Medtronic Financial Analysis

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Medtronic, Inc.

Financial Statement Analysis and

Comparison to St. Jude

November 12, 2014


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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 ................................................................................................................................................. 6Solvency 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


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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 ............................................................................................................... 4Table 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


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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 medicaldevice 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


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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:


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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. Itshould 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 Year 3 Year 2 Year 1 Average

Medtronic

ROE 0.1608 0.1938 0.2187 0.2024 0.1939

Operating Return 0.1753 0.1949 0.1979 0.1971 0.1913

Non-operating Return (0.0144) (0.0011) 0.0208 0.0053 0.0026

St. Jude

ROE 0.1702 0.1755 0.1869 0.2358 0.1921

Operating Return 0.1393 0.1358 0.1411 0.1492 0.1414

Non-operating Return 0.0309 0.0397 0.0458 0.0866 0.0508

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 acquisition-

related 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 ($ 770millions) in fiscal year 4.

STJs profitmargin 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 0.180 0.209 0.223 0.200 0.203

Asset Turnover Ratio 0.467 0.490 0.510 0.528 0.499Financial Leverage 1.910 1.890 1.920 1.920 1.910

ROE 0.161 0.194 0.219 0.202 0.194

STJ

Profit Margin 0.131 0.137 0.147 0.176 0.148

Asset Turnover Ratio 0.564 0.602 0.639 0.689 0.623

Financial Leverage 2.297 2.133 1.986 1.948 2.091

ROE 0.170 0.176 0.187 0.236 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


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MDT

Current ratio 3.815 4.519 2.756 1.936 3.257

Quick ratio 3.247 3.761 2.220 1.310 2.635

Cash ratio 2.562 2.818 1.578 0.514 1.868

Cash conversion cycle 164 179 196 190 182

STJ

Current ratio 2.833 2.001 3.193 2.863 2.723

Quick ratio 2.025 1.433 2.216 1.800 1.869

Cash ratio 0.995 0.673 0.928 0.492 0.772

Cash conversion cycle 187 179 178 202 187

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 meansthat 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 Long-

term Debt Investment.

Table 5: Capital Structure and Long-term Solvency Ratios

Year 4 Year 3 Year 2 Year 1 AverageMDT

Debt-to-equity 0.951 0.869 0.918 0.921 0.915

Debt-to-capital 0.488 0.465 0.479 0.479 0.478

Debt-to-assets 0.488 0.465 0.479 0.479 0.478

Financial leverage 1.951 1.869 1.918 1.921 1.915

Interest coverage 10 11 12 9 11

STJ

Debt-to-equity 1.327 1.265 1.012 0.960 1.141

Debt-to-capital 0.570 0.558 0.503 0.490 0.530

Debt-to-assets 0.570 0.558 0.503 0.490 0.530Financial leverage 2.327 2.265 2.012 1.960 2.141

Interest coverage 9 10 12 14 11


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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 overrecent 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


MDTReceivables Turnover 4.512 4.403 4.276 4.371 4.391

Inventory Turnover 2.521 2.350 2.275 2.387 2.383

Payables Turnover 6.108 6.482 7.679 8.389 7.165

Total asset turnover 0.467 0.490 0.510 0.528 0.499

Fixed asset turnover 6.966 6.685 6.524 6.318 6.624

Working capital turnover 1.151 1.365 2.182 3.393 2.023

STJ

Receivables Turnover 3.970 4.052 4.160 4.129 4.078

Inventory Turnover 2.388 2.492 2.372 2.124 2.344

Payables Turnover 6.675 6.675 5.956 6.592 6.475

Total asset turnover 0.56 0.60 0.64 0.69 0.623

Fixed asset turnover 3.88 3.91 4.14 4.17 4.025

Working capital turnover 2.56 2.68 2.66 3.05 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 STJ2) 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 andlong term obligations

3) Capital structure of MDT still permits growth for debt, a cheaper source of financing thanequity

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 increasingannual 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 financeone 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 ofrevenues 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 toaccount 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.


