Hello, I'm Professor Brian Bushee, welcome back. In this video, we're gonna end our week looking at cash flows with a look at the 3M company's cash flow statement. We're gonna take a look at their actual statement, plus the supplemental disclosures about the statement in the footnotes, and the discussion of the cash flow statement in their management discussion analysis, or MDNA section. Let's get started. 3M's statement of cash flows is on page 51 of their annual report. The first thing I like to look at is this breakdown of operating, investing, and financing activities, to see what kind of stage or life cycle the company's in. So 3M throws off about 5 billion of cash from operations every year. It's pretty steady. They have cash outflows from investing activities of about 2.6 billion every year. And they also have net financing cash outflows of about 2 billion, other than a blip in 2011. So this is sort of the classic, mature company profile. You've got products that are, essentially, cash cows, they're just throwing off cash, things like post it notes and scotch tape. Things that we can't do without. They're still reinvesting a moderate amount back into the company, back into long term assets, and we'll look at this a little more in a second. And, they are net cash out flows for financing, so they don't have to borrow. They don't have to raise money to fund their operations or investments anymore. Instead their operations are able to fund all of their investing activities, and still throw off some cash that they can use, to pay off debt or repurchase equity or pay dividends. So just to get some more insight into this, one thing that's often good to look at is comparing depreciation to purchases of a property plant and equipment. Again it's very rough, but, if you view depreciation as using up your fixed assets, capital expenditures, obviously, is acquiring new ones, it looks like 3M's at about replacement level. So they are investing a lot in new PP&E, but it's sort of replacing the things that they're using up. They do have, though, some active acquisitions, so about a billion or so until 2012. And then there's a lot of activity with marketable securities. So they bought about 5.4 billion of, 5.5 billion of marketable securities, but then they sold or had those almost all mature within 2012. So I think what happens is 3M is throwing off a lot of cash, if they don't immediately have an acquisition in mind, or immediately have purchased the property planned equipment, they plow it into markup on securities on investments. And then when those opportunities to make an acquisition or buy PP&E come, they liquidate the markup on securities and use that to go out and make their acquisitions. So it's almost like they're serving as their own bank, by buying these marketable securities, holding their cash, getting some return, waiting until they can invest it. And then in the financing section, we see a lot of the financing cash out flow is purchase of treasury stock, that's probably for stock options. And then there's a big dividend that they pay to shareholders, which, again, is another example oftentimes of a mature company that, if you don't have a full set of investments that you can plow your cash back into, you may as well pay it back into your shareholders, and let them invest it somewhere. I think you're ready to do these kinds of life cycle or growth analysis on your own. So here's what I want you to do, after the videos over, go on the internet, find a firm that you're interested in, take a look at their cash flow statement, and see what you can learn by looking at the company's operating, investing, and financing cash flows. Now let's dig into the operating section a bit more. So we start with net income. Ignore the noncontrolling interest stuff for now, and just view it as net income. Nice steady growth in that income, indicating that they are consistently able to price their products enough to cover the cost of running the business. And, typical of a mature company, you have this steady profitability. That steady profitability turns into steady cashflows. So, very mature, well performing, humming along nicely company. One of the big discrepancies between net income and net cash in operations is depreciation amortization. Now, remember that's not a source of cash, even though it looks like it here. Remember depreciation reduces net income. It's non cash, so we have to add it back to get from cash, to get to cash from operations. Fairly big number for the 3M, because it does a lot of manufacturing, and manufacturing companies tend to have high depreciation amortization. Then we have a number of other, non cash expenses. So things like pensions, stock based compensation, deferred taxes, and excess tax benefits. So first the pension and post retirement contribution, stock based compensation, these are things we recognize as expenses now, which means they're part of net income. But the cash is either paid in the future, as is the case for pensions and post retirement benefits, or the cash really isn't paid as it is for compensation, although part of it is you're buying back treasury stock to use to satisfy options. But any case, there's no cash flow this period for these expenses. And we'll talk more about the stock based compensation later on. The pensions of post retirements, that's beyond the scope of this course. You'll have to come and take my course at Warton, my elective, to see more on pensions and post retirements. The deferred taxes, we'll, obviously, get to later in the class. So then we get to the section on changes in assets and liabilities. These are the changes in working capital, and what we see is the big chunk here are accounts receivable and inventory are negative. So let's think about what that means. Negative number on the operating cash flow under the indirect method means that these amounts must be going up on the balance sheet. Accounts receivable goes up as a non cash asset, to stay in balance we have to subtract it on a cash flow statement. And yes, even though you can't see it, I am doing up and down arrows with my hand. Inventories go up on the balance sheet, non cash asset going up, we have to subtract that on the cashflow statement. Cashflow is also going up, now remember, that's a liability, so if accounts payable a liability increases, it's on the other side of the balance sheet equation, we have to increase it on the cash flow statement. So these could equal, these could represent either good or bad