Thesis on "Managerial Finance"

Quoted Instructions for "Managerial Finance" Assignment:

INDUSTRY PROJECT:

Objective: the objective of this paper is to tie the relationship of Financial Accounting, Managerial Accounting and Financial Management. This is achieved by having the students us Financial Accounting information and do managerial analysis. The student is to pick a company of their choice and use one of the large web based financial companies such as YAHOOfinanace.com.

I work for an orthopaedic company called DePuy Orthopaedics, Inc. (a Johnson & Johnson owned company) out of Warsaw, Indiana. I would like this to use this company for this paper. You cannot use the company "Zimmer", as this company was used for an example paper the instructor provided. I will add (below the requirements) this sample paper for this requested paper to resemble.

REQUIRED SECTIONS OF PAPER:

1.TREND ANAYLSYS (minimum of 10 items): The student should complete a trend analysis utilizing the Income Statement, Balance Sheet and Cash Flow for the organization. A basic analysis of what trends are developed and why. Possible solutions can be acknowledged.

2.RATIO ANALYSIS (minimum of 10 items): The student needs to also obtain industry ratios for the industry that this company is in some finance companies will automatically calculate these for you. The student may calculate the ratios themselves if desired. A comparison to the industry needs to be done that includes ratio comparison and acknowledgements of key drivers to the business. When analyzing the ratios the student should be able to identify if the company is strong or weak and reasons for their conclusions. Suggested ratios to be analyzed: Current Ratio, Quick Ratio, Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Total Asset Turnover, Total Debt to Total Assets, Times Interest Earned, Profit Margin on sales, Basic Earning Power, Return on Assets, Return on Common Equity, and Stock Price to Earnings.

3.SWOT ANALYSIS (from a financial standpoint): In the SWOT analysis the student needs to, from a financial standpoint, identify the companies Strengths, Weaknesses, Opportunities and Threats. This analysis can be done utilizing analysts remarks and articles on the company. It is helpful if the student uses a company that either they know something about or that is doing something interesting such as acquisitions, bankruptcy and so forth.

4.OVERALL ASSESSMENT (1 paragraph): The student is to indentify if the company is either: excellent, average or poor condition financially and give their justifications.

5.RECOMMENDATIONS (minimum of 5): Discuss recommendations the student has for the company. Should the company become more conservative or less conservative. If the company has a large growth opportunity how is it best to obtain funds for this growth being utilizing existing cash flows, debt or additional equity financing. If the company should exit markets what should they do with the cash.

Minimum standards (deductions from the grade will result in failure to meet these):

1.Paper must be 10 pages (minimum) typed (double space) 12 pt.

2.Title page identifying student, class, company and a required proofreader.

3.The company financials and ratios used should be attached to the back of the paper.

4.A works cited/bibliography page.

Possible additional research websites: quicken.com, multexinvestor.com, etrade.com, moneycentral.msn.com, rmahq.org, yahoo.market.com, NYSE.com, Hoovers.com, Smartmoney.com, schwabnet.com, edgardata.finsys.com, buyandhold.com, and Morningstar.com.

EXAMPLE OF REQUESTED PAPER:

Enhancing the quality of life for patients worldwide

Company Overview

Zimmer Holdings, Inc. (Zimmer) is a global leader in the design, development, manufacture and marketing of reconstructive orthopaedic implants. This includes hip, knee, extremity, dental, spinal implants, and trauma products. These products restore function in joints that are diseased or have suffered trauma. The company also distributes orthopaedic surgical products (OSP). Some OSP products such as tourniquets are used in surgery while other products such as slings and braces aid in post-operation rehabilitation.

The company has operations in over 25 countries. They market products in over 100 countries throughout Americas, Europe, and Asia Pacific. Corporate headquarters are located in Warsaw, Indiana, with more than 100 manufacturing, distribution, and warehousing facilities worldwide. The company sells products direct to healthcare institutions, through independent distributors, and direct to dental practices.

Zimmer identified three corporate strategies that focus on the ability to ENABLE, to INNOVATE, and to GROW. Identified trends below will tie back to the company*****s strategic initiatives and strategy.

