3M Company — Q3 2013 Form 10-Q
Business context and period. Diversified global manufacturer reporting the quarter and nine months ended September 30, 2013. 3M reported five segments: Industrial; Safety and Graphics; Electronics and Energy; Health Care; and Consumer. Segment and geographic comparisons reflect a 2013 reporting realignment. Interim statements are unaudited and were reviewed by the independent accounting firm.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $7.916B | $7.497B | $23.302B | $22.517B |
| Operating income | $1.739B | $1.678B | $5.087B | $5.040B |
| Operating margin | 22.0% | 22.4% | 21.8% | 22.4% |
| Net income attributable to 3M | $1.230B | $1.161B | $3.556B | $3.453B |
| Diluted EPS | $1.78 | $1.65 | $5.10 | $4.91 |
| Operating cash flow | — | $3.824B | $3.562B |
- Q3 sales rose 5.6%; organic local-currency sales grew 5.8% (volume +4.8%, price +1.0%), acquisitions added 1.5%, and currency reduced sales 1.7%. Nine-month sales grew 3.5%; organic local-currency sales increased 3.4%.
- Q3 diluted EPS growth benefited by approximately $0.02 from a lower tax rate and $0.03 from fewer shares; currency reduced EPS by approximately $0.04.
- Nine-month free cash flow, defined by 3M as operating cash flow less capital expenditures, was $2.702B, versus $2.585B. Capital expenditures were $1.122B.
- At September 30, cash and cash equivalents were $2.340B; marketable securities totaled $2.518B; total debt was $5.777B and net debt was $919M. Working capital was $5.843B, down from $7.430B at year-end 2012. Debt was 24% of total capital, versus 25% at year-end.
- Cash dividends paid in the first nine months were $1.307B; share repurchases were $3.538B. The quarterly dividend was raised 7.6% to $0.635 per share.
Material changes and segment trends
- Q3 organic local-currency sales increased in all five segments: Safety and Graphics 8.1%, Health Care 6.8%, Industrial 6.2%, Consumer 4.2%, and Electronics and Energy 3.8%.
- Nine-month Electronics and Energy organic local-currency sales were flat; segment operating income fell 9.2% to $733M and margin declined to 18.0%, primarily due to lower factory utilization and flat sales.
- Q3 operating margin declined 0.4 percentage points year over year. Pricing and raw-material deflation helped, but were outweighed by strategic investments, acquisition effects, foreign exchange, the U.S. medical-device excise tax, and other factors. Nine-month margin fell 0.6 points.
- Q3 Health Care operating income included an $18M pre-tax gain on sale of a non-strategic investment, benefiting segment margin by 1.4 points. The sale was exchanged for a note receivable; cash was collected in October.
- There were no business-combination acquisitions in the first nine months of 2013. 3M sold its Scientific Anglers and Ross Reels businesses in June.
Outlook, risks and unusual items
- Management expected 2013 sales growth and related incremental income, along with other benefits, to more than offset identified earnings headwinds. It projected a 2013 effective tax rate of 28.0%–28.5%, versus 29.0% in 2012; currency was expected to reduce full-year sales by about 2.0% based on September 30 exchange rates.
- Management forecast a $100M pre-tax reduction in pension and postretirement expense versus 2012, or about $0.10 per diluted share; 2013 plan contributions were estimated at $400M–$500M. Capital spending was projected at $1.6B–$1.7B, and gross share repurchases at $4.5B–$5.0B.
- 3M had approximately $4.1B remaining under its $7.5B share-repurchase authorization. It resumed commercial-paper funding in July; $613M was outstanding at quarter-end. A $1.025B-eurobond was reclassified to current debt and is due July 2014. Management cited strong liquidity, investment-grade ratings, and access to capital markets.
- Risks include global economic and market conditions, foreign-exchange and raw-material volatility, competition and product acceptance, acquisitions and integration, ERP implementation and information-security risks, pension assumptions, tax examinations, and legal and environmental proceedings.
- Respirator/asbestos liabilities were $156M with $67M of related insurance receivables; environmental remediation and other environmental liabilities were $26M and $49M, respectively, with $11M and $15M of receivables. The filing says further exposure cannot be estimated for certain matters. 3M also disclosed PFC-related environmental proceedings and an adverse 2012 jury verdict in TransWeb patent/antitrust litigation; court rulings on damages and pending motions were outstanding. The Meda litigation ruling favored 3M, but Meda appealed.
- Other notable items: Q3 strategic spending included ERP, business transformation, and R&D investment. 3M reported that Venezuela’s 2013 currency devaluation had no material consolidated impact. Its auction-rate securities remained illiquid after failed auctions, with a $10M fair value.
Important facts for investors to verify
- Whether organic sales momentum persists and how much reported growth depends on acquisitions, foreign exchange, and price versus volume.
- Whether margin pressure from investments, utilization, acquisitions, and the medical-device tax eases, and whether the $18M Health Care investment gain is nonrecurring.
- Progress against 2013 tax, pension-contribution, capital-spending, and share-repurchase expectations; confirm the July 2014 eurobond refinancing plan.
- Updates to asbestos, PFC/environmental, TransWeb, and other legal exposures, including insurance recoveries and potential losses beyond recorded accruals.
- Working-capital and cash conversion trends, and the effects of continued buybacks and dividends on cash, debt, and liquidity.
- The filing does not provide a clear full-year EPS guidance figure.