3M Company (MMM) — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; filed February 16, 2010. The filing also reports fourth-quarter results. 3M is a diversified global manufacturer operating in six segments, with approximately 63% of sales outside the United States. Segment realignments and changes to U.S. performance reporting took effect in 2009; comparative segment data were recast.
Financial performance
| Metric | FY 2009 | FY 2008 | Change / context |
|---|---|---|---|
| Net sales | $23.123 billion | $25.269 billion | Down 8.5%; organic volume down 9.5%, pricing up 1.8%, acquisitions added 2.1%, translation reduced sales 2.8% |
| Operating income | $4.814 billion | $5.218 billion | Down 7.7%; operating margin 20.8%, versus 20.6% |
| Net income attributable to 3M | $3.193 billion | $3.460 billion | Down 7.7% |
| Diluted EPS | $4.52 | $4.89 | Down 7.6% |
| Operating cash flow | $4.941 billion | $4.533 billion | Up $408 million |
| Capital expenditures | $903 million | $1.471 billion | Reduced in response to economic conditions |
| Total debt / net debt | $5.710 billion / $1.101 billion | $6.718 billion / $4.144 billion | Cash, equivalents and marketable securities totaled $4.609 billion at year-end 2009 |
| Working capital | $5.898 billion | $3.759 billion | Improved year over year |
Fourth-quarter sales were $6.122 billion, up 11.1% from $5.509 billion. Net income attributable to 3M was $935 million, or $1.30 diluted EPS, versus $536 million, or $0.77, in Q4 2008. Sales improved year over year in all segments and major geographic areas. The comparison is affected by the severe downturn in late 2008 and by prior-year restructuring and other charges.
FY 2009 segment results were mixed: Health Care sales were nearly flat and operating income rose 14.9%; Consumer and Office operating income rose 9.5%; Safety, Security and Protection Services operating income rose 5.0%. Industrial and Transportation sales fell 12.9% and operating income 20.0%; Electro and Communications sales fell 19.7% and operating income 40.4%. Display and Graphics sales fell 4.2%, while operating income edged up 1.3%.
Other key metrics: the effective tax rate was 30.0%, compared with 31.1%; dividends paid were $2.04 per share, versus $2.00. Research, development and related expense was $1.293 billion, versus $1.404 billion. Debt was 30% of total capital at year-end, compared with 39% in 2008. The company reported AA- and Aa2 credit ratings, both with stable outlooks.
Material changes and unusual items
- Management attributed the annual sales decline to the global recession, end-market contraction and customer inventory reductions. Year-over-year sales comparisons strengthened through 2009: declines in Q1–Q3 were followed by 11.1% growth in Q4.
- Restructuring charges were $209 million pre-tax, partly offset by a $15 million real-estate gain; the net operating-income impact was a $194 million reduction. Special items reduced 2009 net income attributable to 3M by $119 million, or $0.17 per diluted share. In 2008, special items reduced it by $194 million, or $0.28 per diluted share.
- Restructuring and exit actions since early 2008 reduced employment by approximately 6,400 positions. 3M reported nearly $400 million of 2009 savings from restructuring and expected more than $150 million of additional incremental savings in 2010. A change to the banked-vacation policy added more than $100 million to 2009 operating income, with a slightly smaller benefit expected in 2010.
- 3M contributed $600 million of its own shares to its U.S. pension plan in 2009; this was a non-cash financing activity. Worldwide pension plans were approximately 90% funded at year-end.
- 3M changed the Venezuelan subsidiary’s translation rate at year-end, reducing accumulated other comprehensive income by approximately $55 million. Beginning in 2010, hyperinflationary accounting is expected to reduce that subsidiary’s sales by about two-thirds, using year-end 2009 exchange rates; management did not expect a material effect on consolidated operating income.
Outlook, risks and contingencies
Management emphasized growth acceleration, continued investment in innovation, productivity and cost discipline. It expected 2010 capital spending of approximately $1 billion and cash contributions of $500–$700 million to global pension plans. Pension and postretirement benefit expense was expected to increase by approximately $130 million pre-tax, or $0.12 per diluted share, versus 2009. The filing does not provide a clear quantified forecast for 2010 revenue or earnings.
- Key business risks include economic and capital-market conditions, competition and pricing, customer preferences and ordering patterns, foreign-exchange movements, new-product acceptance, raw-material availability and cost, and execution of acquisitions, restructuring and productivity plans.
- Optical-film patents begin to expire in coming years, potentially increasing competition. 3M also disclosed that the UK government awarded passport production to a competitor when its contract expires in October 2010.
- Legal matters include respirator/asbestos claims, environmental remediation and PFC-related matters, employment litigation, a French competition investigation and a Turkish subsidiary investigation involving alleged bid rigging and bribery. 3M said it voluntarily disclosed the Turkish matter to the DOJ and SEC and could not predict the outcome.
- At year-end, recorded respirator mask/asbestos liabilities were $138 million, with $143 million of related insurance receivables; environmental remediation liabilities were $31 million, with $15 million of related insurance receivables; and other environmental liabilities were $117 million. Management cautioned that estimates may change and that excess exposure could not be reliably quantified.
- More than 250 companies, including 3M, were named in a Passaic River cleanup contribution action. The total costs at issue could exceed $1 billion; 3M could not estimate its exposure and believed any allocable share would likely be a fraction of 1%.
- 3M reported no goodwill impairment. It recorded a $13 million non-cash impairment of assets tied to UK passport production. It also disclosed $5 million of illiquid auction-rate securities whose auctions had failed, with an $8 million pre-tax unrealized loss in accumulated other comprehensive income.
Most important facts for investors to verify
- Whether the Q4 sales rebound continued and translated into sustainable organic volume growth, rather than reflecting easier comparisons or inventory restocking.
- Whether restructuring savings and lower costs can offset weak demand without relying on the banked-vacation policy benefit or further reducing investment.
- Progress and cash requirements for pension funding, including the expected $500–$700 million 2010 contribution and higher benefit expense.
- Developments in significant litigation and investigations, environmental liabilities, and recoverability of related insurance receivables.
- Exposure to optical-film competition, the UK passport contract loss and currency effects, including Venezuela’s 2010 accounting change.
Reporting assurance: PricewaterhouseCoopers issued an unqualified opinion on the consolidated financial statements and on the effectiveness of internal control over financial reporting as of December 31, 2009.