3M Co. (NYSE:MMM)

The period under review demonstrates fluctuating economic profit performance. Net operating profit after taxes (NOPAT) exhibited initial growth, followed by a decline, and then a recovery. The cost of capital remained relatively stable, while invested capital showed an increasing trend over the five-year period. These factors combined to produce varying levels of economic profit.

NOPAT Trend

NOPAT increased from US$5,388 million in 2017 to US$5,630 million in 2018, representing a modest gain. A subsequent decrease was observed in 2019, with NOPAT falling to US$4,679 million. The year 2020 saw a recovery to US$5,797 million, and this upward trend continued into 2021, reaching US$6,058 million. This indicates a cyclical pattern in operational profitability.

Cost of Capital

The cost of capital experienced a slight decrease from 15.20% in 2017 to 15.03% in 2018. It continued to decline to 14.01% in 2019 before increasing slightly to 14.20% in 2020 and 14.25% in 2021. The changes were relatively small, suggesting a consistent capital market assessment of the company’s risk profile.

Invested Capital

Invested capital showed a decrease from US$32,308 million in 2017 to US$31,616 million in 2018. However, from 2018 onwards, invested capital consistently increased, reaching US$38,698 million in 2019, US$38,880 million in 2020, and US$39,156 million in 2021. This suggests ongoing investment in the business.

Economic Profit

Economic profit was positive in 2017 and 2018, at US$478 million and US$879 million respectively. A significant decline resulted in a negative economic profit of US$742 million in 2019. Economic profit recovered to US$275 million in 2020 and further increased to US$479 million in 2021. The fluctuations in economic profit closely mirror the changes in NOPAT, but are also influenced by the level of invested capital and the cost of capital.

The negative economic profit in 2019 is a key observation, indicating that the returns generated were insufficient to cover the cost of capital employed. The subsequent recovery in 2020 and 2021 suggests improved capital allocation and/or operational performance. The increasing invested capital base, coupled with relatively stable cost of capital, highlights the importance of maintaining strong NOPAT growth to generate positive economic profit.

Net Income Attributable to 3M

The net income exhibits a fluctuating trend over the five-year period. Starting at 4,858 million USD in 2017, it increased to 5,349 million USD in 2018, indicating a positive growth. However, there was a decline in 2019, with net income falling to 4,570 million USD. This downward shift was followed by a recovery in 2020 and 2021, reaching 5,384 million USD and 5,921 million USD respectively, signaling an overall increasing trajectory towards the end of the period.

Net Operating Profit After Taxes (NOPAT)

The NOPAT shows similar variability with a general upward movement. It rose from 5,388 million USD in 2017 to 5,630 million USD in 2018, before dropping to 4,679 million USD in 2019, reflecting a noticeable dip in operational profitability after taxes. Subsequently, NOPAT recovered significantly in 2020 and 2021, achieving 5,797 million USD and 6,058 million USD respectively. This rebound suggests improved operational efficiency and tax impact post-2019.

Overall Summary

Both the net income and NOPAT follow a similar pattern characterized by growth in the early years, a decline in 2019, and a strong rebound in the last two years. The dip in 2019 indicates potential challenges during that period, impacting both profitability and operational returns after taxes. The recovery phase through 2020 and 2021 suggests strategic or market conditions improving, leading to enhanced financial performance. The data implies resilience and a return to growth momentum after a temporary setback.

The analysis of the provided financial data reveals a notable trend in the company's tax-related figures over a five-year period from 2017 to 2021.

Provision for Income Taxes

This figure shows a significant and consistent decline from 2017 through 2019, decreasing from US$2,679 million in 2017 to US$1,130 million in 2019. The trend then stabilizes somewhat in the following years, with a slight increase to US$1,318 million in 2020 before a marginal decrease to US$1,285 million in 2021.

Cash Operating Taxes

Cash operating taxes exhibit a similar downward pattern initially, falling from US$2,524 million in 2017 to US$1,349 million in 2019. After this period, the figure rises again in 2020 to US$1,585 million and remains relatively stable into 2021 at US$1,557 million. This suggests some recovery or stabilization in cash tax payments following the prior decline.

Overall, both provisions for income taxes and cash operating taxes experienced a marked reduction between 2017 and 2019. Subsequently, from 2020 onward, there appears to be a trend toward stabilization or slight recovery in tax-related expenses, although these amounts have not returned to the higher levels seen in 2017. This pattern could indicate changes in profitability, tax planning strategies, or tax law impacts over the examined period.

Total Reported Debt & Leases

The total reported debt and leases increased notably from 15,091 million USD at the end of 2017 to 21,299 million USD by the end of 2019. However, a declining trend is observed afterward, with the total reducing to 19,775 million USD in 2020 and further to 18,317 million USD in 2021. This indicates an initial period of increased leverage followed by a consistent effort to reduce debt and lease obligations over the last two years.

