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QUESTION 9

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

Consolidated Statements of Income
Years ended December 31 ($ millions)	2006	2005	2004
Net sales	$22,923	$ 21,167	$ 20,011
Operating expenses
Cost of sales	11,713	10,408	10,002
Selling, general and administrative expenses	5,066	4,631	4,437
Research, development and related expenses	1,522	1,274	1,246
Loss/(gain) from sale of business	(1,074)	--	--
Total operating expenses	17,227	16,313	15,685
Operating income	5,696	4,854	4,326
Interest expenses and income
Interest expense	122	82	69
Interest income	(51)	(56)	(46)
Total interest expense	71	26	23
Income before income taxes	5,625	4,828	4,303
Provision for income taxes	1,723	1,627	1,400
Net income including noncontrolling interest	3,902	3,201	2,903
Less: Net income attributable to noncontrolling interest	51	55	62
Net income	$ 3,851	$ 3,146	$ 2,841

Consolidated Balance Sheets
($ millions)	2006	2005
Assets
Current Assets
Cash and cash equivalents	$ 1,447	$ 1,072
Marketable securities-current	471	--
Accounts receivable-net	3,102	2,838
Inventories
Finished goods	1,235	1,050
Work in process	795	706
Raw materials and supplies	571	406
Total inventories	2,601	2,162
Other current assets	1,325	1,043
Total current assets	8,946	7,115
Marketable securities-noncurrent	166	--
Investments	314	272
Property, plant and equipment	17,017	16,127
Less: Accumulated depreciation	(11,110)	(10,534)
Property, plant and equipment-net	5,907	5,593
Goodwill	4,082	3,530
Intangible assets-net	708	486
Prepaid pension benefits	395	2,905
Other assets	776	640
Total assets	$ 21,294	$ 20,541
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt	$ 2,506	$ 1,072
Accounts payable	1,402	1,256
Accrued payroll	520	469
Accrued income taxes	1,134	989
Other current liabilities	1,761	1,452
Total current liabilities	7,323	5,238
Long-term debt	1,047	1,309
Pension and postretirement benefits	--	--
Other liabilities	2,965	3,599
Total liabilities	11,335	10,146
Equity
3M Company shareholders' equity: Common stock, par value $.01 per share;	9	9
Additional paid-in capital	2,484	2,225
Retained earnings	17,933	15,715
Treasury stock	(8,456)	(6,965)
Accumulated other comprehensive income (loss)	(2,011)	(589)
Total 3M Company shareholders' equity	9,959	10,395
Noncontrolling interest	-	-
Total equity	9,959	10,395
Total liabilities and equity	$ 21,294	$ 20,541

(a) Compute net operating profit after tax (NOPAT) for 2006. Assume that the combined federal and statutory rate is: 36.0% (Round your answer to the nearest whole number.)
2006 NOPAT =Answer

($ millions)

(b) Compute net operating assets (NOA) for 2006 and 2005. Treat noncurrent Investments as a nonoperating item.
2006 NOA =Answer

($ millions)
2005 NOA =Answer

($ millions)

(c) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2006. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.)
2006 RNOA =Answer

%
2006 NOPM =Answer

%
2006 NOAT =Answer

(d) Compute net nonoperating obligations (NNO) for 2006 and 2005.
2006 NNO =Answer

($ millions)
2005 NNO =Answer

($ millions)

(e) Compute return on equity (ROE) for 2006. (Round your answers to two decimal places. Do not round until your final answer.)
2006 ROE =Answer

%

(f) What is the nonoperating return component of ROE for 2006? (Round your answers to two decimal places.)
2006 nonoperating return =Answer

%

Answer 1

(a) Compute net operating profit after tax (NOPAT) for 2006. Assume that the combined federal and statutory rate is: 36.0% (Round your answer to the nearest whole number.)
2006 NOPAT =	($ millions)
Operating income	$5,696.00
Less:
Provision for income taxes	$1,723.00
Total interest expense--net ($71 x 36%)	$25.56
NPOAT	$3,947.44	Million
(b) Compute net operating assets (NOA) for 2006 and 2005. Treat noncurrent Investments as a nonoperating item.	($ millions)	($ millions)
NOA =	2006	2005
Total assets	$21,294.00	$20,541.00
Less:
Cash and cash equivalents	$1,447.00	$1,072.00
Marketable securities-current	$471.00	$0.00
Marketable securities-noncurrent	$166.00	$0.00
Investments	$314.00	$272.00
Total current liabilities	$7,323.00	$5,238.00
Short-term borrowings and current portion of long-term debt	$2,506.00	$1,072.00
Pension and postretirement benefits	$0.00	$0.00
Other liabilities	$2,965.00	$3,599.00
NOA	$6,102.00	$9,288.00
(c) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2006. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.)
2006 RNOA = NPOAT/ Average NOA
RNOA = $3947.44/(6102+9288)/2	51.30%
NOPM = NPOAT/ Net Sales = $3947.44/$22,923	17.22%
NOAT = Net sales / Average NOA = $22,923 /(6102+9288)/2	2.98
Confirm: RONA = NOPM x NOAT = 17.22% x 2.98	51.30%