3M Company — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; financial comparisons are against the corresponding 2013 periods. 3M is a diversified global manufacturer with five reporting segments: Industrial, Safety and Graphics, Electronics and Energy, Health Care, and Consumer. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $8.137 billion | $7.916 billion | $24.102 billion | $23.302 billion |
| Operating income | $1.901 billion | $1.739 billion | $5.473 billion | $5.087 billion |
| Operating margin | 23.4% | 22.0% | 22.7% | 21.8% |
| Net income attributable to 3M | $1.303 billion | $1.230 billion | $3.777 billion | $3.556 billion |
| Diluted EPS | $1.98 | $1.78 | $5.67 | $5.10 |
| Effective tax rate | 30.3% | 27.4% | 29.1% | 28.0% |
- Q3 sales increased 2.8%; organic local-currency sales grew 3.9% (volume +3.2%, pricing +0.7%). Currency translation reduced sales 1.2%. For the first nine months, sales grew 3.4%, with organic local-currency growth of 4.5%.
- All five segments achieved organic local-currency sales growth in Q3. Health Care led at 5.4%, followed by Electronics and Energy at 4.3%, Industrial at 4.2%, and Safety and Graphics and Consumer at 3.1% each. Electronics and Energy had the largest Q3 operating-income growth rate (12.5%); Health Care margin declined year over year.
- Q3 margin improvement reflected pricing and lower raw-material costs, lower benefit costs, volume leverage, and productivity, partly offset by strategic investments. For the first nine months, R&D expense was 5.5% of sales, unchanged from 2013.
- Nine-month operating cash flow was $4.443 billion, versus $3.824 billion; free cash flow, defined by 3M as operating cash flow less capital expenditures, was $3.440 billion, versus $2.702 billion. Capital expenditures were $1.003 billion.
Financial position and capital allocation
- At September 30, cash and cash equivalents were $1.929 billion and marketable securities totaled $1.872 billion. Current assets were $12.681 billion and current liabilities $7.705 billion; working capital was $4.976 billion.
- Total debt was $7.344 billion, up from $6.009 billion at year-end 2013; net debt was $3.543 billion, versus $1.219 billion. Debt was 31% of total capital, compared with 25% at year-end. Commercial paper outstanding was $1.905 billion.
- 3M reported $4.443 billion of nine-month operating cash flow and used $4.373 billion for share repurchases and $1.672 billion for dividends. The board’s $12 billion repurchase authorization had approximately $7.9 billion remaining at quarter-end.
- 3M acquired the remaining 25% interest in Sumitomo 3M Limited for approximately $865 million, bringing its ownership to 100%. Management estimated the transaction would add about $0.08 per diluted share during the first 12 months after closing. The Treo Solutions acquisition cost $94 million net of cash acquired.
Outlook, commentary, and material risks
- Management expected 2014 capital spending of approximately $1.5–$1.6 billion, global pension and postretirement contributions of about $200 million, and share repurchases of $5.5–$6.0 billion. It expected to add $2–$4 billion of leverage versus year-end 2013 and said it was tracking near the midpoint at September 30.
- Management estimated a 2014 effective tax rate of 28.5%–29.0%. The filing discusses the U.S. research and development tax credit in connection with this estimate, but its stated assumptions are not fully consistent: one passage refers to reinstatement, while another says the high end assumes the credit lapses.
- Moody’s affirmed 3M’s Aa2 rating but changed its outlook to negative; S&P’s rating was AA- with a stable outlook. Management cited the potential effect of additional leverage on credit ratings. The $2.25 billion revolving credit facility was undrawn, and the disclosed covenant ratio was approximately 59:1 against a 3:1 minimum.
- Q3 currency effects, including hedging, reduced net income attributable to 3M by an estimated $10 million; the nine-month impact was an estimated $64 million reduction. Foreign-exchange movements also produced a $603 million Q3 cumulative translation loss in other comprehensive income.
- Legal and environmental exposures include respirator-mask/asbestos claims (about 2,230 claimants; $175 million recorded liability and $41 million insurance receivable), PFC-related environmental matters, and other proceedings. The company said it could not estimate potential excess losses for certain matters. In the TransWeb patent/antitrust case, a judgment of approximately $26 million was entered; 3M appealed. An expert in the EDF matter reported alleged damages exceeding €100 million, but liability and damages remain for the court to determine.
- Other risks identified include global economic conditions, competition and pricing, foreign exchange, raw-material availability and costs, execution of acquisitions and productivity initiatives, ERP and cybersecurity risks, and legal or regulatory developments. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether reported organic growth, margin gains, and cash generation continue, particularly amid currency headwinds and weaker performance in selected businesses and regions.
- The 2014 tax-rate assumption and the status of the U.S. research and development tax credit.
- Debt and net-debt trajectory, credit-rating outlooks, and planned repurchases relative to cash generation and investment needs.
- Developments in asbestos, PFC/environmental, TransWeb, and EDF matters, including potential losses beyond recorded accruals and insurance recoveries.
- Whether the expected benefits from the Sumitomo ownership change, Treo integration, strategic investments, and ERP implementation are realized.