Financial Analysis of Motorola Corp.Document Transcript
MANAGERIAL ACCOUNTING and CONTROL - 1 Financial Analysis ofCourse Instructor: Submitted By:Prof. V.K.GUPTA Anirban Ghosh Section C Roll no. PGP2011545Date: November 10, 2011
General Introduction:Motorola as a company has been at the forefront of almost all major technologicalbreakthroughs in the field of communication. Its role as pioneer, innovator and visionary inmobile communications is well-known. Ever since its inception as the Galvin ManufacturingCorporation in 1928, it has come a long way since introducing its first product, the batteryeliminator.For more than three-quarters of the century, Motorola has proven itself a global leader inwireless, broadband and automotive communications technologies and embedded electronicproducts, and has become a company recognized for its dedication to ethical business practicesand pioneering role in important innovations.Operating in a field where innovations happen every day, Motorola has kept moving at the pacepeople are living. Its products have grown and changed over the years, and its drive forexcellence has strengthened and intensified. From the five pound Handie-Talkie™ radio to thelightweight models of today, Motorola has been the leading provider of two-way radio servicesto public safety, government, transportation, utility and manufacturing enterprises. Its digitalcable set-top terminals and cable modems deliver the promise of a connected home just as theoriginal home radios and televisions did in the 1930s and ‘40s. The leader in embeddedprocessor production, Motorola has developed a broad array of microprocessors for a widerange of products, from some of the first video games to today’s advanced digital cameras.Perhaps its greatest contribution lies in the field of personal communications. Motorolachanged the way the world communicates, from the introduction of the DynaTAC cell phone in1983 to today’s sleek handsets and innovative technology for mobile telephone service. It isalso a key supplier of integrated systems for automobiles, portable electronic devices andindustrial equipment.Throughout its history, Motorola has transformed innovative ideas into products that connectpeople to each other and the world around them. Moving forward, the company strives to keepits commitment of making things better and life easier.Given below is a brief snapshot of how the logo of the company has evolved through the ages:
Major events in Motorola’s history:1928 Paul V. Galvin and his brother, Joseph E. Galvin, purchase a battery eliminator business in Chicago, Illinois, U.S.A. They incorporate Galvin Manufacturing Corporation on September 25, 1928.1930 Net sales: $287,256 Galvin Manufacturing Corporation introduces one of the first commercially successful car radios. The original Motorola model 5T71 radio sells for between $110 and $130, and can be installed in most popular automobiles. Galvin Manufacturing Corporation founder Paul V. Galvin creates the brand name "Motorola" for the companys new car radio, linking "motor" (motorcar, motion) with the suffix "ola" (sound).1940 Net sales: $9.94 million Galvin Manufacturing Corp. develops the Handie-Talkie SCR536 two-way radio, a lightweight, handheld radio that becomes widely used during World War II.1943 The first portable FM two-way radio, the SCR300 backpack radio, is designed by Motorola chief scientist Daniel E. Noble for the U.S. Army Signal Corps. Motorolas first public stock is offered. A share sells for $8.50.1950 Net sales: $177.10 million1960 Motorolas 19-inch Astronaut television is the first large-screen, transistorized, cordless portable television.1969 Astronaut Neil Armstrongs first words from the moon are relayed to Earth by a Motorola radio transponder aboard the Apollo 11 lunar module. The transponder provides telemetry, tracking, two-way voice communications and television signal transmissions between Earth and the moon.
1970 Net sales: $796.42 million 1974 Motorolas 8-bit MC6800 microprocessor is used in automotive, computing and video game applications. It contains 4,000 transistors. 1986 Motorola’s revolutionary Six Sigma methodology incorporates data and statistical analysis into project based workflow that allows businesses to make intelligent decisions about where and how to incorporate improvements. The program enables transformational change within the organization and has affected the world economy in savings and efficiency. Motorola alone has documented more than $16 billion in savings as a result of the Six Sigma philosophy. 1990 Net sales: $10.89 billion General Instrument Corporation is the first to propose an all-digital high-definition television (HDTV) technical standard. 2000 Net sales: $37.580 billion Motorola and General Instrument Corporation merge their businesses to provide integrated video, voice and data networking for cable, Internet and high-speed data services® 1996 Motorola conducts the worlds first 700MHz wideband high-speed data trial with public safety users, enabling advanced mission-critical solutions. 2004 Automotive News honors Motorola with a 2004 PACE (Premier Automotive Supplier’s Contribution to Excellence) Award in information technology for its VIAMOTO suite of location and services software. MTV Networks Europe chooses Motorola as the exclusive provider of MTV-created wireless content. Motorola’s innovative approach to streamlining the supplier negotiation process wins the 2004 Franz Edelman Award for achievement in operations research and the management sciences.
