tax rate of 35%
Les: Capex
Est. FCFF, STJ

2010

1,274
67
44
305
1,013

2011
3,741
450
293
501
3,533

2012
4,470
349
227
484
4,213

2013
4,942
388
252
457
4,737

1,287
70
46
307
1,026

1,335
73
47
280
1,102

961
81
53
222
792

2014
4,959
379
246
396
4,809

Further, STJ has a greater financial risk profile than MDT given its higher leverage in addition to
the pressure on operating and net profit margins, and thus, will also have a higher cost of
capital. A higher cost of capital generates a lower valuation of a company given its FCFF. From
the FCFF standpoint, MDT stock is still more valuable than STJ stock.
Upside for MDT Share Price Growth
Since MDT has substantial cash balances, a sizable investment portfolio given its large
investments in marketable securities, and strong cash flows from operations, MDT has flexibility
to maximize shareholder value. Excess cash may be used to pay out dividends for as long as net
income permits. In fact, MDT may even consider increasing its dividend payout ratio which
now stands at approximately 31% of prior years net income. Alternatively, MDT may continue
its share repurchase program and pay shareholders a premium over market to utilize excess
cash and maximize return to shareholders. Stock repurchase might also be a good strategy to
support the companys stock when the market is bad, or as an additional return to shareholders
when net income is not performing well. Buying back shares will generally increase EPS and
reduce P/E ratios, and thus, will make the companys stock more competitive in the market.
Finally, MDT can use its excess cash to acquire companies and increase its leverage. A higher
leverage will allow MDT to take advantage of its benefits such as tax shields and a higher ROE,
which will definitely maximize shareholder return. Thus, for a long-term investment in equity,
MDT still has advantage over STJ given the upside potential for share price growth and returns
from dividends or share repurchase.
Conclusion
MDTs ability to generate strong cash flows will allow the company to source financing either
through debt or equity. MDT is financially strong and has the capacity to meet short-term and
long-term debt obligations as displayed by the calculated financial metrics and measured
against competition. Since it has low leverage, MDT has the option of raising capital through
debt issuance and in turn, optimizes its debt-to-equity ratio. Alternatively, MDT can pursue its
acquisition plans to increase leverage and still improve its capital structure. By carrying out
either method, MDT will be able to maximize shareholder return.

15

Appendix A: Medtronic Financial Statements and Ratios


Medtronic Balance and Common Size Balance Sheets

(in millions, except per share data)


ASSETS
Current assets:
Cash and cash equivalents
Investments
Accounts receivable, less allowances
Inventories
Tax assets
Prepaid expenses and other current assets
Assets held for sale
Total current assets

