3M Company (MMM) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 6, 2020. This is an annual report, not a standalone Q4 filing. 3M is a diversified global manufacturer reporting four segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $32.136 billion | $32.765 billion | Down 1.9% |
| Operating income | $6.174 billion | $7.207 billion | Down 14.3% |
| Operating margin | 19.2% | 22.0% | Down 2.8 percentage points |
| Net income attributable to 3M | $4.570 billion | $5.349 billion | Down 14.6% |
| Diluted EPS | $7.81 | $8.89 | Down 12.1% |
| Operating cash flow | $7.070 billion | $6.439 billion | Up $631 million |
| Free cash flow, non-GAAP | $5.371 billion | $4.862 billion | Up $509 million |
Management’s adjusted, non-GAAP diluted EPS was $9.10, down 13.0% from $10.46. Adjustments exclude significant litigation charges and, for 2019, the Venezuelan subsidiary deconsolidation loss; these figures are not GAAP measures. 2019 R&D and related expenses were $1.911 billion, or 5.9% of sales, versus $1.821 billion and 5.6% in 2018.
Q4 context: Quarterly sales were $8.111 billion versus $7.945 billion in Q4 2018. Net income attributable to 3M was $969 million and diluted EPS was $1.66, compared with $1.347 billion and $2.27 in Q4 2018. Q4 2019 included $214 million of pre-tax litigation charges ($166 million after tax).
Segments
| 2019 segment | Sales | Sales change | Operating income | Operating margin |
|---|---|---|---|---|
| Safety and Industrial | $11.607 billion | Down 7.1% | $2.648 billion | 22.8% |
| Transportation and Electronics | $9.602 billion | Down 5.0% | $2.221 billion | 23.1% |
| Health Care | $7.431 billion | Up 8.9% | $1.863 billion | 25.1% |
| Consumer | $5.089 billion | Up 0.1% | $1.105 billion | 21.7% |
Health Care’s reported growth was substantially acquisition-driven: acquisitions added 9.4% to segment sales, while organic local-currency sales grew 1.6%. Safety and Industrial and Transportation and Electronics faced weaker markets and customer channel-inventory adjustments.
Financial position and liquidity
- At year-end, total debt was $20.313 billion, up from $14.622 billion; net debt, a non-GAAP measure, was $17.819 billion versus $11.352 billion.
- Cash, cash equivalents, and marketable securities totaled $2.494 billion, down from $3.270 billion; approximately $2.4 billion was held by foreign subsidiaries.
- Working capital was $3.749 billion versus $6.465 billion. The decline reflected lower cash and higher current liabilities, including upcoming debt maturities and accrued legal and environmental liabilities.
- 3M reported $7.070 billion of operating cash flow and $5.371 billion of free cash flow. The company attributed the operating cash flow increase partly to timing of litigation-related charges and payments, as well as lower receivables and inventory.
- Committed credit facilities were undrawn at year-end: a $3.0 billion revolver and a $1.25 billion 364-day facility. The company also had $150 million of commercial paper outstanding. Its covenant EBITDA-to-interest ratio was approximately 17:1 against a 3:1 minimum.
- Moody’s rating was A1 with stable outlook. S&P rated 3M AA- and placed it on CreditWatch Negative in January 2020.
Material changes, outlook, and unusual items
- 3M reorganized its former five segments into four in 2019 and changed certain product-line and customer-account allocations; prior-period segment data was presented on the revised basis.
- Acquired M*Modal in February and Acelity in October 2019. Acelity consideration was approximately $4.5 billion net of cash acquired, and 3M assumed about $2.3 billion of debt. Acelity purchase accounting remained preliminary at year-end. Acquisitions contributed to higher debt and Health Care sales but weighed on segment margins during integration.
- Recorded $762 million of pre-tax significant litigation charges in 2019, compared with $897 million in 2018. Also recorded a $162 million pre-tax loss on deconsolidating its Venezuelan subsidiary and $282 million of pre-tax restructuring charges. Restructuring actions affected approximately 3,500 positions worldwide.
- Management cited slower end markets, especially China, automotive, and electronics, customer inventory reductions, lower manufacturing absorption, raw-material inflation, and foreign-exchange translation as pressures. Pricing, cost reductions, and restructuring benefits partly offset these effects.
- 2020 outlook disclosed in the filing includes an estimated effective tax rate of 20%–21%, capital spending of $1.6–$1.8 billion, expected share repurchases of approximately $1.0 billion, and pension/postretirement contributions of $100–$200 million. The filing does not provide a clear 2020 sales or EPS guidance figure.
- 3M agreed to sell substantially all of its drug-delivery business for approximately $650 million, with closing expected in the first half of 2020 and an anticipated pre-tax gain of about $400 million. It completed the sale of its advanced ballistic-protection business in January 2020.
- PFAS-related litigation and regulatory exposure is a major contingency. Year-end accruals included $445 million for other environmental liabilities, $608 million for respirator mask/asbestos liabilities, and $50 million for Aearo-related claims. 3M said it could not estimate potential losses above established environmental and respirator accruals; outcomes could materially affect results or cash flows.
- Other disclosed risks include product-liability proceedings, a U.S. inquiry concerning PFAS compliance and discharges at facilities, an FCPA-related investigation involving China business activities, macroeconomic and trade conditions, currency, raw-material supply and prices, pension assumptions, and execution of acquisitions and the global ERP transformation.
Key investor verification points
- Track organic sales, orders, and inventory trends in Safety and Industrial and Transportation and Electronics, particularly in China, automotive, and electronics markets.
- Assess whether operating margins and adjusted earnings recover after restructuring, acquisition integration, and litigation effects; distinguish reported results from company-defined non-GAAP measures.
- Review PFAS and respirator litigation developments, regulatory proceedings, accrual adequacy, insurance recoveries, and cash-payment timing.
- Monitor leverage, refinancing needs, credit ratings, cash location, and the impact of Acelity financing on capital allocation and liquidity.
- Verify Acelity integration and purchase-accounting assumptions, and the timing and proceeds of the drug-delivery divestiture.
- Note the auditor’s unqualified opinions on the financial statements and internal control; management and the auditor excluded M*Modal and Acelity from the 2019 internal-control assessment because they were acquired during the year.