CFA Institute Research Challenge

Hosted by Local Challenge CFA Society West Michigan

Grand Valley State University – Student Research

Healthcare Sector, Healthcare Equipment Industry

New York Stock Exchange

Stryker Corporation

Date: 1/21/2016 Current Price: $93.91 (1/22/16 Close) Recommendation: Buy Ticker: NYSE – SYK Headquarters: Kalamazoo, MI Target Price: $106.00

Highlights We initiate coverage on Stryker Corporation (SYK) with a Buy

recommendation based one-year target price of $106.00. This offers

a 12.9% upside from its current price of $93.91. (appendix 17) Growth Drivers SYK has shown consistent top line revenue growth averaging 5.8%

since 2010. Growth is driven organically and through the use of

acquisitions. Future growth will be realized through rising

demographic ages, additionally by enhancement of current

acquisitions, while leveraging its Trans-Atlantic operating model to

expand in international markets. Valuation Valuation methods calculated by the team show a current intrinsic

value of $106.00 per share. SYK provides a strong long-term

upside potential through its experience and strong market

penetration in the United States. We estimate SYK’s intrinsic value

using a weighted average of the discounted cash flow analysis and

PE multiples valuation. Risk Factors The risks associated with SYK stem from their operating liabilities

resonating from their sales force. International risks of the

appreciating dollar and the global economic slowing lessen the

sales of the company for their international markets. Regulatory

risks including the ACA implementations to the healthcare

insurance company payback period increase SYK’s cash

conversion cycle and the litigation of product recalls cost SYK

liquidity and billions of dollars, respectively.

Business Description Stryker Corporation (SYK) is a Fortune 500 medical technology

firm. It is located in Kalamazoo, Michigan where it was founded in

1946 by Dr. Homer Stryker. It has three divisions, neurotechnology

and spine, medical and surgical (MedSurg), as well as

orthopaedics. SYK products are sold in over 100 countries through

company-owned sales subsidiaries and branches as well as third-

party dealers and distributors. The company’s products are

marketed directly to doctors, hospitals, and other healthcare

facilities. In 2014 approximately 68.0% of SYK’s revenues were generated

from customers in the United States. With the establishment of

their European regional headquarters in the Netherlands, they hope

to increase their European market share and lower their effective

tax rate. Neurotechnology and Spine Their neurotechnology and spine products include both

neurosurgical and neurovascular devices. SYK’s neurotechnology

offering includes products used for minimally invasive

endovascular techniques; a comprehensive line of products for

traditional brain and open skull base surgical procedures,

orthobiologic and biosurgery products, and minimally invasive

products for the treatment of acute ischemic and hemorrhagic

stroke. MedSurg SYK’s MedSurg products include surgical equipment and surgical

navigation systems; endoscopic and communications systems;

patient handling and emergency medical equipment; and

reprocessed and remanufactured medical devices as well as other

medical device products used in a variety of medical specialties. Orthopaedics (Reconstructive) SYK’s products within their orthopaedics line consist primarily of

implants used in hip and knee joint replacements as well as trauma

and extremities surgeries. They produce advanced implant designs

and specialized instrumentation that make orthopaedic surgery and

recovery simpler, faster and more effective. SYK’s orthopaedic

products also aid surgeons with technology and support to develop

new surgical techniques.

Management and Governance Corporate Governance SYK has a set list of values that they adhere to; integrity,

accountability, people, and performance. Together these values are

at the core of everything SYK does. Board- SYK’s business and affairs are managed under the board

of directors. Directors are expected to spend the time and effort to

meet their responsibilities. (Appendix 1) Shareholder Rights- (Appendices 3 and 18) Audit and Oversight- Management sets a system of internal

control in order to provide reasonable assurance in regards to

preparation and fair presentation of published financial statements.

This is audited by the public accounting firm Ernst & Young LLP. Compensation-The Board of Directors at SYK believe that

stock-based awards are an important component of their overall

compensation plan. Stock-based awards are set for a predetermined

date and are one of the following; Annual grants, off-cycle grants,

acquisition-related grants.

Management SYK devotes separate dedicated sales forces to each of its product

lines who work with the doctors in the operating rooms. This is

done to maintain a high level of focus and expertise. Management

is focused on continuous development and innovation. They

dedicate resources to internal development and innovation. This

would not be possible if they did not collaborate with their

customers. They maintain their capital allocation strategy that

prioritizes acquisitions, dividends, and share repurchases. They

acquire new companies in order to grow their product lines. SYK

has consistently grown their dividend each year since 2010. They

made share repurchases of $946 million from 2012 through quarter

three 2015.

Industry Overview and Competitive Positioning Industry Growth Drivers Market Adoption of Robotic Assisted Surgery Surgical assisted surgeries are the way future surgeries are going to

be completed. According to the Mayo clinic, robotic assisted

procedures make minimally invasive surgeries possible. They have

less complications, less pain, quicker recovery time and smaller

and less noticeable scars compared to a traditional operation. Rising World Demographics Global population trends are an important considerations. Looking

at the ages of populations around the world that are 45 or older, the

United States has 41.4%, China 38.2%, Europe 45.7% and Japan

has 52.8%. The population pyramids also show the common trend

of aging population across the countries. This trend of increasing

age demographics increases SYK’s demand for their products and

will create a margin of safety in the event of an economic downturn

in the coming years. (Appendix 4)

Growth of Emerging Markets Emerging markets such as China, Brazil and India offer huge areas

of growth in the healthcare industry. As income and education rise

and their economies become more advanced, medical spending

increases. China’s medical device industry has surpassed $50

billion, India could reach $6 billion by the end of 2016 and Brazil

almost $5 billion in 2016. Even with struggling growth as a country

in whole, Brazil still sees positive CAGR in the medical device

industry. Mergers and Acquisitions The medical device industry has had large technological gains in

recent years to spur their large market growth. This has led to many

companies entering the market and expanding their business

operation. Large-size companies are now looking to diversify their

portfolio of products and expand globally through mergers and

acquisitions, as see with Zimmer and Biomet merging. This has

produced four main players in the medical device industry, with

Zimmer Biomet (ZBH), Depuy Synthes, a subsidiary of Johnson

and Johnson (JNJ), Medtronic (MDT), and SYK.

