Motorola Case Questions Exercise 2 Please read the information in the case carefully. The financial statement theoretically captures the impact of the strategic decisions made by the firm. If this is true, you should be able to decipher a few strategic areas of concern by examining the financial statements. 1. What are 4 strategic issues that emerge from an analysis of the financial data. Identify each issue. Using the data, give an explanation of what the issue is and what data supports your conclusion. 2. Identify one NON-financial strategic issue that is discussed in the case. 3. After looking at all the information, what do you think is the KEY strategic issue that Motorola must address? (This doesn't have to be from 1 or 2, but should be supported by 1 and/or 2.) Motorola Solutions, Inc. MSI 620076307 B5BKPQ4 NYSE Common stock Income Statement (Industrial) Source : FactSet Fundamentals Common Size - % of Total Revenue Dec '02 Dec '01 Dec '00 Dec '99 365 Days 365 Days 366 Days 365 Days Final Final Final Final 100.00 100.00 100.00 100.00 67.03 75.79 66.77 66.19 Gross Income 32.97 24.21 33.23 33.81 SG&A Expense 29.82 26.37 25.35 27.09 Sales/Revenue Cost of Goods Sold (COGS) incl. D&A Other Operating Expense 0.12 0.00 0.00 0.00 EBIT (Operating Income) 3.03 -2.16 7.88 6.72 Nonoperating Income (Expense) - Net 1.68 7.34 4.83 4.90 Interest Expense 2.50 2.12 1.31 1.22 15.12 21.78 5.46 6.62 -12.92 -18.71 5.94 3.78 -3.60 -5.34 2.43 1.13 0.00 0.00 -- -- -9.31 -13.37 3.51 2.64 0.00 0.00 0.00 0.00 Net Income -9.31 -13.37 3.51 2.64 Net Income available to Common -9.31 -13.37 3.51 2.64 0.00 0.01 0.02 0.03 10.93 6.45 14.59 13.78 Unusual Expense (Income) - Net Pretax Income Income Taxes Equity in Earnings of Affiliates Consolidated Net Income Minority Interest Expense EPS (recurring) EBITDA Supplemental Motorola Solutions, Inc. MSI 620076307 B5BKPQ4 NYSE Common stock Balance Sheet (Industrial) Source : FactSet Fundamentals Common Size - % of Total Assets Dec '02 Dec '01 Dec '00 Dec '99 365 Days 365 Days 366 Days 365 Days Final Final Final Final Cash & ST Investments 23.42 18.45 8.63 10.83 Cash Only 23.21 18.21 7.80 8.96 0.21 0.24 0.84 1.87 Short-Term Receivables 15.82 13.72 16.75 13.73 Accounts Receivables, Net 15.82 13.72 16.75 13.73 Accounts Receivables, Gross 16.67 14.39 16.75 13.73 Bad Debt/Doubtful Accounts -0.85 -0.66 -- -- 0.00 0.00 0.00 0.00 10.23 8.25 12.38 9.17 Finished Goods 4.03 3.41 4.74 2.64 Raw Materials 9.78 8.33 7.64 6.52 Progress Payments & Other -3.58 -3.49 0.00 -- Other Current Assets 11.63 10.92 9.20 10.48 -- -- -- 0.00 11.63 10.92 9.20 10.48 61.11 51.35 46.96 44.21 Net Property, Plant & Equipment 21.77 26.69 26.35 24.77 Property, Plant & Equipment - Gross 72.87 68.29 59.07 58.53 Buildings 17.96 18.59 16.56 16.04 1.17 1.04 0.63 0.67 Machinery & Equipment 53.74 48.67 41.88 41.81 Accumulated Depreciation 51.10 41.60 32.73 33.76 Total Investments and Advances 7.32 8.97 14.00 22.17 LT Investment - Affiliate Companies 0.80 1.02 2.06 6.81 Other Long-Term Investments 6.52 7.95 11.94 15.36 Long-Term Note Receivable 1.36 2.72 6.06 4.50 Intangible Assets 5.73 5.35 5.29 -- Net Goodwill 4.90 -- -- -- Net Other Intangibles 0.83 -- -- -- -- 3.45 -- -- 2.71 1.48 1.35 4.35 -- -- -- -- 2.71 1.48 1.35 -- 100.00 100.00 100.00 100.00 Assets Total Short Term Investments Other Receivables Inventories Prepaid Expenses Miscellaneous Current Assets Total Current Assets Land & Improvements Deferred Tax Assets Other Assets Deferred Charges Tangible Other Assets Total Assets Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 5.81 2.60 15.09 6.71 Accounts Payable 8.09 7.29 8.25 8.08 -- 0.19 0.36 0.02 21.09 18.95 14.69 18.46 -- 0.26 0.21 0.20 5.16 5.31 3.05 2.27 15.93 13.37 11.43 15.98 34.99 29.04 38.39 33.26 27.37 25.07 11.28 9.57 -- -- -- -- Other Liabilities -2.44 3.45 6.37 13.38 Other Liabilities (excl. Deferred Income) -2.44 3.45 6.37 13.38 Deferred Income -- -- 0.00 0.00 Total Liabilities 59.92 57.55 56.04 56.21 0.00 1.45 0.00 0.00 Common Equity 40.08 40.99 43.96 43.79 