3M Company — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. 3M is a diversified global manufacturer operating across six segments. International markets generated 66.1% of 2011 sales.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $29.611 billion | $26.662 billion |
| Operating income | $6.178 billion | $5.918 billion |
| Net income attributable to 3M | $4.283 billion | $4.085 billion |
| Diluted EPS | $5.96 | $5.63 |
| Operating cash flow | $5.284 billion | $5.174 billion |
| Free cash flow (company-defined) | $3.905 billion | $4.083 billion |
| Capital expenditures | $1.379 billion | $1.091 billion |
| Cash, cash equivalents and marketable securities | $4.576 billion | $5.018 billion |
| Total debt | $5.166 billion | $5.452 billion |
Sales rose 11.1%; operating income increased 4.4%, net income 4.8%, and diluted EPS 5.9%. Organic volume contributed 3.7 percentage points to sales growth, pricing 1.0 point, acquisitions 3.3 points, and currency translation 3.1 points. Operating margin fell to 20.9% from 22.2%; cost of sales rose to 53.0% of sales from 51.9%, reflecting raw-material inflation and higher pension costs. Gross raw-material prices increased approximately 4%, while selling prices rose 1.0% overall.
Net debt was $590 million, up from $434 million. Working capital was $6.799 billion, versus $6.126 billion. Debt was 25% of total capital, and 3M reported AA- / stable from S&P and Aa2 / stable from Moody’s. The company paid $2.20 per share in 2011 dividends and repurchased $2.701 billion of stock. Its board subsequently raised the annualized dividend to $2.36 per share.
Fourth-quarter results and segment developments
Fourth-quarter sales were $7.089 billion, up 5.7%; net income was $954 million and diluted EPS was $1.35, versus $928 million and $1.28 a year earlier. Quarterly sales growth included 1.3% organic volume, 2.0% pricing, 2.3% acquisitions and 0.1% favorable currency.
- Industrial and Transportation led annual segment sales growth, up 19.5% to $10.073 billion; operating income rose 17.3%.
- Safety, Security and Protection Services sales increased 15.2% to $3.821 billion; operating income increased 14.9%.
- Health Care sales rose 11.5% to $5.031 billion, while its operating margin eased to 29.6% from 30.2%.
- Display and Graphics sales fell 5.4% to $3.674 billion and operating income declined 16.6%, mainly due to weak LCD-TV optical-film demand and price declines. Electro and Communications sales grew 8.6% for the year, but declined 2.7% in Q4 as electronics activity slowed.
- Consumer and Office sales increased 7.8% to $4.153 billion; operating income was flat at $840 million.
Outlook, commentary and risks
Management expected 2012 capital spending of $1.3–$1.5 billion and pension/postretirement contributions of $800 million–$1 billion. It forecast a 2012 effective tax rate of approximately 29.5%, compared with 27.8% in 2011, and estimated pension and postretirement expense would reduce diluted EPS by about $0.09 year over year. Early-retirement and restructuring costs were expected to reduce Q1 EPS by about $0.04 but be neutral to full-year earnings. Management said sales growth, productivity, and pricing above raw-material inflation were expected to more than offset these headwinds; the filing does not provide a specific full-year sales or EPS target.
Management cited deteriorating Western European demand and weaker consumer-electronics activity. Japan’s earthquake and tsunami and Thailand’s flooding were estimated to reduce 2011 sales growth by 0.8 percentage points and diluted EPS by about $0.06, net of specified offsets. Raw-material and fuel cost increases, foreign exchange, economic conditions, competition, product acceptance, acquisitions, cybersecurity, and legal and regulatory matters are identified risks. 3M noted that it had adequate raw-material supply at filing time but could not predict future shortages.
Defined-benefit plans were 82% funded worldwide at year-end. Lower discount rates materially increased obligations; pension and postretirement changes increased long-term liabilities by approximately $2.4 billion and reduced equity by approximately $1.6 billion. The filing reports no goodwill impairment in 2011. The Avery Dennison office and consumer products acquisition, announced at an approximate $550 million purchase price, was expected to close in the second half of 2012, subject to conditions and approvals.
Contingencies include respirator/asbestos litigation, environmental remediation and PFC-related claims, a major Minnesota natural-resources lawsuit, and other commercial disputes. At year-end, reported respirator/asbestos liabilities were $130 million, with $121 million in related insurance receivables; the company said actual exposure could exceed reserves and could not estimate the excess. Environmental reserves included $28 million for remediation and $75 million for other environmental liabilities. 3M also disclosed an ongoing DOJ/SEC investigation following its voluntary disclosure of alleged bribery and bid-rigging concerns involving a Turkish subsidiary and other country transactions. Management stated that adverse legal developments could materially affect results or cash flows in a period.
PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether organic demand and pricing can sustain growth as Western Europe and electronics-related markets weaken.
- Whether margins recover from 2011’s decline amid raw-material inflation, pension costs, and growth investments.
- Actual 2012 pension funding, expense, tax rate, capital spending, and the effect of currency movements.
- Integration and returns from acquisitions, including the proposed Avery Dennison transaction and its closing conditions.
- Developments in asbestos, PFC/environmental, antitrust, and foreign-corruption matters, including any reserve or insurance-recovery changes.
- Cash deployment among dividends, share repurchases, acquisitions, and pension contributions; assess free cash flow alongside capital spending.