3M Company (NYSE: MMM) — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 14, 2013. 3M is a diversified global technology and manufacturing company. It reported results under six business segments in 2012 and planned to transition to five business groups in Q1 2013.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $29.904 billion | $29.611 billion |
| Operating income | $6.483 billion; 21.7% margin | $6.178 billion; 20.9% margin |
| Net income attributable to 3M | $4.444 billion | $4.283 billion |
| Diluted EPS | $6.32 | $5.96 |
| Operating cash flow | $5.300 billion | $5.284 billion |
| Free cash flow (company-defined, non-GAAP) | $3.816 billion | $3.905 billion |
- FY sales rose 1.0%: organic local-currency growth of 2.6% and acquisitions added 0.8%, partly offset by a 2.4% negative currency impact. Operating margin improved 0.8 percentage points, primarily from higher selling prices and lower raw-material costs.
- Fourth-quarter sales were $7.387 billion, up 4.2%; organic local-currency sales grew 4.3%. Net income attributable to 3M was $991 million, or $1.41 diluted EPS, versus $954 million and $1.35 in Q4 2011.
- Segment performance was mixed: Health Care, Industrial and Transportation, and Consumer and Office grew FY organic local-currency sales 4.7%, 4.5%, and 3.8%, respectively. Display and Graphics declined 2.4% and Electro and Communications declined 0.8%. Display and Graphics operating income fell 12.1%, with weakness in optical systems a key factor.
- Cash and cash equivalents plus marketable securities were $5.693 billion at year-end; total debt was $6.001 billion and net debt was $308 million. Debt was 25% of total capital, unchanged from 2011. Working capital was $7.430 billion, up $631 million.
- Capital spending was $1.484 billion. 3M repurchased $2.204 billion of shares and paid $1.635 billion in dividends. The board later authorized a new $7.5 billion repurchase program and raised the quarterly dividend 7.6% to $0.635 per share.
Outlook, commentary and notable items
- 3M did not provide a specific numerical FY 2013 sales or EPS target in the supplied filing text. Management said sales growth and related incremental income, along with other benefits, were expected to more than offset negative earnings factors.
- For 2013, management expected an effective tax rate of 29.5%–30.0%, approximately $30 million of first-quarter restructuring and one-time acquisition costs, and no material currency effect on earnings. Pension and postretirement expense was expected to decline by about $100 million pre-tax, or approximately $0.10 per diluted share. Planned pension and postretirement contributions were $400 million–$600 million; capital spending was expected at $1.6 billion–$1.8 billion.
- 2012 earnings included approximately $0.04 per diluted share of net insurance recoveries related to the 2011 Japan earthquake and tsunami; restructuring and early-retirement costs were approximately $0.08 per diluted share. Currency effects reduced 2012 net income by an estimated $103 million. Average diluted shares fell 2.2%, contributing an estimated $0.14 per share benefit.
- 3M acquired Ceradyne, CodeRyte and Federal Signal Technologies Group in 2012; net acquisition cash outflow was $1.046 billion. The proposed Avery Dennison Office and Consumer Products acquisition was terminated, with no remaining obligations reported.
- Key risks include global economic conditions, foreign-exchange exposure, competition and customer demand, new-product acceptance, input costs and supply continuity, acquisition integration, IT/ERP security and execution, pension assumptions, taxes, and legal or regulatory proceedings.
Contingencies and unusual exposures
- 3M reported respirator-mask/asbestos liabilities of $154 million and related insurance receivables of $87 million at year-end, including Aearo-related exposure; the filing states that future claim trends, costs, insurance recovery and allocation among parties could change estimates. The company could not estimate potential losses above established accruals.
- Environmental balances included $29 million of remediation liabilities and $57 million of other environmental liabilities, with related insurance receivables of $11 million and $15 million, respectively. PFC-related remediation and monitoring continued at sites in Alabama and Minnesota. 3M said some potential environmental losses could not be estimated.
- A jury returned an adverse verdict against 3M in the TransWeb patent and antitrust litigation in November 2012; damages and final judgment remained pending, and 3M intended to appeal. Other significant pending matters included patent and antitrust litigation with Avery, an appraisal action related to Ceradyne, and a Meda claim seeking more than $300 million. The filing generally states that loss ranges for these matters were not estimable or that recorded amounts were not material.
- 3M reported that the DOJ and SEC closed their FCPA investigations in January 2013 without action or fines. The Turkish Competition Authority found insufficient evidence of a competition-law violation in its investigation.
- No goodwill impairment was indicated in the 2012 annual test. However, management highlighted continued monitoring of Security Systems amid weak demand; goodwill and long-lived assets associated with that business were approximately $600 million and $300 million, respectively.
Most important facts for investors to verify
- Whether organic growth and margin improvement can continue, particularly given declines in Display and Graphics and Electro and Communications and the weakness in optical films.
- Whether currency pressure, global economic conditions, and customer demand materially affect 2013 results.
- Actual 2013 capital spending, pension contributions, tax rate, and the impact of the planned segment reorganization.
- Developments in TransWeb, Avery-related litigation, Meda, respirator/asbestos claims, and PFC environmental matters, including any changes to accruals or expected insurance recoveries.
- How the $7.5 billion repurchase authorization, dividend increase, acquisitions, and higher year-end debt affect cash deployment and net debt.