Trend Analysis

Income Statement

Zimmer reported net sales of $3.9 billion in 2007. This represents a 12% increase in reported sales of $3.5 billion in 2006 and an 18.6% increase over reported sales of $3.3 billion in 2005. The company continues to do well by increasing sales every year. This substantial growth is attributed to several factors. The percent of sales generated from new products continuously increases, demonstrating the company*****s committed investment towards innovation and strategic initiative to innovate. New products generated 21 % of sales in 2005, 24% in 2006, and increased to 25% in 2007. New products representing growth include Gender Solutions Knee Femoral implants, Gender Solutions M/L Taper with Kinectiv Technology, Trabecular Metal Acetabular Cups, Dynesys Dynamic Stabilization System, and PALACOS Bone Cement.

The company has grown sales in all regions. In 2007, sales in Americas grew 10%; Europe grew 16%; and Asia Pacific grew 12%. Sales growth was evident in all product segments. The extremity product sales increased 34% and dental sales increased 23%, representing the growth leaders for the company. The Bigliani/Flatow Complete Shoulder Solution and Coonrad/Moorey Total Elbow led extremity sales. The Tapered Screw-Vent Implant System led dental sales. All other segments reported growth including 12% in knees, 11% in spine, 9% in hips, 8% in OSP and 6% in trauma. Existing products representing growth include the NexGen LPS and CR Flex Knee, NexGen Rotating Hinge Knee, NexGen LCCK Revision, Trabecular Metal Primary Hips, and Zimmer Periarticular Locking Plates.

The knee and hip business represent the largest amount of sales. The knee products generate 42% of the company*****s sales and continue to hold the number one market position at 28% of the $5.8 billion dollar market. Hip sales generate 33% of Zimmer*****s sales and also hold the number one market position. The company holds 26% market share of the $5.0 billion dollar market. Other product segments generate 3% to 6% of the business and hold 3% to 22% of the global market share.

Cost of revenue for the company increased at 18.4% from $739 million in 2005 to $875 million in 2007. Cost of revenue increased just slightly lower than the increase of total revenue at .2%. As total revenue increases, the cost of revenue will also increase. A major factor of this increase is due to the large amount of new products being introduced. The company has a strategy to innovate, and the cost of revenue will continue to increase as new products are being produced.

Research and development increased 19.4% from $175 million in 2005 to $209 million in 2007. The company continues to increase spending and invest in research and development in all product segments based on the corporate strategy to innovate. Investments were made in 2007 to research and development facilities in Warsaw, Indiana. The company continues to research genetically engineered tissues such as soft tissue biological repair and replacement. Research is being conducted on cartilage regeneration and cell-based therapies. Zimmer collaborated with ISTO Technologies and announced that clinical trials began in 2007 for DeNovo ET Engineered Tissue Graft. Additional research is also being conducted on advanced metals.

The company also signed an agreement with Regeneration Technologies, Inc. (RTI) in 2007 to distribute a new allograft bone paste in flowable and moldable formations. Approval was received by the FDA in 2007 on the Zimmer NexGen LPS-Flex Mobile Bearing Knee and the Zimmer M/L Taper Prosthesis with Kinectiv Technology. The company will continue to invest heavily in research and development in order to keep new, innovative products in the pipeline and continue to remain competitive and a leader in the orthopaedic market.

Selling and general administrative costs increased 18.2% from $1.2 billion in 2005 to $1.4 billion in 2007. This is expected to increase as revenues increase. Revenues increased 18.6% indicating that selling and general administrative increased slightly below that at 18.2%. The company has a corporate strategy to enable. They have increased and innovated training and education through the Institute, which has increased costs. The company has also launched an extensive Direct-to-Patient campaign focusing on the Gender Solutions Knee and Back in the Grove Community Healthcare Program aimed at providing consumers joint replacement information. Zimmer has invested in the enhancement of the company*****s quality systems, information technology efficiency, and expanded their compliance program.

The company*****s interest expense decreased substantially from $14 million in 2005 to zero in 2006 and 2007. Zimmer had zero interest expense for two years, making this a strength of the company.

Net income increased 5.5% from $727 million in 2005 to $773 million in 2007. Zimmer continues to increase net income. Factors affecting the increase include higher operating profit, lower acquisition expenses, and decreased interest expense.

