3M Company — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; filed February 12, 2015. The filing also reports fourth-quarter 2014 results. 3M is a diversified global technology and manufacturing company operating in Industrial, Safety and Graphics, Electronics and Energy, Health Care, and Consumer. About 63% of FY2014 sales were international.
Financial performance
| Metric | FY2014 | FY2013 | Change / context |
|---|---|---|---|
| Net sales | $31.821 billion | $30.871 billion | Up 3.1%; organic local-currency growth was 4.9%, acquisitions added 0.1%, and currency translation reduced sales 1.9%. |
| Operating income | $7.135 billion | $6.666 billion | Up 7.0%; operating margin rose to 22.4% from 21.6%. |
| Net income attributable to 3M | $4.956 billion | $4.659 billion | Up 6.4%. |
| Diluted EPS | $7.49 | $6.72 | Up 11.5%; lower diluted share count contributed approximately $0.34 per share. |
| Operating cash flow | $6.626 billion | $5.817 billion | Up $809 million. |
| Free cash flow | $5.133 billion | $4.152 billion | Free cash flow conversion was 104%, versus 89%. |
| Total debt / net debt | $6.837 billion / $3.486 billion | $6.009 billion / $1.219 billion | Debt-to-total-capital rose to 34% from 25%. |
| Cash, cash equivalents and marketable securities | $3.351 billion | $4.790 billion | Down $1.439 billion; approximately $3.3 billion was held by foreign subsidiaries. |
| Working capital | $5.767 billion | $5.235 billion | Up $532 million. |
| Effective tax rate | 28.9% | 28.1% | Higher by 0.8 percentage points. |
Cost of sales was 51.7% of sales, down from 52.1%, implying a gross margin of approximately 48.3% versus 47.9%. Management cited price increases, raw-material cost deflation, lower pension costs, and volume leverage as operating-margin benefits; strategic investment and currency effects partly offset them.
Fourth quarter: Sales were $7.719 billion, up 2.0% year over year; net income attributable to 3M was $1.179 billion and diluted EPS was $1.81, compared with $1.103 billion and $1.62. Organic local-currency sales grew 6.3%, while currency translation reduced sales 4.4%. Operating margin improved to 21.5% from 20.9%.
Material changes versus prior period
- FY2014 organic local-currency growth accelerated to 4.9% from 3.4% in 2013, though reported sales growth was slightly lower (3.1% versus 3.2%) as currency translation remained a headwind and acquisitions contributed less.
- Operating margin improved 0.8 percentage points, compared with a 0.1-point decline in 2013. Company-wide benefits included approximately 1.0 point from pricing and raw-material costs, 0.5 point from lower pension costs, and 0.3 point from volume leverage; strategic investments reduced margin by 0.6 point.
- All five segments reported positive FY2014 organic local-currency sales growth. Health Care led at 5.8%, followed by Safety and Graphics at 5.4%, Electronics and Energy at 5.2%, Industrial at 4.9%, and Consumer at 3.9%.
- Electronics and Energy returned to growth: sales rose 3.9% and operating income rose 16.8%, following a 2013 sales decline and lower operating income. Health Care remained the highest-margin segment, with a 30.9% operating margin, down from 31.3%.
- Debt increased and cash balances declined as 3M pursued a more leveraged capital structure and substantial shareholder returns. The company repurchased $5.652 billion of stock and paid $2.216 billion in dividends during 2014.
Outlook, management commentary and risks
- Management said 3M remained on track for its 2013–2017 goals: average annual diluted EPS growth of 9–11%, organic local-currency sales growth of 4–6%, ROIC of about 20%, and free-cash-flow conversion of about 100%. FY2014 results were 11.5%, 4.9%, 22.0%, and 104%, respectively.
- For 2015, management expected an effective tax rate of approximately 28–29%, assuming reinstatement of the U.S. R&D tax credit; capital spending of $1.5–$1.7 billion; gross share repurchases of $3–$5 billion; pension and postretirement contributions of $100–$200 million; and pension/postretirement expense to increase by about $210 million pre-tax from 2014.
- The board declared a first-quarter 2015 dividend of $1.025 per share, a 20% increase. 3M reported 57 consecutive years of dividend increases.
- Foreign exchange was a notable headwind: translation reduced FY2014 sales growth by 1.9%; management estimated currency effects, including hedging, reduced net income by approximately $97 million. The company operates in more than 70 countries and derives roughly two-thirds of revenue outside the U.S.
- Other key risks include global economic conditions, competition and pricing, customer demand, raw-material supply and cost volatility, new-product acceptance, acquisitions and integration, information-technology security and the phased global ERP implementation, and legal, environmental, tax, pension, and regulatory matters.
- Pension: Worldwide plans were 85% funded at year-end. Lower U.S. discount rates increased benefit obligations; the year-end measurement reduced stockholders’ equity by $1.8 billion. Updated mortality assumptions increased the U.S. pension projected benefit obligation by about $820 million and the postretirement obligation by about $100 million. No goodwill impairment was identified in 2014.
- Contingencies: 3M disclosed respirator/asbestos liabilities of $140 million, excluding Aearo’s $24 million accrual; it could not estimate the potential excess over those accruals. Environmental liabilities totaled $71 million, with $26 million of related insurance receivables. The company also described PFC remediation and litigation, a patent/antitrust judgment of approximately $26 million under appeal, and product claims including a French electrical-splice matter where an expert cited alleged damages exceeding €100 million; the expert opinion was not a final liability determination.
- Unusual items and portfolio actions: 3M acquired Treo Solutions for healthcare analytics and purchased the remaining 25% interest in Sumitomo 3M for 90 billion yen. A 2014 pension lump-sum offer reduced the pension obligation by about $270 million, with a similar cash payout from plan assets; a separate plan amendment reduced year-end obligation by about $266 million. 3M also sold its global Static Control business in January 2015.
Most important facts for investors to verify
- Whether organic growth and margin improvement persist after separating pricing, volume, raw-material deflation, foreign exchange, and strategic investment effects.
- Whether 2015 guidance and the longer-term financial goals are achieved, particularly given expected higher pension expense and the assumption that the R&D tax credit is reinstated.
- How increased leverage, reduced cash balances, share repurchases, and dividends affect credit ratings, liquidity, and capital allocation; Moody’s outlook was negative despite its Aa3 rating.
- Potential changes in pension funding and obligations from discount rates, mortality assumptions, returns, and future contributions.
- Developments in asbestos/Aearo, PFC and other environmental matters, and product and intellectual-property litigation, including exposures not estimable by the company.
- Whether foreign-exchange exposure, particularly in developing markets, and competition following optical-film patent expirations materially affect results.