Microsoft Excel LibreOffice Calc

3M Co. (MMM)

Economic Value Added (EVA)

Difficulty: Advanced

EVA is registered trademark of Stern Stewart.

Economic value added or economic profit is the difference between revenues and costs,where costs include not only expenses, but also cost of capital.

Economic Profit

3M Co., economic profit calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net operating profit after taxes (NOPAT)1 5,630  5,388  5,159  4,939  4,896 
Cost of capital2 11.30% 11.39% 11.35% 11.24% 11.78%
Invested capital3 31,599  32,295  29,390  29,760  24,519 
Economic profit4 2,061  1,708  1,825  1,593  2,009 

Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-08), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-12).

2018 Calculations

1 NOPAT. See Details »

2 Cost of capital. See Details »

3 Invested capital. See Details »

4 Economic profit = NOPAT – Cost of capital × Invested capital
= 5,630 – 11.30% × 31,599 = 2,061

Item Description The company
Economic profit Economic profit is a measure of corporate performance computed by taking the spread between the return on invested capital and the cost of capital, and multiplying by the invested capital. 3M Co.’s economic profit declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Net Operating Profit after Taxes (NOPAT)

3M Co., NOPAT calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net income attributable to 3M 5,349  4,858  5,050  4,833  4,956 
Deferred income tax expense (benefit)1 (109) 253  (5) (23) (191)
Increase (decrease) in allowances2 (8) 15  (3) (3) (10)
Increase (decrease) in deferred revenue3 104  (16) 29  (25) 22 
Increase (decrease) in product warranty liabilities4 (2) 3  19  (2) (1)
Increase (decrease) in accrued restructuring actions balances5 36  82  (57) 63  — 
Increase (decrease) in equity equivalents6 21  337  (17) 10  (180)
Interest expense 350  322  199  149  142 
Interest expense, operating lease liability7 32  8  12  12  10 
Adjusted interest expense 382  330  211  161  152 
Tax benefit of interest expense8 (80) (116) (74) (56) (53)
Adjusted interest expense, after taxes9 301  215  137  105  99 
(Gain) loss on marketable securities —  —  —  —  1 
Interest income (70) (50) (29) (26) (33)
Investment income, before taxes (70) (50) (29) (26) (32)
Tax expense (benefit) of investment income10 15  18  10  9  11 
Investment income, after taxes11 (55) (33) (19) (17) (21)
Net income (loss) attributable to noncontrolling interest 14  11  8  8  42 
Net operating profit after taxes (NOPAT) 5,630  5,388  5,159  4,939  4,896 

Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-08), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-12).

2018 Calculations

1 Elimination of deferred tax expense. See Details »

2 Addition of increase (decrease) in allowances.

3 Addition of increase (decrease) in deferred revenue.

4 Addition of increase (decrease) in product warranty liabilities.

5 Addition of increase (decrease) in accrued restructuring actions balances.

6 Addition of increase (decrease) in equity equivalents to net income attributable to 3M.

7 Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 1,000 × 3.15% = 32

8 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 382 × 21.00% = 80

9 Addition of after taxes interest expense to net income attributable to 3M.

10 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 70 × 21.00% = 15

11 Elimination of after taxes investment income.

Item Description The company
NOPAT Net operating profit after taxes is income from operations, but after removement of taxes calculated on cash basis that are relevant to operating income. 3M Co.’s NOPAT increased from 2016 to 2017 and from 2017 to 2018.

Cash Operating Taxes

3M Co., cash operating taxes calculation

US$ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Provision for income taxes 1,637  2,679  1,995  1,982  2,028 
Less: Deferred income tax expense (benefit) (109) 253  (5) (23) (191)
Add: Tax savings from interest expense 80  116  74  56  53 
Less: Tax imposed on investment income 15  18  10  9  11 
Cash operating taxes 1,811  2,524  2,064  2,052  2,261 

Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-08), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-12).

Item Description The company
Cash operating taxes Cash operating taxes are estimated by adjusting income tax expense for changes in deferred taxes and tax benefit from the interest deduction. 3M Co.’s cash operating taxes increased from 2016 to 2017 but then declined significantly from 2017 to 2018.

Invested Capital

3M Co., invested capital calculation (financing approach)

US$ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Short-term borrowings and current portion of long-term debt 1,211  1,853  972  2,044  106 
Long-term debt, excluding current portion 13,411  12,096  10,678  8,753  6,731 
Capital lease obligations 75  60  45  46  59 
Operating lease liability1 1,000  1,069  783  901  797 
Total reported debt & leases 15,697  15,078  12,478  11,744  7,693 
Total 3M Company shareholders’ equity 9,796  11,563  10,298  11,708  13,109 
Net deferred tax (assets) liabilities2 (86) (276) (277) 41  (1,158)
Allowances3 95  103  88  91  94 
Deferred revenue4 617  550  566  537  562 
Product warranty liabilities5 48  50  47  28  30 
Accrued restructuring actions balances6 124  88  6  63  — 
Equity equivalents7 798  515  430  760  (472)
Accumulated other comprehensive (income) loss, net of tax8 6,866  7,026  7,245  6,359  6,289 
Noncontrolling interest 52  59  45  39  33 
Adjusted total 3M Company shareholders’ equity 17,512  19,163  18,018  18,866  18,959 
Construction in progress9 (1,193) (843) (809) (723) (679)
Marketable securities10 (417) (1,103) (297) (127) (1,454)
Invested capital 31,599  32,295  29,390  29,760  24,519 

Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-08), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-12).