April
25,
2014

April
26,
2013

April
26,
2012

April
26,
2011

Common Size Balance Sheet Ratios


2014
2013
2012
2011

1,403

919

1,172

1,382

3.7%

2.6%

3.6%

4.5%

12,838
3,811
1,725
736
697

10,211
3,727
1,712
539
744

8,178
3,808
1,800
703
675

1,046
3,761
1,619
523
561
258

33.8%
10.0%
4.5%
1.9%
1.8%

29.3%
10.7%
4.9%
1.5%
2.1%

24.9%
11.6%
5.5%
2.1%
2.1%

3.4%
12.3%
5.3%
1.7%
1.8%

21,210

17,852

16,336

9,150

55.9%

51.2%

49.8%

29.8%

Property, plant, and equipment, net

2,392

2,490

2,473

2,488

6.3%

7.1%

7.5%

8.1%

Goodwill

10,593

10,329

9,934

9,520

27.9%

29.6%

30.3%

31.0%

Other intangible assets, net


Long-term investments
Long-term deferred tax assets, net
Other assets

2,286

2,673

2,647

6.0%

7.7%

8.1%

300
1,162

232
1,324

176
1,252

2,725
6,116
314
362

0.8%
3.1%

0.7%
3.8%

0.5%
3.8%

8.9%
19.9%
1.0%
1.2%

37,943

34,900

32,818

30,675

100.0%

100.0%

100.0%

100.0%

1,613
742
1,015
164
19
2,006

910
681
1,011
88
16
1,244

3,274
565
912
154
14
1,008

1,723
495
874
50
7
1,489
88

4.3%
2.0%
2.7%
0.4%
0.1%
5.3%

2.6%
2.0%
2.9%
0.3%
0.0%
3.6%

10.0%
1.7%
2.8%
0.5%
0.0%
3.1%

5.6%
1.6%
2.8%
0.2%
0.0%
4.9%
0.3%

5,559

3,950

5,927

4,726

14.7%

11.3%

18.1%

15.4%

10,315
662

9,741
752

7,359
759

8,112
480

27.2%
1.7%

27.9%
2.2%

22.4%
2.3%

26.4%
1.6%

1,343
386
235

1,168
340
278

1,005
276
379

496
461
432

3.5%
1.0%
0.6%

3.3%
1.0%
0.8%

3.1%
0.8%
1.2%

1.6%
1.5%
1.4%

18,500

16,229

15,705

14,707

48.8%

46.5%

47.9%

47.9%

100

102

104

107

0.3%

0.3%

0.3%

0.3%

19,940
(597)

19,061
(492)

17,482
(473)

16,085
(224)

52.6%
-1.6%

54.6%
-1.4%

53.3%
-1.4%

52.4%
-0.7%

Total shareholders equity

19,443

18,671

17,113

15,968

51.2%

53.5%

52.1%

52.1%

Total liabilities and shareholders equity

37,943

34,900

32,818

30,675

100.0%

100.0%

100.0%

100.0%

Total assets
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Short-term borrowings
Accounts payable
Accrued compensation
Accrued income taxes
Deferred tax liabilities
Other accrued expenses
Liabilities held for sale
Total current liabilities
Long-term debt
Long-term accrued compensation and retirement
benefits
Long-term accrued income taxes
Long-term deferred tax liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Notes 4, 15, and 18)
Shareholders equity:
Preferred stock par value $1.00; 2.5 million shares
authorized, none outstanding
Common stock par value $0.10; 1.6 billion shares
authorized
Retained earnings
Accumulated other comprehensive loss

Medtronic Income and Common Size Income Statements


(in millions, except per share data and
additional information)

Fiscal Year

Operating Results for the Fiscal Year:

2014

2013

2012

2011

2010

Common Size Income Statement Ratios


2014

2013

2012

2011

2010

Net sales

17,005

16,590

16,184

15,508

15,392

100.0%

100.0%

100.0%

100.0%

100.0%

Cost of products sold

4,333

4,126

3,889

3,700

3,582

25.5%

24.9%

24.0%

23.9%

23.3%

Gross Profit

12,672

12,464

12,295

11,808

11,810

74.5%

75.1%

76.0%

76.1%

76.7%

Gross margin percentage

74.50%

75.10%

76.00%

76.10%

76.70%

Research and development expense

1,477

1,557

1,490

1,472

1,424

8.7%

9.4%

9.2%

9.5%

9.3%

Selling, general, and administrative

5,847

5,698

5,623

5,427

5,282

34.4%

34.3%

34.7%

35.0%

34.3%

EXPENSES

expense
Special charges

40

0.2%

Restructuring charges, net

78

172

87

259

50

0.5%

1.0%

0.5%

1.7%

0.3%

Certain litigation charges, net

770

245

90

245

374

4.5%

1.5%

0.6%

1.6%

2.4%

Acquisition-related items

117

(49)

12

14

23

0.7%

-0.3%

0.1%

0.1%

0.1%

Amortization of intangible assets

349

331

335

339

317

2.1%

2.0%

2.1%

2.2%

2.1%

Other expense, net

181

108

364

110

150

1.1%

0.7%

2.2%

0.7%

1.0%

Interest expense, net

108

151

149

278

246

0.6%

0.9%

0.9%

1.8%

1.6%

Total Expenses

8,967

8,213

8,150

8,144

7,866

52.7%

49.5%

50.4%

52.5%

51.1%

Earnings from continuing operations before

3,705

4,251

4,145

3,664

3,944

21.8%

25.6%

25.6%

23.6%

25.6%

Provision for income taxes

640

784

730

609

861

3.8%

4.7%

4.5%

3.9%

5.6%

Earnings from continuing operations

3,065

3,467

3,415

3,055

3,083

18.0%

20.9%

21.1%

19.7%

20.0%

202

41

16

1.2%

0.3%

0.1%

3,617

3,096

3,099

22.3%

20.0%

20.1%

income taxes

Earnings from discontinued operations,


net of tax
Net earnings

3,065

3,467

18.0%

20.9%

Appendix B: St. Jude Financial Statements and Ratios


St. Jude Medical Inc. Balance and Common Size Balance
Sheets
CONSOLIDATED BALANCE SHEETS

