3M Company (MMM) — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 8, 2018. The fourth quarter ended December 31, 2017. 3M is a diversified global technology and manufacturing company reporting through five segments: Industrial; Safety and Graphics; Health Care; Electronics and Energy; and Consumer.
Financial performance
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Net sales | $31.657 billion | $30.109 billion | Up 5.1%; organic local-currency sales up 5.2% |
| Operating income | $7.820 billion | $7.223 billion | Up 8.3% |
| Operating margin | 24.7% | 24.0% | Up 0.7 percentage points; gains on divestitures contributed |
| Net income attributable to 3M | $4.858 billion | $5.050 billion | Down 3.8%, including a $762 million net tax expense from U.S. tax reform |
| Diluted EPS | $7.93 | $8.16 | Down 2.8%; $9.17 excluding the TCJA impact, up 12.4% on a non-GAAP basis |
| Operating cash flow | $6.240 billion | $6.662 billion | Down $422 million |
| Free cash flow | $4.867 billion | $5.242 billion | Conversion was 100%, versus 104% |
| Total debt / net debt | $13.949 billion / $9.793 billion | $11.650 billion / $8.955 billion | Net debt is a company-defined non-GAAP measure |
| Cash, cash equivalents and marketable securities | $4.156 billion | $2.695 billion | About $3.975 billion was held by foreign subsidiaries |
Sales growth was broad-based: all five segments grew organically in local currency for the year. Electronics and Energy sales rose 11.1% (organic growth 11.0%), led by electronics; Safety and Graphics sales rose 4.5%, with organic growth partly offset by divestitures. Industrial sales rose 4.9%, while operating income fell 4.4%. Consumer operating income fell 6.8%, and Health Care operating income rose 1.0%.
In Q4, sales were $7.990 billion, up 9.0%; operating income was $1.821 billion, up 9.4%, and margin was 22.8% versus 22.7%. Reported net income was $523 million and diluted EPS $0.85, versus $1.155 billion and $1.88 a year earlier. Excluding the $762 million TCJA charge, Q4 net income was $1.285 billion and diluted EPS $2.10, up 11.7% year over year on a non-GAAP basis.
Material changes and capital position
- 2017 sales growth improved from 2016, when sales declined 0.5% and organic local-currency sales were approximately flat. Electronics and Energy rebounded from an 8.4% sales decline in 2016.
- Operating margin increased 0.7 percentage points year over year. Divestiture gains supported results, while $413 million of incremental strategic investments, higher pension expense and currency effects were drags. 2017 included $586 million of gains on business sales.
- Operating cash flow declined, reflecting higher pension contributions and working-capital use. Pension and postretirement contributions were $967 million, including a $600 million U.S. pension contribution in December; receivables, inventory and payables together used $608 million of working capital.
- Cash dividends paid totaled $2.803 billion, or $4.70 per share, up from $4.44 per share. 3M repurchased $2.1 billion of stock, compared with $3.8 billion in 2016.
- Scott Safety was acquired in October for approximately $2.0 billion net of cash acquired. The acquisition added goodwill and intangibles; its purchase-price allocation remained preliminary at year-end.
Outlook, commentary and risks
- Management expected a 2018 effective tax rate of approximately 20%–22%. The 2017 TCJA tax expense was provisional, primarily reflecting a $745 million transition-tax obligation; 3M had not completed its analysis of certain TCJA provisions, including GILTI.
- Management expected 2018 capital spending of $1.5–$1.8 billion, gross share repurchases of $2–$5 billion, and global defined-benefit pension and postretirement contributions of $300–$500 million. Pension expense was expected to rise by about $76 million pre-tax in 2018. The board declared a first-quarter 2018 dividend of $1.36 per share, a 16% increase.
- 3M agreed to sell substantially all of its Communications Markets Division for $900 million, subject to adjustments and closing conditions. The business had annual sales of about $400 million; management expected an approximately $500 million pre-tax gain in 2018. The transaction was expected to close in 2018.
- Key exposures include global economic and currency conditions, competition and pricing, raw-material availability and costs, execution of acquisitions and productivity initiatives, cybersecurity and the ongoing worldwide ERP implementation, pension assumptions, and legal and regulatory proceedings.
- Environmental and product litigation is significant. The Minnesota natural-resources lawsuit included a state expert’s $5 billion damages assertion; 3M recorded no liability, stating loss was not probable and estimable. The respirator-mask/asbestos accrual was $608 million, plus $30 million for Aearo-related claims; the company said it could not estimate potential losses above those accruals. 3M also faced multiple PFC-related matters and a growing number of lawsuits alleging infections associated with its Bair Hugger patient-warming system.
Investor verification priorities
- Confirm the final TCJA transition-tax and deferred-tax accounting after the measurement period, and compare the resulting tax rate with management’s 2018 estimate.
- Track the Minnesota natural-resources litigation and other PFC claims, including whether estimates or accruals change; review the respirator/asbestos reserve assumptions and insurance recoveries.
- Verify the Communications Markets sale’s completion, proceeds, gain and any associated costs against the stated expectations.
- Assess whether operating cash flow, working capital, pension funding and planned repurchases support dividends and investment without materially increasing leverage.
- Evaluate the durability of organic growth and margins separately from acquisition, divestiture and other unusual gains; note that the filing does not state a consolidated 2018 sales or EPS forecast.
Audit: PwC gave unqualified opinions on the consolidated financial statements and internal control over financial reporting. Scott Safety, acquired in October 2017 and representing less than 1% of consolidated assets and sales, was excluded from the internal-control assessment.