3M Company — Q3 2009 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2009. 3M is a diversified global manufacturer operating across six business segments. The interim statements are unaudited; the independent accountant’s review found no material modifications needed for GAAP conformity.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $6.193 billion | $6.558 billion | $17.001 billion | $19.760 billion |
| Operating income | $1.478 billion | $1.513 billion | $3.472 billion | $4.463 billion |
| Operating margin | 23.9% | 23.1% | 20.4% | 22.6% |
| Net income attributable to 3M | $957 million | $991 million | $2.258 billion | $2.924 billion |
| Diluted EPS | $1.35 | $1.41 | $3.21 | $4.11 |
| Operating cash flow | Not separately stated | Not separately stated | $3.897 billion | $3.408 billion |
- Q3 sales fell 5.6% year over year, but increased 8.3% sequentially from Q2. Organic volume declined 7.1%; pricing added 2.0 percentage points, acquisitions 1.8 points, and currency reduced sales 2.3 points.
- Nine-month sales declined 14.0%; organic volume fell 13.2%. Nine-month EPS and net income also declined materially year over year.
- Q3 cost of sales improved to 51.2% of sales from 52.3%, aided by cost reductions, pricing and lower raw-material costs. Nine-month cost of sales was 52.5%, versus 52.0%.
- At September 30, cash and cash equivalents were $3.239 billion and marketable securities totaled $1.216 billion. Total debt was $6.125 billion; net debt was $1.670 billion, down from $4.144 billion at year-end 2008. Debt-to-total-capital was 32%, versus 39%.
- Working capital was $5.430 billion, up from $3.759 billion at year-end. Nine-month capital expenditures were $629 million; dividends paid were $1.070 billion.
Segment performance and notable changes
- Health Care: Q3 sales rose 1.6% and operating income 15.3%; operating margin was 31.3%. Local-currency sales grew 4.7%.
- Display and Graphics: Q3 sales rose 4.5% and operating income 27.1%, supported by improving optical-film demand. Management cautioned that competition and pricing pressure remain intense.
- Industrial and Transportation: Q3 sales fell 8.6%; nine-month operating income fell 37.0%, reflecting severe automotive, appliance and industrial-market weakness.
- Electro and Communications: Q3 sales fell 16.5% and operating income 26.7%; nine-month sales fell 26.3% and operating income 55.6%, amid weak electronics, telecom and construction markets.
- Consumer and Office and Safety, Security and Protection Services had lower Q3 sales but higher operating income year over year. Respirator demand related to H1N1 supported Safety, Security and Protection Services; factories were at capacity and backorders were expected beyond year-end.
- Segment structure and reporting were changed in Q1 2009; comparative segment figures were recast. 3M also began awarding dual credit for certain U.S. sales in segment reporting, with an offsetting elimination so company totals are unchanged.
Outlook, management commentary, risks and unusual items
- Management said results improved through 2009 as demand stabilized in some markets and cost controls and restructuring progressed. It did not provide formal full-year revenue or EPS guidance in the supplied filing text.
- Restructuring charges were $26 million pre-tax in Q3 and $209 million for the first nine months. The 2009 actions and carryover savings were expected to save about $100 million in Q4 2009, with an additional $150 million to $175 million of incremental savings in 2010. The company expected 2009 capital expenditures of about $900 million.
- Management expected $300 million to $500 million of cash contributions to pension and postretirement plans in Q4, including an estimated $60 million for postretirement plans. Contributions were discretionary for U.S. pension plans.
- The UK government awarded passport production to a competitor when 3M’s contract expires in October 2010. 3M recorded a $13 million asset impairment; it reported no goodwill impairment but said future impairment remained possible.
- Material exposures include product-liability and asbestos claims, environmental remediation and perfluorinated-compound matters, employment class actions, and competition proceedings. Accrued balances included $126 million for respirator mask/asbestos liabilities, $31 million for environmental remediation and $123 million for other environmental liabilities. The company said it could not reliably estimate potential losses beyond certain recorded reserves.
- Other risks highlighted include prolonged economic weakness, foreign exchange movements, competitive pricing, raw-material and energy availability and costs, acquisition integration, productivity execution, and legal or regulatory outcomes. Venezuela was approaching highly inflationary accounting status; 3M said dollar functional currency might be required if the threshold were met.
- Share repurchases were suspended to preserve liquidity; about $2.6 billion remained authorized. The 2009 quarterly dividend was increased 2% to $0.51 per share.
Most important facts for investors to verify
- Whether improving sequential sales and operating trends continued after Q3, particularly in industrial, electronics and automotive end markets.
- Whether planned restructuring savings were realized and whether further restructuring costs or workforce actions arose.
- Actual pension contributions, funded status and any effect of the $600 million contribution made in company shares.
- Potential additional costs from asbestos, environmental, employment and other litigation, including insurance recoverability and reserve adequacy.
- Whether the UK passport contract loss or other market changes triggered further asset or goodwill impairment.
- Changes in cash, debt, liquidity, currency exposure and the company’s decision on resuming share repurchases.