Competitive Positioning There is a high amount of rivalry between medical device

companies competing for new products in all areas of surgical care,

including post-surgery. SYK has low pressure from sellers as the

materials needed are of high quality but are common and available

from many producers. Buyers have low power as well due to the

regulations that are imposed on doctors and the products that they

use to ensure safety during the surgery, and few companies can

provide them. The threats of new entrants into the medical device

market is low, however companies already operating in the market

are moving towards the areas that SYK is operating in, increasing

competition in these segments. Threat of substitutes is medium due

to the socio-cultural shift of consumers opting for alternative

medicine and diet to minimize the risk of needing selective

surgeries in the future. (Appendix 12) SWOT Analysis SYK has high strengths due to the current profits of the company

and the quality products the company produces. Weak international

sales growth and litigation costs affect the EPS of the company,

however the international market does pose opportunities to expand

the sales of the company in the future. Threats to the company

come from existing competitors in the medical device market

creating products to directly compete with SYK. (Appendix 5)

Investment Summary We issue a Buy recommendation on Stryker Corporation (SYK)

with a target price of $106.00 using the Discounted Cash Flow

Method, Dividend Discount Model, and P/E Multiples Analysis.

This offers approximately 12.9% upside from its closing price of

on January 22, 2016. This valuation is supported by numerous

merits, as outlined below.

Merits Defensive SYK falls into the Healthcare Sector, which makes them a

defensive stock. They are a defensive stock because; healthcare is a

basic necessity and SYK has the third largest market share behind

Medtronic and DePuy. Strong Financials SYK is highly liquid with a liquidity ratio of 1.81. This allows

them to make acquisitions and pay liabilities. Its total debt to equity

ratio is 1.06. This is right in line with their top competitors. It has a

growing Free Cash Flow that allows it to make acquisitions, pay

dividends, and reinvest. (Appendices 9 and 10) Leveraging of Trans-Atlantic Operating Model The creation of a regional headquarters in the Netherlands in July

of 2014 allowed for a substantial future tax savings while allowing

for a base of operations for growth in European and emerging

markets. Approximately 70.8% of consolidated cash and cash

equivalents are held overseas. This cash is intended to be used by

reinvesting organically or through acquisitions outside of the

United States. China, the world's largest emerging market, and

becoming one of the largest markets for medical devices surpassing

$50 billion in 2015. Reforms by the Chinese government allowed

easier access for foreign companies to enter and SYK acquired

Trauson Holding Company in March of 2013 for $675 million.

Trauson was China’s number one supplier of trauma products and

pelvic reconstruction plates and the third largest spine distributor.

This acquisition creates a presence in China with a network of 633

distributors covering 3,880 hospitals. While taking advantage of

the lower production costs in China, this strategic move also gives

SYK a “value” product which will be scaled to provide emerging

markets with products that still have gross margins in the upper

60% range. Continued Growth of Mako Surgical Mako Surgical Corp. was acquired in December 2013 for $1.65

billion. This amplified SYK’s operating room integration and

surgical navigation while providing means for robotic assisted

surgeries. Economics of scope increased, locking hospitals into

using SYK replacement joints, bones and supplies while using

Mako. Mako, while providing “consistent, reproducible, precision”

assists in total knee and recently approved total hip replacement

surgeries with reasonable expectations to expand into shoulder

surgeries. Although the sales have been slower than anticipated,

they have set records every quarter with sales, most recently selling

17 robots in Q3 of 2015. Q4 sales are projected to increase even

more due the fact that year-end sales are seasonally strong in Q4

and Mako was approved for total hip replacement with expansion

on the types of implants allowed for use. Expansion into Extremities With the global extremity industry expected to increase in value to

$1.66 billion by 2016, SYK acquired Small Bone Innovations

(SBi) in 2014 for $375 million, SYK now has the ability to provide

small bones for fingers, wrists, and elbows to treat trauma and

disease. The Scandinavian Total Ankle Replacement System or

STAR, included in the acquisition, is the only complete three piece

cement less mobile bearing ankle on the market. SYK was first rumored to be targeting Smith & Nephew in

December 2014. The London based company is one of the only

mid-sized medical device companies left. In December 2015 it was

rumored again that SYK had extended an 18 billion dollar deal for

the merger. Smith & Nephew, which is a European orthopaedic

leader, operates in a value business strategy compared to SYK’s

high services model. This would allow SYK to introduce products

into emerging markets quicker and be leveraged through their

Trans-Atlantic operating model. SYK would gain significant

market share and would help SYK become the leading orthopaedic

provider in the European market. This would further the expansion

of robotic assisted surgeries through Blue Belt Technologies which

was recently acquired by Smith & Nephew. This merger would

also have significant tax savings and could act as a corporate

inversion. In comparison to two of its closest competitors, ZBH and MDT,

SYK has been efficient at capitalizing its new acquisitions onto its

balance sheet. Over the last five years, all three companies have

made multiple acquisitions. However, out of the three companies,

SYK has recorded the least amount of intangible assets. This shows

that SYK executives can effectively target and acquire companies

while paying fair value for the firms.