Balance Sheet

Cash and cash equivalents increased 90.1% from $245 million in 2005 to $466 million in 2007. The largest increase came in 2007 with $466 million compared to $268 million in 2006. This would indicate the company could possibly be preparing to buy another company for cash. The company*****s strategy is to grow and would be successful in growing by buying another company to complete their portfolio. The company could also be preparing to buy additional manufacturing space or another facility.

Net receivables increased 22.3% from 583 million in 2005 to $829 million in 2007. This is consistent with the increase in revenues. As revenues increase, net receivables will also increase.

Inventory grew 24.6% from $583 million in 2005 to $727 million in 2007. This is due to several factors. Zimmer retains ownership to the majority of products sold while consigning to healthcare institutions and distributors. The company implemented an initiative in 2007 to increase U.S. field consigned inventories to better position the distributors to quickly react to local demands from doctors and hospitals. Investments were also made to facilities which enable the production of additional inventory to reduce backorders.

Property, plant, and equipment also increased at 36.9% from $708 million in 2005 to $971 million in 2007. One of the company*****s strategic initiatives is to grow. Zimmer invested heavily in facilities around the world. Manufacturing and distribution facilities in Warsaw were expanded in 2007 as part of a $66 million dollar project. The expansion added 100,000 square feet to the distribution center and 120,000 square feet to the manufacturing facility. In 2007, a Global Enterprise Resource Planning project kicked off to implement a single, global ERP system to set global operational and data standards. Investments to property, plant, and equipment are considered a strength of the company and positions the company for growth.

The company purchased Centerpulse in 2003 resulting in an increase in goodwill. Goodwill increased 7.9% from $2.4 billion in 2005 to $2.6 in 2007. Acquiring Centerpulse was important for Zimmer to gain sales and market share. Zimmer paid top dollar for the company while competing with extremely high offers from other orthopaedic companies. In 2007, the company acquired Endius Inc., a spinal company, for $80 million. They also acquired ORTHOsoft, Inc., a computer navigation company, for $50 million. These acquisitions attribute to increased goodwill. The company did have a reduction in goodwill of $61.4 million due to a decrease in tax liability under FIN 48.

Accounts payable rose 18.4% from $413 million in 2005 to $489 million in 2007. This is consistent with the increase in revenues, cost of revenues, and increase in selling expenses. Long term debt decreased 45% from $231 million in 2005 to $104 million in 2007. This is a strength for the company as it continues to pay off debt.

Retained earnings increased 82.8% from $1.9 billion in 2005 to $3.5 billion in 2007. This includes a reduction in retained earnings of $4.8 million due to the decreased tax liability under FIN 48.

Cash Flow

Total cash flow from operating activities increased 23.4% from $878 million in 2005 to $1 billion in 2007. The principal source of cash was net earnings of $773 million. This is a 5.5% increase over net earnings of $732 million in 2005. However, 2007 net earnings reflected a decrease of 7.4% from 2006 earnings of $834 million. This is due to reduction in earnings of $169.5 million paid in a settlement to the Department of Justice. The company used $53.3 million of cash towards investments to support sales growth. Accrued but unpaid dollars to healthcare professionals under contracts amounted to $23 million in 2007.

Total cash flow from operating activities increased 57.9% from $311 million in 2005 to $491 million in 2007. Contributing factors for this increase were the acquisitions of Endius and ORTHOsoft at $160.3 million. The company also invested in additional instruments ($138.5 million) and information technology that contributed to a small increase. Investments were also made to property, plant, and equipment through expansion of facilities in Warsaw, Indiana, Puerto Rico, and Switzerland.

Cash flows from financing activities decreased 17.6% to $399 million in 2007 from $484 million in 2005. The repurchase of common stock affected this in 2006 and 2007. Change in cash and cash equivalents increased an incredible 152% from $78 million in 2005 to $198 million in 2007. Zimmer is in a strong financial position for investment to carry the company forward. The company*****s corporate fact sheet states, *****Our strong cash flow generation positions us to return value to stockholders through strategic acquisitions, investments in our business, and share repurchases.*****

