Hello, I'm professor Brian Bushee. Welcome back. In this video we're going to take a look at the 3M Company financial statements and see what their disclosures say about their stockholders equity, Stock-Based compensation, and earnings per share. Let's get started. We're going to start on page 45, on 3M's income statement, or as they say, consolidated statement of income. As we go down, we can see net income attributable to 3M. $4,444. Then there's the weighted average shares outstanding under basic calculation. So those are the actual shares outstanding. $693.9 gives us a basic EPS of $6.40. Then there's the number of shares outstanding under the diluted calculation. And we take the net income attributable divided by that 703.3 to get diluted EPS of 632, so it's about eight cents per share once we do the dilution. So a couple things to notice. Looks like there's about 10 million shares that would be converted if we look at diluted EPS. And there's no adjustment for the net income. We use the same net income as the numerator in both. So that means that there's no convertible debt, where we'd have to adjust the numerator, it also means there's no preferred dividends, because we didn't do any adjustment for preferred dividends and either case. So it looks like this entire 10 million of shares is due to Stock-Basee compensations. Next we go to page 48 and the balance sheet. And we go down to the stockholder's equity section. So here we can see shareholders' equity. There's common stock with par value of $.01. They don't tell us shares issued or shares authorized here. We could sort of ball park the shares issues because they have a balance of 9 million in common stock, and if the par value was 1 cent that would be about 900 million shares issued. We see the shares outstanding as 687 million. Then we have the initial paid capital, retained earnings, here's treasury stock. They don't tell us how much shares are in treasury. But if we have about 900 million here, and about 687 here, then it's about 213 million. We'll be able to find the exact figures later. One thing I want you to keep in you head though, is this 12 million 407 of treasury stock. Later on we'll figure out the average price they pay for treasury stock, once we figure out the precise shares. And then of course here's our good freind accumulated other comprehensive income, or in this case accumulated other comprehensive loss of 4.75 million. Now I know you're sitting here looking at the non controlling interest and thinking to yourself, why won't he ever talk about non controlling interest? I'll just briefly remind you what it is, but it is something that we're not going to get into in this course. So what happens is, 3M buys more than 50% of the common stock of another company. They now control the company because they could out vote the other shareholders. They bring all the assets and liabilities of that company onto their financial statement. That's why it's called a consolidated balance sheet, consolidated statement of income. But their shareholders don't hold 100% of those assets and liabilities, so this non controlling interest represents the ownership of the assets and liabilities. By people that are not 3M owners. These are the people that own the minority stakes in the subsidiaries that then get consolidated. And again, we'd have to go through consolidation accounting for you to fully sort of understand the implications of this. We don't have the time, you could do a whole course on this, I'm not going to do a whole course on this. So it's just beyond the scope of this course. On the next page is the statement of stockholder's equity. And we've got 2009 in 2010, 2010 to 2011. I'm going to jump ahead to what happened between December 2011 and December 2012. So just going through the columns, we've got a total of everything but we really want to look at this specific column. So here's common stock in additional paid in capital. And you can see that there was an impact due to Stock-Based compensation. So that's the credit to a pick that you do when you recognize stock compensation expense, so the stock compensation expense was around 277. In the retained earnings column, we can see that net income made it go up, dividends made it go down. We can see specifically that they paid 236 per share in dividends. And then they've got this negative to retain earnings for issuances pursuant to stock option and benefit plans. So it looks like what 3M did here is, instead of doing a debit to, or I'm sorry, a debit to APEC, they ended up doing a debit to retain earnings for the difference between the treasury stock that they're going to issue and the cash receipts from employees. And I'll talk more about that in a little bit. But typically this is in APEC, but you do have the option to put it in retained earnings. And of course it's 3M so they must have done it right because 3M wouldn't make any mistakes. And then we've got treasury stock, so we had reacquired stock. That's the stock that they purchased during the year. And then the 1,492 is what they issued to employees for stock options. And then finally we have the column for AOCL, Other Comprehensive Income. And here are the four items that go into it. Of course the one that we run into are the debt and equity securities, unrealized gain of $4 million. If we drop down in the footnote here is more information about treasury stock giving us the specific number of shares. So here we can see that there are 256 million of stock held in treasury, and remember that number I told you to remember? The balance of 12,407 in treasury stock, that's the balance at treasury stock at year end. If we divide that by this 250, I'll just round it up to 257. We get $48 and $0.27 per share. Wow, that's hideous handwriting. Anyway, that's the average price that 3MS paid for treasury stock for all the stock that they hold. We can also do that calculation for 2012. So they reacquired 2,220, they bought 25 million shares. So if we take 2,220 divided by 25 million shares. We come up with $88.8 per share. And so what you can see is the stock price is much higher in 2012 than it was historically when 3M has been buying this treasury stock. On the next page is the statement of cash flows, and in the operating section we can see a line for Stock-Based compensation expense of 223. Now notice that number is slightly different than the 277 that we saw before and probably more different than you could attribute to rounding error. I don't want to go into why this is different. This is one of those things that would make stock option accounting a whole week of videos rather than just part of a week of videos. But this is the amount of expense that actually went into the income statement, and it gets added back in the statement of cash flows. Then if we go down to the cash from financing section, we can see the treasury stock purchased, 2,204 Before it said 2,220, I have no idea why those two are different, but this kind of stuff happens all the time when you're using real financial statements. There's proceeds from the issuance of treasury stock pursuant to option and benefit plans. That's 1,012, and so if you remember, It