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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. Whileon 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


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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 short-

term 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 andprincipal 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 4-

year period, a closer look at the financial performance of both companies provides a better


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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 profitability2) 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 stockinvestment than STJ

4) Value of company will still depend on its ability to generate cash; MDT generates strongercash 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, continuewith 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

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

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

1/4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014

Stock Price PerormanceBase Prices = 1/4/10

MDT STJ


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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 stockholdersstill 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 providesopportunity 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 2010 2011 2012 2013 2014*

Beginning price 43.90 37.41 38.69 41.88 57.24

Ending price 37.09 38.25 41.02 57.39 68.70

Dividends per share 0.8800 0.9525 1.0225 1.1000 1.1950

Capital Gain -16% 2% 6% 37% 20%

Dividend Yield 2% 3% 3% 3% 2%

Total Shareholder Return -14% 5% 9% 40% 22%

Dividend growth 8% 7% 8% 9%

Dividend payout 31% 33% 29% 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


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13

Table 8: STJ Stock Repurchasing

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 long-

term in MDT stock is better than STJ stock.

Cash FlowsQuick-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

STJ 2010 2011 2012 2013 2014*

Beginning price 37.03 42.28 34.93 36.61 61.71

Ending price 42.75 34.30 36.14 61.95 65.22

Dividends per share - 0.8400 0.9200 1.0000 1.0800Capital Gain 15% -19% 3% 69% 6%

Dividend Yield 0% 2% 3% 3% 2%

Total Shareholder Return 15% -17% 6% 72% 7%

Dividend growth 10% 9% 8%

Dividend payout 23% 34% 38%

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


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14

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-capexratio 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

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 quick-

and-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

2010 2011 2012 2013 2014

Sales (in US$ Mn)

MDT 15,508 16,184 16,590 17,005

STJ 5,165 5,612 5,503 5,501

Additions to PPE (in US$ Mn)

MDT 501 484 457 396

STJ 305 307 280 222

Capex-to-Sales (%)

MDT 3% 3% 3% 2%

STJ 6% 5% 5% 4%

CFO (in US$ Mn)

MDT 3,741 4,470 4,942 4,959

STJ 1,274 1,287 1,335 961

CFO-to-Sales

MDT 24% 28% 30% 29%

STJ 25% 23% 24% 17%

CFO-to-Capex (x)

MDT 7.47 9.24 10.81 12.52

STJ 4.18 4.19 4.77 4.33


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15

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 andlong-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.

(in US$ Mn) 2010 2011 2012 2013 2014

CFO, MDT 3,741 4,470 4,942 4,959

Interest expense 450 349 388 379

Add: Int. exp., net of tax rate of 35% 293 227 252 246

Les: Capex 501 484 457 396

Est. FCFF, MDT 3,533 4,213 4,737 4,809

CFO, STJ 1,274 1,287 1,335 961

Interest expense 67 70 73 81

Add: Int. exp., net of tax rate of 35% 44 46 47 53

Les: Capex 305 307 280 222

Est. FCFF, STJ 1,013 1,026 1,102 792


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Appendix A: Medtronic Financial Statements and Ratios

Medtronic Balance and Common Size Balance Sheets

April

25,

April

26,

April

26,

April

26, Common Size Balance Sheet Ratios

(in millions, except per share data) 2014 2013 2012 2011 2014 2013 2012 2011

ASSETS

Current assets:

Cash and cash equivalents 1,403 919 1,172 1,382 3.7% 2.6% 3.6% 4.5%

Investments 12,838 10,211 8,178 1,046 33.8% 29.3% 24.9% 3.4%

Accounts receivable, less allowances 3,811 3,727 3,808 3,761 10.0% 10.7% 11.6% 12.3%

Inventories 1,725 1,712 1,800 1,619 4.5% 4.9% 5.5% 5.3%

Tax assets 736 539 703 523 1.9% 1.5% 2.1% 1.7%

Prepaid expenses and other current assets 697 744 675 561 1.8% 2.1% 2.1% 1.8%

Assets held for sale 258

Total current assets 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 2,286 2,673 2,647 2,725 6.0% 7.7% 8.1% 8.9%

