3M Company — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless stated otherwise. 3M is a diversified global manufacturer operating in six business segments. Segment results were recast for product transfers effective in Q1 2010, so the comparable segment figures reflect the new structure.
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net sales | $6.348 billion | $5.089 billion |
| Operating income | $1.445 billion | $803 million |
| Operating margin | 22.8% | 15.8% |
| Income before taxes | $1.403 billion | $759 million |
| Net income attributable to 3M | $930 million | $518 million |
| Diluted EPS | $1.29 | $0.74 |
| Operating cash flow | $1.082 billion | $695 million |
| Capital expenditures | $157 million | $244 million |
Sales rose 24.7%; organic sales volume increased 19.2%, while currency added 5.0 percentage points. Cost of sales fell to 51.0% of sales from 54.5%; SG&A fell to 20.8% from 23.4%, and R&D to 5.4% from 6.3%. Management attributed improved profitability to higher volume and factory utilization, prior restructuring savings, and productivity initiatives. EPS includes an $84 million non-cash tax charge, equal to $0.11 per diluted share.
Business segments
| Segment | Sales | Sales growth | Operating income | Operating margin |
|---|---|---|---|---|
| Industrial and Transportation | $2.073 billion | 29.3% | $454 million | 21.9% |
| Health Care | $1.117 billion | 12.0% | $347 million | 31.1% |
| Consumer and Office | $912 million | 14.7% | $219 million | 24.0% |
| Display and Graphics | $869 million | 42.4% | $212 million | 24.3% |
| Safety, Security and Protection Services | $809 million | 20.4% | $181 million | 22.4% |
| Electro and Communications | $665 million | 38.6% | $137 million | 20.6% |
All six segments reported sales growth and operating margins above 20%. Display and Graphics and Electro and Communications had the fastest sales growth; Health Care had the highest segment margin.
Balance sheet and liquidity
- At March 31, 2010, cash and cash equivalents were $2.848 billion and marketable securities totaled $2.339 billion. Combined cash and securities were $5.187 billion.
- Total debt was $5.778 billion, leaving net debt of $591 million, compared with $1.101 billion at December 31, 2009. Debt was 29% of total capital, versus 30% at year-end.
- Working capital was $6.958 billion, up $1.060 billion from year-end, mainly due to increased short-term marketable securities. No commercial paper was outstanding; $122 million of the $1.5 billion credit facility was used for letters of credit.
- Operating cash flow improved year over year, but receivables and inventory uses of cash were $356 million and $190 million, respectively. Investing cash outflow was $987 million, including net purchases of marketable securities and investments; financing cash outflow was $275 million. Cash ended the quarter $192 million below year-end.
Changes, outlook and management commentary
- Growth was broad-based geographically and across segments; emerging markets, especially developing Asia, were particularly strong. Management cited market penetration, new products, electronics and automotive demand, respiratory protection, and some inventory restocking. It noted Q1 sales remained below 2008 levels.
- Restructuring actions approved in 2008 and 2009 reduced approximately 6,400 positions. They generated nearly $400 million of savings in 2009; management expected more than $150 million of incremental savings in 2010, mostly in the first half. Q1 2009 included $67 million of restructuring charges.
- Management expected a 2010 effective tax rate of 29.5% or less, subject to discrete items and geographic income mix. The Q1 rate was 31.9%, including the one-time tax charge; other factors partly offset it.
- Management forecast 2010 capital expenditures of $1.0–$1.1 billion, versus $903 million in 2009, and pension and postretirement contributions of $500–$700 million. No full-year sales or earnings guidance is provided in the filing text.
- The Board raised the quarterly dividend 2.9% to $0.525 per share. Approximately $2.6 billion remained under the share repurchase authorization.
- Venezuela’s highly inflationary accounting treatment changed effective January 1, 2010. Management estimated the change would reduce the subsidiary’s 2010 sales by about two-thirds versus 2009, based on year-end exchange rates, without otherwise materially affecting consolidated operating income.
Risks, contingencies and unusual items
- The Patient Protection and Affordable Care Act and related legislation caused a one-time, non-cash $84 million income tax charge from reducing the deferred tax asset for retiree drug subsidies.
- Legal and regulatory matters include respirator/asbestos claims, environmental proceedings involving perfluorinated compounds, a French competition investigation, and an internal investigation disclosed to the DOJ and SEC concerning alleged conduct involving a Turkish subsidiary. Outcomes and potential effects are uncertain.
- At March 31, accrued liabilities included $133 million for respirator mask/asbestos claims and $118 million of related insurance receivables; $30 million for environmental remediation and $15 million of related insurance receivables; and $112 million for other environmental liabilities. The company said it could not reliably estimate how much these liabilities might exceed reserves.
- 3M was among third-party defendants in Passaic River cleanup litigation; total costs at issue could exceed $1 billion, but the company could not estimate its exposure and believed any allocable share would likely be a fraction of 1%.
- Aearo-related asbestos and silica claims had a $33 million estimated probable liability reserve. The filing cautions that developments could make actual liabilities significantly larger.
- Other stated risks include global economic conditions, currency movements, competition and customer demand, acceptance of new products, input costs and supply interruptions, acquisitions, productivity execution, and litigation. The filing also describes failed-auction liquidity constraints on $6 million of auction-rate securities.
Important facts for investors to verify
- Whether sales and margin momentum persisted after Q1, and how much growth reflected market-share gains versus recovery, restocking, currency, and comparison with weak 2009 results.
- Whether expected restructuring savings, 2010 capital spending, and $500–$700 million of benefit-plan contributions were achieved.
- How the $84 million tax item and other discrete tax benefits affect the full-year effective tax rate relative to management’s estimate of 29.5% or less.
- Developments in the DOJ/SEC and Turkish subsidiary investigation, environmental proceedings, and asbestos/product-liability matters, including reserve and insurance-recovery adequacy.
- Changes in net debt, working capital, marketable-securities liquidity, and the status of the share repurchase authorization.
The independent accountant reported that its interim review found no material modifications needed for the financial statements to conform with U.S. GAAP; this was a review, not an audit opinion on the interim statements.