Reference no: EM132746678
Question: Analysis and Interpretation of ProfitabilityBalance sheets and income statements for 3M Company follow. 3M COMPANY
Consolidated Statements of Income
For Years Ended December 31 ($ millions) 2018 2017
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,765 $31,657
Operating expenses
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,682 16,055
Selling, general and administrative expenses . . . . . . . . . . . . .7,602 6,626
Research, development and related expenses . . . . . . . . . . . .1,821 1,870
Gain on sale of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (547) (586)
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,558 23,965
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,207 7,692
Other expense, net* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 144
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 7,548
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,637 2,679
Net income including noncontrolling interest . . . . . . . . . . . . . . . . 5,363 4,869
Less: Net income attributable to noncontrolling interest. . . . . . . . 14 11
Net income attributable to 3M. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,349 $ 4,858
Interest expense, gross is $350 million in 2018 and $322 million in 2017.
3M COMPANY
Consolidated Balance Sheets
At December 31 ($ millions) 2018 2017
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,853 $3,053
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380 1,076
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,020 4,911
Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,366 4,034
Prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 741 937
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 266
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,709 14,277
Property, plant and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8,738 8,866
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,051 10,513
Intangible assets-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,657 2,936
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,345 1,395
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,500 $37,987
Current liabilities
Short-term borrowings and current portion of long-term debt . . . . . . $ 1,211 $ 1,853
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,266 1,945
Accrued payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749 870
Accrued income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 310
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,775 2,709
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,244 7,687
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,411 12,096
Pension and postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,987 3,620
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,010 2,962
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,652 26,365
3M Company shareholders' equity
Common stock par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,643 5,352
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,636 39,115
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,626) (25,887)
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . (6,866) (7,026)
Total 3M Company shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9,796 11,563
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 59
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,848 11,622
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,500 $37,987
Required: a. Compute net operating profit after tax (NOPAT) for 2018. Assume that the combined federal and state statutory tax rate is 22%.
b. Compute net operating assets (NOA) for 2018 and 2017.
c. Compute and disaggregate 3M's RNOA into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2018. Demonstrate that RNOA = NOPM × NOAT.
d. Compute net nonoperating obligations (NNO) for 2018 and 2017. Confirm the relation: NOA = NNO + Total equity.
e. Compute return on equity (ROE) for 2018.
f. What is the nonoperating return component of ROE for 2018?
g. Comment on the difference between ROE and RNOA. What inference can we draw from this comparison?