Question

Analysis and Interpretation of Profitability Balance sheets and income statements for 3M Company follow. Consolidated Statements of Income Years ended December 31 ($ millions) 2012 2011 2010 Net sales $29,904 $ 29,611 $ 226,662 Operating expenses Cost of sales 15,685 15,693 13,831 Selling, general and administrative expenses 6,102 6,170 5,479 Research, development and related expenses 1,634 1,570 1,434 -- -- -- Total operating expenses 23,421 23,433 20,744 Operating income 6,483 6,178 5,918 Interest expenses and income Interest expense 171 186 201 Interest income (39) (39) (38) Total interest expense--net 132 147 163 Income before income taxes 6,351 6,031 5,755 Provision for income taxes 1,840 1,674 1,592 Net income including noncontrolling interest $4,511 $4,357 $4,163 Less: Net income attributable to noncontrolling interest 67 74 78 Net income attributable to 3M $ 4,444 $ 4,283 $ 4,085 Consolidated Balance Sheets ($ millions) 2012 2011 Assets Current Assets Cash and cash equivalents $ 2,883 $ 2,219 Marketable securities-current 1,648 1,461 Accounts receivable-net of allowances of $105 and $108 4,061 3,867 Inventories Finished goods 1,754 1,536 Work in process 1,186 1,061 Raw materials and supplies 897 819 Total inventories 3,837 3,416 Other current assets 1,201 1,277 Total current assets 13,630 12,240 Marketable securities-noncurrent 1,162 896 Investments 163 155 Property, plant and equipment 22,525 21,166 Less: Accumulated depreciation (14,147) (13,500) Property, plant and equipment-net 8,378 7,666 Goodwill 7,385 7,047 Intangible assets-net 1,925 1,916 Prepaid pension benefits 16 40 Other assets 1,217 1,656 Total assets $ 33,876 $ 31,616 Liabilities Current liabilities Short-term borrowings and current portion of long-term debt $ 1,085 $ 682 Accounts payable 1,762 1,643 Accrued payroll 701 676 Accrued income taxes 371 355 Other current liabilities 2,281 2,085 Total current liabilities 6,200 5,441 Long-term debt 4,916 4,484 Pension and postretirement benefits 3,086 3.972 Other liabilities 1,634 1,857 Total liabilities $15,836 $15,754 Equity 3M Company shareholders' equity $9 $9 Additional paid-in capital 4,044 3,767 Retained earnings 30,679 28,348 Treasury stock (12,407) (11,679) Accumulated other comprehensive income (loss) (4,750) (5,025) Total 3M Company shareholders' equity 17,575 15,420 Noncontrolling interest 465 442 Total equity $18,040 $15,862 Total liabilities and equity $33,876 $31,616 (a) Compute net operating profit after tax (NOPAT) for 2012. Assume that the combined federal and statutory rate is: 37.0% (Round your answer to the nearest whole number.) 2012 NOPAT =Answer ($ millions) (b) Compute net operating assets (NOA) for 2012 and 2011. Treat noncurrent investments as a nonoperating item. 2012 NOA =Answer ($ millions) 2011 NOA =Answer ($ millions) (c) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2012. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.) 2012 RNOA =Answer % 2012 NOPM =Answer % 2012 NOAT =Answer (d) Compute net nonoperating obligations (NNO) for 2012 and 2011. 2012 NNO =Answer ($ millions) 2011 NNO =Answer ($ millions) (e) Compute return on equity (ROE) for 2012. (Round your answers to two decimal places. Do not round until your final answer.) 2012 ROE =Answer % (f) What is the nonoperating return component of ROE for 2012? (Round your answers to two decimal places.) 2012 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 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. 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.

Answer 1

Solution:

(a) NOPAT: $4,594

Working:

= $6,483 = {$1,840 + ($132 * 0.37)}

= $4,594

　

(b) NOA Year 2012= $18,185; NOA Year 2011= $16,297

Working:

NOA Year 2012 = {$33,876 - $2,883 - $1,648 - $1,162 - $163)} - ($6,200 - $1,085) - $3,086 - $1,634

NOA Year 2012 = $18,185

NOA Year 2011 = {($31,616 - $2,219 - $1,461 - $896 - $155)} - ($5,441 - $682) -$3,972 * $1,857

NOA Year 2011 = $16,297

　

(c) RNOA Year 2012 = [$4,594 / {($18,185 + $16,297) / 2}] = 26.65%

NOPM Year 2012 = [$4,594 / $29,904] = 15.36%

NOATYear 2012 = [$29,904 / {($18,185 + $16,297) / 2}] = 1.73 2012

RNOA = (15.36% * 1.73) = 26.57%

　

(d) NNO Year 2012= [($1,085 + $4,916) * ($2,883 + $1,648 + $1,162 + $163)] = $145

Confirm: NOA Year 2011= NNO + Total SE; It gives $18,185 = ($145 + $18,040)

NNO Year 2011= [($682 + $4,484)] - [($2,219 + $1,461 + $896 + $155)] = $435

Confirm: NOA Year 2011 = NNO + Total SE; Putting values, $16,297 = ($435 + $15,862)

　

e) ROE Year 2012= [$4,444 / {($17,575 + $15,420) / 2}] = 26.94%

f) Non-operating return Year 2012 = ROE - RNOA = (26.94% - 26.65%) = 0.29%

g) Since ROE exceeds RNOA this indicates that 3M will be able to borrow money to fund operating assets which gives a higher return than the cost of the debt. The excess accrues for 3M’s stockholders benefits.