Financial Analysis

Capital Allocation SYK has three primary objectives for capital allocation. The

primary use is intended for mergers and acquisition costs. In the

time period from 2012 up to Q3 2015, acquisition costs totaled

approximately $3.5 billion on 11 different acquisitions. The

secondary goal is to distribute a constant and rising dividend each

year. Since 2010, SYK has increased its dividend payout every

year by an average of 14.20% per year. The third use of capital

SYK employs are share repurchases. From 2012 through Q3 2015

SYK repurchased $946 million worth of shares. They currently

have $136 million authorized to buy back under their 2012

repurchase plan, and $2 billion under their 2015 repurchase plan

which was approved in March. Profitability By examining Greenblatt’s return on capital formula and earnings

yields we have determined that SYK has a favorable financial

position in comparison to its two closest competitors. In addition to

MDT and ZBH, four other competitors were originally scrutinized.

However, ZBH and MDT will only be included due to their closely

related operations and size. Starting with the return on capital formula, SYK recently (2015

LTM) surpassed both ZBH and MDT with a ROC of 31.7%, far

above the 18.2% and 17.7% reported by MDT and ZBH

respectively. Looking at the three companies’ earnings yields, SYK

has remained a favorable position, maintaining yields 200 basis

points over its next closest competitor for the last five years. SYK

reported 5.54% in 2010, and has grown to 6.65% in the LTM of

2015. ZBH and MDT had respective yields of 5.09% and 4.34% in

the LTM 2015. (Appendix 13) Earnings Management To better understand management’s representation of financial data

and search for balance sheet bloat, we first calculated scaled net

operating assets. For the three firms we have discussed, SYK has

maintained low SNOA. ZBH had a lower percentage than SYK in

the LTM of 2015, but SYK was lower than both competitors from

2010 to 2014. Looking at scaled total accruals, our calculation has

shown consistently negative accruals for all three companies. The

2015 LTM data point is an outlier at .017. This metric is a measure

of accounting practices and our last data point does not include one

fiscal year of data, our team recommends recalculation when

earnings are available. Excluding that data point, SYK has

downward trending accruals that appear far more attractive than the

upward trending accruals of its competitors. (Appendix 14)

ROE SYK is expected to boost ROE to ~17.00% as it improves net profit

margins, the results of recent operations reconstructuring efforts.

Recovering healthy sales growth in the near future will also help

the ROE to improve.

Valuation Discounted Cash Flow model (DCF) We used the discounted cash flow model to estimate the intrinsic

value of SYK’s share prices by projecting forward five years of

operations, profitability, and free cash flows. We believe five years

is a reasonable time horizon to forecast SYK’s operations due to its

consistent operations; we can also see the effects of recent

acquisition activities on operations. In this model, we calculated

free cash flow from projected sale revenue (Appendix 6). We

derive with our price target of $106.00 from the DCF model. The

foundation of this result is based on the historical performances of

operations, our forecasted growth rate of profitability and sales,

forward-looking effects of the recent reconstructing operations

activities, the predicted market conditions, industry outlooks, and

recent M&A activities. The estimate price is subjected to changes

and sensitivity, according to these calculated factors below: Weighted Average Cost of Capital (WACC) The Risk-free rate of 2.79% was calculated using the projected 10

year treasury rates of return which take into account three possible

rate hikes in 2016. Taking the unstable and pessimistic world

economic environment into accounts, the team projected the FED

will be reluctant to raise the interest further. The expected market

risk is calculated based on the last 5 years average returns. To

derive with the above Beta value of SYK stock, we run the

regression of SYK’s daily-adjusted close stock price against the

S&P 500 daily composite values from 1/1/2011 to 12/31/2015. We

calculate the cost of equity using the Capital Asset Pricing model.

The cost of debt, on the other hand, is the sum of the projected risk-

free rate and the AAA’s average bonds spread. We calculate the

after-tax cost of debt with the assumption that SYK has a 30% tax

bracket. SYK’s historical capital structure comprise of 30%

interest-bearing debt and 70% equity.

Revenue growth We forecast revenue growth for SYK for the next five years

coming from various operations across the world. With the adverse

effect of the current world economic conditions and the instability

of the currency exchange rates, we anticipate most of the revenue

growth in the next five years will come from U.S. market. Growth

in emerging market will remain low as currency exchange rates

remain speculative and the overall world economy struggles with

weak indicators such as the Brazil and China market. Strong

growth in orthopedic segment will continue contribute as the main

source the revenue for SYK. We see the company’s aim to

diversify its products portfolio to reduce its reliance on

orthopaedics segment is beneficial in the long run. Lessening the

dependence on orthopaedics will reduce the company’s operation

exposure with the business cycle; orthopedic products are mostly

elective and the sales can negatively affected when the economy is

going through a downturn. The introduction of MAKO products,

together with Patient Safety Technologies, SBi, and Surpass

provide SYK with more opportunities and technologies for internal

innovations and growth in its product portfolio. With the

company’s commitments on further growing in Neurotechnology

and spine segments, we are confident that sales growth rate will

improve after 2016 as its divergence strategy becomes more

stabilized and the world economic condition improve. Terminal growth rate We project sustainable growth rate of 3.5% for SYK, much higher

than the 2.0% growth rate of GDP to perpetuity in developed

countries. The difference between the GDP growth rates will

reflect the higher projected health care costs. As the world

economic environment becomes stable, we see spending for

healthcare in emerging market countries will contribute greatly to

the increase in spending on healthcare services and equipment. We

see great potential of growth for the healthcare-related industries in

emerging market countries as the population becomes more health

conscious and their disposable incomes increase at a much faster

rates than those of developed countries. Dividend Discount Model Our team calculated a price target using the dividend discount