Ratio Analysis

Zimmer is a financially successful company as proven by their above average industry ratios. They lead and surpass the industry in nearly every ratio. The P/E Ratio (price per share/earnings per share) for Zimmer is 16.51 compared to the industry ratio of 4.17. The expectation for future earnings and the value of this company is good. The quick ratio is 1.74 for the company versus the industry ratio of 1.58. The quick ratio measures the current assets, less inventory, divided by current liabilities. A quick ratio of one or higher is favorable. Zimmer is way ahead of the industry and the S&P of 1.03. This is a big strength of the company and puts them in a great financial position. The current ratio measures the current assets divided by the current liabilities. The company*****s current ratio of 2.73 is also higher than the industry ratio of 2.07 and the S&P ratio of 1.27. This demonstrates the company*****s ability to meet current obligations. Total debt to equity is 5.98 versus the industry debt to equity of 23.15. This is due to Zimmer*****s low debt (long term debt decreased 45%) and increased assets of 15.9%. Zimmer is doing much better than their competitors in managing debt and has tremendous financial strength. This puts the company in a stable position should there be a downturn in the economy.

The majority of all profitability ratios exceed the S&P but more importantly exceed the industry. Gross margin (ratio of company*****s operating revenue to sales) of 76.43 substantially exceeds the industry of 8.52 and S&P of 37.05. This demonstrates very efficient operations of the company. Operating revenue (sales revenue minus cost of goods sold) of 27.16 also exceeds the industry of 2.66. Net profit margin (ratio of net profits to sales) of 18.84 versus the industry of 1.94 and S&P of 11.25 proves the company is efficient and profitable as the higher net margin ratio, the better.

Zimmer*****s efficiency ratios are performing above the industry, proving the company provides a good return to their investors. Return on assets (net income divided by total assets) for the company is 14.07 compared to the return on assets of 1.58 for the competition and 8.14 for the S&P. This demonstrates the company*****s ability to use their assets to generate earnings. The return on investment ratio of 13.13 is higher than the industry of 2.20 and S&P of 11.15. Return on equity (12 months net income divided by common stock equity) of 14.36 is well above the industry of 3.11 but slightly below the S&P of 20.37. This important ratio measures how well a company performs for its shareholders. Zimmer performs well within the industry but slightly below other companies outside the industry.

The revenue per employee ratio is calculated by taking the revenues divided by the total employees to show the labor intensity of the company. Zimmer*****s revenue per employee is 541,500 compared to the industry of 340,163 and S&P of 862,606. This suggests that the competition expects more of their employees than Zimmer does, making this a strength of the company. Inventory turnover ratio (cost of 12 month sales divided by average inventory) is 1.31 versus the industry ratio of 0.52 and S&P of 9.39. The higher the number, the better the company is moving inventory. Zimmer moves their inventory better than the competition. Companies outside the industry move their inventory better. Orthopaedic companies normally must take an entire set of implants (along with several different types of sets) into surgery. The doctor will chose the appropriate size needed and only use (buy) that particular size and type.

