Stryker Corporation: In-sourcing PCBs

Harvard Business School Case 207-121

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Stryker Corporation: In-Sourcing PCBs
Exhibit 1: Selected Financial and Operating Data for Stryker Corporation
(figures in US$ millions, except employees)

2002 2001 2000

Net sales $3,012 $2,602 $2,289
Gross profit 1,898 1,637 1,473
RD&E expense 144 144 124
SG&A expense 1,187 1,000 898
Operating profit 521 454 417
Net interest expense 41 66 98
Net earnings $329 $255 $211

Cash & marketable securities $38 $50 $54

Working capital 444 460 380
Net property, plant & equipment 519 444 378
Capital expenditures 139 162 81
Depreciation & amortization 186 172 169
Total assets 2,838 2,439 2,441
Long-term debt (incl current portion) 502 723 1,013
Stockholders' equity 1,521 1,027 866
Dividends $24 $20 $16
Number of employees 14,045 12,839 12,084

Source: Stryker Corporation 2006 Annual Report

Historical figures have been restated to reflect the adoption of SFAS 123R.
Stryker Corporation: In-Sourcing PCBs
Exhibit 2: Selected Cost Projections Under Different Sourcing Policies

Quarterly data: 2004 - 2005

2004 2004 2004 2004 Total 2005 2005 2005 2005 Total
Q1 Q2 Q3 Q4 2004 Q1 Q2 Q3 Q4 2005
Projected PCB Purchases under current sourcing 2,559,479 2,559,479 2,559,479 2,559,479 10,237,918 2,559,479 2,559,479 2,559,479 2,559,479 10,237,918

PCB Purchases assuming transition to in-sourcing 2,559,479 2,559,479 2,559,479 2,559,479 10,237,918 2,559,479 852,000 388,186 - 3,799,665

Decrease in purchases from contract manufacturers - - - - - - 1,707,479 2,171,293 2,559,479 6,438,252

Manufacturing costs for Stryker facility

Materials - 1,306,515 1,504,869 1,504,869 4,316,253
Variable costs - 229,600 229,600 459,200 229,600 392,701 523,232 523,232 1,668,764
Fixed costs 252,000 252,000 374,444 374,444 1,252,888 374,444 417,256 535,412 535,412 1,862,524
Total Stryker manufacturing cost 252,000 252,000 604,044 604,044 1,712,087 604,044 2,116,473 2,563,512 2,563,512 7,847,541

Annual data: 2004 - 2009

2004 2005 2006 2007 2008 2009
Projected PCB Purchases under current sourcing 10,237,918 10,237,918 11,773,605 14,363,798 16,518,368 20,152,409

PCB Purchases assuming transition to in-sourcing 10,237,918 3,799,665 - - - -

Decrease in purchases from contract manufacturers - 6,438,252 11,773,605 14,363,798 16,518,368 20,152,409 R22 - (R24+R32)
= (R22 - R24) - R32)
Manufacturing costs for Stryker facility - = R26 - R32
Materials - 4,316,253 5,745,591 6,922,397 7,960,757 9,712,123
Variable costs 459,200 1,668,764 1,668,927 1,336,177 1,421,416 1,525,709
Fixed costs 1,252,888 1,862,524 2,139,445 2,239,932 2,324,005 2,412,930
Total Stryker manufacturing cost 1,712,087 7,847,541 9,553,963 10,498,507 11,706,178 13,650,762
Stryker Corporation: In-Sourcing PCBs
Exhibit 3: Effect on Accounts Payable, Out-sourcing v. In-sourcing of PCBs

2004 2005 2006 2007 2008 2009

Old A/P = 30 days of CM purchases 841,473 841,473 967,694 1,180,586 1,357,674 1,656,362
Delta old AP - 126,221 212,893 177,088 298,688
New A/P = 120 days of 60% of Materials * 841,473 851,425 1,133,377 1,365,514 1,570,341 1,915,816
Delta NewAP 9,953 281,952 232,137 204,827 345,475
Change in A/P, new vs. old - 9,953 165,683 184,928 212,667 259,454

Incremental Delta AP - (9,953) (155,731) (19,244) (27,739) (46,787)

* A/P is assumed to be the same under both policies during 2004.

Source: Casewriter estimates

Delta Working Capital 9,953 155,731 19,244 27,739 46,787

Cash flow statement from Balance Sheet

Closing less Opening

Closing WC - Opening WC = cash flow from WC

Incremental cash flow : New - Old

Stryker Corporation: In-Sourcing PCBs
Exhibit 4: Contemporaneous interest rate data

Yields (annual %) on selected US$ bonds at 31 May 2003

US Treasury Bonds
1-year 1.18 %
5-year 2.52
10-year 3.57
20-year 4.52

Corporate obligations
Short-term
90-day commercial paper 1.19
Long-term
Moody's Aaa 5.22
Moody's Baa 6.38

Source: US Federal Reserve

 2003 2004 2005 2006 2007 2008 2009

Capex
Building 3,030
Furnishing 126
Comm & IT 210
Mfg Eqpt 2,643
Total 3,366 2,643

Depreciation
Building 101 101 101 101 101 101
Furnishing 21 42 42 21
Comm & IT 35 70 70 35
Mfg Eqpt 189 378 378 378 378 378
Total 346 591 591 535 479 479

Cash Flows
Capex -3,366 -2,643
Working Capital 0 10 156 19 28 47
Cost Savings -1,712 -1,409 2,220 3,865 4,812 6,502
Architect fees -278
Pre tax -278 -1,712 -1,409 2,220 3,865 4,812 6,502
Tax -100 -616 -507 799 1,392 1,732 2,341
After tax -178 -1,096 -902 1,421 2,474 3,080 4,161
Add Depreciation 346 591 591 535 479 479
PAT + Dep -178 -750 -311 2,011 3,008 3,558 4,640
Cash Flow -3,544 -3,393 -301 2,167 3,028 3,586 4,686
Salvage Value 2,731
Cash flow incl salvage value -3,544 -3,393 -301 2,167 3,028 3,586 7,417
NPV 1,423
1,423
1,238 2003 is year 1 and so NPV is as of 2002

There was no row for interest expense

Time value of money / discounting implicitly takes this into account
We should not double count the interest cost

Discount rate 10%

Yr 0 Purchase -100 Purchase -100
Yr 1 Sell 110 Sell 110
NPV 0 Less int 10
Cash Flow 100
NPV -9
Double Count
 Assumptions
What is the economic life of the asset
Total Is it longer than the depreciable life?
3,030 Will you need capex in 2008 or 2009 or 2010?
126
210
2,643
6,009

2004 Dep Salvage Value

606 100% 75% Book value of Fixed assets 2,990
126 50% 75% Working Capital -259
210 50% 75% Total 2,731
2,077 50% 75% 25%
3,019

259 Ex 3
Ex 2

36%

15%

Cook Book
Ignore interest and loan drawdown and loan repayments in the cash flow
Discount at the "correct" discount rate
average cost of debt and equity
Post mid term