Long-term investments 6,116 19.9%

Long-term deferred tax assets, net 300 232 176 314 0.8% 0.7% 0.5% 1.0%

Other assets 1,162 1,324 1,252 362 3.1% 3.8% 3.8% 1.2%

Total assets 37,943 34,900 32,818 30,675 100.0% 100.0% 100.0% 100.0%

LIABILITIES AND SHAREHOLDERS EQUITY

Current liabilities:

Short-term borrowings 1,613 910 3,274 1,723 4.3% 2.6% 10.0% 5.6%

Accounts payable 742 681 565 495 2.0% 2.0% 1.7% 1.6%

Accrued compensation 1,015 1,011 912 874 2.7% 2.9% 2.8% 2.8%

Accrued income taxes 164 88 154 50 0.4% 0.3% 0.5% 0.2%

Deferred tax liabilities 19 16 14 7 0.1% 0.0% 0.0% 0.0%

Other accrued expenses 2,006 1,244 1,008 1,489 5.3% 3.6% 3.1% 4.9%

Liabilities held for sale 88 0.3%

Total current liabilities 5,559 3,950 5,927 4,726 14.7% 11.3% 18.1% 15.4%

Long-term debt 10,315 9,741 7,359 8,112 27.2% 27.9% 22.4% 26.4%

Long-term accrued compensation and retirement 662 752 759 480 1.7% 2.2% 2.3% 1.6%

benefits

Long-term accrued income taxes 1,343 1,168 1,005 496 3.5% 3.3% 3.1% 1.6%

Long-term deferred tax liabilities 386 340 276 461 1.0% 1.0% 0.8% 1.5%

Other long-term liabilities 235 278 379 432 0.6% 0.8% 1.2% 1.4%

Total liabilities 18,500 16,229 15,705 14,707 48.8% 46.5% 47.9% 47.9%

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 100 102 104 107 0.3% 0.3% 0.3% 0.3%

Retained earnings 19,940 19,061 17,482 16,085 52.6% 54.6% 53.3% 52.4%

Accumulated other comprehensive loss (597) (492) (473) (224) -1.6% -1.4% -1.4% -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%


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2

Medtronic Income and Common Size Income Statements

(in millions, except per share data and

additional information) Fiscal Year Common Size Income Statement Ratios

Operating Results for the Fiscal Year: 2014 2013 2012 2011 2010 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.

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%

EXPENSES

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

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

income taxes

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

Earnings from discontinued operations, 202 41 16 1.2% 0.3% 0.1%

net of tax

Net earnings 3,065 3,467 3,617 3,096 3,099 18.0% 20.9% 22.3% 20.0% 20.1


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Appendix B: St. Jude Financial Statements and Ratios

St. Jude Medical Inc. Balance and Common Size BalanceSheets

CONSOLIDATED BALANCE SHEETS Common Size of Balance Sheet

(in millions, except par value and share amounts)

Dec 282013

Dec 292012

Dec 312011

Jan 12011

Jan 22010

Dec 282013

Dec 292012

Dec 312011

Jan 12011

Jan 22010

ASSETS

Current Assets

Cash and cash equivalents 1,373 1,194 986 500 393 13% 13% 11% 6% 6%

Accounts receivable, less allowance fordoubtful accounts

,422 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%

Total current assets 3,910 3,551 3,391 2,912 2,560 38% 38% 38% 34% 40%

Property, Plant and Equipment 0% 0% 0% 0% 0%

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%

Net property, plant and equipment 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%

LIABILITIES AND SHAREHOLDERS'EQUITYCurrent Liabilities

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 1 - 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%

