3M Company — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2009. 3M is a diversified global manufacturer operating in six business segments. Comparisons below are with the corresponding 2008 period unless noted. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Net sales | $5.719 billion | $6.739 billion | $10.808 billion | $13.202 billion |
| Operating income | $1.191 billion | $1.449 billion | $1.994 billion | $2.950 billion |
| Operating margin | 20.8% | 21.5% | 18.4% | 22.3% |
| Net income attributable to 3M | $783 million | $945 million | $1.301 billion | $1.933 billion |
| Diluted EPS | $1.12 | $1.33 | $1.86 | $2.70 |
| Effective tax rate | 30.8% | 32.0% | 30.5% | 31.9% |
- Q2 sales declined 15.1%; management attributed the decline to a 13.5% fall in organic volume and a 5.5 percentage-point foreign-exchange headwind, partly offset by 1.9% higher pricing and 2.2 percentage points from acquisitions. Organic volume decline improved from 19.5% in Q1. Sales rose 12.4% sequentially from Q1.
- Q2 cost of sales was 52.1% of sales, unchanged year over year. For the first half it was 53.2%, up 1.3 percentage points. The first-half operating margin fell 3.9 percentage points.
- First-half operating cash flow was $2.161 billion, down $79 million. Capital expenditures were $454 million; management expected about $900 million for full-year 2009. Cash and cash equivalents ended June at $2.596 billion.
- At June 30, total debt was $6.080 billion, cash plus marketable securities was $3.281 billion, and net debt was $2.799 billion. Debt-to-total-capital was 35%, versus 39% at year-end 2008. Working capital was $4.580 billion.
- First-half dividends paid were $709 million. The quarterly dividend had been increased 2% to $0.51 per share. Share repurchases were largely suspended; approximately $2.6 billion remained authorized.
Q2 segment performance
| Segment | Sales 2009 | Sales 2008 | Operating income 2009 | Operating income 2008 |
|---|---|---|---|---|
| Industrial and Transportation | $1.726 billion | $2.178 billion | $285 million | $427 million |
| Health Care | $1.065 billion | $1.120 billion | $329 million | $310 million |
| Consumer and Office | $866 million | $939 million | $197 million | $187 million |
| Safety, Security and Protection Services | $794 million | $979 million | $183 million | $186 million |
| Display and Graphics | $808 million | $849 million | $183 million | $185 million |
| Electro and Communications | $551 million | $760 million | $67 million | $153 million |
Health Care and Consumer and Office increased Q2 operating income despite lower sales. Industrial and Transportation and Electro and Communications had the sharpest operating-income declines. Segment structure and reporting measures changed in Q1 2009; prior periods were recast, including dual credit for certain U.S. sales.
Material changes, outlook and risks
- Restructuring: Q2 restructuring charges were $116 million pre-tax ($69 million reduction in 3M-attributable net income, or $0.09 per diluted share); first-half charges were $183 million pre-tax ($114 million after tax, or $0.16 per diluted share). Actions included approximately 900 permanent position reductions in Q2 and about 700 U.S. voluntary early retirements. Together with Q1 actions, management expected approximately $100 million of savings in second-half 2009 and a further $120 million in 2010. Some additional, smaller Q3 actions were possible.
- Management outlook: Management said many industries appeared at or near a bottom, expected inventory reductions to wane in the second half, and believed 3M’s growth could equal or exceed industrial production. These are expectations, not formal numerical sales or earnings guidance. Respirator demand related to H1N1 produced backorders extending beyond year-end; 3M approved added capacity investment.
- Special items and asset risk: Q2 included a $15 million pre-tax gain from selling a New Jersey roofing granule facility. The loss of the UK passport production contract after October 2010 led to a $13 million non-cash impairment and accelerated depreciation/amortization; 3M reported no related goodwill impairment at June 30 and continued to monitor the assets and approximately $200 million of division goodwill.
- Pensions and liquidity: 3M expected about $800 million of pension and postretirement contributions in the second half of 2009, including an intended $600 million contribution in 3M shares to U.S. pension plans. The U.S. contribution was discretionary and could vary with funding status and tax deductibility. The company cited continuing access to capital markets, AA- / Aa2 ratings with stable outlooks, and a 25-to-1 EBITDA-to-interest ratio against a 3-to-1 covenant minimum.
- Legal and environmental matters: Recorded balances included $131 million of respirator/asbestos liabilities and $173 million of related insurance receivables, $31 million of environmental remediation liabilities, and $130 million of other environmental liabilities. The company stated it could not reliably estimate potential excess over certain reserves or losses in several proceedings. A New Jersey Passaic River contribution claim concerns a cleanup whose total costs could exceed $1 billion; 3M said its share, if any, was likely to be a fraction of 1% but could not yet be estimated. Other material matters include age-discrimination litigation and PFC-related regulatory and legal issues. A Washington County, Minnesota, jury found for 3M in June in a PFC-related case.
- Other exposure: Marketable securities totaled $685 million. Auction-rate securities were valued at $4 million and remained illiquid following failed auctions; gross unrealized losses across marketable securities were approximately $20 million pre-tax. Management estimated currency effects reduced attributable net income by about $80 million in Q2 and $100 million in the first half.
Important facts for investors to verify
- Whether sequential sales and organic-volume improvement continued, and whether management’s second-half demand and industrial-production expectations were realized.
- Whether restructuring savings were achieved without undermining sales, margins, or operating capacity; track actual cash costs and employment changes.
- Whether planned pension contributions, particularly the intended stock contribution, changed with plan funding conditions.
- Developments in the UK passport contract transition, associated asset charges, and respiratory-product backorders and capacity investment.
- Changes in legal and environmental reserves, insurance recoveries, and unquantified potential exposures, including the Passaic River matter.
- Cash generation, debt maturities and liquidity access, as well as the valuation and liquidity of auction-rate and other investment securities.