Common Size of Balance Sheet

(in millions, except par value and share amounts)


Dec
2013

28

Dec
2012

29

Dec
2011

31

Jan
2011

Jan
2010

Dec 28
2013

Dec 29
2012

Dec 31
2011

Jan
2011

Jan
2010

ASSETS
Current Assets
Cash and cash equivalents

1,373

1,194

986

500

393

13%

13%

11%

6%

6%

Accounts receivable, less allowance for 1,422


doubtful accounts

1,349

1,367

1,331

1,171

14%

15%

15%

16%

18%

Inventories

708

610

624

668

660

7%

7%

7%

8%

10%

Deferred income taxes, net

229

220

232

197

165

2%

2%

3%

2%

3%

Other current assets

178

178

181

216

172

2%

2%

2%

3%

3%

3,910

3,551

3,391

2,912

2,560

38%

38%

38%

34%

40%

0%

0%

0%

0%

0%

Total current assets


Property, Plant and Equipment
Land, building and improvements

651

602

528

494

424

6%

6%

6%

6%

7%

Machinery and equipment

1,674

1,603

1,546

1,378

1,189

16%

17%

17%

16%

18%

Diagnostic equipment

474

424

380

353

336

5%

5%

4%

4%

5%

Property, plant and equipment at cost

2,799

2,629

2,454

2,224

1,949

27%

28%

27%

26%

30%

Less accumulated depreciation

(1,389)

(1,204)

(1,065)

(900)

(796)

-14%

-13%

-12%

-11%

-12%

1,410

1,425

1,388

1,324

1,153

14%

15%

15%

15%

18%

Goodwill

3,524

2,961

2,953

2,956

2,006

34%

32%

33%

35%

31%

Intangible assets, net

911

804

856

987

456

9%

9%

10%

12%

7%

Other assets

493

530

417

388

251

5%

6%

5%

5%

4%

TOTAL ASSETS

10,248

9,271

9,005

8,566

6,426

100%

100%

100%

100%

100%

Current debt obligations

62

530

83

80

335

1%

6%

1%

1%

5%

Accounts payable

247

254

202

298

133

2%

3%

2%

3%

2%

Dividends payable

72

68

67

13

1%

1%

1%

0%

0%

Income taxes payable

32

142

0%

2%

0%

0%

0%

Employee compensation and related benefits

312

299

305

320

269

3%

3%

3%

4%

4%

Other current liabilities

655

482

402

320

317

6%

5%

4%

4%

5%

1,380

1,775

1,062

1,017

1,067

13%

19%

12%

12%

17%

Long-term debt

3,518

2,550

2,713

2,432

1,588

34%

28%

30%

28%

25%

Deferred income taxes, net

240

323

279

311

132

2%

3%

3%

4%

2%

Other liabilities

706

529

477

435

315

7%

6%

5%

5%

5%

5,844

5,177

4,531

4,195

3,102

57%

56%

50%

49%

48%

0%

0%

0%

0%

0%

Net property, plant and equipment

LIABILITIES
AND
EQUITY
Current Liabilities

SHAREHOLDERS'

Total current liabilities

Total liabilities
Shareholders' Equity
Common
stock
($0.10
par
value;
500,000,000 shares authorized; 289,117,352
and
295,648,327
shares
authorized;
289,117,352 and 295,648,327 shares
December 29, 2012, respectively)
Additional paid-in capital

29
220

30
-

32
43

33
156

32
6

0%
2%

0%
0%

0%
0%

0%
2%

1%
0%

Retained earnings

3,936

4,018

4,384

4,099

3,191

38%

43%

49%

48%

50%

Accumulated other comprehensive income

46

46

16

84

94

0%

0%

0%

1%

1%

Total
shareholders'
noncontrolling interest

4,231

4,094

4,475

4,372

3,285

41%

44%

50%

51%

51%

173

38

2%

0%

0%

0%

1%

Noncontrolling interest

equity

before

Total shareholders' equity


TOTAL
LIABILITIES
SHAREHOLDERS' EQUITY

AND

4,404

4,094

4,475

4,372

3,324

43%

44%

50%

51%

52%

$10,248

$9,271

$9,005

$8,566

$6,426

100%

100%

100%

100%

100%

St. Jude Medical Inc. Income and Common Size Income Statements
CONSOLIDATED STATEMENTS OF EARNINGS

Common Size of Income Statement

(in millions, except per share amounts)


