11

Finance and Logistics

John H. Vande Vate

Spring, 2005

22

The Real Contest

• Financing (Money) is the fuel of business

• Everyone competes in the financial markets

• Logistics only really matters to top management if it improves financial performance

33

What Drives Share Price

• Revenue Growth

• Profitability

• Capital Utilization

• Cash Flow

44

Profitability• Net Operating Profit after Taxes as a % of

Revenues (NOPAT)Revenues

- Raw Materials

Wages and Salaries

Logistics Costs

Utilities

Insurance

Taxes

NOPAT

• Profitability = NOPAT/Revenues

55

Example

• Adtran www.adtran.com• Huntsville, Alabama Telecom supplier• NOPAT = (in millions)

Revenues – Operating Expenses – Taxes = $345.725 - $308.2 - $7.401 = $30.123

Profitability or Keep (NOPAT/Revenues)30.123/345.725 = 8.7%

66

Revenues

Operating Expenses: raw materials, labor, etc.

Operating Expenses: marketing, promotion,

administrative overhead

Operating Expenses: Guess that would be R&D

Net Operating Profit Before Taxes

Taxes

77

Capital Utilization

• Revenues as a % of Capital InvestedCash & Cash EquivalentsAccts ReceivableInventoryOther Current AssetsFixed Assets (Property, Plants and Equipment)

Capital• Speed = Revenues/Capital

88

Total Assets

Less Non-Interest Bearing Current Liabilities

99

Adtran’s Speed

• Revenues = $345.725 Million

• Capital = $521.213 - $32.045 Million

= $489.168 Million

• Speed = $345.725/$489.168 = .71

1010

ROI = Margin*Speed

Margin = NOPAT/Revenue

Speed = Revenue/Capital

6%

19%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Dell Cisco

MarginMargin

ROI

4.9

0.7

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Dell Cisco

SpeedSpeed

Margin Speed ROIDell 6% 5 30%

Cisco 19% 0.7 13%

1111

Capital Charge

• Annualizing Capital Investments

• Cost of Capital

• Combination of – Fair return to bond holders (creditors)– Fair return to share holders (owners)

• Which return is higher?

• Why?

1212

Economic Profit or EVA

Revenue

Operating Expenses

Taxes

NOPAT

Capital Charge

Economic Profit

-

-

Economic Profit measures whether a company is creating, preserving or destroying value

1313

Capital Utilization

(in Millions) Wal-Mart Kmart Sears 03 Wal-Mart Kmart Sears 03Revenue $256,329 $17,072 $41,124 1.000$ 1.000$ 1.000$ Operating Expenses $243,656 $16,661 $37,998 0.951$ 0.976$ 0.924$ Operating Income $12,673 $411 $3,126 0.049$ 0.024$ 0.076$ Non-Operating Income (Expense) $2,516 $92 $27 0.010$ 0.005$ 0.001$ Net Operating Profit Before Taxes $15,189 $503 $3,153 0.059$ 0.029$ 0.077$ Cash Taxes $5,516 $194 $1,089 0.022$ 0.011$ 0.026$ Net Operating Profit After Taxes $9,673 $309 $2,064 0.038$ 0.018$ 0.050$ % NOPAT / Revenue 3.77% 1.81% 5.02% Capital $73,861 $4,312 $17,947 0.288$ 0.253$ 0.436$ Cost of Capital 10% 10% 10%Capital Charge $7,386 $431 $1,795 0.029$ 0.025$ 0.044$ % Capital Charge / Revenue 2.88% 2.53% 4.36% Economic Profit $2,287 ($122) $270 0.009$ (0.007)$ 0.007$ % Economic Profit / Revenue 0.89% -0.72% 0.66%

1414

Operating Aspects of Capital

• Inventory

• Accounts Receivable

• Accounts Payable

• ...

1515

Days Purchases Outstanding

• Days Purchases Outstanding = Accounts Payable/Cost of Goods Sold per day

• Cost of Goods Sold per day is $468K/day

• Adtran = $17.789/$0.468/day = 38 days

1616

Adtran Example

Purchases

1717

Estimate of the value of those goods

$170.79 Million Annually or

$468 K per day

1818

Adtran Days of Inventory

• Inventory = $39.926 Million

• Value of one days sales = $468K/day

• Days of sales in Inventory = $39.926/$0.468/day = ~85 days

1919

Adtran Example Inventory

2020

Days Sales Outstanding

• Accounts Receivable/Daily Revenues

• Adtran

$43.342 Million in Receivables

$345.725 Million in Annual Sales $0.947 Million in sales per dayDays Sales Outstanding =

$43.342/$0.947/day = 45.8 days

2121

Adtran Example Receivables

2222

The Cash Operating Cycle• Days Receivables Outstanding

Days in Inventory

Days Purchases Outstanding

Cash Operating Cycle-Number of net days from the time a dollar is paid for raw

materials to the time the finished goods are paid for.

• Adtran– Purchases = 45.8 + 85 – 38 = 92.8 days

2323

We must Finance the Cash Operating Cycle

• Not just the inventory!• How to reduce the Cash Operating Cycle?

– Payment terms– Just-in-time

• Faster Production• Reduced Inventory• Faster Modes• Closer to Vendors/Customers

– Credit terms

2424

Extremes

65(165)

52(51)

75(38)

32(79)

45(25)

(200) (150) (100) (50) - 50 100 150 200 250

Kodak

Solectron

Cray

Dell

Northrop

Days in Inventory

Days Sales Outstanding

Days Payments Outstanding

2525

Total Shareholder Return

• Start with 1 share on a given date,

• Reinvest the dividends to acquire additional shares

• Stock splits add shares

• Compare value of investment today with value at the start

2626

Adtran Example

• TSR from Jan 1, 1999 to Dec 31, 2004• On Jan 4th, 1999 share price was $8.74• Paid a $2.15 cash dividend on July 29, 2003

when the price was $48.72 so we were able to purchase an additional 2.15/48.72 = 0.044 shares

• Paid a $0.15 cash dividend on October 29, 2003 when the price was $68.61 so we received 1.044*$0.15 and were able to purchase and additional 0.002 shares

2727

Adtran Example Cont’d• 2:1 stock split on December 16, 2003 so we

now have 2*(1+0.044+0.002) =2.092 shares• Paid a $0.08 cash dividend on January 30,

2004 when the price was $34.42 so we were able to purchase

2.092*0.08/34.42 = .005 additional shares• Paid a $0.08 cash dividend on April 30, 2004

when the price was $24.52 so we were able to purchase

2.097*0.08/24.52 = .007 additional shares

2828

Adtran Example Cont’d

• Paid a $0.08 cash dividend on July 30, 2004 when the price was $26.71 so we were able to purchase

2.104*0.08/26.71 = .006 additional shares• Paid a $0.08 cash dividend on October 29,

2004 when the price was $21.60 so we were able to purchase

2.110*0.08/21.60 = .008 additional shares• Closed at $19.14 on December 31, 2004

2929

TSR

• Started with $8.74 on January 4, 1999

• Ended with 2.118 shares each worth $19.14 on December 31, 2004

• Starting value $8.74

• Ending Value $40.54

• TSR = (40.54-8.74)/8.74 = 364%

• CAGR = 24%

3030

An ExampleTotal Shareholder Return (from 1/1/99) vs Days of Inventory

0%

20%

40%

60%

80%

100%

120%

140%

0 5 10 15 20 25 30

Days of Inventory

TS

R %

__

Chevron Texaco closed on 12/4/04 at $53 4/8

This analysis suggests that based on speed only it should have closed at around $115 7/8