3M Company — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. 3M is a diversified global manufacturer operating across six business segments. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q2 2010 | Q2 2009 | H1 2010 | H1 2009 |
|---|---|---|---|---|
| Net sales | $6.731B | $5.719B | $13.079B | $10.808B |
| Operating income | $1.596B | $1.191B | $3.041B | $1.994B |
| Operating margin | 23.7% | 20.8% | 23.2% | 18.4% |
| Net income attributable to 3M | $1.121B | $783M | $2.051B | $1.301B |
| Diluted EPS | $1.54 | $1.12 | $2.83 | $1.86 |
| Operating cash flow | Not separately reported | Not separately reported | $2.220B | $2.161B |
- Q2 sales rose 17.7%, driven by 17.8% organic volume growth; price reduced growth by 0.6 percentage points and acquisitions added 0.7 points. Sales increased across all segments and geographic regions.
- All six segments reported sales growth in Q2. Largest reported increases were Electro and Communications (+31.8%), Display and Graphics (+29.5%), and Industrial and Transportation (+23.3%). Health Care had the highest segment operating margin at 30.9%.
- H1 operating cash flow increased $59M year over year. Higher earnings were partly offset by a $920M year-on-year working-capital increase, including higher receivables and inventories. H1 capital expenditures were $337M.
- At June 30, cash and marketable securities totaled $5.537B against total debt of $5.677B, leaving net debt of $140M, versus $1.101B at year-end 2009. Debt was 28% of total capital, compared with 30% at year-end.
- Working capital was $7.454B, up $1.556B from year-end, primarily due to increased short-term marketable securities. Current liabilities were $5.437B; the filing reports no outstanding commercial paper.
Changes, outlook, and management commentary
- Results improved substantially from the recession-affected 2009 comparison. Prior-year restructuring charges were $116M in Q2 and $183M in H1; the Q2 2009 comparison also included a $15M property-sale gain. Management attributed margin improvement to volume, factory utilization, and savings from earlier restructuring.
- Management expects solid organic sales-volume growth in excess of economic growth, while noting tougher year-over-year comparisons in H2 2010. The filing does not provide a specific full-year sales or EPS forecast.
- Management expects the 2010 effective tax rate to be 29.5% or less and capital expenditures of approximately $1B. Expected 2010 pension and postretirement contributions are $500M–$700M; contribution levels may vary.
- A one-time, non-cash $84M tax charge, or $0.11 per diluted share, was recorded in Q1 following U.S. health-care legislation affecting the tax treatment of Medicare Part D subsidies. H1 effective tax rate was 29.1%; Q2 was 26.6%.
- 3M resumed significant share repurchases in Q2; approximately $2.2B remained under its authorization at June 30. The quarterly dividend was raised 2.9% to $0.525 per share.
- Venezuela’s high-inflation accounting change and exchange controls are expected to reduce the subsidiary’s 2010 sales by about two-thirds versus 2009 (using year-end 2009 exchange rates); management said the impact on consolidated operating income is not expected to be material.
Risks, contingencies, and unusual items
- Key risks include global economic conditions, foreign exchange, competition and pricing, raw-material and energy availability and costs, product acceptance, acquisitions, productivity execution, and litigation or regulatory outcomes. A downgrade from current S&P AA- or Moody’s Aa2 ratings could raise funding costs and affect market access.
- Legal matters include a French competition investigation and a continuing U.S. DOJ/SEC-cooperating internal investigation into allegations involving a Turkish subsidiary. 3M said it could not predict the outcomes.
- At June 30, the company reported 2,278 individual claimants in respirator/mask litigation. Recorded respirator/mask/asbestos liabilities were $127M, with $118M of related insurance receivables. Environmental remediation liabilities were $28M with $15M of insurance receivables; other environmental liabilities were $108M. The company cautioned that estimates and recoveries may change.
- For a New Jersey Passaic River cleanup contribution claim, proposed total cleanup costs could exceed $1B; 3M could not estimate its exposure, but believed any allocable share was likely to be a fraction of 1%. Environmental matters also include perfluorinated-compound remediation and regulatory activity.
- $7M of auction-rate securities remained illiquid after failed auctions; those holdings were less than 1% of the marketable-securities portfolio. The company also identified possible downside in pension-plan investments tied to WG Trading Company, but said it did not expect a material adverse effect on consolidated financial position.
Investor verification priorities
- Verify the sustainability of organic volume growth and margins as 2009 comparisons become more demanding, and assess the effect of pricing and raw-material cost trends.
- Track working-capital absorption, especially receivables and inventory, against the reported sales rebound and planned capital spending.
- Review the basis for the 2010 tax-rate outlook, including the $84M one-time charge, international tax benefits, and unresolved tax examinations.
- Monitor pension funding needs and the range of expected contributions, as well as the liquidity and valuation of investments and securities.
- Follow developments in the Turkish compliance investigation, environmental proceedings, and respirator litigation and related insurance recoveries.
- Confirm that acquisition integration, share repurchases, dividends, and planned capital investment remain consistent with the company’s stated liquidity and growth priorities.