Fiscal Year Ended

Dec
28
2013
5,501

Dec 29
2013

Dec 31
2011

Jan 1
2011

Jan 2
2010

5,503

5,612

5,165

Cost of sales before special charges

1,529

1,445

1,485

Special charges

45

93

1,574

Net sales

Dec
29
2013
100%

Dec
31
2011
100%

Jan 1
2011

Jan 2
2010

4,681

Dec
28
2013
100%

100%

100%

1,382

1,220

27.8%

26%

26%

27%

26%

47

28

34

0.8%

2%

1%

1%

1%

1,538

1,532

1,410

1,253

28.6%

28%

27%

27%

27%

Cost of sales:

Total cost of sales

3,927

3,965

4,079

3,755

3,428

71.4%

72%

73%

73%

73%

Selling, general and administrative expense

Gross profit

1,884

1,891

2,085

1,818

1,675

34.2%

34%

37%

35%

36%

Research and development expense

691

676

705

631

560

12.6%

12%

13%

12%

12%

Purchased in-process research and development charges

12

0.0%

0%

0%

0%

0%

Special charges

301

298

171

17

74

5.5%

5%

3%

0%

2%

1,051

1,100

1,114

1,277

1,113

19.1%

20%

20%

25%

24%

267

95

(95)

(68)

(56)

4.9%

2%

-2%

-1%

-1%

784

1,005

1,019

1209

1057

14.3%

18%

18%

23%

23%

Income tax expense

92

253

193

301

280

1.7%

5%

3%

6%

6%

Net earnings before nonontrolling interest

692

752

826

907

777

12.6%

14%

15%

16%

17%

Net loss attibutable to noncontrolling interest

(31)

-0.6%

Net earnings

723

752

827

907

777

13.1%

14%

15%

18%

17%

Basic

2.52

2.40

2.55

2.76

2.28

0.0%

0%

0%

0%

0%

Diluted

2.49

2.39

2.52

2.75

2.26

0.0%

0%

0%

0%

0%

1.00

0.92

0.84

0.0%

0%

0%

0%

Basic

287

313

324

328

328

5.2%

6%

6%

6%

7%

Diluted

291

315

327

330

344

5.3%

6%

6%

6%

7%

Operating profit
Other expense, net
Earnings before income taxes and noncontrolling interest

Net earnings per shae attibutable to St. Jude Medical,


Inc.:

Cash dividends declared per share:


Weighted average shares outstandings:

Appendix C: Competitors Analysis


Figure 2 shows the net sales of each product as a percentage of total net sales for
average of the last four fiscal years. Table
Surgical Technologies

Neuromodulation

Spine

Endovascular

Structural Heart

Coronary

CRDM

Diabetes
9%

9%
10%

30%
20%

10%

7%

5%

In each product division, MDT identified its competitors shown in the table 11. Because
each division takes up to different proportion of net sales, we assign the same weight as
the percentage of net sale for each competitor. Some competitors such as Johnson and
Johnson, St. Jude are identified as competitors in multiple product divisions. We then
sum up the weight for each competitor. The total weight of competitors is shown in
Table 12. Boston Scientific, Johnson & Johnson, and St. Jude are the top three
competitors.

Table 11. Medtronic Inc.


Segment

Produt
CRDM

Coronry
Structual
Heart

Endovascu
lar

% of net
sales
30%

10%

7%

5%

Competitors

Weight
30%

Sum of Weight

Boston Scientific

30%

Competitors

Biotrnik

30%

Abbott

15%

Sorin Group

30%

Allergan

11%

Abbott

10%

Alphatec Holdings

20%

Boston Scientific

10%

Arthrocare

Neuromo
dulation

Diabetes

Surgical
Tehnologi
es

20%

11%

9%

9%

Total

9%

Edwards Lifesciences

7%

Biomet

20%

St. Jude Medical

7%

Biotrnik

30%

Sorin

7%

Boston Scientific

56%

Maquest Medical System

7%

BrainLAB

9%

Terumo Medical Corporation

7%

Cook. Inc

5%

Abbott

5%

Coridien PLC

9%

Boston Scientific

5%

CR Boird

Johnson & Johnson

5%

DePuySynthes

CR Boird

5%

DexCom

9%

Cook. Inc

5%

Edwards Lifesciences

7%

W.L.Gore & Associate

5%

Endologix

5%

Endologix
Spine

Table 12.

