Finance and Logistics

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Finance and Logistics

• John H. Vande Vate
• Spring, 2005

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The Real Contest

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

• Financing (Money) is the fuel of business
• Everyone competes in the financial markets

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What Drives Share Price

• Revenue Growth
• Profitability
• Capital Utilization
• Cash Flow

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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

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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

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Capital Utilization

• Revenues as a of Capital Invested
• Cash Cash Equivalents
• Accts Receivable
• Inventory
• Other Current Assets
• Fixed Assets (Property, Plants and Equipment)
• Capital
• Speed Revenues/Capital

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Adtrans Speed

• Revenues 345.725 Million
• Capital 521.213 - 32.045 Million
• 489.168 Million
• Speed 345.725/489.168 .71

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ROI
ROI MarginSpeed Margin NOPAT/Revenue Speed
Revenue/Capital
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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?

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

• Revenue
• Operating Expenses
• Taxes
• NOPAT
• Capital Charge
• Economic Profit

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-
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Capital Utilization
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Operating Aspects of Capital

• Inventory
• Accounts Receivable
• Accounts Payable
• ...

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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

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Adtran Example
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Estimate of the value of those goods 170.79
Million Annually or 468 K per day
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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

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Adtran Example
Inventory
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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 day
• Days Sales Outstanding 43.342/0.947/day
  45.8 days

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Adtran Example
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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

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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

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Extremes
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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

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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
  1.0440.15 and were able to purchase and
  additional 0.002 shares

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Adtran Example Contd

• 21 stock split on December 16, 2003 so we now
  have 2(10.0440.002) 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
• 2.0920.08/34.42 .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
• 2.0970.08/24.52 .007 additional shares

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Adtran Example Contd

• Paid a 0.08 cash dividend on July 30, 2004 when
  the price was 26.71 so we were able to purchase
• 2.1040.08/26.71 .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
• 2.1100.08/21.60 .008 additional shares
• Closed at 19.14 on December 31, 2004

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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

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An Example