In: Accounting
Analysis and Interpretation of Profitability
Balance sheets and income statements for 3M Company follow.
3M COMPANY | ||||
---|---|---|---|---|
Consolidated Statements of Income | ||||
For Years ended December 31 ($ millions) | 2015 | 2014 | 2013 | |
Net sales | $30,274 | $31,821 | $30,871 | |
Operating expenses | ||||
Cost of sales | 15,383 | 16,447 | 16,106 | |
Selling, general and administrative expenses | 6,182 | 6,469 | 6,384 | |
Research, development and related expenses | 1,763 | 1,770 | 1,715 | |
Total operating expenses | 23,328 | 24,686 | 24,205 | |
Operating income | 6,946 | 7,135 | 6,666 | |
Interest expenses and income | ||||
Interest expense | 149 | 142 | 145 | |
Interest income | (26) | (33) | (41) | |
Total interest expense--net | 123 | 109 | 104 | |
Income before income taxes | 6,823 | 7,026 | 6,562 | |
Provision for income taxes | 1,982 | 2,028 | 1,841 | |
Net income including noncontrolling interest | $4,841 | $4,998 | $4,721 | |
Less: Net income attributable to noncontrolling interest | 8 | 42 | 62 | |
Net income attributable to 3M | $ 4,833 | $ 4,956 | $ 4,659 |
3M COMPANY | |||
---|---|---|---|
Consolidated Balance Sheets | |||
At December 31 ($ millions, except per share amount) | 2015 | 2014 | |
Current Assets | |||
Cash and cash equivalents | $1,798 | $1,897 | |
Marketable securities-current | 118 | 1,439 | |
Accounts receivable-net of allowances of $91 and $94 | 4,154 | 4,238 | |
Inventories | |||
Finished goods | 1,655 | 1,723 | |
Work in process | 1,008 | 1,081 | |
Raw materials and supplies | 855 | 902 | |
Total inventories | 3,518 | 3,706 | |
Other current assets | 1,398 | 1,023 | |
Total current assets | 10,986 | 12,303 | |
Marketable securities-noncurrent | 9 | 15 | |
Investments | 117 | 102 | |
Property, plant and equipment | 23,098 | 22,841 | |
Less: Accumulated depreciation | (14,583) | (14,352) | |
Property, plant and equipment-net | 8,515 | 8,489 | |
Goodwill | 9,249 | 7,050 | |
Intangible assets-net | 2,601 | 1,435 | |
Prepaid pension benefits | 188 | 46 | |
Other assets | 1,053 | 1,769 | |
Total assets | $32,718 | $31,209 | |
Liabilities | |||
Current liabilities | |||
Short-term borrowings and current portion of long-term debt | $2,044 | $106 | |
Accounts payable | 1,694 | 1,807 | |
Accrued payroll | 644 | 732 | |
Accrued income taxes | 332 | 435 | |
Other current liabilities | 2,404 | 2,884 | |
Total current liabilities | 7,118 | 5,964 | |
Long-term debt | 8,753 | 6,705 | |
Pension and postretirement benefits | 3,520 | 3,843 | |
Other liabilities | 1,580 | 1,555 | |
Total liabilities | $20,971 | $18,067 | |
Equity | |||
3M Company shareholders' equity | |||
Common stock, par value $0.01 per share: | |||
Shares outstanding-2015: 609,330,124; | |||
Shares outstanding-2014: 635,134,594 | $9 | $9 | |
Additional paid-in capital | 4,791 | 4,379 | |
Retained earnings | 36,575 | 34,317 | |
Treasury stock | (23,308) | (19,307) | |
Accumulated other comprehensive income (loss) | (6,359) | (6,289) | |
Total 3M Company shareholders' equity | 11,708 | 13,109 | |
Noncontrolling interest | 39 | 33 | |
Total equity | $11,747 | $13,142 | |
Total liabilities and equity | $32,718 | $31,209 |
(a) Compute net operating profit after tax (NOPAT) for 2015. Assume
that the combined federal and statutory rate is: 37.0% (Round your
answer to the nearest whole number.)
2015 NOPAT =Answer($ millions)
(b) Compute net operating assets (NOA) for 2015 and 2014. Treat
noncurrent investments as a nonoperating item.
2015 NOA =Answer($ millions)
2014 NOA =Answer($ millions)
(c) Compute 3M's RNOA, net operating profit margin (NOPM) and net
operating asset turnover (NOAT) for 2015. (Round your answers to
two decimal places. Do not round until your final answer. Do not
use NOPM x NOAT to calculate RNOA.)
2015 RNOA =Answer%
2015 NOPM =Answer%
2015 NOAT =Answer
(d) Compute net nonoperating obligations (NNO) for 2015 and
2014.
2015 NNO =Answer($ millions)
2014 NNO =Answer($ millions)
(e) Compute return on equity (ROE) for 2015. (Round your answers to
two decimal places. Do not round until your final answer.)
2015 ROE =Answer%
(f) What is the nonoperating return component of ROE for 2015?
(Round your answers to two decimal places.)
2015 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.
Part A
2015 NOPAT = $6,946 (operating income) – [$1982 (provision for interest income taxes) + ($123 {total interest expense-net} × 0.37)] = 6946 - (1982+(123*0.37)) = $4918
Part B
2015 NOA = $32718 (total assets) - $1798 (Cash and equivalents) - $118 (Marketable securities) - $117 (investments)- $9 (Marketable securities-non-current) - ($7118 {total current liabilities} - $2044 {short term borrowings & current portion of long term debt}) -$3520 {Pension & post retirement} -$1580 {other liabilities} = $20,502
2014 NOA = ($31,209 - $1897 - $1439- $15- $102) – ($5964 - $106) - $3843 - $1555= $16500
Part C
2015 RNOA = $4,918 (NOPAT) / [($20502 (2015 NOA) + $16,500 {NOA 2014}) / 2] = 26.58%
2015 NOPM = $4,918 (NOPAT)/ $30274 (Net sales) = 16.24%
2015 NOAT = $30274 (Net sales) / [($20502 (2015 NOA) + $16,500 {2014 NOA)) / 2] = 1.64
Part D
2015 NNO = ($2044+ $8753) – ($1798+ $118+ $9 + $117) = $8755
2014 NNO = ($106 + $6705) – ($1897 + $1,439 + $15 + $102) = $3358
Part E
2015 ROE = $4,833 / [($11708 + $13109) / 2] = 38.95%
Part F
2015 nonoperating return = ROE – RNOA = 38.95% – 26.58% = 12.37%
Part G
Answer is option B
ROE>RNOA implies that 3M is able to borrow money to fund operating assets that yield areturn greater than the cost of the debt.
Confirm:2012 NOA= NNO + Total SE $18,185 = $145 + $18,04012
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2015 NOPM = $4,918 (NOPAT)/ $30274 (Net sales) = 16.24%
2015 NOAT = $30274 (Net sales) / [($20502 (2015 NOA) + $16,500 {2014 NOA)) / 2] = 1.64
ROA = 16.24% (NOPM) × 1.64 (NOAT)= 26.63%
Part D