Question

Analysis and Interpretation of Profitability
Balance sheets and income statements for 3M Company follow.

Consolidated Statements of Income
Years ended December 31 ($ millions)	2010	2009	2008
Net sales	$26,662	$23,123	$25,269
Operating expenses
Cost of sales	13,831	12,109	13,379
Selling, general and administrative expenses	5,479	4,907	5,245
Research, development and related expenses	1,434	1,293	1,404
Loss/(gain) from sale of business	--	--	23
Total operating expenses	20,744	18,309	20,051
Operating income	5,918	4,814	5,218
Interest expenses and income
Interest expense	201	219	215
Interest income	(38)	(37)	(105)
Total interest expense	163	182	110
Income before income taxes	5,755	4,632	5,108
Provision for income taxes	1,592	1,388	1,588
Net income including noncontrolling interest	4,163	3,244	3,520
Less: Net income attributable to noncontrolling interest	78	51	60
Net income	$ 4,085	$ 3,193	$ 3,460

Consolidated Balance Sheets
($ millions)	2010	2009
Assets
Current Assets
Cash and cash equivalents	$ 3,377	$ 3,040
Marketable securities-current	1,101	744
Accounts receivable-net	3,615	3,250
Inventories
Finished goods	1,476	1,255
Work in process	950	815
Raw materials and supplies	729	569
Total inventories	3,155	2,639
Other current assets	967	1,122
Total current assets	12,215	10,795
Marketable securities-noncurrent	540	825
Investments	146	103
Property, plant and equipment	20,253	19,440
Less: Accumulated depreciation	(12,974)	(12,440)
Property, plant and equipment-net	7,279	7,000
Goodwill	6,820	5,832
Intangible assets-net	1,820	1,342
Prepaid pension benefits	74	78
Other assets	1,262	1,275
Total assets	$ 30,156	$ 27,250
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt	$ 1,269	$ 613
Accounts payable	1,662	1,453
Accrued payroll	778	680
Accrued income taxes	358	252
Other current liabilities	2,022	1,899
Total current liabilities	6,089	4,897
Long-term debt	4,183	5,097
Pension and postretirement benefits	2,013	2,227
Other liabilities	1,854	1,727
Total liabilities	14,139	13,948
Equity
3M Company shareholders' equity: Common stock, par value $.01 per share;	9	9
Additional paid-in capital	3,468	3,153
Retained earnings	25,995	23,753
Treasury stock	(10,266)	(10,397)
Accumulated other comprehensive income (loss)	(3,543)	(3,754)
Total 3M Company shareholders' equity	15,663	12,764
Noncontrolling interest	354	538
Total equity	16,017	13,302
Total liabilities and equity	$ 30,156	$ 27,250

(a) Compute net operating profit after tax (NOPAT) for 2010. Assume that the combined federal and statutory rate is: 37.0% (Round your answer to the nearest whole number.)
2010 NOPAT =Answer

($ millions)

(b) Compute net operating assets (NOA) for 2010 and 2009. Treat noncurrent Investments as a nonoperating item.
2010 NOA =Answer($ millions)
2009 NOA =Answer($ millions)

(c) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2010. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.)
2010 RNOA =Answer%
2010 NOPM =Answer%
2010 NOAT =Answer

(d) Compute net nonoperating obligations (NNO) for 2010 and 2009.
2010 NNO =Answer($ millions)
2009 NNO =Answer($ millions)

(e) Compute return on equity (ROE) for 2010. (Round your answers to two decimal places. Do not round until your final answer.) Hint: Remember ROE is calculated attributable to controlling interest.
2010 ROE =Answer%

(f) What is the nonoperating return component of ROE for 2010? (Round your answers to two decimal places.)
2010 nonoperating return =Answer%

(g) Which of the following statements reflects the best inference we can draw from the difference between 3M's ROE and RNOA?

ROE > RNOA implies that 3M's equity has grown faster than its NOA.

ROE > RNOA implies that 3M has increased its financial leverage during the period.

ROE > RNOA implies that 3M has taken on too much financial leverage.

ROE > RNOA implies that 3M is able to borrow money to fund operating assets that yield a return greater than its cost of debt.

Answer 1

a) Net Operating Profit After Tax

$ in Millions

NOPAT for 2010 =	Earnings before interest and tax for 2010 * (1 – tax rate)
=	$ 5,918 * (1 – 37%)
=	$3,728

b) Non - Operating Assets

Non - Operating Assets = Operating Assets – Operating Liabilities

Operating Assets = Total assets – Excess cash and cash equivalents – Financial Investments/Assets

Operating Liabilities = Total Liabilities – Financial liabilities (Debt)

Notes:

1. Since it is expressly mentioned that non-current investments should be considered as non-operating, it is assumed that the current marketable securities are operating assets. Similarly, since no information is provided regarding cash, it is assumed that no excess cash is held by the firm and the balance in cash and cash equivalents is required for operations
2. Operating liabilities does not include equity
3. Accrued income taxes under liabilities are assumed to be taxes on operating income

Based on the above, the non –operating assets for 2009 and 2010 are as follows:

Particulars	$ in Millions
	2010	2009
Total Assets	$        30,156	$        27,250
Less: Non-current investments	$           (540)	$           (825)
Operating Assets (A)	$        29,616	$        26,425
Total Liabilities	$        14,139	$        13,948
Less: Long-term Debt	$        (4,183)	$        (5,097)
Operating Liabilities (B)	$          9,956	$          8,851
Net Operating Assets (A-B)	$        19,660	$        17,574

c) Return on Net Operating Assets

RNOA is calculated as Net Operating Profit After Taxes divided by the firms average Net Operating Assets

So,

RNOA for 2010 =	NOPAT for 2010 / ((NOA for 2009 + NOA for 2010) / 2)
=	($5,918*(1 - 37%)) / (($ 17,574 + $ 19,660) / 2)
=	20.03%

Net Operating Profit Margin

NOPM for 2010 =	Operating income before interest and taxes / Net Sales
=	$ 5,918 / $ 26,662
=	22.20%

Net Operating Asset Turnover

NOAT for 2010 =	Net Sales / Average Net Operating Assets for 2010
=	Net Sales / ((NOA for 2009 + NOA for 2010)/2)
=	$ 26,662 / (($ 17,574 + $ 19,660)/2)
=	1.43

d) Net Non Operating Obligations is the excess of debt over non-operating assets. Positive NNO means and excess of debt, negative NNO means an excess of assets/investments For 2010 and 2009, they are calculated as follows

Particulars	$ in Millions
	2010	2009
Long term debt	$          4,183	$          5,097
Less: Non-Operating Assets (non-current investments)	$           (540)	$           (825)
Net Non Operating Obligations	$          3,643	$          4,272

Note: Answered first 4 sub-parts of the question as HOMEWORKLIB guidelines.