3M Company (MMM) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. 3M is a diversified global manufacturer reporting across Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer. The interim financial statements are unaudited; the auditor performed a review, not an audit.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $8.278 billion | $7.685 billion |
| Operating income | $1.007 billion | $1.742 billion |
| Operating margin | 12.2% | 22.7% |
| Net income attributable to 3M | $602 million | $1.323 billion |
| Diluted EPS | $0.98 | $2.16 |
| Operating cash flow | $143 million | $988 million |
| Free cash flow | $(161) million | $701 million |
Sales increased 7.7%: organic local-currency growth was 2.8%, acquisitions added 1.9%, currency translation added 4.2%, and divestitures reduced growth by 1.2%. All five business groups reported higher sales. Safety and Graphics led reported growth at 15.0%, including Scott Safety; Consumer operating income declined 2.4%.
Results included an $897 million pre-tax charge for resolving Minnesota’s natural-resource-damages lawsuit and a $217 million tax expense adjustment related to the 2017 Tax Cuts and Jobs Act (TCJA). Excluding those items, 3M reported operating income of $1.904 billion, a 23.0% operating margin, net income of $1.529 billion, and diluted EPS of $2.50, up 15.7%. The adjusted effective tax rate was 17.6%, versus 23.7% in Q1 2017. These are company-presented non-GAAP measures.
Balance sheet, liquidity and capital allocation
- At March 31, cash and cash equivalents were $3.491 billion; cash, equivalents and marketable securities totaled $4.122 billion.
- Total debt was $15.660 billion, up $1.711 billion from year-end 2017; net debt was $11.538 billion. Commercial paper outstanding rose to approximately $2.3 billion from $745 million.
- Current assets were $14.818 billion and current liabilities $8.959 billion; working capital was $5.859 billion, down $731 million from year-end.
- Operating cash flow fell primarily because of the Minnesota settlement, with higher receivables and inventory also using cash. Capital spending was $304 million. Free cash flow was negative after capital spending.
- 3M repurchased $937 million of stock and paid $810 million in dividends during the quarter. Management expected 2018 repurchases of $3 billion to $5 billion and capital spending of $1.5 billion to $1.8 billion.
- The $3.75 billion revolving credit facility was undrawn; the company reported an approximately 24:1 EBITDA-to-interest ratio against a 3:1 covenant minimum. Credit ratings were AA- from S&P and A1 from Moody’s, both with stable outlooks.
Outlook, notable items and risks
- Management estimated a 2018 effective tax rate of approximately 23% to 25%, subject to tax-law interpretation, remaining TCJA analysis, audit resolutions and income mix. The company had not completed its analysis of certain TCJA provisions.
- 3M expected global pension and postretirement contributions of $300 million to $500 million in 2018. It reported no required minimum U.S. pension contribution for the year.
- A planned sale of substantially all of the Communication Markets Division to Corning for $900 million was expected to close in 2018; 3M anticipated a pre-tax gain of approximately $500 million. Closing remained subject to customary conditions and approvals.
- The Minnesota settlement provides an $850 million grant to a state water-quality and sustainability fund; 3M recorded a total $897 million pre-tax charge, including legal fees and related obligations.
- Environmental and product-liability matters remain significant uncertainties. The company had a $598 million accrual for its respirator-mask/asbestos litigation and a $29 million Aearo-related accrual, while stating it could not estimate the amount by which liabilities might exceed these accruals. Numerous PFC-related claims and proceedings were also disclosed.
- After quarter-end, a Kentucky jury awarded approximately $2 million in compensatory damages and $63 million in punitive damages in a respirator case. 3M said it planned to appeal and believed liability was not probable and estimable.
- Other risks highlighted include global economic and currency conditions, competition and customer demand, raw-material availability and costs, acquisition integration, productivity execution, cybersecurity and ERP implementation, pension funding, and legal and regulatory outcomes.
Key facts for investors to verify
- Reconcile reported earnings and margins to the $897 million Minnesota charge and $217 million TCJA adjustment; assess the company’s non-GAAP exclusions.
- Track operating cash flow, working-capital investment and cash generation after capital spending.
- Monitor commercial-paper balances, total and net debt, and planned buybacks and dividends.
- Review the timing and final terms of the Corning divestiture and the expected gain.
- Follow developments in PFC/environmental and product-liability cases, including the respirator verdict and appeal, and assess potential exposure beyond recorded accruals.
- Assess whether the projected tax rate, capital spending and pension contribution ranges remain consistent with subsequent disclosures.