Total 3M Company Shareholders’ Equity

Shareholders’ equity showed a downward trend from 11,563 million USD in 2017 to 9,796 million USD in 2018, indicating a reduction in net assets during that period. From 2018 onwards, equity exhibited a recovery and growth, climbing to 10,063 million USD in 2019, then more significantly increasing to 12,867 million USD in 2020 and reaching 15,046 million USD in 2021. This reflects improving retained earnings or capital infusions contributing to the strengthening of the equity base over the latter years.

Invested Capital

Invested capital was relatively stable between 2017 and 2018, with marginal decrease from 32,308 million USD to 31,616 million USD. In 2019, a considerable increase occurred, bringing the invested capital to 38,698 million USD. This level was maintained with slight increments through 2020 and 2021, totaling 38,880 million USD and 39,156 million USD respectively. This pattern suggests significant new investments or assets acquisition in 2019, followed by stabilization of capital deployment in subsequent years.

Overall Insights

The combined analysis suggests a strategic shift over the reported period. After increasing debt levels through 2019, the company appears to focus on deleveraging in 2020 and 2021, coinciding with rising shareholders' equity and steady invested capital. This could imply improved profitability, asset management, or capital restructuring efforts enhancing the company's financial stability and reducing reliance on borrowed funds.

The period between 2017 and 2021 demonstrates fluctuating financial performance as measured by economic value added metrics. Economic profit exhibited volatility, transitioning from positive values in 2017, 2018, and 2021 to a substantial loss in 2019, followed by a modest recovery in 2020. Invested capital generally increased over the five-year span, although a slight decrease was noted between 2017 and 2018. The economic spread ratio, reflecting the relationship between economic profit and invested capital, mirrored the profit fluctuations, showing both positive and negative values throughout the period.

Economic Profit

Economic profit began at US$478 million in 2017 and increased significantly to US$879 million in 2018. A dramatic decline followed in 2019, resulting in an economic loss of US$742 million. This was partially offset by a return to profitability in 2020 with a profit of US$275 million, and further improvement in 2021, reaching US$479 million. The overall trend suggests considerable instability in the company’s ability to generate returns exceeding its cost of capital.

Invested Capital

Invested capital experienced a minor decrease from US$32,308 million in 2017 to US$31,616 million in 2018. Subsequently, it increased steadily over the remaining years, reaching US$38,698 million in 2019, US$38,880 million in 2020, and US$39,156 million in 2021. This indicates a consistent, albeit moderate, expansion of the company’s capital base.

Economic Spread Ratio

The economic spread ratio began at 1.48% in 2017 and rose to 2.78% in 2018, coinciding with the increase in economic profit. The ratio then turned negative in 2019, reaching -1.92%, reflecting the substantial economic loss. A partial recovery occurred in 2020, with the ratio reaching 0.71%, and continued into 2021, increasing to 1.22%. The fluctuations in this ratio directly correlate with the changes in economic profit and demonstrate the company’s varying efficiency in deploying capital to generate returns.

In summary, the analysis reveals a period of inconsistent economic performance. While invested capital generally increased, the ability to translate that capital into economic profit was uneven, resulting in significant volatility in the economic spread ratio. The negative economic spread ratio in 2019 is a particular point of concern, indicating that the company’s returns were insufficient to cover its cost of capital during that year.

The economic profit margin exhibited considerable fluctuation between 2017 and 2021. Initial positive values transitioned to a substantial loss before recovering, demonstrating volatility in the company’s value creation relative to its cost of capital.

Economic Profit Margin Trend

The economic profit margin began at 1.51% in 2017, indicating a modest economic profit relative to net sales. This margin expanded significantly to 2.68% in 2018, suggesting improved profitability and efficient capital utilization. However, a dramatic shift occurred in 2019, with the margin declining to -2.32%, representing an economic loss. A partial recovery was observed in 2020, with the margin reaching 0.85%, but it remained below the levels seen in 2017 and 2018. The margin further improved to 1.35% in 2021, approaching the initial value from 2017, but still indicating a relatively narrow margin of economic profit.

Relationship to Adjusted Net Sales

Adjusted net sales generally increased over the period, moving from US$31,641 million in 2017 to US$35,386 million in 2021. Despite this growth in sales, the economic profit margin did not consistently benefit. The substantial decline in margin in 2019 occurred alongside a slight decrease in adjusted net sales, suggesting that factors beyond revenue volume significantly impacted value creation. The increase in sales in 2021 was accompanied by a modest improvement in the economic profit margin, indicating a positive, but not necessarily proportional, relationship.

The negative economic profit margin in 2019 is a key observation, signaling that the company’s returns did not cover its cost of capital during that year. The subsequent recovery, while positive, was not robust enough to return the margin to its earlier levels. This suggests potential challenges in translating sales growth into economic profit, or increased costs of capital during certain periods.