3M Company (NYSE: MMM) — FY 2010 Form 10-K
Reporting period: Year ended December 31, 2010; filed February 16, 2011. The filing is an annual report, not a standalone quarterly filing. 3M is a diversified global technology and manufacturing company with six operating segments and operations in more than 65 countries; about two-thirds of sales came from outside the United States.
Financial performance
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $26.662 billion | $23.123 billion |
| Operating income / margin | $5.918 billion / 22.2% | $4.814 billion / 20.8% |
| Net income attributable to 3M | $4.085 billion | $3.193 billion |
| Diluted EPS | $5.63 | $4.52 |
| Operating cash flow | $5.174 billion | $4.941 billion |
| Capital expenditures | $1.091 billion | $903 million |
| Free cash flow, company-defined non-GAAP | $4.083 billion | $4.038 billion |
| Cash, cash equivalents and marketable securities | $5.018 billion | $4.609 billion |
| Total debt / net debt | $5.452 billion / $434 million | $5.710 billion / $1.101 billion |
| Working capital | $6.126 billion | $5.898 billion |
| Dividend per share | $2.10 | $2.04 |
Sales rose 15.3%, including 13.7% organic volume growth, 0.9% acquisition impact and 1.0% favorable currency translation, partly offset by a 0.2% price decline and divestitures. The effective tax rate fell to 27.7% from 30.0%. The company reported no 2010 special items affecting operating income; net income included an $84 million non-cash tax charge, or $0.12 per diluted share, related to U.S. health-care legislation.
Fourth-quarter sales were $6.709 billion, up nearly 10% year over year. Quarterly net income attributable to 3M was $928 million, or $1.28 per diluted share, versus $935 million, or $1.30, in fourth-quarter 2009. Management cited H1N1-related comparisons, higher raw-material costs and investment spending as pressures on the quarter.
Material changes and segment performance
- All six segments had positive organic volume growth for the year. Electro and Communications led with 27.0% organic local-currency sales growth; Display and Graphics grew 23.0%; Industrial and Transportation grew 17.3%.
- Operating income increased across four segments, led by Electro and Communications (+96.0%) and Display and Graphics (+60.3%). Safety, Security and Protection Services operating income declined 2.4%; Health Care increased 1.0%.
- Sales rebounded from the 2009 downturn: 2009 sales had fallen 8.5% amid the global slowdown, while 2010 sales exceeded 2008 levels. Operating margin improved from 20.8% to 22.2%.
- 2010 operating cash flow increased $233 million, but working capital absorbed cash as demand recovered. Inventories increased 19.6% and receivables increased 11.2% versus year-end 2009.
- Debt to total capital declined to 25% from 30%. 3M repurchased $854 million of shares and paid $1.5 billion in dividends in 2010.
Outlook, commentary and risks
- For 2011, management expected sales growth of 10% or more: organic volume growth of 5.5%–7.5%, currency contribution of 1%–2% using December 31, 2010 exchange rates, and acquisition contribution of 4%–6%. The filing does not provide a clear 2011 EPS target.
- Management expected 2011 pension and postretirement expense to rise about $213 million pre-tax, or $0.22 per diluted share, versus 2010; the 2010 banked-vacation benefit would not recur, and the estimated effective tax rate was about 29.5%. Expected 2011 pension and postretirement cash contributions were $400 million–$600 million. Planned capital spending was $1.3 billion–$1.4 billion.
- 2010 raw-material and transportation-fuel costs increased, particularly for oil-derived inputs and metals. 3M reported adequate supply at year-end and said it used contracts and additional sourcing to manage commodity risk.
- Principal stated risks include global economic and capital-market conditions, competition and customer preferences, foreign-exchange movements, product development and acceptance, supply availability and costs, acquisition integration, productivity delivery, and legal, regulatory and environmental matters. The company also noted expected competition as certain Display and Graphics optical-film patents begin to expire.
- Environmental and legal exposures include ongoing PFC remediation, respirator/asbestos claims, and commercial and employment litigation. Recorded year-end amounts included $24 million of environmental remediation liabilities, $90 million of other environmental liabilities, and $126 million of respirator-mask/asbestos liabilities with $122 million of related insurance receivables. 3M said some potential losses could not be estimated; it recorded no liability for several matters it assessed as not probable and estimable.
- Notable proceedings include Minnesota’s December 2010 PFC natural-resource damages suit; an Avery Dennison antitrust action; a Meda AB claim seeking at least $200 million; and a DOJ/SEC inquiry following 3M’s voluntary disclosure of an investigation into alleged conduct at its Turkey subsidiary. The filing says 3M cannot predict the outcome of the Turkey investigation. The French Competition Authority fined 3M France €1.97 million; the company said it did not plan to appeal.
- Fourth-quarter acquisitions included Arizant, Attenti and Cogent. 3M reported approximately $1.4 billion of cash outflows, net of acquired cash and marketable securities, for these three acquisitions, and total 2010 acquisition cash outflows of $1.830 billion net of cash acquired. Goodwill impairment testing indicated no impairment in 2010.
Investor verification priorities
- Check whether 2011 sales growth, organic volume, acquisition contributions and capital-spending expectations were achieved; the filing supplies no clear EPS guidance.
- Assess the quality and sustainability of earnings growth, including segment trends, price versus volume, acquisition contributions, and the nonrecurrence of 2010 benefits and charges.
- Monitor cash conversion and working-capital growth, particularly inventory and receivables, alongside acquisition spending, repurchases, dividends and pension funding.
- Review pension assumptions and sensitivity: worldwide plans were reported 90% funded, while lower year-end discount rates contributed to the expected 2011 expense increase.
- Track legal, environmental and regulatory developments, insurance recoverability and whether reserves remain adequate; several exposures were not reasonably estimable.
- Confirm acquisition integration and goodwill assumptions, especially for Cogent, whose Security Systems reporting unit 3M planned to monitor for impairment indicators.
PricewaterhouseCoopers issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor excluded Cogent, Arizant and Attenti from the 2010 internal-control assessment because they were acquired in the fourth quarter.