Trouble in recent years:After running into record losses to the tune of almost $4.3 billion from 2007 to 2009; on March26, 2008, Motorolas board of directors approved a split into two different publicly tradedcompanies.Motorola Inc. was eventually divided into two independent public companies, MotorolaMobility and Motorola Solutions on January 4, 2011. Motorola Solutions is generally consideredto be the direct successor to Motorola, Inc., as the reorganization was structured with MotorolaMobility being spun off.In more recent news, Google finally acquired Motorola Mobility in August 2011 for $12.5billion, the details of which we will see later. Motorola Inc. Board of directors: Sanjay Jha: Chairman and Chief Executive Officer Motorola Mobility Inc. – Since joining Motorola in 2008, Jha has been instrumental in the creation of Motorola Mobility, having been a driving force behind the turnaround of the Mobile Devices business and its subsequent combination with the Home business. The turnaround enabled Motorola to spin off Motorola Mobility on Jan. 4, 2011 as an independent, publicly traded company. Dan Moloney, President Motorola Mobility Inc. – Dan Moloney is responsible for the Home business, which comprises the company’s video network infrastructure and home devices portfolios. In addition, he oversees the company’s focus on converged experience solutions, as well as Motorola Mobility’s Advanced Technology, Supply Chain, IT and Government Relations functions.
Marshall Brown Scott Crum John Bucher Senior Vice President Corporate Vice PresidentVice President, Chief of Staff Chief People Officer Chief Strategy Office Mike Fleming Scott Offer Bill Ogle Senior Vice President Senior Vice President Senior Vice President Chief Supply Chain Officer General Counsel Chief Marketing Officer The board of directors is made up of 12, two of whom are also part of the Senior Management Team. Motorola is authorized to have a Board of up to 14 Directors but according to the guidelines Motorola uses, 12 is considered the optimum number of Director
Business Segments:Motorola, Inc. has become a global provider of wireless, broadband, automotivecommunications technologies and embedded electronic products. It provides software-enhanced wireless telephone and messaging, two-way radio products and systems, as well asnetworking and Internet-access products, for consumers, network operators and commercial,government and industrial customers. The Company also provides end-to-end systems for thedelivery of interactive digital video, voice and high-speed data solutions for broadbandoperators, and embedded semiconductor solutions for customers in wireless communications,networking and transportation markets. In addition, Motorola offers integrated electronicsystems for the automotive, telematics, industrial, telecommunications, computing andportable energy systems markets.Outlined are the major components of Motorola’s communications technologies andembedded electronic products: Wireless Handsets: Motorola is one of the worlds leading providers of wireless handsets, which transmit and receive voice, text, images and other forms of information and communication. Wireless Networks: They develop, manufacture and market public and enterprise wireless infrastructure communications systems, including hardware and software. Mission-Critical Information Systems: In addition, they are a leading provider of customized, mission-critical radio communications and information systems. The current market share of Motorola as of Q3 10 is as shown below:
BroadbandMotorola is a global leader in developing and deploying end-to-end digital broadbandentertainment, communication and information systems for the home and for theoffice. Broadband, a method of quickly sending and receiving large amounts of information, is atechnology that keeps pace with todays busy lifestyles. There are four major categories ofbroadband access: Cable Internet, Digital Subscriber Line (DSL), Integrated Service DigitalNetwork (ISDN), and Satellite Internet. Motorola broadband technology enables networkoperators and retailers to deliver products and services that connect consumers to what theywant, when they want it. AutomotiveMotorola combines automotive-grade wireless communications, GPS technology andembedded computing to deliver the smart solutions, information and peace of mind thatdrivers demand. Motorola is leading the charge to take you further into the future, faster thanever before. Motorola is the worlds market leader in embedded telematics systems that enableautomated roadside assistance, navigation and advanced safety features for automobiles.Motorola also provides integrated electronics for the powertrain, chassis, sensors and interiorcontrols. SemiconductorFor more than 30 years, Freescale Semiconductor (formerly Motorola, Inc., SemiconductorProducts Sector) has blazed the trail for technology advances in embedded solutions. Today,Freescale Semiconductor is continuing its rich legacy of innovation, and setting the standard forintelligent embedded solutions for tomorrows advanced products.The appeal of the 32-Bit Embedded Processor portfolio is due to the fact that our solutions areideal for a wide range of industries—avionics, healthcare, communications, networking,robotics and more—wherever our customers require muscle and intelligence to drive control-intensive products.Freescal Semiconductor is a leading global semiconductor company focused on providingembedded processing and connectivity products to large, high-growth markets. Motorola alsooffers customers a broad portfolio of complementary devices that provide connectivitybetween products, across networks and to real-world signals such as sound, vibration andpressure. These products include sensors, radio frequency semiconductors, powermanagement and other analog and mixed-signal integrated circuits.
