3M CO annual report, FY2015

3M Company — 2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015; filed February 11, 2016. 3M is a global diversified technology and manufacturing company with five segments: Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer. About 60% of sales came from outside the United States.

Financial performance

Metric	2015	2014
Net sales	$30.274 billion	$31.821 billion
Operating income	$6.946 billion; 22.9% margin	$7.135 billion; 22.4% margin
Net income attributable to 3M	$4.833 billion	$4.956 billion
Diluted EPS	$7.58	$7.49
Operating cash flow	$6.420 billion	$6.626 billion
Free cash flow	$4.959 billion	$5.133 billion
Capital expenditures	$1.461 billion	$1.493 billion

Full-year sales declined 4.9%, primarily due to a 6.8% adverse foreign-currency translation effect. Organic local-currency sales grew 1.3%: volume contributed 0.2% and price 1.1%; acquisitions added 0.8% and divestitures reduced sales 0.2%.
Net income fell about 2.5%, while diluted EPS rose 1.2%, helped by a 3.7% reduction in weighted-average diluted shares to 637.2 million. Currency effects reduced EPS by about $0.43; restructuring reduced it by $0.14.
Operating margin improved 0.5 percentage points, chiefly from higher selling prices and lower raw-material costs; higher pension costs, strategic investments, acquisitions and restructuring partly offset the benefit. Cost of sales improved to 50.9% of sales from 51.7%.
2015 fourth-quarter sales were $7.298 billion, down 5.4% year over year; net income was $1.038 billion and diluted EPS $1.66, versus $1.179 billion and $1.81. Organic local-currency sales fell 1.1%; foreign exchange reduced sales 5.8%. Operating margin was 20.5%, versus 21.5%, with restructuring charges reducing the margin by 1.6 percentage points.
Annual organic local-currency sales grew in Health Care (3.7%), Consumer (3.4%), Safety and Graphics (2.4%), and Industrial (0.7%); Electronics and Energy declined 1.9%. Electronics and Energy was the weakest segment, while Health Care had the highest segment operating margin at 31.8%.
R&D and related expenses were $1.763 billion, or 5.8% of sales. 3M reported $6.4 billion of operating cash flow and free-cash-flow conversion of 103%.

Balance sheet, liquidity and capital allocation

At year-end, total debt was $10.797 billion, cash, cash equivalents and marketable securities were $1.925 billion, and net debt was $8.872 billion. Debt-to-total-capital increased to 48% from 34% in 2014.
Working capital fell to $3.868 billion from $6.339 billion, driven by lower marketable securities and higher short-term debt. The company cited ongoing cash generation and capital-market access as supporting liquidity. Its $2.25 billion revolving credit facility was undrawn; the reported covenant ratio was approximately 56:1 against a 3:1 minimum.
3M repurchased $5.238 billion of stock and paid $2.561 billion in dividends in 2015. In February 2016, it authorized a new $10 billion repurchase program and said it expected $4–$6 billion of gross repurchases in 2016. The board declared a first-quarter 2016 dividend of $1.11 per share, an 8% increase.
2016 capital spending was expected to be approximately $1.3–$1.5 billion. 3M expected global pension and postretirement contributions of $100–$200 million in 2016.

Material changes, outlook and unusual items

Fourth-quarter restructuring actions affected approximately 1,700 positions and generated a $114 million pretax charge ($88 million after tax; $0.14 per diluted share). Remaining activities were expected to be completed in 2016.
2015 acquisitions included Capital Safety and Polypore Separations Media, with combined net cash acquisition outlays reflected in investing cash flow of $2.914 billion. These acquisitions added fall-protection and filtration capabilities. 3M also acquired Ivera Medical. 2015 divestitures included its static-control business and portions of its library systems and French license-plate businesses.
Management expected a 2016 effective tax rate of approximately 29.5%–30.5%. It forecast a roughly $320 million pretax decrease in 2016 defined-benefit pension and postretirement expense versus 2015, including a $180 million reduction associated with a revised cost-estimation method. The 2016 U.S. 401(k) match was reduced; the company estimated a $35 million reduction in defined-contribution pension expense.
Management emphasized investment in organic growth, R&D, commercialization, productivity and a multi-year global ERP/business-transformation program. No overall 2016 sales or EPS guidance is provided in the supplied filing text.
Goodwill was $9.249 billion after acquisitions; the 2015 annual impairment test identified no goodwill impairment. The Capital Safety and Polypore purchase-price allocations remained preliminary.

Risks, contingencies and reporting

Key risks include global economic weakness, currency movements, competitive pricing and customer demand, product-development execution, raw-material availability, acquisition integration, ERP and cybersecurity risks, pension-market sensitivity, and legal, regulatory and environmental proceedings. 3M’s AA- S&P rating had a stable outlook; Moody’s Aa3 rating had a negative outlook.
Environmental liabilities were $78 million in aggregate ($43 million remediation and $35 million other environmental liabilities), with $26 million of related insurance receivables. The filing describes continuing PFC/PFOA/PFOS remediation and related litigation; some potential losses could not be estimated.
Respirator-mask/asbestos liabilities were accrued at $144 million, excluding $21 million of Aearo-related accruals; related insurance receivables were $39 million. 3M could not estimate the upper end of potential losses beyond the accruals.
Other notable proceedings included 122 Bair Hugger patient-warming lawsuits, for which no liability was recorded because loss was not considered probable and estimable; French EDF litigation involving an expert’s estimate of damages exceeding €100 million, which was not a final liability finding; and a TransWeb patent/antitrust judgment of approximately $26 million, affirmed on appeal in February 2016 and described as immaterial to 3M’s consolidated results and financial condition.
The filing reports an unqualified audit opinion and effective internal control over financial reporting. The assessment excluded the two August 2015 acquisitions during their first year of integration.

Important facts for investors to verify

Whether organic sales and margins recover, particularly in Electronics and Energy, and how much reported growth remains obscured by foreign exchange.
Whether 2016 repurchases, dividends and acquisition spending are supported by operating cash flow as debt and leverage rise.
The progression and ultimate costs of PFC-related matters, asbestos claims, Bair Hugger litigation and other product-liability proceedings, including insurance recoveries.
Whether restructuring savings, ERP/productivity benefits and the forecast pension-cost reduction are realized, and whether the 2016 tax-rate expectation holds.
Final purchase-price allocations and integration performance for Capital Safety and Polypore, and the effect of acquisitions on segment returns and goodwill risk.