St. Jude Medical

5%
20%

5%

G.E.Healthcare

9%

DePuySynthes

20%

Globus Medical

20%

Stryker

20%

Gyrus ACMI

9%

Na Vasive

20%

Insulet

9%

Johnson & Johnson

20%

Integra Lifesciences Holdings

Globus Medical

20%

Johnson & Johnson

Zimmer Holdings

20%

Maquest Medical System

Alphatec Holdings

20%

Na Vasive

20%

Orthafix International

20%

Orthafix International

20%

Biomet

20%

Philips Medical

9%

Boston Scientific

11%

Roche

9%

Allergan

11%

Siencens Medical

9%

St. Jude Medical

11%

Sorin

Urologix

11%

Sorin Group

30%
48%

9%
43%
7%

7%

Johnson & Johnson

9%

St. Jude Medical

DexCom

9%

Stryker

9%

Insulet

9%

Stryker

20%

Roche

9%

Tandem Diabetes

9%

Tandem Diabetes

9%

Terumo Medical Corporation

7%

Johnson & Johnson

9%

Urologix

Gyrus ACMI

9%

W.L.Gore & Associate

Stryker

9%

Zimmer Holdings

Zimmer Holdings

9%

Integra Lifesciences Holdings

9%

BrainLAB

9%

G.E.Healthcare

9%

Siencens Medical

9%

Philips Medical

9%

Coridien PLC

9%

Arthrocare

9%

11%
5%
29%

Appendix D: Calculation of ROE disaggregation into operating and nonoperating return


MDT
NOPAT COMPUTATION
Less: Tax on Operating
Profit
Tax expense from income
statement
Tax shield (interest
expense x statutory tax
rate of 35%)
NOPAT

YR 4
3,773

YR 3
4,402

YR2
4,294

YR 1
3,942

640

784

730

609

38
3,095

53
3,565

52
3,512

97
3,236

Operating Assets
Accounts receivable, less allowances
Inventories
Tax assets
Prepaid expenses and other current
assets
Property, plant, and equipment, net
Goodwill
Other intangible assets, net
Long-term investments
Long-term deferred tax assets, net
Other assets
Total Operating Assets
Operating Liabilities
Accounts payable
Accrued compensation
Accrued income taxes
Deferred tax liabilities
Other accrued expenses
Long-term accrued compensation
and retirement
Long-term accrued income taxes
Long-term deferred tax liabilities
Other long-term liabilities
Total Operating Liabilities
Net Operating Assets

3,811
1,725
736

3,727
1,712
539

3,808
1,800
703

3,761
1,619
523

3,335
1,481
544

697
2,392
10,593
2,286
300
1,162
23,702

744
2,490
10,329
2,673
232
1,324
23,770

675
2,473
9,934
2,647
176
1,252
23,468

561
2,488
9,520
2,725
6,116
314
362
21,873

704
2,421
8,391
2,559
4,632
248
19,683

742
1,015
164
19
2,006

681
1,011
88
16
1,244

565
912
154
14
1,008

495
874
50
7
1,489

420
1,001
235
890

662
1,343
386
235
6,572
17,130

752
1,168
340
278
5,578
18,192

759
1,005
276
379
5,072
18,396

480
496
461
432
4,784
17,089

516
595
89
196
3,942
15,741

STJ
NOPAT COMPUTATION
EBIT
Income tax expense
Tax shield (interest
expense x statutory tax
rate of 35%)
NOPAT

YR 4

YR 3

YR2

YR1

1,051

1,100

1,114

1,277

92

253

193

301

28

26

25

23

931

821

896

952

Operating Assets
Accounts receivable, less allowance for
doubtful accounts

1,422

1,349

1,367

1,331

1,171

Inventories

708

610

624

668

660

Deferred income taxes, net

229

220

232

197

165

178

178

181

216

172

1,410

1,425

1,388

1,324

1,153

3,524

2,961

2,953

2,956

2,006

Intangible assets, net

911

804

856

987

456

Other assets

493

530

417

388

251

8,875

8,077

8,019

8,066

6,033

247

254

202

298

133

32

142

Employee compensation and related benefits

312

299

305

320

269

Other current liabilities

655

482

402

320

317

Deferred income taxes, net

240

323

279

311

132

Other liabilities

706

529

477

435

315

Total Operating Liabilities

2,192

2,029

1,667

1,683

1,166

Net Operating Assets

6,683

6048

6352.601

6382.938

3965.25

Other current assets


Net property, plant and equipment
Goodwill

Total operating assets


Operating Liabilities
Accounts payable
Income taxes payable