model (DDM). However, the DDM model is best for value firms

that do not have many growth opportunities. Therefore, it was not

included in our final weighting of the security price. The DDM

resulted in a target price of $44.33 which is reflective of the

acquisitive nature of SYK and the quantity of growth opportunities

available. (Appendix 7) The 2016 estimated dividend is the product of the $.38 dividend

announced by SYK for next quarter multiplied by four to reflect the

entire year. This is a close estimate because SYK for the last five

years has raised dividends once a year and proceeded to pay out a

consistent dividend for the next three quarters. Our 2017-2018 and

2019-2020 growth rates were found by averaging EBIT, EPS,

dividend, sales, and analyst’s estimates of growth. The weighted

average of these numbers resulted in growth rates of 11.98% and

9.29% respectively. To discount the dividends we used our

calculated WACC of 7.7% and our terminal growth rate we

calculated to be 3.5%. Please refer to the corresponding sections

above for how these rates were derived. Although the DDM model creates a major price discrepancy

between our other two valuation techniques, the model is still

relevant. The difference between the $44.33 calculated by the

DDM, and the weighted estimated price of $106.00 calculated from

the multiple and DCF valuation is the present value of SYK’s

growth opportunities and reflective of our bullish rating on the

company.

Multiple Analysis Based off of our conservative forward looking earnings multiple

valuation, our team is issuing a target price of $103.98. This price

is a function of our forecasted earnings and our industry extracted

cap rate. We forecasted revenue in constant currency at 6%,

however, due to the strong dollar we revised this growth to 3.5% to

reflect the negative impact of currency exchanges and slow growth

of the global economic environment. Our COGS was determined to

be 32% of revenue, which was an average of the COGS over the

last five years. Our SG&A, R&D, and amortization expenses we

trended forward linearly. Although SYK’s corporate strategy

includes increased centralization of administrative practices, these

percentages were not adjusted in order to keep a conservative

approach. Our team maintained that practice for future merger and

restructuring charges, considering it is likely that SYK will

continue to acquire smaller firms. Finally, we chose a 25% tax rate,

this conservative number is much higher than the 18.3% reported

tax rate of the last twelve months of 2015, and is in line with our

conservative methodology. (Appendices 8 and 15) To determine the multiple for our valuation our team extracted

historic multiples from SYK’s competitors and the healthcare

medical equipment and supplies sector. Over the last two years the

average P/E for SYK’s closest competitors has been 31.9, and the

sector as a whole which included 238 companies has had an

average PE of 31.7. Again to stay in line with our conservative

approach we have decided to use a forward looking PE of 25. This

multiplied by our earnings yields a target price of $103.98 for

2016.

Investment Risks International Risks (IR): IR1.) Slow economic growth in overseas countries that SYK

operates is bringing down the overall growth rate of the company.

This is most notably affecting the countries of China and Brazil,

SYK’s two biggest overseas markets, and could drag down further

sales. IR2.) As foreign currencies continue to lag or even depreciate

against the dollar, Stryker will see less growth in their overseas

operations. This will bring down the overall growth rate of the

company, as SYK hopes to push their overseas efforts into more

foreign markets, such as Great Britain and Europe.

Regulatory Risks (RR): RR1.) In 2014, Stryker had a litigation that is still pending and

resulting in a company estimate of $1.43 Billion USD. This is due

to the negative health aspects of their Hip replacement product, the

Rejuvenate and ABG II modular neck hip system. This represents a

$3.81 per share loss for the company when place within one

accounting period (2014). These types of losses can happen in the

future bringing SYK future sales down.

RR2.) The Affordable Care Act pushes doctors and patients to

practice more “Preventative Medicine”. This litigation push could

move customers away from SYK’s strategic position in the market,

and cut away from their profits. SYK is preparing for this shift with

their recent acquisitions. Also the ACA has also allowed medical

insurance companies to allow the payments for surgeries to happen

over an extended period of time, increasing SYK’s A/R and greatly

increasing their Cash Conversion Cycle. This makes SYK less

liquid and makes the company less able to make strategic moves

into the future. In addition, the excise tax on medical devices

increases the cost of SYK’s products, and this may make SYK

products less competitive.

Operational Risks (OR): OR1.) In 2013, the company was accused by the SEC for bribery

in the amount of 2 Million USD. Direct selling to doctors and

hospitals is the main sales tactic of SYK, and the revenue streams

depend heavily on this selling tactic. Failure in this aspect of the

company will result in massive losses in the profitability of the

company. OR2.) An Increase in MedSurg division of the company due to the

increase in the practice of preventative medicine in line with the

ACA regulations, along with the shifts in socio-cultural tendencies

to favor healthier diets and exercise. As these shifts in demands

happen, SYK along with its competition will be fighting against

each other for these new revenue streams within the

hospital/patient care realm. The intensity of rivalry between

competitors in this field have now intensified with the forecasted

needs of the consumers in the short term.

Disclosures:

Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.

The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might

bias the content or publication of this report.

Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.

Market making:

The author(s) does not act as a market maker in the subject company’s securities.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the

author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or

completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This

information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This

report should not be considered to be a recommendation by any individual affiliated with CFA Society West Michigan, CFA

Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge

Appendices Appendix 1: Board of Directors

Board Member

Title Background Description

Kevin A. Lobo Chairman of the Board and Chief Executive Officer Since 2012

● Joined in April 2011 ● Group President of

Orthopaedics

Mr. Lobo has many years of experience with companies such as Johnson and Johnson, along with Ethicon Endo Surgery. He has also held financial positions with Unilever and Kraft. He has a Great understanding of SYK’s values and brings in expertise in the field of medical technology to the company.