Common Stock Par/Carry Value 24.78 20.25 15.53 4.92 Additional Paid-In Capital/Capital Surplus 7.96 5.11 2.81 6.89 Retained Earnings 9.21 16.27 22.97 23.52 -1.49 -1.53 -0.80 -0.64 2.10 1.03 3.63 9.29 Other Appropriated Reserves -2.47 -0.13 -0.17 -0.20 Total Shareholders' Equity 40.08 42.45 43.96 43.79 0.00 0.00 0.00 0.00 40.08 42.45 43.96 43.79 100.00 100.00 100.00 100.00 Income Tax Payable Other Current Liabilities Dividends Payable Accrued Payroll Miscellaneous Current Liabilities Total Current Liabilities Long-Term Debt Provision for Risks & Charges Preferred Stock (Carrying Value) Cumulative Translation Adjustment/Unrealized Unrealized Gain/Loss Marketable Securities Accumulated Minority Interest Total Equity Liabilities & Shareholders' Equity Motorola Solutions, Inc. MSI 620076307 B5BKPQ4 NYSE Common stock Ratios - Annual Source : FactSet Fundamentals Dec '02 Dec '01 Dec '00 Dec '99 365 Days 365 Days 366 Days 365 Days Final Final Final Final -- -- 34.91 112.40 Price/Sales (x) 0.74 1.13 1.22 2.97 Price/Book Value (x) 1.78 2.47 2.38 5.52 Price/Cash Flow (x) 14.74 16.82 -- 47.71 Enterprise Value/EBIT (x) 28.17 -- 17.53 44.38 Enterprise Value/EBITDA (x) 7.81 19.71 9.46 21.65 Enterprise Value/Sales (x) 0.85 1.27 1.38 2.98 Total Debt/Enterprise Value (x) 0.41 0.25 0.22 0.07 EPS (recurring) 1.04 1.75 8.55 8.41 -7.63 -12.46 4.06 3.06 DPS 1.12 1.12 1.12 1.12 Dividend Yield (%) 1.85 1.07 0.79 0.33 -- -- 27.59 36.64 Gross Margin (%) 32.97 24.21 33.23 33.81 SG&A to Sales (%) 29.82 26.37 25.35 27.09 3.03 -2.16 7.88 6.72 -12.92 -18.71 5.94 3.78 Net Margin (%) -9.31 -13.37 3.51 2.64 Return on Assets (%) -8.09 -10.40 3.31 2.47 Return on Equity (%) -19.56 -24.01 7.54 5.72 Return on Total Capital (%) -11.31 -14.80 5.05 4.07 Return on Invested Capital (%) -11.99 -17.14 6.09 4.70 6.46 8.60 -5.38 11.09 -19.56 -24.01 7.54 5.72 -9.31 -13.37 3.51 2.64 Asset Turnover (x) 0.87 0.78 0.94 0.94 Equity Leverage 2.42 2.31 2.28 2.31 -19.56 -24.01 7.54 5.72 Operating Margin (%) 3.03 -2.16 7.88 6.72 Asset Turnover (x) 0.87 0.78 0.94 0.94 Interest Burden -4.26 8.67 0.75 0.56 Equity Leverage 2.42 2.31 2.28 2.31 Tax Burden 0.72 0.71 0.59 0.70 Valuation Price/Earnings (x) EPS (diluted) Dividend Payout Ratio (%) Profitability Operating Margin (%) Pretax Margin (%) Cash Flow Return on Invested Capital (%) Basic DuPont ROE (%) (3 Step) Net Margin (%) Extended DuPont ROE (%) (5 Step) Efficiency Revenue/Employee 0.28 0.27 0.26 0.26 -0.03 -0.04 0.01 0.01 5.92 5.05 6.15 6.08 61.70 72.35 59.33 60.08 6.36 5.58 5.79 5.71 57.41 65.39 63.01 63.89 7.65 6.69 8.27 7.58 Days of Payables Outstanding 47.69 54.52 44.12 48.18 Cash Conversion Cycle (Days) 71.42 83.22 78.22 75.78 Total Asset Turnover (x) 0.95 0.88 0.89 0.83 Working Capital Turnover (x) 3.64 3.95 10.36 7.57 Current Ratio 1.75 1.77 1.22 1.33 Quick Ratio 1.45 1.48 0.90 1.05 Cash Ratio 0.67 0.64 0.22 0.33 Net Debt/EBITDA (x) 0.94 1.62 1.37 0.48 Net Debt/(EBITDA-Capex) (x) 1.19 5.33 5.56 1.29 Total Debt/EBITDA (x) 3.19 4.87 2.04 1.43 (Total Debt + Pension Liability)/EBITDA (x) 3.83 -- -- -- EBITDA/Interest Expense (x) 4.37 3.05 11.10 11.30 EBIT/Interest Expense (x) (Int. Coverage) 1.21 -1.02 5.99 5.51 Fixed-charge Coverage Ratio (x) 1.21 -1.02 5.99 5.51 CFO/Interest Expense (x) 2.00 3.17 -2.36 5.11 LT Debt/EBITDA (x) 2.63 4.41 0.87 0.84 LT Debt/Equity (%) 68.28 59.06 25.67 21.86 LT Debt/Total Capital (%) 37.36 35.75 16.04 15.94 LT Debt/Total Assets (%) 27.37 25.07 11.28 9.57 Total Debt/Total Assets (%) 33.18 27.67 26.38 16.28 Net Debt/Total Equity (%) 24.35 21.73 40.37 12.44 Total Debt/Total Equity (%) 82.77 65.19 60.01 37.18 Net Debt/Total Capital (%) 13.32 13.15 25.23 9.07 Total Debt/Total Capital (%) 45.29 39.47 37.50 27.10 Net Debt/FFO (x) 1.39 6.86 1.74 0.59 LT Debt/FFO (x) 3.89 18.65 1.10 1.03 FCF/Total Debt (x) 0.08 0.07 -0.47 -0.12 CFO/Total Debt (x) 0.14 0.21 -0.10 0.32 Net Income/Employee Receivables Turnover (x) Days of Sales Outstanding Inventory Turnover (x) Days of Inventory on Hand Payables Turnover (x) Liquidity Credit Analysis