2. 1 1 Finance and Logistics John H. Vande Vate Spring, 2005

3. 2 2 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

4. 3 3 What Drives Share Price Revenue Growth Profitability Capital Utilization Cash Flow

5. 4 4 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

6. 5 5 Example Adtran www.adtran.comwww.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%

7. 6 6 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

8. 7 7 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

9. 8 8 Total Assets Less Non-Interest Bearing Current Liabilities

10. 9 9 Adtran’s Speed Revenues = $345.725 Million Capital = $521.213 - $32.045 Million = $489.168 Million Speed = $345.725/$489.168 =.71

11. 10 ROI = Margin*Speed Margin = NOPAT/Revenue Speed = Revenue/Capital Margin ROI Speed

12. 11 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?

13. 12 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

14. 13 Capital Utilization

15. 14 Operating Aspects of Capital Inventory Accounts Receivable Accounts Payable...

16. 15 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

17. 16 Adtran Example Purchases

18. 17 Estimate of the value of those goods $170.79 Million Annually or $468 K per day

19. 18 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

20. 19 Adtran Example Inventory

21. 20 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

22. 21 Adtran Example Receivables

23. 22 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

24. 23 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

25. 24 Extremes

26. 25 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

27. 26 Adtran Example TSR from Jan 1, 1999 to Dec 31, 2004 On Jan 4 th, 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

28. 27 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

29. 28 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

30. 29 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%

31. 30 An Example