Howard E. Cox, Jr. Board Director since 1974

● Partner of Greylock venture capitalist firm

Mr. Cox has extensive experience by being a Director of many institutions, such as the Harvard Medical School Board of Fellows and the Secretary of Defense Business Board. His continued commitment to SYK gives the company a historical reference and venture capitalism expertise is beneficial when referencing to acquisitions.

Srikant M. Datar, Ph.D.

Board Director since 2009

● Works with Novartis AG and T-Mobile

● Professor at Harvard and Stanford

Doctor Datar has extensive accounting and finance expertise that shows during his tenue as professor of Graduate School of Business Administration at Harvard and Accounting and Management professor at Stanford. He also serves on the board of Novartis AG and T-Mobile, giving him many insights into the international markets

Dr. Roch Doliveux Board Director since 2010

● CEO of UCB S.A from 2005 until 2014

Dr. Doliveux is a doctor of veterinary medicine from Maisons-Alfort and brings his extensive expertise in global markets to SYK’s board in order for the company to expand their international presence. His action on many regional boards of UCB S.A will help SYK expand into new regions and imprint their global presence in the medical device market

Loiuse L. Francesconi Board Director since 2006

● Chairman of the Tucson Medical Center Healthcare Board of Trustees

● Former Vice PResident of Raytheon Company

Her presence in the board brings experience in the hospital setting, one of the major sources of revenue for SYK and a great customer base for the company’s products. Her various leadership roles in other companies also brings knowledge to the areas of finance, operational, and governance aspects of the company

Allan C. Golston Board Director since 2011

● President of the Bill and Melinda Gates Foundation since 2006

● Director of Malt-O-Meal

Mr. Golston provides SYK with experience in the healthcare sector and with his CPA certification, provides SYK with advice during the auditing process. His experience in providing healthcare to underprivileged people provides SYK with insight into the needs of the ultimate consumer and design products to meet those needs.

William U. Parfet Independent Board Director Since 1993

● CEO of MPI, a drug safety and pharmaceutical company

● Director of Monsanto ● Director of Taubman

Center ● 30 year career of Upjohn

company (now Pfizer) as an executive

Mr. Parfet has extensive experience in leadership roles in many public companies, giving his experience to the SYK board and to the executives. His experience with various pharmaceutical companies gives him extensive knowledge in regards to research and development of new products, leading SYK into the future. He also is very active in the accounting field, working on the Financial Accounting Foundation that sets the rules for accounting standards across the U.S.

Andrew K. Silvernail Board Director since 2013

● CEO of IDEX company since 2011

● Group president for Rexnord Industries

● senior leader at Newell Rubbermaid

Mr. Silvernail has extensive leadership roles in companies that provide materials for products in the healthcare field. This experience helps SYK develop products with the highest quality materials, ensuring the quality is brought to the consumers of SYK products. His experience in the healthcare field as well provide SYK with insights into giving a better healthcare service to clients.

Ronda E. SYK Board Member since 1984

● Granddaughter of the founder of the company

● Vice chair of Greenleaf Trust

● Harvard Medical School Board of Fellows

Ms. SYK brings various matters regarding social responsibility to the company. She also brings the SYK values instilled in her through her upbringing to make sure that the SYK board and executives stay on mission. In addition, she brings a strong shareholder presence into the boardroom.

Appendix 2: Key Executives

Executive Title Description

Kevin A. Lobo Chairman and Chief Executive Officer Kevin A. Lobo was appointed Chairman of the Board on July 22, 2014 in addition to his responsibilities as Chief Executive Officer of

SYK Corporation, which he assumed on October 1, 2012. Mr. Lobo joined SYK in April 2011, and had previously been Group President

of Orthopaedics. Mr. Lobo serves on the Board of Directors for Parker Hannifin Corporation, the global leader in motion and control

technologies. He is also a board member of the Advanced Medical Technology Association (AdvaMed), the Business Leaders for

Michigan and United Way for Kalamazoo/Battle Creek regions, and is a member of the Business Roundtable. Mr. Lobo has a broad

business career that includes executive positions in general management and finance. After holding finance positions with KPMG,

Unilever and Kraft Canada he spent eight years with Rhone-Poulenc, including roles based in Europe as Worldwide Corporate

Controller of the chemical spin-out, Rhodia, and General Manager of Specialty Phosphates EMEA. He then spent eight years at

Johnson & Johnson, including CFO of McNeil Consumer Healthcare and Ortho Women’s Health & Urology, President of J&J Medical

Products Canada and President of Ethicon Endo Surgery.

Yin C. Becker

Vice President, Communications, Public Affairs and Strategic Marketing

Yin C. Becker was named Vice President, Communications, Public Affairs and Strategic Marketing in January of 2012. Ms. Becker

leads the development and management of the company’s global communications, public affairs and corporate marketing strategies that

enhance SYK’s position as an industry leader. With 27 years of experience in the medical technology industry, Ms. Becker’s career

spans several senior leadership positions at SYK. She served as Vice President, Healthcare Innovations, Executive Director of the

Homer SYK Learning Center and Vice President, Global Communications for SYK’s Orthopaedics business. Prior to joining SYK, Ms.

Becker also served for ten years at Pfizer Inc. in various leadership roles in marketing and sales. Ms. Becker holds a B.A. in Psychology

from Rider University and she is the Vice Chair for HINJ and a member of the Ramapo College Board of Governors.

