0:15

K so I'll start our look on the balance sheet for 3M, and

Â if we go into liabilities we can see long term debt about five billion.

Â There's short term borrowings and current portion of long term debt.

Â Which is another billion or so.

Â So, if you add this together, that's, five,

Â about six billion of debt, either long term or short term.

Â 0:45

Which is not that high compared to the stockholder's equity of 3M.

Â So 3M has about 18 billion of stockholders equity.

Â So you're looking at a long term debt to a equity ratio of about a third,

Â which is fairly low, which again indicates sort of the fact that 3M's in a pretty

Â good financial state, fairly conservative in how they're managing their business.

Â They're not taking on a lot of debt.

Â Now in terms of the leases, we're not going to see any of the operating leases

Â here, because, of course, those are going to be off balance sheet.

Â But we will see some evidence of capital leases in a little bit.

Â 1:27

Next ,we could take a look at 3M's statement of cash flows and

Â to see the action with debt, long-term debt,

Â we would go down to cash Cash from Financing Activities.

Â So we have change in short term debt, which is a pretty small number, and then

Â here is repayment of debt, and proceeds of debt, maturity greater than 90 days.

Â So these would be the long term debt instruments that 3M has.

Â And as what you can, what you can see is for most the cases we have here.

Â Three was actually paying more debt than they're borrowing.

Â Only in the most recent year,

Â 2012, do we see that they borrowed more than they pay back.

Â So again, some evidence that they're not relying a lot on debt financing recently

Â most of how, how they've been financing their obser, operation.

Â Operations, as we saw earlier in the course was this

Â tremendously high $5 billion of cash they generate from operating the company.

Â So this is probably debt related to specific long-term projects,

Â 2:39

So we go to foot note nine, where 3M details its long term debt, and

Â short term borrowings.

Â They have a table where they have all of their major debt issuances listed.

Â All the smaller ones are combined into other borrowings.

Â So their biggest one is a Euro bond with a principe amount of 70, 775 Euros.

Â So it tells you the currency is Euro.

Â Fixed interest rate.

Â The effective rate so that was the interest rate in play when it was issued.

Â The maturity date, so it's two years, and the balance.

Â Now, the balance is bigger than the principal, in this case.

Â 'because the principal's in Euros, and it's translated into dollars.

Â So let's look at one that's in dollars.

Â There's a medium term note with a one billion dollar principal amount.

Â So a note is sort of like a bond.

Â Still plays.

Â Pays coupon payments, but, but not at long term.

Â 3:31

US dollar, fixed interest rate means the interest rate doesn't change over

Â the life of the bond.

Â We've got the affective rate, and notice that the balance.

Â Is increasing between 2011 and 2012, and it's at a point where

Â it's below the principal amount.

Â So what that tells is that this note was issued at a discount.

Â So was issued where the effect interest rate,

Â the market rate was above the coupon rate.

Â And so the market paid less than $1 billion.

Â 4:03

The proceeds were a discount, so what's been happening is every year this, balance

Â has been increasing towards one billion, which is where it's going to get in 2016.

Â And we can see that with this medium term note that's 850 million.

Â That and the balance is increased up to 850 million and

Â sure enough it's due in 2013.

Â So the discount has been eliminated through that interest expense and

Â cash journal entry that we do where we plug bonds payable.

Â And so now we're getting to the point where it's maturing, and

Â the balance is at 850 which is the principal amount.

Â So you can go down and

Â look at the different debt issuances that are summarized here.

Â 4:45

All the long term debt that comes due in

Â the next year is summarized in the current portion of long term debt.

Â And then the rest of it will go into the long-term debt

Â section of the balance sheet.

Â And then down below there's some more interest more information on

Â short-term borrowings, weighted average borrowing weight, rates.

Â 5:25

So I'll be honest with you here.

Â I typically do not spend a lot of time looking at this footnote.

Â The information here is a lot more relevant to corporate finance issues.

Â So how the company is managing its capital structure through borrowing activities,

Â and my bias is always trying to use accounting information to

Â assess managers' performance and operating the company.

Â Not in financing it.

Â 5:49

But if you are interested in those issues, I would strongly suggest our

Â Coursera course on corporate finance, An Introduction to Corporate Finance, where

Â you can dig into these issues more than I can, as someone who's not a finance guy.

Â And not terribly interested in debt financing.

Â Sorry.

Â 6:08

so to find information on operating leases we need to

Â go to a footnote called commitment and contingencies.

Â And this is where you would find it in any an report.

Â There's always a note.

Â On contingencies these are things that are sort of like liabilities.

Â They're, they're contractual obligations but they haven't met the definition of

Â a liability and so they're not on the balance sheet, and so

Â here's where 3M reports their operating leases.

Â So we can see their rent expense was about 300 million in 2012.

Â Just to give you a sense for how much of their.

Â Incoming cash flows is going towards renting property plant and equipment.

Â 6:48

But what, what we're really interested in is trying to figure out

Â how big these operating leases would be if they would be on the balance sheet.

Â And we can see down here is a disclosure of all of the expected cash payments

Â they're going to make on these leases from 2013 going to 2017 and beyond.

Â And notice the operating leases,

Â the cash flow payments are much bigger than the capital leases.

Â I don't know if you remember this the last time we

Â looked at property plan equipment but.