Analyzing Motorola’s sales by region across the globe gives us the following: Other Japan, 3% countries, 5% Latin America, 8% Asia-Pacific, 10% United States, 50% China, 10% Europe, 14%Globally Motorola suffered some loss due to a partial spin-off of its chip unit, but the rise in saleof cell phones in the world market helped the company to regain its position in the growingglobal cell phone market. Motorola announced an expansion plan of new mobile handsets inthe United Arab Emirates spreading awareness of 3G phones and develop brand recognition toconsolidate its market share. This is an excellent decision by Motorola seeing as how they haveso much competition in its native land of the U.S. from which it has depended on for themajority of its revenue. In another article in Sao Paulo, Brazil VIVO, the largest mobiletelephone carrier in South America with more than 22 million subscribers, has awardedMotorola Inc.s, Brazilian subsidiary, Motorola Industrial Ltda., a major contract for 25 MotorolaSoftSwitches for CDMA (MSS-C). The Motorola Mobile Switching Centers (MSS-Cs) initially willserve a over six million subscribers for the Brazilian network.It is clearly evident that Motorola is taking serious proactive steps to maintaining a strong holdon the global telecommunication technology market by seeking out markets other than the U.S.and neighboring continental countries.
Similarly an industry sales comparison for the year 2010 gives the following result:Competition between makers of Telecommunications equipment has been and continues to beheated not only in the U.S. but also in developing overseas markets. China, which is undergoinga major network ‘build out’ following the recent deregulation of its telecommunicationsindustry there, has proven to be fertile ground for leading telecom equipment vendorsprospecting for new contracts. Wireless leaders Ericsson and Nokia provide much networkequipment, as well as phones, that enable services with 3G capabilities. Finland-based Nokiamaintains a healthy lead in the cell phone market. It is followed by mobile products pioneerMotorola, industrial powerhouse Cisco Systems, and a host of Asian challengers that includesNEC, Samsung, SANYO, and Panasonic Mobile Communications.
A brief snapshot from the Balance Sheet of Motorola Inc. provides us with the following figures: Similarly the Net Sales of the company show the following trend since 2007 (in $000,000,000):2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 9.6 7.4 8.0 7.4 7.1 4.4 4.5 4.3 4.7 4.1 4.5 4.8 5.6 The sharp decrease in sales from 2008 to 2009 was largely due to effects of the global recession.
Key Ratio Analysis: Return on Assets ROA= Net Income/Total Assets2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 1.3% -2.20% 0.00% -4.70% -52.50% -3.5% 0.60% 0.40% 2.20% 1.10% 2.70% 1.70% 4.70% Analysis: Motorola is doing an excellent job of increasing sales but it is not evident on the Return on Assets. They are their competitor’s realm but it is certainly an aspect that can be improved to make investors more attracted to Motorola. Rating: POOR The dip in ROA in Q4 2008 was due to the global economic downturn which affected the whole industry.
Return on Invested Capital ROIC= Net Income/ (Long Term Liabilities + Shareholder’s Equity)2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4-1.0% -4.10% 0.0% -6.20% -103.1% -9.0% 0.0% -0.20% 1.10% -0.20% 1.90% 0.30% 6.90% The ROIC is a measure of how the firm is utilizing the funds invested in it for a long time.