Dean H. Bergy Vice President, Corporate Secretary Dean H. Bergy was named Vice President, Corporate Secretary in October 2012.

Mr. Bergy joined the Company in 1994 as the Corporate Controller. In 1996, he was promoted to Vice President, Finance of our Medical

division and then to Vice President, Finance of the corporation in 1998. In January 2003, he was appointed Vice President and Chief

Financial Officer. He also held the role of Secretary from January 2003 to February 2005, and resigned as Vice President, CFO in March

2009. Mr. Bergy continued to be employed by the Company as an Advisor to the CFO and was elected Secretary of the Company in

September 2011, and also served as Interim Chief Financial Officer and Vice President, Corporate Secretary from October 2012 until

April 22, 2013. Prior to joining SYK, Mr. Bergy was an Audit Senior Manager for Ernst & Young LLP. Mr. Bergy holds a B.B.A. in

Accounting from the University of Michigan and is a Certified Public Accountant. He completed the Program for Management

Development at the Harvard Business School in 2001.

William E. Berry Jr.

Vice President, Corporate Controller

William E. Berry Jr. was named Vice President, Corporate Controller and Principal Accounting Officer in February 2014. Mr. Berry has oversight responsibility for the global accounting and financial functions and is responsible for internal reporting and consolidations, SEC and external reporting, financial accounting research, policies and procedures and the company’s finance training and development programs. Mr. Berry joined SYK in August 2011 as Corporate Controller. Prior to that, he served as the Assistant Corporate Controller for Whirlpool Corporation the world’s leading global manufacturer and marketer of major home appliances leading the accounting and reporting functions for the multi-national company. From 2007 to 2009 Mr. Berry served as the Controller of the Electronics and Safety Division of Delphi Automotive LLP, a leading global vehicle components manufacturer. From 1995 to 2007 Mr. Berry served Federal-Mogul Corporation, a leading global supplier of vehicle and industrial products, and during his 12-year tenure he held various positions of increasing responsibility most recently as the Director of Finance for Global Powertrain and prior to that while based in Germany as the Director of Corporate Finance for Europe and South Africa. Mr. Berry began his career in public accounting at Deloitte & Touche LLP. He earned a Bachelor’s of Business Administration degree in accounting from Eastern Michigan University, is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants

Jeanne M. Blondia

Vice President, Finance and Treasurer

Jeanne M. Blondia joined SYK as Vice President and Treasurer in May 2008. In January of 2014 she was named Vice President,

Finance and Treasurer. Ms. Blondia is responsible for the Treasury department including all treasury, risk, insurance, real estate and

travel functions and works closely with the global finance team. Prior to joining SYK, Ms. Blondia served as the Vice President and

Treasurer of Constellation Energy Group, Inc. At Constellation she had full treasury responsibilities including funding plans for business

growth and was also highly involved in merger and acquisition activities. She previously worked at the General Motors Treasurer’s office

in New York and held various roles of increasing responsibility, including Director of Business Development for GMAC, GM’s finance

subsidiary. She began her career as an Analyst at DRI, an economic consulting firm. Ms. Blondia holds a B.A. in Economics from

Kalamazoo College and an M.B.A. in Finance from the University of Michigan.

Lonny J. Carpenter

Group President, Global Quality and Business Operations

Lonny J. Carpenter was named Group President, Global Quality and Operations, in January 2016 and further expanded his role. Mr.

Carpenter is responsible for setting company-wide direction for our quality, manufacturing, procurement and logistics strategies, and

ensuring the successful execution of that direction, as well as oversight of our European Business Operations, Transatlantic Operating

Model, Canada and our global Enterprise Resource Planning (ERP) platform. Mr. Carpenter began his career with SYK in 1989 at the

Instruments division where he excelled in various manufacturing and operations roles, the last being Vice President, Global Operations.

In 2006 he was promoted to Vice President/General Manager of the Medical division and then to President in 2008. That same year, he

was promoted to Group President, Instruments and Medical. Mr. Carpenter holds a Bachelor of Science degree from the United States

Military Academy at West Point.

Irene B. Corbe

Vice President, Internal Audit Irene B. Corbe joined SYK in April 2014 as Vice President, Internal Audit. Ms. Corbe reports to the Audit Committee of SYK's Board of

Directors. In this role, Irene oversees SYK’s financial audit activity which is a critical component of the corporate governance structure.

Irene joined SYK with 25 years of experience in internal audit, finance and accounting in various roles of increasing responsibilities.

Most recently, Ms. Corbe was the Vice President, Internal Audit at Whirlpool Corporation. Ms. Corbe received her Masters of Business

Administration from Oakland University and her undergraduate degree in business administration from the University of Michigan. She is

also a Certified Public Accountant.

M. Kathryn (Katy) Fink

Vice President, Global Human Resources

M. Kathryn (Katy) Fink was named Vice President, Global Human Resources, in January 2016. Ms. Fink is responsible for all human

resources policies, practices, planning, direction and activities, including Talent Acquisition, Talent Development, Total Rewards and HR

Shared Services. Ms. Fink began her career with SYK in 2013 as Vice President, Talent Management and was promoted in 2015 to

Vice President, Human Resources, MedSurg and Neurotechnology Group. Prior to joining SYK, she held a number of HR roles of

increasing scope and complexity at Cintas Corporation, Ethicon Endo-Surgery, a division of Johnson & Johnson. Ms. Fink holds a

Bachelor of Science degree from Kenyon College and Master's degree in human resource management (HRM) at Rutgers' School of

Management and Labor Relations.

