3M Company — 2013 Form 10-K Summary
Business context and reporting period
3M is a diversified global technology and manufacturing company operating in Industrial; Safety and Graphics; Electronics and Energy; Health Care; and Consumer. This filing covers the fiscal year ended December 31, 2013, including fourth-quarter results. International operations generated 63.9% of annual sales. The company realigned its business segments and geographic reporting in 2013; comparative information reflects the revised structure.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $30.871 billion | $29.904 billion |
| Net income attributable to 3M | $4.659 billion | $4.444 billion |
| Diluted EPS | $6.72 | $6.32 |
| Operating income | $6.666 billion | $6.483 billion |
| Operating margin | 21.6% | 21.7% |
| Operating cash flow | $5.817 billion | $5.300 billion |
| Free cash flow (company-defined, non-GAAP) | $4.152 billion | $3.816 billion |
| Total debt | $6.009 billion | $6.001 billion |
| Cash, cash equivalents and marketable securities | $4.790 billion | $5.693 billion |
Fourth-quarter sales were $7.569 billion, up 2.4%; net income attributable to 3M was $1.103 billion and diluted EPS was $1.62, versus $991 million and $1.41 in fourth-quarter 2012. Annual sales rose 3.2%; organic local-currency growth was 3.4% (volume +2.5%, price +0.9%), acquisitions contributed 1.4%, and currency translation reduced sales 1.6%. Gross margin, calculated from reported sales and cost of sales, was approximately 47.9%, versus 47.6%.
Net debt, defined by 3M as debt less cash and marketable securities, increased to $1.219 billion from $308 million. Working capital declined to $5.235 billion from $7.430 billion. The debt-to-total-capital ratio was 25%; credit ratings were AA- from S&P and Aa2 from Moody’s, both with stable outlooks. The $1.5 billion revolving credit facility was undrawn, and the company reported a covenant EBITDA-to-interest ratio of approximately 55:1.
Material changes versus prior year
- Sales growth accelerated from 1.0% in 2012 to 3.2% in 2013, while organic local-currency growth increased from 2.6% to 3.4%.
- Net income increased 4.8%, and diluted EPS rose 6.3%, helped by a lower tax rate and a 1.4% reduction in diluted weighted-average shares. Operating margin edged down 0.1 percentage point.
- Operating cash flow rose $517 million, primarily reflecting lower pension contributions and higher net income; higher working-capital needs partly offset the improvement.
- Segment sales grew in Industrial (6.5%), Health Care (3.8%), Safety and Graphics (3.4%), and Consumer (1.1%); Electronics and Energy declined 1.2%. Electronics and Energy operating income fell 7.0%, and its margin declined to 17.7% from 18.8%.
- Share repurchases rose to $5.212 billion from $2.204 billion. 3M paid $1.730 billion in dividends. The 2013 declared dividend total of $3.395 per share includes $0.855 declared in December for payment in March 2014.
Outlook, commentary, risks and unusual items
- For 2014, management expected capital spending of $1.7–$1.8 billion, gross share repurchases of $3–$5 billion, pension and postretirement contributions of $100–$200 million, and an effective tax rate of approximately 28%–29%. It also anticipated $2–$4 billion of added leverage. The filing does not provide a clear 2014 sales or EPS forecast.
- Management expected 2014 defined-benefit pension and postretirement expense to decrease approximately $160 million pre-tax versus 2013. Worldwide plans were 94% funded at year-end; the primary U.S. qualified plan was 103% funded.
- Margin pressures included lower factory utilization/productivity, ERP and business-transformation spending, increased R&D investment, acquisition impacts, the U.S. medical-device excise tax, and currency. These were substantially offset by selling-price increases, lower raw-material costs, and reduced pension costs. Raw-material costs were approximately 2% favorable year over year.
- Key exposures include global economic conditions, competition and product acceptance, foreign exchange, raw-material availability and prices, execution of acquisitions and the worldwide ERP rollout, cybersecurity, pension assumptions, and legal, regulatory and environmental matters. 3M noted that multi-layer optical-film patents began expiring at the end of 2013, potentially increasing competition.
- Contingencies include respirator-mask/asbestos claims (about 2,200 claimants; $152 million accrued liabilities and $58 million insurance receivables, including Aearo-related amounts), environmental remediation and PFC-related matters, and other litigation. The company said some potential losses cannot currently be estimated; adverse developments could cause additional charges. A TransWeb patent/antitrust case had an adverse jury verdict, with court rulings and potential appeal pending. The Minnesota PFC natural-resources case also remained unresolved.
- Other notable items: no acquisitions closed in 2013; 3M sold its Scientific Anglers and Ross Reels businesses. A non-strategic equity-investment sale generated an $18 million pre-tax gain. No goodwill impairment was recorded. The annual audit opinion was unqualified, and management and the auditor concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether organic growth and segment profitability—particularly the recovery or continued weakness in Electronics and Energy—are sustained.
- Whether planned 2014 repurchases, added leverage and dividend commitments remain supported by cash generation and liquidity.
- How ERP/business-transformation spending, factory utilization, raw-material pricing and the medical-device tax affect margins.
- Developments in PFC/environmental matters, respirator litigation and other contingencies, including changes to accruals and expected insurance recoveries.
- Whether 2014 pension assumptions, funding status and the expected expense reduction are realized.