SWOT Analysis

Strengths

*****¢ Total Revenue increased by 18.6%

*****¢ Gross Profit increased by 18.6%

*****¢ Operating Income increased by 6.8%

*****¢ Interest Expense decreased 100%

*****¢ Net Income increased by 5.5%

*****¢ Cash and Cash Equivalents increased by 90.1%

*****¢ Inventory increased by 24.6%

*****¢ Net Receivables increased by 22.3%

*****¢ Property, Plant, and Equipment increased by 36.9%

*****¢ Total Assets increased by 15.9%

*****¢ Long Term Debt decreased by 45%

*****¢ Retained Earnings increased by 82.8%

*****¢ Total Stockholder Equity increased by 16.3%

*****¢ Cash and Cash Equivalents increased 152%

*****¢ P/E Ratio 395% higher than industry

*****¢ Current Ratio 31.8% higher than industry

*****¢ Total Debt to Equity 74.2% lower than industry

*****¢ Gross Margin 897% higher than industry

*****¢ Operating Margin 1021% higher than industry

*****¢ Net Profit Margin 1023% higher than industry

*****¢ Return on Assets 890% higher than industry

*****¢ Return on Investment 596% higher than industry

*****¢ Return on Equity 461% higher than industry

Weaknesses

*****¢ Total Cost of Revenue increased by 18%

*****¢ Selling General and Administrative increased by 18.2%

*****¢ Total Liabilities increased by 13.9%

*****¢ P/E Ratio 61.9% lower than S&P

*****¢ Return on Equity 70.5% lower than S&P

*****¢ Receivable Turnover 50.2% lower than S&P

Opportunities

*****¢ Increasing global obesity will raise global market

*****¢ More active lifestyles will increase number of procedures

*****¢ Longer life expectancy will increase number of procedures

*****¢ Desire for less invasive approaches will increase MIS procedures

*****¢ Younger patients undergoing joint replacements

*****¢ Increasing demand for Gender specific implants; Zimmer first to the market

*****¢ Significant new products scheduled for release in 2008

*****¢ Shift in demand to premium products

*****¢ Acquisition of Endius, Inc. which will increase spinal sales and market share

*****¢ Acquisition of ORTHOsoft, Inc. to bring innovative tools to marketplace

*****¢ Announcement to additionally invest in spine and dental products

*****¢ Plans to develop additional manufacturing facility in Ireland

Threats

*****¢ Increased compliance requirements will create roadblocks

*****¢ Stricter governmental policy/reimbursement practices will make business difficult

*****¢ Increased pressure from competition; potential loss of sales

*****¢ Business highly dependent on distributors to sell

*****¢ Business highly dependent on receiving raw materials from suppliers

*****¢ Adoption of hip resurfacing will threaten hip sales growth

Overall Assessment

Zimmer is a financially strong company that is well ahead of the industry. Revenues continue to increase annually. Significant investments continue to be made in Research and Development ensuring the company will always be working towards improving processes and bringing innovative products to the market, keeping them ahead of the competition. The company has little debt and spends cash towards the investment of additional companies to gain market share and expand their product portfolio.

The company*****s 2007 annual report sums it up well and states, *****Solid financial results and market changing product innovations demonstrate that our deep-seated commitment to enhancing patients***** lives also represents sound strategy and the foundation for continuing progress.*****

Recommendations

Cost of revenue for Zimmer increased 5.5% from 2005 to 2006 and 12.2% from 2006 to 2007. Any decreases in the cost of revenue would increase profits. Improvements to scrap rates on certain products would improve costs. Other processes could be improved to speed up production time on products that are difficult to make. A clear understanding of product demand would ensure the production of correct quantities, which would also decrease costs.

Selling and general administrative costs could also be reduced. While it is a strength to attract employees to the company with a Revenue/Employee ratio higher than the industry, it could also mean that Zimmer has a more relaxed environment resulting in additional costs.

Another recommendation would be to reduce liabilities. Total liabilities increased 13.9% with a significant increase in accounts payable of 23.3%. Considering the long term debt decreased 45%, total liabilities should have also decreased. The company should also continue to reduce long term debt as they have in the past.

While the P/E ratio for Zimmer is well above the industry, it is 61.9% below the S&P. The value of the company is good, but may not be as good as other companies in other industries. Any improvements the company could make to the P/E ratio would attract additional investors from different industries. This is also true with the company*****s return on equity. While it is a strength within the industry, it is a weakness compared to companies outside the industry. Any improvement could attract additional investors from outside the industry. The company could improve this by increasing revenues, reducing cost of revenue or operating expenses, which increases net income.

Zimmer*****s inventory increased by 24.6%. On one hand, that is a strength of the company as they increase manufacturing capacity to make sure the right products are on the shelf when needed to minimize backorder. On the other hand, it represents a weakness as the amount of inventory has significantly increased.

My final recommendation would be to continue to invest in and research genetically engineered tissues, cartilage regeneration, computer assisted surgery, and minimally invasive surgeries. These technologies are the wave of the future and position the company to service the surgeon and patient of the future.

Works Cited

*****Beginner*****s Guide to Financial Statements.***** U.S. Securities and Exchange Commission. 5 Feb. 2007. 21 Nov. 2008 .

*****Corporate Fact Sheet.***** Zimmer. 2008. Zimmer, Incorporated. 3 Nov. 2008 .

*****Form 10-K for ZIMMER HOLDINGS INC.***** Yahoo! Finance. 2008. 31 Oct. 2008 .

*****Ratios.***** Reuters. 2008. 22 Oct. 2008 .

*****2007 Annual Report.***** Zimmer. 2008. Zimmer, Incorporated. 3 Nov. 2008 .

*****Understanding Financial Ratios.***** Money-Zine. 2007. 21 Nov. 2008 .

*****Zimmer Holdings, Inc.***** Yahoo! Finance. 2008. 22 Oct. 2008 .