Return on Equity ROE= Net Income/Equity2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 3.0% -5.00% 0.1% -10.70% -153.1% -9.8% 1.6% 0.90% 5.80% 2.70% 6.50% 4.30% 11.20% Analysis: Motorola falls between the industry and S & P 500 when comparing Return on Equity. However, it is substantially higher than the industry. Motorola, Inc. is on the forefront of the industry, it takes work and excellent management for the company to enjoy an EXCELLENT Return on Equity. Though not as big as the S & P 500, Motorola is still within fierce competition of opponents who may not even be in their telecommunications industry.
Gross margin % Gross margin= Gross Margin/ Net sales Revenue (%)2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q426.40% 28.90% 28.90% 24.20% 29.80% 27.10% 30.30% 33.40% 36.20% 34.80% 36.20% 36.60% 36.00% Analysis: Since costs of goods and sales are so high, it is almost impossible to reduce those costs. However, information seems to indicate that Motorola may be able to improve those numbers. The Return on Assets and Capital is excellent; while the Return on Equity is much better than the industry but significantly less than the S&P. . The 2011 expected growth rate estimate is over 200%. In 2011 we anticipate Motorola expected earning growth rate to stabilize around a mid 20% figure. Rating– EXCELLENT
Net margin % Net margin%= Net Income/ Net Sales Revenue (%)2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 1.3% -2.60% 0.0% -5.20% -51.2% -7.0% 0.0% -1.80% 1.0% -0.20% 1.10% 0.20% 3.90% Analysis: Higher than the industry, but lower than the S & P 500. This percentage is found by dividing net income by total revenue. In general, profit margins reflect the firm’s ability to produce a product or service at a low cost or a high price. This shows us how Motorola, though not having as a good a Gross Margin as the industry, their Net Margin is EXCELLENT.
Weighted Average Cost of Capital:2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 6.9% 6.40% 6.40% 6.20% 4.7% 5.2% 6.2% 6.30% 6.6% 6.6% 6.1% 6.2% 6.80% Analysis: Motorola does not have any preferred stock. The capital structure of a firm is the sum of the value of the firm’s debt and its equity. The purpose of this information is to maximize the value of the firm and minimize the firm’s weighted cost of capital. WACC was fairly stable for the years, ranging from 6.1% to 6.9% besides dropping to 4.7% during the global economic downturn. The stability is impressive because Motorola was losing money for the years 2001 & 2002.
Asset Turnover: Asset Turnover= Sales Revenue/ Total Assets2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 1.11 0.87 0.96 0.90 1.02 0.69 0.73 0.69 0.75 0.67 0.73 0.75 0.89 Analysis: Asset turnover is used to indicate how effectively a firm is using all of its assets. If the asset turnover ratio is high, the firm is presumably using its assets effectively in generating sales. If the ratio is low, the firm is not using its assets to their capacity and must either increase sales or dispose of some of the assets. Motorola’s asset turnover is SATISFACTORY.
Inventory Turnover: Inventory Turnover: Cost of Sales/ Total Inventory2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q410.01 7.20 8.34 8.56 7.53 6.30 7.65 8.84 11.13 10.09 10.78 9.16 10.62 Analysis: The inventory ratio measures how quickly inventory is produced and sold. It is significantly affected by the production technology of goods being manufactured and the perishability of the finished goods. Motorola’s inventory turnover is lower than both the industry and the S & P 500, therefore, it is FAIR.
Current Ratio: Current Ratio= Current Assets/ Current Liabilities2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 1.78 1.74 1.75 1.67 1.64 1.74 1.92 2.02 1.94 1.99 2.03 2.00 1.97 Analysis follows after calculation of Quick Ratio.
Quick Ratio: Quick Ratio= Monetary Current Assets/ Current Liabilities2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 1.11 1.00 1.01 0.97 0.99 1.06 1.24 1.30 1.31 1.36 1.41 1.39 1.39 Analysis: Most widely used measures of accounting liquidity. The current ratio for Motorola is lower than the industry but higher than S & P 500. The same is true for the quick ratio. It falls between the S & P 500 and the industry. Therefore, at the present time Motorola’s liquidity status is FAIR.
Days Sales Outstanding/Days Receivables (DSO) Days Sales Outstanding= Account Receivables/Sales per day2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 49 57 50 52 44 74 72 56 53 61 57 59 51 Analysis: As can be seen from the graph, between the end of 2008 and start of 2009, Motorola forwarded a lot of credit to its customers. The DSO levels of Motorola are slightly hiogher than the industry average.
