Net Sales, $ Billion

How credible was that estimate? Nortel’s accounts receivable- sales to customers that had not yet paid the bill-had shot up by $ billion in a year. The company said the rise “was driven by increased sales in the fourth quarter of 1999.” However, inventories had also ballooned by $1.2 billion-meaning that Nortel was producing equipment even faster than those “increased sales” could unload it.

Meanwhile, Nortel’s “long term receivables”-bills not yet paid for multi year contracts-jumped from $519 million to $1.4 billion. And Nortel was having a hard time controlling costs; its selling, general, and administrative expense (or overhead) had risen from 17.6% of revenues in 1997 to 18.7% in 1999. All told, Nortel had lost $351 million in 1999.

Then there was Nortek, Inc., which produces stuff at the dim end of the glamour spectrum: vinyl siding, door chimes, exhaust fans, range hoods, trash compactors. In 1999, Nortek earned $49 million on $ billion in net sales, up from $21 million in net income on $1.1 billion in sales in 1997. Nortek’s profit margin (net earnings as a percentage of Commentary on Chapter 18 483net sales) had risen by almost a third from 1.9% to 2.5%. And Nortek had cut overhead from 19.3% of revenues to 18.1%.