Motorola is a global manufacturer of communication products, semiconductors, and

embedded electronic solutions. The company is divided into six operating segments
that publicly report financial results.
The semi-conductor and communications sectors account for the majority of sales
The latter segment accounted for 15.8% of Motorolas sales in 2002.
Motorola is now a very successful company, but this was not always the case. Lets try
and see why using their accounts. Sales peaked at over $37B in 2000 and dropped to
less than $27B in 2002. Motorola had a net loss in 2001 and 2002. Data for 2003
indicates that Motorola has returned to profitability.
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1998 1999 2000 2001 2002
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Year
Sales Revenue
After Tax Profits
% 76 . 2 3
Revenue Sales
Profit Gross
Margin Profit Gross
% 31 . 9
Revenue Sales
Tax after Profit
Margin Profit Net
The gross profit margin is the amount of each $s worth of sales that is left over after repaying
production costs, i, e. the cost of goods sold. This ratio can be changed by 1. a change in sales
price and or volume and 2. a change in the cost of production.
Evaluating Motorola relative to the semiconductor industry first, we note that Motorola had
a slightly lower gross profit margin that the industry as a whole , which was 37.49%.
The situation was different when evaluating Motorola relative to the telecommunications
equipment industry, and, considering that the majority of Motorolas business was in this
industry, this is the more interesting and relevant story.
Relative to the telecommunications equipment industry, Motorola had a better gross profit
margin than the industry average of 29.52%.
The net profit margin measures the profit that is available from each $ s worth of sales after
all production costs, expenses, interest and taxes have been paid.
The net profit margin for the semiconductor industry was -3% and for the
telecommunications equipment industry it was -1.24.


The ratios indicate that Motorola had a higher production cost of sales than
the average firm in the semiconductor industry, resulting in a lower gross
profit margin.
It also had higher expense costs, resulting in lower net profit margin
performance relative to the semiconductor industry.
Motorola had a higher gross profit margin than the average firm in the
telecommunications equipment industry, but had a lower net margin. This
must be because Motorola had a higher overhead costs or expenses.
As an illustration of what these expenses might have been consider labour
productivity, for this purpose defined as sales per employee. In 2001, Motorola
generated sales of $31,191M with 111,000 employees, for a productivity of $0.27M
per employee.
In contrast, Nokia generated sales of $27,645M with just 53,800 employees,
for a productivity of $0.53M per employee. This is nearly double the
productivity of Motorola.
Clearly, Motorola has significant costs associated with its level of employment
that are not being returned in sales.



Evaluating Motorola relative to the semiconductor industry first, we
note that Motorola was slightly less liquid than the average firm in the
industry, with both a current ratio and a quick ratio that were lower
than the industry averages of 2.44 and 2.08 respectively.
The situation is different when evaluating Motorola relative to the
telecommunications equipment industry. Relative to the
telecommunications equipment industry, Motorola had a better
liquidity position, with both the current ratio and the quick ratio being
higher than the industry averages of 1.52 and 1.23 respectively.
1.77
s Liabilitie Current
Assets Current
Ratio Current
47 . 1
s Liabilitie Current
Stock - Assets Current
Ratio Quick
Evaluating Motorola relative to the semiconductor industry first,
Motorolas average collection period, at 61 days, was higher than the
industry average of 50 days.
Motorolas average collection period, was lower than the industry
average of 50 days, indicating Motorola should have evaluated its credit
policies.
Relative to the telecommunications equipment industry, Motorola
collected receivables much quicker than the average firm in this
industry 73 days.
Relative to this industry, Motorola should have evaluated its credit
policies to determine if perhaps strict credit policies are negatively
impacting upon sales.


days 61
Sales Daily
debtors Trade
days debtor Trade
Both fixed asset turnover and total asset turnover are above the semiconductor industry averages,
of 1.58 and 0.61 respectively, indicating that Motorola was using its assets more efficiently than the
industry average in generating sales.
Motorola used its total assets slightly less efficiently than the average firm in the
telecommunications equipment industry (at 0.9) and its fixed asset turnover is significantly less
than the industry average of 6.24.
Several explanations are possible for these deviations from industry norms:-
Perhaps this was the result of a conscious choice to invest heavily in technology and automation
in its manufacturing processes (as opposed to a more labour-intensive manufacturing strategy);
while such fixed investments will yield significant gains in good market conditions, the
investments commit the firm to fixed costs (depreciation) in bad economic conditions.
Alternatively, the poor fixed asset turnover may have indicated overcapacity caused by extremely
poor forecasts of future sales.
Or, the poor ratio may have indicated a fundamental inability or inefficiency in using the
deployed assets.


37 . 4
assets Fixed
Sales
ty productivi asset Fixed
86 . 0
assets Total
Sales
ty productivi asset Total
Perhaps contributing to the poor overhead cost structure is that
Motorola has elements of being a conglomerate that most of the other
firms in the industry did not have in 2002.
Motorola is involved in diverse business segments
telecommunications, semiconductors, automotive components, and
batteries, to name a few and must evaluate whether the administrative
and infrastructure costs of managing these diverse segments are less
than the benefits of having the segments under one corporate umbrella.
It is not obvious that the diverse business segments within Motorola
were being used synergistically to increase overall value.
If there are not synergies between the business segments, Motorola
shareholders should prefer that Motorola divest the segments as
investors can diversify their portfolios more efficiently than Motorola
can.
Most of the other firms in the industry did not have to absorb the costs
associated with managing such diverse business activities.

An alternative understanding of Motorola's position in 2002 can
be obtained by looking at performance indicators that measure
the success of the underlying operation.
This can be done using the Return on Capital Employed (ROCE):-
Capital refers to the amount of money put into the business to
generate a profit. This is of course an indirect route in that the
money is used to buy stock and equipment (fixed assets) which
are combined to generate a product whose sale - hopefully- creates
a profit.
The capital placed into a company can come for three sources; (i)
long term loans such as a bank loan, (ii) share capital and (iii)
retained profits. Thus capital employed can be defined as:-
Capital Employed = Shareholders Equity + Long Term Loans.
RATIO ANALYSIS
Capital Employed
Because long term loans are included in the definition of capital
employed, it must be compared with profits before interest and tax,
i.e. operating profit.
% 98 . 7
Pr

Employed Capital
ofit Operating
ROCE
The ROCE therefore measures the amount of capital used by a
company to generate its profits/losses.
Further the ROCE is identically equal to the product of two further
ratios:-

RATIO ANALYSIS
Return of Capital Employed
venue Sales
ofit Operating
x
Employed Capital
venue Sales
Employed Capital
ofit Operating
ROCE
Re
Pr Re Pr

The first ratio is capital productivity, the second is the return on
sales.
The whole point of investing capital into a business is to make a higher
return than could be obtained by putting this capital into a deposit
account or some other form of investment. Such interest rates vary over
the business cycle but a crude average bench mark would be 6% in 2002.
At around 22% in 2002, Motorola has not been outperforming such
deposit accounts.
Ideally, any company will want the ROS figure to be as high as possible so
that a large profit can be squeezed out of a $s worth of sales.
ROS varies by industry and with economic conditions. In manufacturing it is
typically around 10%. Clearly, in 2002, Motorola was not making much of a
profit on every $ of product that was sold.
This poor ROCE is therefore due to a inability to convert sales into profit,
which we saw above was partly due to unusually high overhead expenses.

RATIO ANALYSIS
Return of Capital Employed
) 082 . 0 ( 67 . 2
30004
2485
11239
30004
2211 . 0

x ROCE