Price to Book Ratio/Market to book ratio: Market/book= Market price per share/ Book Value per share2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 1.40 0.81 0.64 0.65 0.62 0.61 0.94 1.19 1.08 0.97 0.89 1.13 1.16
Debt-Equity Ratio: Debt-Equity Ratio= Total Liabilities/Shareholders Equity2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 0.28 0.28 0.27 0.28 0.44 0.43 0.41 0.40 0.40 0.37 0.34 0.33 0.26 Analysis: Financial leverage is related to the extent to which a firm relies on debt financing rather than equity. Measures of financial leverage are tools in determining the probability that the firm will default on its debt contracts. The more debt a firm has, the more likely it is that the firm will become unable to fulfill its contractual obligations. Motorola’s Debt/Equity Ratio is higher than the industry, but lower than the S & P 500. Motorola’s status in Debt/Equity Ratio is FAIR.
Strengths & WeaknessesMotorola is a fine company that has been around all century. Having started with the idea of a batteryand then mass production of radios, Motorola has really got its foot in the market of communications.MOT created many of the original concepts for the 2way radios, it has since then been part of theindustry curve that helps provide people with cell phones that enable much greater and easiercommunication than ever thought possible. As an innovator of new technology Motorola is a leader. -STRENGTH.The cell phone market shares were lost to Nokia in the 1990’s because MOT had focused on analogtechnology while digital services were the trend for consumers. Today, Motorola has taken marketshare back from its competitors by bringing to market many variations of the digital phone that hasdone well with consumers. Motorola has focused on a trend that has resulted in major returns; thisconcept is one of the clam shell phones, which Motorola has been the strongest proponent. -STRENGTHFinancial Ratios should also be considered when evaluating the strengths and weaknesses of thecompany. When analyzing this company it is imperative that the communications equipment industrybe identified. When looking at the growth and earnings numbers, Motorola is capable of sustainingboth. The current P/E is better than past numbers and indicates an improvement in the near future.The weakest part of the financial evaluation was the Gross Margin. Since costs of goods and sales are sohigh, it is almost impossible to reduce those costs. However, information seems to indicate that in 2004and go forward, Motorola may be able to improve those numbers. The Return on Assets and Capital isexcellent; while the Return on Equity is much better than the industry but significantly less than theS&P. This is a company that can make money and has a product under demand by the public and othersectors. Although Motorola lost money in 2001 and 2002, for the first quarters of 2004 Motorola issurprising analyst with remarkable growth rates. The 2004 expected growth rate estimate is over 200%.In 2005 we anticipate Motorola expected earnings growth rate to stabilize around a mid 20% figure. –EXCELLENTThe weighted average cost of capital (WACC) for Motorola has been stable over the most recent threeyears. It is costing Motorola less to borrow money and this number has fluctuated minimallyconsidering the industry and the economy. – STRENGTHThe Beta for Motorola is higher than the market, which indicates that investing in Motorola is risky. Wethink that because of anticipated higher growth rates, it is worth taking a risk on this security. – WEAKBased on our research information, a constant cost of capital, strong earnings growth rate estimates,and an ability to grab market share, coupled with strong financial ratios, Motorola is a risky but strongcompany worth investment.
References:1) U.S. Securities and Exchange Commission EDGAR Database2) http://www.nasdaq.com/asp/quotes_reports.asp?symbol=MSI&selected=MSI3) Report titled “Motorola profit sinks on mobile woes; Shares plunge to five-year low” by Jeffry Bartash in the Wall Street Journal on January 23, 2008 available at:4) http://www.marketwatch.com/story/motorola-profit-slides-on-mobile-woes-shares-hit-5-year low?siteid=yhoof5) “History of Motorola Inc.” at http://en.wikipedia.org/wiki/Motorola6) Data used from official website: http://investors.motorola.com/ - Investor Relations http://investors.motorola.com/governance.cfm - Corporate Governance practices http://investors.motorola.com/google-acquisition.cfm - Acquisition by Google www.motorola.com/Consumers/US-EN/About_Motorola/Corporate_Overview - Corporate Overview http://mediacenter.motorola.com/content/default.aspx?NewsAreaID=1 – Executive Team7) Quarterly and Annual financial statements8) Peervalue Analytical report of Motorola Inc. at http://www.peervalue.com/MOT/company.html