1 Addition of capitalized operating leases.

2 Elimination of deferred taxes from assets and liabilities. See Details »

3 Addition of allowance for doubtful accounts receivable.

4 Addition of deferred revenue.

5 Addition of product warranty liabilities.

6 Addition of accrued restructuring actions balances.

7 Addition of equity equivalents to total 3M Company shareholders’ equity.

8 Removal of accumulated other comprehensive income.

9 Subtraction of construction in progress.

10 Subtraction of marketable securities.

Item Description The company
Invested capital Capital is an approximation of the economic book value of all cash invested in going-concern business activities. 3M Co.’s invested capital increased from 2016 to 2017 but then slightly declined from 2017 to 2018.

Cost of Capital

3M Co., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 115,068  115,068  ÷ 130,865  = 0.88 0.88 × 12.58% = 11.06%
Debt3 14,797  14,797  ÷ 130,865  = 0.11 0.11 × 2.42% × (1 – 21.00%) = 0.22%
Operating lease liability4 1,000  1,000  ÷ 130,865  = 0.01 0.01 × 3.15% × (1 – 21.00%) = 0.02%
Total: 130,865  1.00 11.30%

Based on: 10-K (filing date: 2019-02-07).

1 US$ in millions

2 Equity. See Details »

3 Debt. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 132,731  132,731  ÷ 148,188  = 0.90 0.90 × 12.58% = 11.27%
Debt3 14,388  14,388  ÷ 148,188  = 0.10 0.10 × 1.97% × (1 – 35.00%) = 0.12%
Operating lease liability4 1,069  1,069  ÷ 148,188  = 0.01 0.01 × 0.75% × (1 – 35.00%) = 0.00%
Total: 148,188  1.00 11.39%

Based on: 10-K (filing date: 2018-02-08).

1 US$ in millions

2 Equity. See Details »

3 Debt. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 106,231  106,231  ÷ 119,154  = 0.89 0.89 × 12.58% = 11.21%
Debt3 12,140  12,140  ÷ 119,154  = 0.10 0.10 × 1.87% × (1 – 35.00%) = 0.12%
Operating lease liability4 783  783  ÷ 119,154  = 0.01 0.01 × 1.52% × (1 – 35.00%) = 0.01%
Total: 119,154  1.00 11.35%

Based on: 10-K (filing date: 2017-02-09).

1 US$ in millions

2 Equity. See Details »

3 Debt. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 91,161  91,161  ÷ 103,211  = 0.88 0.88 × 12.58% = 11.11%
Debt3 11,149  11,149  ÷ 103,211  = 0.11 0.11 × 1.76% × (1 – 35.00%) = 0.12%
Operating lease liability4 901  901  ÷ 103,211  = 0.01 0.01 × 1.32% × (1 – 35.00%) = 0.01%
Total: 103,211  1.00 11.24%

Based on: 10-K (filing date: 2016-02-11).

1 US$ in millions

2 Equity. See Details »

3 Debt. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 105,311  105,311  ÷ 113,417  = 0.93 0.93 × 12.58% = 11.68%
Debt3 7,309  7,309  ÷ 113,417  = 0.06 0.06 × 2.14% × (1 – 35.00%) = 0.09%
Operating lease liability4 797  797  ÷ 113,417  = 0.01 0.01 × 1.25% × (1 – 35.00%) = 0.01%
Total: 113,417  1.00 11.78%

Based on: 10-K (filing date: 2015-02-12).

1 US$ in millions

2 Equity. See Details »

3 Debt. See Details »

4 Operating lease liability. See Details »

Economic Spread

3M Co., economic spread calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US$ in millions)
Economic profit1 2,061  1,708  1,825  1,593  2,009 
Invested capital2 31,599  32,295  29,390  29,760  24,519 
Ratio
Economic spread3 6.52% 5.29% 6.21% 5.35% 8.19%

Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-08), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-12).

2018 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × 2,061 ÷ 31,599 = 6.52%

Ratio Description The company
Economic spread The ratio of economic profit to invested capital, also equal to the difference between return on invested capital (ROIC) and cost of capital. 3M Co.’s economic spread deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Economic Profit Margin

3M Co., economic profit margin calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US$ in millions)
Economic profit1 2,061  1,708  1,825  1,593  2,009 
Net sales 32,765  31,657  30,109  30,274  31,821 
Add: Increase (decrease) in deferred revenue 104  (16) 29  (25) 22 
Adjusted net sales 32,869  31,641  30,138  30,249  31,843 
Ratio
Economic profit margin2 6.27% 5.40% 6.05% 5.27% 6.31%

Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-08), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-12).

2018 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ Adjusted net sales
= 100 × 2,061 ÷ 32,869 = 6.27%

Ratio Description The company
Economic profit margin The ratio of economic profit to sales. It is the company’s profit margin covering income efficiency and asset management. Economic profit margin is not biased in favor of capital-intensive business models, because any added capital is a cost to the economic profit margin. 3M Co.’s economic profit margin deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.