Â capital leases for 3M are not that big, I think it's about $100 million or

Â so that they have on the balance sheet, but operating leases, it's a lot more that

Â they're keeping off balance sheet, and this is something where last week we were

Â speculating, part of the reason why 3M didn't seem to have a lot of.

Â Property plant equipment, or

Â a lot of depreciation could be these operating leases.

Â So, what we're going to try now is to estimate how big these operating leases

Â would be, if they were actually put on the balance sheet as assets and liabilities.

Â 'Kay, so I'm going to pop into Excel.

Â And we're going to try and

Â figure out the present value of these operating lease cash flows.

Â because the present value of this cash flows is one way that we can estimate what

Â the liability would be if these were on the balance sheet.

Â So I've copied over the future cash flows into these Excel cells.

Â These cells in Excel, and we just are going to take the present value.

Â Now one issue we have is we've got this after 2017,

Â and it's hard to take the present value of something that's that amorphous.

Â So we're going to have to make an assumption.

Â So what we're going to do is carry over these payments, but for

Â the after 2017, I'm going to split it up into two payments after that,

Â just to make the present value easier.

Â So I'm going to assume that this is,

Â the way the trend is going that there's going to be two more payments, one of 60.

Â And one of 59 you could split it into three if you wanted,

Â do it more complicated, but you're going to get sort of the same answer.

Â Now that we have the payment stream, what we can do is go ahead and

Â calculate the present values.

Â 9:12

I got that from if you remember a few minutes ago we saw the weighted average

Â effective interest rate was about three and a half percent, so

Â that's what I'm going to use for these leases, and then I created a formula,

Â let me bring up what it looks like, where I linked to that cell, so

Â it puts in the interest rate, of course I could have just typed it in as well.

Â For the number of periods that we're discounting the cash flow back,

Â I've taken the year, so 2013, minus 2012, so I'm discounting back one year.

Â There's no payment, but instead we're just discounting back this future

Â 9:45

cash flow of 194 to present value terms, and it would be 187.

Â Then I do the formula for the next year which is

Â the same except now it's D13, so it's discounting this payment back two years.

Â So we're discounting 158 back two years, and so forth.

Â So if you go all the way to 2019.

Â The way the formula looks is we use this interest rate of 3.5%,

Â we discount it back seven years, 2019 minus 2012, this,

Â this payment seven years from now of $59, in present value terms that's 46.

Â Then I can add that up, and I would see that the present value is 6.62.

Â So that's one estimate of what the liability would be if

Â this was on the balance sheet.,

Â and then the cool thing about setting up the formula is I could play around with

Â the rate.

Â So one thing I noticed is, 3M recently took out a medium term note with

Â about this maturity and the interest rate that they got was one and half percent.

Â And so I could type that in and it would change the present value up to 735.

Â 10:56

Now the other way I said you could do this is you could do this is you could take 8

Â times Rent Expense.

Â So we saw in the Scotia the rent expense was 300.

Â If we take 8 times that we get twen, $2.4 billion.

Â So what's the liability going to be?

Â Somewhere between 735 million and $2.4 billion.

Â So a good question is how can something like eight times rent expense be even

Â close to as accurate as doing the present value of all these future lease payments?

Â 11:30

because something like the 8*Rent Expense assumes that it's

Â about three percent over eight years, so it's a very course estimate, but

Â the problem with the present value calculation that we did,

Â is if you look at the payments, they start at 194 and then they drop substantially.

Â Meanwhile, 3M has been paying about 300 or so a year in rent expense.

Â So, what's missing from this present value, or from the table of payments is,

Â is that these leases are expiring and so the payments go away.

Â But if 3M still needs the equipment, they still need the buildings,

Â they're going to have to renew the leases.

Â So, really,.

Â This is a bit misleading because it's showing these leases go away.

Â When in fact, 3M would probably have to renew these leases going forward.

Â And that's why something like an 8 times rent expense,

Â which assumes a constant payment, may actually give you

Â a better guesstimate of the amount than the present value approach.

Â Although we can look at both and split the difference.

Â 12:32

So, anyway let's just split the difference and say that there's about

Â 1.5 billion of both assets and liabilities that [INAUDIBLE]

Â keeps off the balance sheet through it's use of operating leases.

Â So, how big of a deal is this.

Â Well, if we remember from the balance sheet, or, at least I remember from

Â the balance sheet, net property plant equipment was about 8 billion dollars.

Â And long term debt was about 6 billion dollars.

Â So if we added what we see here for the operating leases,

Â net property plant in equivalent would increase to $9.5 billion and

Â long term debt would increase to $7.5 billion.

Â Now it's still relative to stockholders equity of.

Â Of 18 billion, this would not dramatically increase the leverage ratio,

Â but it does increase it, and it's a pretty sizable number.

Â So, if I was going to compare 3M to other companies, what I might want to do is some

Â kind of quick and dirty adjustment to get these operating leases.

Â Back on the balance sheet so I could get an apples-to-apples comparison to

Â the other, companies, if I was going to do any kind of ratios.

Â So, you know, it's not as.

Â It's not as enormous as these operating leases can be for some companies.

Â But it is still a big deal that's kept off the balance sheet for 3m.

Â >> And that wraps up our look at time valued money, long term debt and leases.

Â Thanks for sticking with me through a lot of minutes of video this week.

Â Don't worry, next week we're going to move on to a lighter, happier topic.

Â Taxes. I'll see you then.

Â