David K. Floyd

Group President, Orthopaedics David K. Floyd was named Group President, Orthopaedics on November 15, 2012. The leaders of SYK’s Reconstructive, Trauma and

Extremities, Spine, Performance Solutions, Asia and South Pacific businesses report to David. Mr. Floyd joined SYK after 25 years in

the medical technology and orthopaedics industry, where he held a number of senior level leadership roles at DePuy, a division of

Johnson and Johnson, Abbott Spine, AxioMed Spine, Centerpulse Orthopaedics and most recently, Chief Executive Officer for

OrthoWorx. Mr. Floyd received his bachelor’s of science degree from Grace College in Winona Lake, Indiana.

David G. Furgason

Vice President, Tax David G. Furgason was named Vice President, Tax, in August 2012 and is responsible for all aspects of tax for SYK’s global business,

including global tax policy and strategy, compliance, audits and accounting for income taxes. Mr. Furgason began his career with SYK in

2004 as Senior Manager, Tax Planning, Audits and Accounting at our Corporate headquarters in Kalamazoo, Michigan. He was

promoted to Director of Tax, U.S. in August of 2006 and appointed Director, Global Tax Operations in 2010. Prior to SYK, David had an

18 year career in public accounting as a principal with Jansen Furgason & Valk, PC, and a manager with Ernst & Young. Mr. Furgason

is a Certified Public Accountant and holds a Bachelor of Business Administration degree from Western Michigan University.

Michael D. Hutchinson

General Counsel Michael D. Hutchinson joined SYK as its Assistant Counsel in June 2008, was promoted to Chief Legal Counsel for the Orthopaedics

Group in December 2008, then Deputy General Counsel in 2012, and General Counsel in 2013. Mr. Hutchinson is responsible for the

leadership and strategic direction of SYK’s legal, compliance, and corporate secretary functions. Prior to joining SYK, Mr. Hutchinson

worked for several law firms and as an in-house attorney in the Washington, D.C. area. Mr. Hutchinson received his law degree from

the George Washington University Law School and his undergraduate degree from Clark University.

William R. Jellison

Vice President, Chief Financial Officer

William R. Jellison joined SYK as Vice President, Chief Financial Officer in April 2013. Mr. Jellison has global responsibilities for

Finance activities, including Corporate Accounting, Reporting, Tax, Treasury and Internal Audit functions for the Company. Mr. Jellison

began his career with the Donnelly Corporation, a publicly traded international automotive parts supplier, where he served in several

senior leadership roles advancing to Vice President of Finance. Prior to joining SYK, Mr. Jellison spent 15 years at Dentsply

International, the world’s largest manufacturer of professional dental products, most recently as the company’s Senior Vice President

and Chief Financial Officer. To broaden his operational experience, he also spent 2 years as a Senior Vice President with full P&L

responsibilites for some of Dentsply's operating divisions located in the U.S., Europe & Asia. Mr. Jellison holds a Bachelor’s degree in

business administration from Hope College, and became a Certified Management Accountant. Mr. Jellison is a member of the Institute

of Management Accountants and is also affiliated with Financial Executives International.

Katherine A. Owen

Vice President, Strategy and Investor Relations

Katherine A. Owen joined SYK as Vice President, Strategy and Investor Relations, in February 2007. Ms. Owen is responsible for

overseeing the strategic planning and business development processes at SYK, as well as investor relations. Prior to joining SYK, Ms.

Owen served as a Medical Technology Analyst at Merrill Lynch. She previously served as a Medical Technology Analyst at Cowen &

Co./SG Cowen. She also was a Corporate Lending Analyst at State Street Bank and an Underwriter at Chubb Insurance Corporation.

Ms. Owen holds a B.A. in Economics from the University of Massachusetts at Amherst and a M.B.A. from Boston College.

Bijoy Sagar

Vice President, Chief Information Officer

Bijoy Sagar was named Vice President, Chief Information Officer, in May 2014. Mr. Sagar is responsible for the development and

execution of our global information technology strategy.Prior to joining SYK, Mr. Sagar spent 20 years in the information technology

field, most recently serving as Chief Information Officer for Merck Millipore, and before that as Global Head of Information Systems and

a Member of the Divisional Board for the $15 Billion Chemicals Division of Merck KGaA. Prior to joining Merck in 2006, Bijoy held

various roles of increasing responsibility with Millennium Pharmaceuticals, Amgen, and Eli Lilly & Company. Mr. Sagar holds a

Bachelor’s and Master’s in science from the University of Bombay.

Timothy J. Scannell

Group President, MedSurg and Neurotechnology

Timothy J. Scannell was named Group President, MedSurg & Neurotechnology on January 1, 2013. The leaders of the

Craniomaxillofacial (CMF), Endoscopy, Healthcare Systems, Instruments, Medical, Neurovascular, Sustainability Solutions, Japan and

Latin America divisions report to Tim. Mr. Scannell began his career with SYK in 1990. During eleven years with SYK's Endoscopy

division, he served in various sales and marketing leadership roles and progressed to the position of Executive Vice President

overseeing sales, marketing and operations. He was then named as Vice President and General Manager of SYK's Biotech division in

2001. In 2003 he was promoted to Vice President and General Manager of SYK's Spine division and later to President of Spine. He

became the Group President of Spine and Endoscopy in 2008 and was named Group President, MedSurg & Spine in August of 2009.

Mr. Scannell serves on the Board of Directors for Insulet Corporation, the leader in tubeless insulin pump technology with its OmniPod®

Insulin Management System. Mr. Scannell holds bachelor’s and master’s degrees in business administration from the University of

Notre Dame.