news. Bad news scenario would be our customers are not paying us, we're having trouble selling your inventory, we're having to stretch our payables. But that's probably not the case here given the nice growth and profitability that's going on, so a more likely story is it's still a growing company. So during the year, we're making a lot of credit sales at the end of the period. We're building inventories in anticipation of future sales. We are getting more raw materials at the end of the year in anticipation of production. And so based on other things I've seen, it probably is a good new scenario that this is representing growth and working capital, rather than, bad news where you can't collect receivables, and you can't get rid of your inventories. So, overall, for the face of the statement it looks like a mature company that still has some growth potential. Now, we're gonna look at some other sections to try to get some additional information about what's going on with cash flows. And yes, while you're looking at those cash flow statements that you downloaded from the internet, you should also take a close look at the operating section. Look at net income, look at cash operations, and look at all the things that cause differences between the two, to see what kind of items that you would have questions about, or wanna learn more about to understand why the company's net income is different from its cash flows. Now I've jumped ahead to page 69 where we have footnote 6 which is supplemental cash flow information. So if you remember back to the first video that week I said that there has to be disclosure of cash, taxes paid, and cash interest payments. And as we talked about in, I think, the second to last video, that disclosure is there, so if people want to remove cash interest and cash taxes from operating cash flow, they have the number. So in this footnote we see, the cash taxes and the cash interest. So if you wanna start with the cash from operations and the cash flow statement, in terms ofi doing some kind of valuation, to measure operating cash flow, but you don't want tax or interest in there, you can pull those numbers using this disclosure. One last section to look at, related to cash flows, is in the management discussion and analysis which is on page 36. Remember this is the, the MDNA is the section where 3M management is supposed to provide their own narrative to explain what happened during the year. So it'll give us more insight into some of the numbers that we saw on the cash flow statement. They repeat their operating section, and talk about what happened in terms of their cash flows during the year. The big reason for the year on year in cash flows is net income went up. They do note that accounts receivable, inventories and payables increased by 312 compared to increases of 484 last year. But they really don't talk much about what happened with that. Then at the bottom of the page, they disclose free cash flow. And as I said a couple videos ago, this is a voluntary disclosure. Notice it's labeled as a non gap measure. That means that there's no requirement by the SEC or the FASB to provide this measure, which also means there's no standardization. Companies can define this measure, however they want, and, and when they do that, they have to alert investors and analysts that this is a non gap measure, so it's not standardized. So, remember free cashflow is supposed to be operating cashflow minus investment in the future. So, we've got net cash from operations from the cashflow statement as 3M's operating cashflow. And then these purchase of PP&E as their measure of investment in the future. Investing in new property plan equipment which gives them a pretty high free cash flow. And that's a pretty good definition. I've seen a lot worse. This is a pretty good definition of free cash flow. But again, before you would use this number, you wanna make sure you know what's in the definition, and that you're comfortable with it. On the next page, we have cash from investing activities. And what they've done here is they've netted all the marketable securities action into a small number, so instead of showing on the face the 5 billion they bought, and then the almost 5 billion they sold, they just show a net number. So it really highlights that the big drivers of cash outflows were purchases of PP&E and acquisitions. And they tell you that PP&E is expanding manufacturing capacity in key growth markets, especially international like China, Turkey, and Poland. And so we can see that they do still have growth opportunities, and a lot of those growth opportunities seem to be international. For acquisitions they refer us to note two, you can go there and look I'm probably not going to jump ahead and look at that. And then finally they talk about cash flows from financing activities. So remember the big chunks here were proceeds from, I'm sorry, purchases of treasury stock, and the treasury stock they say is for stock based compensation. Now we'll talk about this later in the course but, basically, stock based compensation is where you award your employees either stock options or stock grants. You could either issue new stock to satisfy that, or what most companies do is they just buy back their own stock, and then either sell it to employees or give it to employees under these stock based compensation plans. And then the other big chunk here is dividends to stockholders, 3M has paid dividends since 1916. So we're almost on 100 years of dividends, and actually again, just consistent with companies that are very mature products throwing off a lot of cash. One thing they tend to do is they start paying dividends. 3M started pretty early. Not sure it was Post It Notes in 1916. And the thing about dividends is they tend to be sticky, once you start paying them, you always want to keep paying them if you ever cut them. It would be viewed by the market as bad news. So that's where we find all the cash flow information in the annual report. And that's gonna wrap it up for our week on cash flow statements. Hey, I was gonna say that. Well, this does wrap up our week long look at the cash flow statement. I know it was difficult, and there were some parts that didn't probably make a lot of sense right off the back. But the cash flow statement's a very important statement, and we're gonna be seeing it again and again and again, as we look at more advanced topics, and the more you see it, the more you'll get the hang of it. I'll see you next time.