Total current liabilities 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%

Total liabilities 5,844 5,177 4,531 4,195 3,102 57% 56% 50% 49% 48%

Shareholders' Equity 0% 0% 0% 0% 0%

Common stock ($0.10 par value;500,000,000 shares authorized; 289,117,352and 295,648,327 shares authorized;289,117,352 and 295,648,327 sharesDecember 29, 2012, respectively) 29 30 32 33 32 0% 0% 0% 0% 1%Additional paid-in capital 220 - 43 156 6 2% 0% 0% 2% 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' equity beforenoncontrolling interest

4,231 4,094 4,475 4,372 3,285 41% 44% 50% 51% 51%

Noncontrolling interest 173 - - - 38 2% 0% 0% 0% 1%


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2

Total shareholders' equity 4,404 4,094 4,475 4,372 3,324 43% 44% 50% 51% 52%

TOTAL LIABILITIES ANDSHAREHOLDERS' EQUITY

$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 Dec282013

Dec 292013

Dec 312011

Jan 12011

Jan 22010

Dec282013

Dec292013

Dec312011

Jan 12011

Jan 22010

Net sales 5,501 5,503 5,612 5,165 4,681 100% 100% 100% 100% 100%

Cost of sales:

Cost of sales before special charges 1,529 1,445 1,485 1,382 1,220 27.8% 26% 26% 27% 26%

Special charges 45 93 47 28 34 0.8% 2% 1% 1% 1%

Total cost of sales 1,574 1,538 1,532 1,410 1,253 28.6% 28% 27% 27% 27%

Gross profit 3,927 3,965 4,079 3,755 3,428 71.4% 72% 73% 73% 73%

Selling, general and administrative expense 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 - - 4 12 6 0.0% 0% 0% 0% 0%

Special charges 301 298 171 17 74 5.5% 5% 3% 0% 2%

Operating profit 1,051 1,100 1,114 1,277 1,113 19.1% 20% 20% 25% 24%

Other expense, net 267 95 (95) (68) (56) 4.9% 2% -2% -1% -1%

Earnings before income taxes and noncontrolling interest 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%

Net earnings per shae attibutable to St. Jude Medical,Inc.:

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%

Cash dividends declared per share: 1.00 0.92 0.84 - 0.0% 0% 0% - 0%

Weighted average shares outstandings:

Basic 287 313 324 328 328 5.2% 6% 6% 6% 7%

Diluted 291 315 327 330 344 5.3% 6% 6% 6% 7%


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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

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.

9%

10%

20%

5%7%

10%

30%

9%

Surgical Technologies Neuromodulation Spine

Endovascular Structural Heart Coronary

CRDM Diabetes


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2

Table 11. Medtronic Inc.

Segment Produt

% of net

sales Competitors Weight Table 12.

