Financial Analysis of Marketing Decisions BU.410.

610 (81) Mid-Term Assignment 13 September 2012

Section 1 The financial ratios for 2011 and 2012 computed in section 2 and section 3 of this report show that profitability of Medtronic has gone up from 19.43% in 2011 to 22.34% in 2012. These figures are based on the companys ability to run its operations efficiently while controlling costs and passing them effectively to consumers as visible form the breakeven analysis and profitability ratios. The breakeven analysis tells us that the company has made higher profits in 2012 by reaching breakeven point at an earlier stage as compared to the previous year. This was done by controlling costs while increasing sales. The company has been able to do so by various strategies of globalization, innovation and differentiation. It worked on emerging markets and focused on existing products, restructuring them and dividing them into two broad categories to manage them efficiently, and invested in R&D to introduce new products to increase sales while keeping costs as low as possible. Breakeven ($) Corporate CVG RTG 2011 11,005.30 5,531.06 5,468.31 2012 10,723.68 5,410.14 5,314.80

A higher gross profit margin of 75.97% in 2012 from 75.44% in 2011 also suggests that the company has managed to decrease the costs relative to the sales. Introduction of new products, acquisitions and alliances and product differentiation had a positive impact on sales, while downsizing of staff by investing in R&D for efficient working solutions and letting go of unprofitable products had a positive impact on lowering costs.

The cash flow margin for 2011 is calculated to be 23.47% while that of 2012 is 27.61%, which suggests operational efficiency to generate cash. This cash can be utilized in R&D to further improve performance, in dividends to increase shareholder value or acquisitions or mergers to expand locally and globally. All of these investments play an important part to fulfill the CEOs mission of 2011, which is innovation and globalization. The CEO of Medtronic also aimed to better utilize the companys resources in 2011. The company managed to fulfill part of its goal as visible from the receivable and inventory turnover ratios from both fiscal years. Ratios Receivables turnover DSO Inventory turnover DSH 2011 4.16 87 2.30 157 2012 4.25 85 2.16 167

The higher receivable turnover in 2012 suggests that the company not only is better using its assets, but can give credit and collect it 4.25 times in 360 days with a cycle of approximately 85 days. Better credit policies for the fiscal year 2012 have positively impacted this ratio. However, the decreased inventory turnover ratio also suggests that the company is not converting its inventory to cash very efficiently. This might be due to the introduction of many new products in the fiscal year 2012, and might increase in the fiscal year 2013 with the distribution and performance measures for new products which were launched in the third and fourth quarters of 2012. For now, the figures suggest that the company needs to work on increasing this figure by better estimating demand and stocking accordingly. This in return will have a positive impact on

working capital and liquidity ratios, which have apparently decreased from 2011 to 2012. Although the working capital is still positive in 2012, it is lower than 2011. This suggests that the company may have taken loans to invest in new ventures and the low liquidity ratio suggests that it might not be able to pay them off when the time comes. But growth in sales due to new products and acquisitions in 2012 suggests that the liquidity ratio and working capital will be higher for next year. Following its strategies to decrease costs, differentiate and introduce products, improve processes and expand into global markets, the company managed to fulfill its goals for 2011. The company was able to make profit regardless of major costs of restructuring, additional investment in R&D and acquisitions. With a new strategy the company has managed to increase profitability under the new leadership in the face of severe competition, economic meltdown and massive expansion of the health industry, thus developing a level of trust with the stakeholders. With the CEO presenting new competitive goals for 2012 and strategies to expand product lines, provide more value to customers and build on global markets, he aims to build on what he has built during his first year in the company, which seems to be a logical approach to achieve higher profitability.

Section 2 Sales breakeven (corporate) = Total fixed cost / 100 total variable cost as a percentage of total sales = 8298 / 100 24.6 = 8298 / 0.754 Sales breakeven (corporate) = $ 11, 005.30 Sales breakeven (CVG) = Total fixed cost / 100 total variable cost as a percentage of total sales Total fixed cost for CVG = 147+135.72+2766.50+754+7+229.50+139 = 4178.72 Total variable cost as a percentage of sales = 2089 / 8544 = 24.45% Sales breakeven = 4178.72 / 100 24.45 = 4178.72 / 0.7555 Sales breakeven (CVG) = $ 5,531.06 Sales breakeven (RTG) = Total fixed cost / 100 total variable cost as a percentage of total sales Total fixed cost for RTG = 98+125.28+2766.5+754+7+229.5+139 = 4119.28 Total variable cost as a percentage of sales = 1822.99 / 7389 = 24.67 Sales breakeven = 4119.28 / 100 24.67 = 4119.28 / 0.7533 Sales breakeven (RTG) = $ 5,468.31 Profitability = Net income / Net sales = 3096 / 15933 = 19.43% Gross profit margin = Gross profit / Net sales

= 12021 / 15933 = 75.44% Receivables turnover = Net sales / Net receivables = 15933 / 3822 = 4.16 Inventory turnover = CoGS / Inventory = 3912 / 1695 = 2.30 Cash flow margin = Cash flow from operations / Net sales = 3741 / 15933 = 23.47% Working capital = Current assets Current liabilities = 9117 4714 = 4,403 Liquidity ratio (current) = Current assets / Current liabilities = 9117 / 4714 = 1.93 Working capital turnover = Net sales / Net working capital = 15933 / 4403 = 3.61 Days sales outstanding = 360 / Receivables turnover = 360 / 4.16 = 86.53 = 87 days Days sales on hand = 360 / Inventory turnover = 360 / 2.30 = 156.52 = 157 days

Section 3 Sales breakeven (corporate) = Total fixed cost / 100 total variable cost as a percentage of total sales = 8150 / 100 24 = 8150 / 0.76 Sales breakeven (corporate) = $ 10,723.68 Sales breakeven (CVG) = Total fixed cost / 100 total variable cost as a percentage of total sales Total fixed cost for CVG = 54+45.24+2811.5+745+6+182+74.5+167.5 = 4085.74 Total variable cost as a percentage of sales = 2076.72 / 8482 = 24.48% Sales breakeven = 4085.74 / 100 24.48 = 4085.74 / 0.7552 Sales breakeven (CVG) = $ 5,410.14 Sales breakeven (RTG) = Total fixed cost / 100 total variable cost as a percentage of total sales Total fixed cost for RTG = 36+41.76+2811.5+745+6+182+74.5+167.5 = 4064.26 Total variable cost as a percentage of sales = 1812.28 / 7702 = 23.52% Sales breakeven = 4064.26 / 100 23.52 = 4064.26 / 0.7648 Sales breakeven (RTG) = $ 5,314.80 Profitability = Net income / Net sales = 3617 / 16184 = 22.34% Gross profit margin = Gross profit / Net sales

= 12295 / 16184 = 75.97% Receivables turnover = Net sales / Net receivables = 16184 / 3808 = 4.25 Inventory turnover = CoGS / Inventory = 3889 / 1800 = 2.16 Cash flow margin = Cash flow from operations / Net sales = 4470 / 16184 = 27.61% Working capital = Current assets Current liabilities = 9515 5857 = 3,658 Liquidity ratio (current) = Current assets / Current liabilities = 9515 / 5857 = 1.62 Working capital turnover = Net sales / Net working capital = 16184 / 3658 = 4.39 Days sales outstanding = 360 / Receivables turnover = 360 / 4.25 = 84.70 = 85 days Days sales on hand = 360 / Inventory turnover = 360 / 2.16 = 166.66 = 167 days