3M Company — Q1 2013 Form 10-Q
Business context and period: Diversified global manufacturer reporting the unaudited quarter ended March 31, 2013, compared with Q1 2012. 3M reorganized its segments and geographic reporting during the quarter; comparative segment data is presented on the new basis.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Net sales | $7.634 billion | $7.486 billion; up 2.0% |
| Operating income / margin | $1.646 billion / 21.6% | $1.634 billion / 21.8% |
| Net income attributable to 3M | $1.129 billion | $1.125 billion |
| Diluted EPS | $1.61 | $1.59 |
| Operating cash flow | $994 million | $828 million |
| Free cash flow (company-defined, non-GAAP) | $670 million | $567 million |
| Cash, cash equivalents and marketable securities | $5.828 billion | $5.693 billion at Dec. 31, 2012 |
| Total debt / net debt | $5.936 billion / $108 million | $6.001 billion / $308 million at Dec. 31, 2012 |
| Working capital | $7.918 billion | $7.430 billion at Dec. 31, 2012 |
- Organic local-currency sales grew 2.1%: volume contributed 1.7% and pricing 0.4%. Acquisitions added 1.7%; currency translation reduced sales 1.8%.
- Operating margin declined 0.2 percentage points. Pricing and raw-material deflation, lower benefit costs and organic volume helped; reduced factory utilization, acquired-business mix and other items more than offset those benefits.
- Cash flow from operations rose $166 million year over year, mainly reflecting $269 million lower pension and postretirement contributions, partly offset by higher tax payments. Working capital used cash in both periods.
- Debt was 24% of total capital, down from 25% at year-end. 3M reported $2.928 billion cash and $2.900 billion marketable securities; its $1.5 billion revolving facility was undrawn. The company reported no commercial paper outstanding.
Material changes and segment performance
- Health Care, Consumer, Industrial, and Safety and Graphics recorded organic local-currency growth of 4.0%, 3.7%, 2.9%, and 2.3%, respectively. Electronics and Energy declined 2.2%, primarily from weak consumer-electronics demand and customer inventory reductions.
- Electronics and Energy operating income fell 16.3% to $196 million; its margin dropped to 15.3% from 17.7%, mainly due to lower factory utilization and volumes. Industrial income declined 2.6% to $576 million, including acquisition and utilization pressures.
- Q1 operating income benefited from a $64 million year-over-year reduction in Corporate and Unallocated expenses, about half related to lower pension and postretirement costs; ERP implementation costs also shifted toward business segments.
- There were no business combinations closed in Q1. The Ceradyne and Federal Signal Technologies acquisitions contributed to sales and affected margins.
- Other comprehensive income included a $398 million after-tax cumulative translation loss, versus a $134 million gain in Q1 2012; this reduced comprehensive income attributable to 3M to $878 million from $1.365 billion.
Outlook, risks and contingencies
- Management expected 2013 sales growth and related incremental income, together with other benefits, to more than offset identified earnings headwinds; the filing does not provide a specific full-year sales-growth or EPS target.
- Management forecast a 2013 effective tax rate of approximately 29.5%–30.0%, currency effects reducing full-year sales by approximately 1.5% based on March 31 rates, pension and postretirement expense about $100 million lower pre-tax year over year, and pension/postretirement contributions of $400–$600 million.
- Expected 2013 capital spending was $1.6–$1.8 billion. The board authorized up to $7.5 billion in share repurchases with no set expiration; approximately $6.9 billion remained available at quarter-end. The quarterly dividend was raised 7.6% to $0.635 per share.
- Key business risks include uneven global demand, currency movements, competitive pricing and customer preferences, input costs and supply disruptions, acquisition integration, product development, and execution and security risks from the phased worldwide ERP rollout. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- Legal and environmental matters include respirator/asbestos claims (about 2,095 claimants; $160 million liability and $80 million insurance receivable, including Aearo-related balances), PFC-related environmental matters, and an adverse 2012 TransWeb jury verdict with damages and final judgment still pending. 3M also faces Meda litigation seeking more than $300 million; the court’s decision was expected in 2013. The filing says some potential losses cannot be reasonably estimated beyond recorded accruals.
- Other notable exposures include a pending IRS Tax Court petition relating to 2006 and ongoing tax examinations. The filing reports $198 million of unrecognized tax benefits that would affect the effective tax rate if recognized.
Important facts for investors to verify
- Whether weak electronics demand, customer destocking and lower factory utilization continued beyond Q1, and the resulting effects on Electronics and Energy margins.
- How much of reported sales growth and future earnings depends on acquisitions, foreign-exchange movements, pricing and raw-material costs.
- Progress toward management’s 2013 tax-rate, currency, pension, capital-spending and contribution expectations; these are forecasts, not guaranteed outcomes.
- Developments in major litigation and environmental matters, including TransWeb, Meda, respirator/asbestos claims, PFC remediation and the realization of insurance recoveries.
- Capital allocation and liquidity: execution of the buyback authorization, dividend payments, cash held internationally, and the timing of the $850 million principal amount of notes due in August 2013.
The independent accountant performed an interim review, not an audit, and reported no material modifications required for the interim statements.