CRDM 30% St. Jude Medical 30% Sum of Weight

Boston Scientific 30% Competitors Total

Biotrnik 30% Abbott 15%

Sorin Group 30% Allergan 11%

Coronry 10% Abbott 10% Alphatec Holdings 20%

Boston Scientific 10% Arthrocare 9%

Structual

Heart 7% 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%

Endovascu

lar 5% Abbott 5% Coridien PLC 9%

Boston Scientific 5% CR Boird 5%

Johnson & Johnson 5% DePuySynthes 20%

CR Boird 5% DexCom 9%

Cook. Inc 5% Edwards Lifesciences 7%

W.L.Gore & Associate 5% Endologix 5%

Endologix 5% G.E.Healthcare 9%

Spine 20% DePuySynthes 20% Globus Medical 20%

Stryker 20% Gyrus ACMI 9%

Na Vasive 20% Insulet 9%

Johnson & Johnson 20% Integra Lifesciences Holdings 9%

Globus Medical 20% Johnson & Johnson 43%

Zimmer Holdings 20% Maquest Medical System 7%

Alphatec Holdings 20% Na Vasive 20%

Orthafix International 20% Orthafix International 20%

Biomet 20% Philips Medical 9%

Neuromo

dulation 11% Boston Scientific 11% Roche 9%

Allergan 11% Siencens Medical 9%

St. Jude Medical 11% Sorin 7%

Urologix 11% Sorin Group 30%

Diabetes 9% Johnson & Johnson 9% St. Jude Medical 48%

DexCom 9% Stryker 9%

Insulet 9% Stryker 20%

Roche 9% Tandem Diabetes 9%

Tandem Diabetes 9% Terumo Medical Corporation 7%

Surgical

Tehnologi

es 9% Johnson & Johnson 9% Urologix 11%

Gyrus ACMI 9% W.L.Gore & Associate 5%

Stryker 9% Zimmer Holdings 29%

Zimmer Holdings 9%

Integra Lifesciences Holdings 9%

BrainLAB 9%

G.E.Healthcare 9%

Siencens Medical 9%

Philips Medical 9%

Coridien PLC 9%

Arthrocare 9%


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Appendix D: Calculation of ROE disaggregation into operating and non-

operating return

MDT

NOPAT COMPUTATION YR 4 YR 3 YR2 YR 1

3,773 4,402 4,294 3,942

Less: Tax on Operating

Profit

Tax expense from income

statement 640 784 730 609

Tax shield (interest

expense x statutory tax

rate of 35%) 38 53 52 97

NOPAT 3,095 3,565 3,512 3,236

Operating Assets

Accounts receivable, less allowances 3,811 3,727 3,808 3,761 3,335

Inventories 1,725 1,712 1,800 1,619 1,481

Tax assets 736 539 703 523 544

Prepaid expenses and other current

assets 697 744 675 561 704

Property, plant, and equipment, net 2,392 2,490 2,473 2,488 2,421

Goodwill 10,593 10,329 9,934 9,520 8,391

Other intangible assets, net 2,286 2,673 2,647 2,725 2,559

Long-term investments - - - 6,116 4,632

Long-term deferred tax assets, net 300 232 176 314 -Other assets 1,162 1,324 1,252 362 248

Total Operating Assets 23,702 23,770 23,468 21,873 19,683

Operating Liabilities

Accounts payable 742 681 565 495 420

Accrued compensation 1,015 1,011 912 874 1,001

Accrued income taxes 164 88 154 50 235

Deferred tax liabilities 19 16 14 7 -

Other accrued expenses 2,006 1,244 1,008 1,489 890

Long-term accrued compensation

and retirement 662 752 759 480 516

Long-term accrued income taxes 1,343 1,168 1,005 496 595Long-term deferred tax liabilities 386 340 276 461 89

Other long-term liabilities 235 278 379 432 196

Total Operating Liabilities 6,572 5,578 5,072 4,784 3,942

Net Operating Assets 17,130 18,192 18,396 17,089 15,741


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STJ

NOPAT COMPUTATION YR 4 YR 3 YR2 YR1

EBIT 1,051 1,100 1,114 1,277

Income tax expense 92 253 193 301

Tax shield (interest

expense x statutory taxrate of 35%)

28 26 25 23

NOPAT 931 821 896 952

Operating Assets

Accounts receivable, less allowance for

doubtful accounts

1,422 1,349 1,367 1,331 1,17

Inventories 708 610 624 668 66

Deferred income taxes, net

229 220 232 197 16

Other current assets 178 178 181 216 17

Net property, plant and equipment 1,410 1,425 1,388 1,324 1,15

Goodwill 3,524 2,961 2,953 2,956 2,00

Intangible assets, net 911 804 856 987 45

Other assets 493 530 417 388 25

Total operating assets 8,875 8,077 8,019 8,066 6,03

Operating Liabilities

Accounts payable 247 254 202 298 13

Income taxes payable 32 142 1 0

Employee compensation and related benefits 312 299 305 320 26Other current liabilities 655 482 402 320 31

Deferred income taxes, net 240 323 279 311 13

Other liabilities 706 529 477 435 31

Total Operating Liabilities 2,192 2,029 1,667 1,683 1,16

Net Operating Assets 6,683 6048 6352.601 6382.938 3965.2

Medtronic Financial Analysis

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