was 1,492, when Columbus sailed the ocean blue, was the original cost of the treasury stock. We received 1,012 in cash which is a difference of 480. That 480 is essentially the quote unquote cash cost of the stock options. We bought 1,492 worth of stock and sold it to employees at 1,012 and took a quote unquote loss though that loss doesn't show up anywhere on the income statement. And this 482 is essentially the same thing as this 478 right here, except for of course the usually rounding error which seems to plague us. One more thing in the cash from financing section, there's excess tax benefits from Stock-Based compensation of 62. These are the tax savings that 3M got from employees exercising the options, so they got $62 million of tax savings during 2012. So one of the things that's always frustrating in people learning accounting, and I know you're probably frustrated because I'm cavalier about it, is how all these numbers that should be the same aren't the same. And I keep making jokes about rounding errors, or this always happens, but the fact of the matter is there's a lot more complexities then what I'm teaching you that cause some of these numbers to differ across the statements. Like with the stock option expense, there's four flitch errors when people leave before the vesting periods over, there's adjustments that are made for that that can cause the numbers you see on the cash flow statement to not reconcile with the number that you see in the statement of stockholders equity. So the numbers are close enough, and as long as they're close enough, don't worry that they don't match exactly, because the reason that they don't match exactly are things that are beyond the scope of the course. Did I mention that there are things beyond the scope of the course? Yeah, okay, well this is one of them also. Now I've jumped ahead to page 55 where there's a disclosure about earnings per share where they talk about how they calculate basic and diluted earnings per share. The disclosure that you always want to look for is certain options outstanding were not included in the computation of diluted earnings per share. because they would not have had a dilutive effect. In other words they're out of the money. And you can see that it was 12.6 million options in 2012, so there is an additional 12.6 million options out that there could turn into common stock, if they ever got into the money. And then we go down below here, and we can see the calculation for earnings per share, which is basically the same thing that we saw on the income statement, there´s nothing new here. Below that there's a discussion of Stock-Based compensation. So they have stock options, restricted stock, restricted stock units, performance shares and the General Employees' Stock Purchase Plan or GESPP. [LAUGH] And then they talk about how they do the accounting, but really most of the information is in note 14. Jumping ahead to note 5 on page 67, here we get all the detail on common stocks. So again, $0.01 par value, 3 billion shares authorized, 944 million shares issued. So we're only off by 44 million shares in a rough calculation. Treasury stock. There are 256 million shares which we saw before. Preferred stock without par value of 10 million shares is authorized but unissued. So 3M could Issue 10 million shares preferred stock without going to get permission from the board, because it's been authorized. They just have never issued it. And then we see a disclosure of AOCI or AOCL, since it's a loss. And again, if you were looking at their marketable securities, this would be the place to go to dig out these unrealized gains or losses. And then if you learn these other items down the road, like the translation adjustment, pension plans, which is the biggest chunk here, or cash flow hedges for derivatives, you'd find the information here in AOCL. Finally on page 111 is NOTE 14, which is Stock-Based Compensation. There is a lot of information about the plans at the start which you can read through on your own if you're interested in. I'm not going to go through all the details here. But they will tell you about the kind of incentive compensation plans that they have. Then we get down to disclosure. And we hadn't seen this one before. Pupco didn't have this disclosure, but it shows where Stock-Based compensation shows up on the income statement. So much like depreciation can be in cogs or S-G-N-A, depending on what the equipment or buildings are used for. Stock-Based compensation can be spread into cogs, S-G-N-A, or R and D, depending on whether it goes too employees whose wages go through cogs, go through S-G-N-A, or are considered R and D. Most of it is the SGNA, and that's the top management incentive plans would be there. So here we the $223 of Stock-Based compensation expense which is the same number we saw in a cash flow statement. That's the number that actually went into the income statement. Then we have the fact it has an income tax expense, and then the net of tax effect. This table should look familiar. This is where we can see the number of options that have been granted. So given out this year, new to employees. Exercise, so this is where the employees are actually buying back the stock at the exercise price. And it canceled, so they expire or they don't invest them, so they go away. And if you wanted to do the calculations, you could take exercise times this weighted average exercise price, and you would get the cash that we got from employees who exercised options during the year. And then we also have the options exercisable, these are ones that have vested and could go ahead and exercised at any point. Then if we go down below here. This is where they show you the details on the Black-Scholes option-pricing model. So if you still have that formula in front of us, all you have to do is plug in these parameters and you end up with the fair value of the options which the fair value granted were $14.94. Now of course that's much, much less than the exercise price because what this fair value is measuring is the expected profit that you're going to get in holding the options. Where remember, if the stock price goes down, you get nothing, and if it goes up, then you get the gap between the increase in stock price and that exercise price. And it goes on, and there's more information in here about their restricted stock units. Again, the same kind of disclosures as we've seen before. And at this point, the note goes on, and on, and on, and on, and on, and on, and on. So if you are really interested in General Employee Stock Purchase Plans, or GESPPs, you can go and look at this, but I am officially done talking about 3M's stock option accounting. And that wraps up our week of stock holder's equity. And it also wraps up the new material that we're going to cover in the course. Wow, it seems like it was just nine weeks ago that we started this adventure, and now we've worked our way all the way around the balance sheet. What we're going to do next week is go through a different financial statement. And try to do a comprehensive financial statement analysis. So goodbye 3M. Next week, hello Vulcan. I'll see you then.