Elizabeth A. Staub

Vice President, Regulatory Affairs and Quality Assurance

Elizabeth A. Staub was named Vice President, Regulatory Affairs and Quality Assurance, in April 2006. Ms. Staub is responsible for

overseeing SYK’s compliance with worldwide product quality and regulatory requirements, including FDA and other regulatory bodies.

Ms. Staub began her career with SYK in April 1989 and held a number of quality, regulatory and operational positions within the

Company’s Orthopaedics division, including Manager, Quality Assurance; Team Leader for the packaging cell; Manufacturing Team

Leader for the external support cell; Director of the Knee Steering Team; Vice President, Quality Assurance, Regulatory Compliance and

Clinical Research; and Director of the Business Process Excellence Project. She then served as Director, Regulatory Affairs and Quality

Assurance, for the Company from 2005 to 2006. Prior to joining SYK, Ms. Staub spent six years with Baxter Healthcare in a variety of

quality assurance positions. Ms. Staub holds a B.S. in Medical Technology from York College of Pennsylvania.

Appendix 3: Shareholder Rights

All shareholders are invited to the annual shareholder meeting held on the third Monday in April. At any

meeting of shareholders each outstanding share of stock having voting power shall be entitled to one vote on

each matter. All shareholders are entitled to vote for the board of directors. Shareholders running for a board

seat must receive a majority of the vote to be elected.

Appendix 4: Population Pyramids

Appendix 5: SWOT Analysis

Strengths: ● Leader in market share for the

segments of the surgical equipment that operating in

● Excellent relations with customers ● Positions in future technologies and

cutting edge techniques ● Diverse portfolio of products

Weaknesses: ● Exposed to high amounts of litigation risks ● Failure to connect with customers could lead

to lower sales ● Slowing international growth can greatly affect

revenue growth

Opportunities: ● High amounts of new customers due

to ACA ● Smaller companies with technology in

new, developing areas are good acquisition targets

● Healthcare represents a majority of discretionary spending for Americans

Threats: ● Exposed to litigation that takes away majority

of earnings ● Competition intensifying from the expected

increase from ACA ● Shifts in needs for ultimate consumers away

from product line

Appendix 6: Historical and Projected Cash Flow from 2014 to 2020

2016 2017 2018 2019 2020

PV in 2015 $1,125.83 $1,582.09 $1,737.79 $1,455.78 $38,026.44

Enterprise Value $43,927.92

Number of shares outstanding (m) 376.55821

Debt $ 3,469.00

Equity value $40,458.92

Value per share $107.44

Appendix 7: Valuations

Appendix 8: Historical Income Statement

t

Appendix 9: SYK’s Long-term Debt Structure

Name Maturity

Date Amount

$(Mil) Price Coupon

% Coupon

Type Yield to

maturity (%)* Weight Weighted

factors

SYK 2% 9/30/2016 750 100.8 2.00 Fixed 0.9 0.19 0.18%

SYK 3.375% 11/1/2025 750 100.1 3.38 Fixed 3.4 0.19 0.63%

SYK 1.3% 4/1/2018 600 99.5 1.30 Fixed 1.6 0.15 0.23%

SYK 3.375% 5/15/2024 600 99.0 3.38 Fixed 3.5 0.15 0.53%

SYK 4.375% 1/15/2020 500 108.7 4.38 Fixed 2.1 0.13 0.26%

SYK 5/15/2044 400 97.5 4.38 Fixed 4.5 0.10 0.45%

SYK 4.1% 4/1/2043 400 98.0 4.10 Fixed 4.2 0.10 0.42%

After-tax cost of debt 2.70%

* Yield to maturity have been adjusted, assuming 25% tax bracket.

Appendix 10: Historical and Projected Key Financial Ratios

Financial Condition 2014 2015 2016E 2017E 2018E 2019E 2020E

Profitability

NOI / EBITDA Margin 85.5% 85.4% 84.7% 84.0% 83.3% 82.7% 82.0%

Operating Profit Margin 23.0% 22.9% 22.5% 22.3% 22.0% 21.8% 21.6%

Net Profit Margin 5.3% 12.0% 15.2% 15.2% 14.9% 14.8% 14.8%

Return on Assets 2.9% 7.4% 9.4% 9.4% 9.2% 9.2% 9.1%

Return on Equity 6.0% 13.9% 17.6% 17.6% 17.3% 17.2% 17.2%

Liquidity

Current Ratio 1.06x 1.08x 135.4% 130.2% 120.8% 120.1% 122.9%

Cash Ratio .55x .45x .66x .64x .58x .58x .58x

Activity

Accounts Receivable

Turnover 6.15x 6.58x 6.58x 6.94x 7.65x 8.8x 7.9x

Total Asset Turnover .55x .62x .68x .57x .63x .6x .7x

Fixed Asset Turnover 8.81x 8.73x 8.4x 8.26x 8.22x 8.2x 8.4x

Financial Leverage

Long-term Debt to Assets 18% 16% 18% 20% 20% 23% 25%

Long-term Debt to Equity .73x .71x .66x .47x .12x -.34x -1.51x

Debt to Equity 1.06x .88x .89x .93x .97x .91x 1.03x

Interest Coverage 19.7x 19.99x 20.28x 20.57x 20.35x 20.75x 21.x

Shareholder Ratios

Dividend Payout Ratio .9x .43x .45x .46x .48x .51x .48x

Appendix 11: Corporate Subsidiaries

Appendix 12: Market Share Graphs Market Share of Medical Device Companies by Segment:

Appendix 13: Profitability Graphs

Appendix 14: Earnings Management Graph

Appendix 15: Multiple Graphs

Appendix 16: Market Cap to GDP with SMA

Appendix 17: Stryker vs. S&P500 5 Years

Appendix 18: Ownership